FREEPORT-MCMORAN INC
Item 1A. Risk Factors.
This report contains "forward-looking statements" within the meaning of United States (U.S.) federal securities laws. Forward-looking statements are all statements other than statements of historical facts, such as projections or expectations relating to ore grades and milling rates; production and sales volumes; unit net cash costs; operating cash flows; capital expenditures; exploration efforts and results; development and production activities and costs; liquidity; tax rates; the impact of copper, gold and molybdenum price changes; the impact of deferred intercompany profits on earnings; reserve estimates; future dividend payments; and share purchases and sales.
We undertake no obligation to update any forward-looking statements. We caution readers that forward-looking statements are not guarantees of future performance and our actual results may differ materially from those anticipated, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include the following:
Financial risks
Declines in the market prices of copper and molybdenum have adversely affected our earnings, cash flows and asset values and, if sustained, may adversely affect our ability to repay debt. Fluctuations in the market prices of copper, gold and molybdenum have caused and may continue to cause significant volatility in our financial performance and in the trading prices of our debt and common stock.
Our financial results will vary with fluctuations in the market prices of the commodities we produce, primarily copper and gold, and to a lesser extent molybdenum. As described below, beginning in 2015, copper prices declined significantly, before recovering in fourth-quarter 2016. If prices decline in the future, they may have a material adverse effect on our financial results, the value of our assets and/or our ability to repay our debt and meet our other fixed obligations; and may depress the trading prices of our common stock and of our publicly traded debt securities.
In response to market-conditions, beginning in the second half of 2015, we made adjustments to operating plans for our mining operations, including reducing operating and capital costs and adjusting production at our North America copper mines; reducing mining and stacking rates at our El Abra mine in Chile by approximately 50 percent to achieve lower operating and labor costs, defer capital expenditures and extend the life of the operation; and operating the Henderson molybdenum mine in Colorado at reduced rates. If market prices for our primary commodities decline or persist at low levels, we may have to further revise our operating plans, including curtailing production, reducing operating costs and capital expenditures and discontinuing certain exploration and development programs. We may be unable to decrease our costs in an amount sufficient to offset reductions in revenues, in which case we may incur additional losses, and those losses may be material.
Fluctuations in commodities prices are caused by varied and complex factors beyond our control, including global supply and demand balances and inventory levels; global economic and political conditions; international regulatory, trade and tax policies; commodities investment activity and speculation; the price and availability of substitute products; and changes in technology.
Copper prices may be affected by demand from China, which has become the largest consumer of refined copper in the world, and by changes in demand for industrial, commercial and residential products containing copper. Copper prices declined significantly during 2015 and remained low throughout most of 2016, with London Metal Exchange (LME) spot copper prices averaging $2.21 per pound in 2016, $2.49 per pound in 2015 and $3.11 per pound in 2014. During fourth-quarter 2016, copper prices improved, with the LME spot price averaging $2.39 per pound. The LME spot copper price was $2.50 per pound on December 31, 2016, and $2.73 per pound on February 15, 2017.
Factors affecting gold prices may include the relative strength of the U.S. dollar to other currencies, inflation and interest rate expectations, purchases and sales of gold by governments and central banks, demand from China and India, two of the world’s largest consumers of gold, and global demand for jewelry containing gold. The London PM gold price averaged $1,250 per ounce in 2016, $1,160 per ounce in 2015 and $1,266 per ounce in 2014. The London PM gold price was $1,224 per ounce on February 15, 2017.
Molybdenum prices also declined significantly during 2015 and have remained low throughout 2016, with the Metals Week Molybdenum Dealer Oxide weekly average price averaging $6.47 per pound in 2016, $6.66 per pound in 2015 and $11.41 per pound in 2014. The Metals Week Molybdenum Dealer Oxide weekly average price was $7.59 per pound on February 15, 2017.
Lower copper and molybdenum prices during 2016 and 2015 resulted in non-cash charges for inventory adjustments ($36 million for the year 2016 and $338 million for the year 2015) and long-lived mining asset impairments ($37 million for the year 2015). Refer to Notes 4 and 5 for additional information. Declines in copper and/or molybdenum prices could result in additional metals inventory adjustments and impairment charges for our long-lived assets. Other events that could result in impairment of our long-lived assets include, but are not limited to, decreases in estimated proven and probable mineral reserves and any event that might have a material adverse effect on mine production costs.
Our debt and other financial commitments may limit our financial and operating flexibility.
At December 31, 2016, our total consolidated debt was $16.0 billion (see Note 8) and our total consolidated cash was $4.2 billion. We also have various other financial commitments, including reclamation and environmental obligations, take-or-pay contracts and leases. Our level of indebtedness and other financial commitments could have important consequences to our business, including the following:
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Limiting our flexibility in planning for, or reacting to, changes in the industries in which we operate;
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Increasing our vulnerability to general adverse economic and industry conditions;
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Limiting our ability to fund future working capital, capital expenditures and/or material contingencies, to engage in future development activities, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flows from operations to payments on our debt;
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Requiring us to sell assets to reduce debt; or
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Placing us at a competitive disadvantage compared to our competitors that have less debt and/or fewer financial commitments.
Any failure to comply with the financial and other covenants in our debt agreements may result in an event of default that would allow the creditors to accelerate maturities of the related debt, which in turn may trigger cross-acceleration or cross-default provisions in other debt agreements. Our available cash and liquidity would not be sufficient to fully repay borrowings under our debt instruments that are accelerated upon an event of default.
From August 2015 through November 2016, we sold 326.5 million shares of our common stock under registered at-the-market equity programs, which generated $3.5 billion in gross proceeds (refer to Note 10). In addition, during 2016, we issued 48.1 million shares of our common stock in connection with the settlement of two drilling rig contracts (refer to Note 13) and 27.7 million shares of our common stock in exchange for $369 million of FCX senior notes (refer to Note 10). Any additional issuance of equity capital to fund operations, reduce debt, improve our financial position or for other purposes, may have a negative impact on our stock price.
As of February 15, 2017, our senior unsecured debt was rated "BB-" with a stable outlook by Standard & Poor’s (S&P), "BBB-" with a negative outlook by Fitch Ratings (Fitch), and "B1" with a positive outlook by Moody’s Investors Service (Moody's). There is no assurance that our credit ratings will not be downgraded in the future. For more information, refer to the risk factor below relating to mine closure and reclamation regulations and plugging and abandonment obligations related to our remaining oil and gas operations.
Mine closure and reclamation regulations impose substantial costs on our operations and include requirements that we provide financial assurance supporting those obligations. We also have plugging and abandonment obligations related to our remaining oil and gas properties, and are required to provide bonds or other forms of financial assurance in connection with those operations. Changes in or the failure to comply with these requirements could have a material adverse effect on us.
We are required by U.S. federal and state laws and regulations to provide financial assurance sufficient to allow a third party to implement approved closure and reclamation plans for our mining properties if we are unable to do so. The U.S. Environmental Protection Agency (EPA) and state agencies may also require financial assurance for investigation and remediation actions that are required under settlements of enforcement actions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) or similar state laws. Refer to Note 12 for additional information regarding our financial assurance obligations.
With respect to our mining operations, most of our financial assurance obligations are imposed by state laws that vary significantly by jurisdiction, depending on how each state regulates land use and groundwater quality. Although Section 108(b) of CERCLA has required EPA to identify classes of facilities that must establish evidence of financial responsibility since it was adopted in 1980, currently there are no financial assurance requirements for active mining operations under CERCLA. In August 2014, several environmental organizations initiated litigation against EPA to require it to set a schedule for adopting financial assurance regulations under CERCLA governing the hard rock mining industry. EPA and the environmental organizations reached a joint agreement and submitted it to the U.S. Court of Appeals for the District of Columbia Circuit for approval. Notwithstanding industry objections, the court approved the agreement on January 29, 2016, thereby requiring the EPA to propose financial assurance regulations for the hard rock mining industry by December 1, 2016, and to provide notice of its final action by December 1, 2017. The proposed regulations were published on January 11, 2017, subject to a 60-day comment period. The proposed rules, if promulgated without material modification, would result in onerous financial responsibility obligations for our U.S. hard rock mining operations, and the form, cost and availability of financial mechanisms necessary to meet such obligations is uncertain (if they could be met at all). In addition, complying with these obligations could be very costly, harm the international competitiveness of our U.S. hard rock mining operations and could have a material adverse effect on our cash flows, results of operations and financial condition.
We are also subject to financial assurance requirements in connection with our remaining oil and gas operations under both state and federal laws, including financial responsibility required under the Oil Pollution Act of 1990 to cover containment and cleanup costs resulting from an oil spill. In 2016, the U.S. Bureau of Ocean Energy Management issued revised requirements for lessees operating in federal waters to secure the cost of plugging, abandoning, decommissioning and/or removing wells, platforms and pipelines at the end of production. The revised requirements eliminate previously provided waivers from requirements to post security. The new requirements to post significant amounts of security in the form of bonds or similar assurances could have a material adverse effect on our cash flows, results of operations and financial condition. The cost for bonds or assurances can be substantial, and there is no assurance that they can be obtained in all cases.
As of December 31, 2016, our financial assurance obligations totaled $1.1 billion for closure and reclamation/restoration costs of U.S. mining sites, and $0.7 billion for plugging and abandonment obligations of our remaining oil and gas operations (refer to Note 12). A substantial portion of our financial assurance obligations are satisfied by FCX guarantees and financial capability demonstrations. As a result of the downgrade of our credit ratings on our debt to below investment grade by S&P and Moody’s, we may be required to provide additional or alternative forms of financial assurance, such as letters of credit, surety bonds or collateral. These other forms of assurance are costly to provide and, depending on our financial condition and market conditions, may be difficult or impossible to obtain. Failure to provide the required financial assurance could result in the closure of the affected properties.
Refer to Notes 1 and 12, for further discussion of our environmental and asset retirement obligations.
Unanticipated litigation or negative developments in pending litigation or with respect to other contingencies could have a material adverse effect on our cash flows, results of operations and financial condition.
We are involved in numerous legal proceedings and subject to other contingencies that have arisen or may arise in the ordinary course of our business or are associated with environmental issues arising from legacy operations conducted over the years by Freeport Minerals Corporation (FMC) and its affiliates, including those described in
Note 12 and in Item 3. "Legal Proceedings" involving matters such as remediation, restoration and reclamation of environmental contamination, claims of personal injury or property damage arising from such contamination or from exposure to substances such as lead, arsenic, asbestos, talc and other allegedly toxic substances, disputes over water rights, and disputes with foreign governments or regulatory authorities over royalties, taxes, rights and obligations under concession or other agreements, or other matters. We are also involved periodically in other reviews, inquiries, investigations and other proceedings initiated by or involving government agencies, some of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In addition, from time to time we are involved in disputes over the allocation of environmental remediation obligations at Superfund and other sites. The outcome of litigation is inherently uncertain and adverse developments or outcomes can result in significant monetary damages, penalties, other sanctions or injunctive relief against us, limitations on our property rights, or regulatory interpretations that increase our operating costs. Management does not believe, based on currently available information, that the outcome of any individual legal proceeding will have a material adverse effect on our financial condition, although individual or cumulative outcomes could be material to our operating results for a particular period, depending on the nature and magnitude of the outcome and the operating results for the period.
With respect to the asbestos exposure cases described in Note 12, there has been an increase in the number of cases against FMC and its affiliates alleging exposure to talc contaminated with asbestos and to talc that is not alleged to be contaminated with asbestos. Recently, there have been a limited number of large jury awards in single plaintiff cases primarily brought by consumers against makers of common consumer products containing talc and alleging serious health risks, including ovarian cancer associated with long-term use of such products. Prior affiliates were involved in talc mining, and some of those affiliates have been named as defendants in some of those cases. We have indemnification rights against a successor to those businesses, and the successor has acknowledged those indemnification obligations and has taken responsibility for all cases we have tendered to it. However, the indemnitor may have limited financial resources and limited amounts of insurance available to meet those obligations.
International risks
Our international operations are subject to political, social and geographic risks of doing business in countries outside the U.S.
We are a U.S.-based mining company with substantial assets located outside of the U.S. We conduct international mining operations in Indonesia, Peru and Chile. Accordingly, in addition to the usual risks associated with conducting business in countries outside the U.S., our business may be adversely affected by political, economic and social uncertainties in each of these countries. Risks of conducting business in countries outside of the U.S. include:
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Renegotiation, cancellation or forced modification of existing contracts;
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Expropriation or nationalization of property;
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Changes in the host country's laws, regulations and policies, including those relating to labor, taxation, royalties, divestment, imports, exports, trade regulations, currency and environmental matters, which because of rising "resource nationalism" in countries around the world, may impose increasingly onerous requirements on foreign operations and investment;
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Political instability, bribery, extortion, corruption, civil strife, acts of war, guerrilla activities, insurrection and terrorism;
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Changes in the aspirations and expectations of local communities in which we operate with respect to our contributions to employee health and safety, infrastructure and community development and other factors that may affect our social license to operate, all of which lead to increased costs;
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Changes in U.S. trade, tax, immigration or other policies that may harm relations with foreign countries or result in retaliatory policies;
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Foreign exchange controls and movements in foreign currency exchange rates; and
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The risk of having to submit to the jurisdiction of an international court or arbitration panel or having to enforce the judgment of an international court or arbitration panel against a sovereign nation within its own territory.
Our insurance does not cover most losses caused by the above described risks. Accordingly, our exploration, development and production activities outside of the U.S. may be substantially affected by many unpredictable factors beyond our control, some of which could have a material adverse effect on our cash flows, results of operations and financial condition.
Our international operations must comply with the U.S. Foreign Corrupt Practices Act and similar anti-corruption and anti-bribery laws of the other jurisdictions in which we operate. There has been a substantial increase in the global enforcement of these laws in recent years, and a steadily increasing focus on enforcement of those laws continues. Any violation of those laws could result in significant criminal or civil fines and penalties, litigation, and loss of operating licenses or permits, and may damage our reputation, which could have a material adverse effect on our cash flows, results of operations and financial condition.
We are involved in several significant tax proceedings and other tax disputes with the Indonesian and Peruvian tax authorities (refer to Note 12 for further discussion of these matters). Other risks specific to certain countries in which we operate are discussed in more detail below.
Because our Grasberg mining operation in Indonesia is a significant operating asset, our business may continue to be adversely affected by political, economic and social uncertainties in Indonesia.
Our mining operations in Indonesia are conducted by our subsidiary PT Freeport Indonesia (PT-FI) pursuant to a Contract of Work (COW) with the Indonesian government. Maintaining a good working relationship with the Indonesian government is important to us because of the significance of our Indonesia operations to our business, and because our mining operations there are among Indonesia's most significant business enterprises. Partially because of their significance to Indonesia's economy, the environmentally sensitive area in which they are located, and the number of people employed, our Indonesia operations have been the subject of political debates and of criticism in the Indonesian press, and have been the target of protests and occasional violence. For further discussion of the history of PT-FI's COW, refer to Note 13.
The initial term of PT-FI's COW expires in 2021, but the COW explicitly provides that it can be extended for two 10-year periods subject to Indonesian government approval, which cannot be withheld or delayed unreasonably. PT-FI has been engaged in discussions with officials of the Indonesian government since 2012 regarding various provisions of its COW, including extending its term. Notwithstanding provisions in the COW prohibiting it from doing so, the Indonesian government has sought to modify existing mining contracts, including PT-FI’s COW, to address provisions contained in the mining law enacted in 2009; and mining regulations adopted thereunder, including provisions that conflict with the COW, such as the size of contract concessions, government revenues, domestic processing of minerals, divestment, provision of local goods and services, conversion from a COW to a licensing framework for extension periods, and a requirement that extensions may be applied for only within two years prior to a COW’s expiration.
Regulations published in January 2014 imposed, among other things, a progressive export duty on copper concentrate and restricted exports of copper concentrate and anode slimes (a by-product of the copper refining process containing metals, including gold) after January 12, 2017. Despite PT-FI’s rights under its COW to export concentrate without the payment of duties, PT-FI was unable to obtain administrative approval for exports and operated at approximately half of its capacity from mid-January 2014 through July 2014.
In July 2014, PT-FI entered into a Memorandum of Understanding (MOU) with the Indonesian government, in which, subject to concluding an agreement to extend PT-FI's operations beyond 2021 on acceptable terms, PT-FI agreed to construct new smelter capacity in Indonesia and to divest an additional 20.64 percent interest at fair value. Under the MOU, PT-FI provided a $115 million assurance bond to support its commitment for smelter development, agreed to pay higher royalty rates and agreed to pay export duties until certain smelter development milestones were met. The MOU also anticipated an amendment of the COW within six months to address other matters; however, no terms of the COW other than those relating to the smelter bond, increased royalties and export duties were changed. In January 2015, the MOU was extended to July 25, 2015, and it expired on that date. The Indonesian government has continued to impose the increased royalty rates, export duties and smelter assurance bond.
In October 2015, the Indonesian government provided a letter of assurance to PT-FI indicating that it would revise regulations allowing it to approve the extension of PT-FI's operations beyond 2021, and provide the same rights and the same level of legal and fiscal certainty provided under the current COW.
In January and February 2017, the Indonesian government issued new regulations to address exports of unrefined metals, including copper concentrate and anode slimes, and other matters related to the mining sector. The new regulations permit the continuation of copper concentrate exports for a five-year period through January 2022, subject to various conditions, including conversion from a contract of work to a special operating license (known as an IUPK, which provides virtually none of the protections of a contract of work), commitment to completion of smelter construction in five years and payment of export duties to be determined by the Ministry of Finance. In addition, the new regulations enable application for extension of operating rights five years before expiration of the IUPK and require foreign IUPK holders to divest 51 percent to Indonesian interests no later than the tenth year of production. Export licenses would be valid for one-year periods, subject to review every six months, depending on smelter construction progress.
The January 2017 regulations permit the export of anode slimes, which is necessary for PT Smelting (PTFI’s 25-percent-owned copper smelter and refinery located in Gresik, Indonesia) to continue operating. PT Smelting is seeking to renew its anode slimes export license; however, we cannot predict when PT Smelting’s anode slimes export license may be renewed. In addition, a labor strike at PT Smelting has resulted in a shutdown of its operations since January 19, 2017. Although PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity, on February 10, 2017, PT-FI was forced to suspend production as a result of limited storage capacity at PT-FI and PT Smelting. PT Smelting has indicated that it expects to resume operations in March 2017. Delays in PT Smelting obtaining its anode slimes export license or restarting operations could further impact PT-FI's operations.
Following the issuance of the January and February 2017 regulations and discussions with the government, PT-FI advised the Indonesian government that it was prepared to convert its COW to an IUPK, subject to obtaining an investment stability agreement providing equivalent rights with the same level of legal and fiscal certainty enumerated under its COW, and provided that the COW would remain in effect until it is replaced by a mutually satisfactory alternative. PT-FI also committed to commence construction of a new smelter during a five-year timeframe after approval of the extension of its long-term operating rights.
Under its COW, PT-FI has specified rights to export copper concentrate without restriction or payment of export duties. PT-FI has requested that concentrate exports be permitted without the imposition of export duties while the new license and stability agreement are negotiated. The Indonesia government has indicated that in order to export its concentrate production, PT-FI would be required to immediately convert to an IUPK, forgo its current rights to fiscal and legal certainty and commit to a new smelter prior to completing a long-term investment stability agreement. PT-FI has advised the Indonesian government that attempts to enforce the new regulations on PT-FI violates its COW and that it is unwilling to terminate its COW unless replaced by a mutually acceptable form of agreement providing fiscal and legal assurances to support its long-term investment plans in Papua, Indonesia.
As of February 24, 2017, PT-FI has not obtained approval to export concentrate and production remains suspended. PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity (assuming that PT Smelting's export license is approved and its operations are resumed in March 2017). PT-FI has begun to significantly adjust its cost structure, reduce its workforce and spending with local suppliers, and suspend investments in its underground development projects and new smelter.
On February 17, 2017, pursuant to the COW’s dispute resolution provisions, PT-FI provided formal notice to the Indonesian government of an impending dispute listing the government’s breaches and violations of the COW as described in the risk factor below “PT-FI's COW may be subject to termination if we do not comply with our contractual obligations, and if a dispute arises, we may have to submit to the jurisdiction of an international arbitration panel.”
We cannot predict whether or when PT-FI will be able to resume exporting copper concentrate. For each month of delay in obtaining approval to export, PT-FI’s share of production is projected to be reduced by approximately 70 million pounds of copper and 70 thousand ounces of gold. The inability of either PT-FI to export copper concentrate, or PT Smelting to export anode slimes or restart operations, for any extended period of time would lead to the
continued suspension of production in Indonesia, which would have a material adverse effect on our cash flow, results of operations and financial position, and could result in asset impairments, inventory write downs, difficulty in meeting covenants under our credit facilities, and a significant reduction in our reported mineral reserves.
We also cannot predict whether PT-FI will be successful in reaching a satisfactory agreement on the terms of its long-term mining rights. If PT-FI is unable to reach agreement with the Indonesian government on its long-term rights, we may be required to reduce or defer investments in underground development projects, which would have a material adverse effect on our future production, cash flow, results of operations and financial position, and could result in asset impairments, inventory write downs, difficulty in meeting covenants under our credit facilities, and a significant reduction in our reported mineral reserves.
In October 2016, a new Minister of Energy and Mineral Resources was appointed, and is the fourth person to hold the office since July 2016. We cannot predict what impact the transition will have on the progress or outcome of PT-FI’s license and stability agreement negotiations.
PT-FI's COW may be subject to termination if we do not comply with our contractual obligations, and if a dispute arises, we may have to submit to the jurisdiction of an international arbitration panel.
PT-FI's COW was entered into under Indonesia's 1967 Foreign Capital Investment Law, which provides guarantees of remittance rights and protection against nationalization. The COW may be subject to termination by the Indonesian government if we do not satisfy our contractual obligations, which include the payment of royalties and taxes to the government and the satisfaction of certain mining, environmental, safety and health requirements.
Recently adopted Indonesian laws and regulations conflict with the mining rights established under the COW. Although the COW grants to PT-FI the unencumbered right to operate in accordance with the COW, government agencies have sought and continue to seek to impose additional restrictions on PT-FI that could affect exploration and operating requirements. For further discussion, refer to the above risk factor "Because our Grasberg mining operation in Indonesia is a significant operating asset, our business may continue to be adversely affected by political, economic and social uncertainties in Indonesia."
PT-FI's COW requires that disputes with the Indonesian government be submitted to international arbitration. On February 17, 2017, pursuant to the COW’s formal dispute resolution provisions, PT-FI provided formal notice to the Indonesian government of an impending dispute listing the government’s breaches and violations of the COW, including, but not limited to, the following:
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Restrictions on PT-FI’s basic right to export mining products in violation of the COW;
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Imposition of export duties other than those taxes and other charges expressly provided for in the COW;
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Imposition of surface water taxes in excess of the restrictions imposed by the COW (refer to Note 12 for further discussion of these assessments);
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Requirement for PT-FI to build a smelter, while such requirements are not contained in the COW;
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Unreasonable withholding and delay in granting approval of two successive ten-year extensions of the term of the COW; and
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Imposition of divestment requirements that are not provided for in the COW.
If the dispute is not resolved by June 17, 2017, PT-FI may commence arbitration under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules to enforce all provisions of the COW and seek damages, specifically in respect of the issuance of the January 11, 2017, regulations which are not in accordance with honoring the contractual commitments of the Indonesian government and PT-FI under the COW. The arbitration proceedings would take place in Jakarta, Indonesia, and for limited purposes, would be overseen by the Indonesian courts under the Indonesian Arbitration Act. The international arbitration process is complex and could take considerable time to complete and there is no assurance that we will prevail. If we prevail, we will face the additional risk of having to enforce the judgment of an international arbitration panel against Indonesia within its own territory. Additionally, our operations may be materially and adversely affected while resolution of a dispute is pending.
At times, certain government officials and others in Indonesia have questioned the validity of contracts entered into by the Indonesian government prior to May 1998 (i.e., during the Suharto regime, which lasted over 30 years), including PT-FI's COW, which was signed in December 1991. We cannot provide assurance that the validity of, or our compliance with, the COW will not be challenged for political or other reasons.
We will not mine all of our ore reserves in Indonesia before the initial term of our COW expires.
Our proven and probable ore reserves in Indonesia reflect estimates of minerals that can be recovered through the end of 2041, and our current mine plan and planned operations are based on the assumption that we will receive the two 10-year extensions. As a result, we will not mine all of these ore reserves during the initial term of the current COW. Prior to the end of 2021, we expect to mine 17 percent of aggregate proven and probable recoverable ore at December 31, 2016, representing 22 percent of PT-FI's share of recoverable copper reserves and 33 percent of its share of recoverable gold reserves. There can be no assurance that the Indonesian government will approve our COW extensions. For further discussion, refer to the above risk factors "Because our Grasberg mining operation in Indonesia is a significant operating asset, our business may continue to be adversely affected by political, economic and social uncertainties in Indonesia" and "PT-FI's COW may be subject to termination if we do not comply with our contractual obligations, and if a dispute arises, we may have to submit to the jurisdiction of an international arbitration panel."
Operational risks
Our mining operations are subject to operational risks that could adversely affect our business.
Our mines are very large in scale and, by their nature are subject to significant operational risks, some of which are outside of our control, and many of which are not covered fully, or in some cases even partially, by insurance. These operational risks, which could materially and adversely affect our business, operating results and cash flow, include earthquakes, rainstorms, floods, and other natural disasters; equipment failures; accidents; wall failures and rock slides in our open-pit mines, and structural collapses of our underground mines or tailings impoundments; and lower than expected ore grades or recovery rates.
The waste rock (including overburden) and tailings produced in our mining operations represent our largest volume of waste. Managing the volume of waste rock and tailings presents significant environmental, safety and engineering challenges and risks. We maintain large leach pads and tailings impoundments containing viscous material, which are effectively large dams that must be engineered, constructed and monitored to assure structural stability and avoid leakages or structural collapse. Our tailings impoundments in arid areas must have effective programs to suppress fugitive dust emissions, and we must effectively monitor and treat acid rock drainage at all of our operations. In Indonesia, we use a river transport system for tailings management, which presents other risks, as discussed below.
The failure of tailings and other impoundments at any of our mining operations could cause severe property and environmental damage and loss of life, and we apply significant financial resources and both internal and external technical resources to the effective, safe management of all those facilities. The importance of careful design, management and monitoring of large impoundments was emphasized in recent years by large scale tailings dam failures at unaffiliated mines, which caused extensive property and environmental damage and resulted in the loss of life. As a member company of the International Council on Mining and Metals (ICMM), we intend to augment our existing practices to be consistent with the ICMM’s Tailings Governance Framework adopted in December 2016 in an effort to reduce the risk of catastrophic failure of tailings storage facilities.
Labor unrest, activism and civil and religious strife could disrupt our operations and may adversely affect our business, financial condition, results of operations and prospects.
As of December 31, 2016, approximately half of our global labor force was covered by collective bargaining agreements and approximately one third of our global labor force was covered by agreements that have expired and are currently being negotiated or will expire during 2017, including the agreement covering employees at our PT-FI operations in Indonesia.
Labor agreements are negotiated on a periodic basis, and may not be renewed on reasonably satisfactory terms to us or at all. If we do not successfully negotiate new collective bargaining agreements with our union workers, we
may incur prolonged strikes and other work stoppages at our mining operations, which could adversely affect our financial condition and results of operations. Additionally, if we enter into a new labor agreement with any union that significantly increases our labor costs relative to our competitors, our ability to compete may be materially and adversely affected. Refer to Items 1. and 2., "Business and Properties," for additional information regarding labor matters, and expiration dates of such agreements.
We could also experience labor disruptions such as work stoppages, work slowdowns, union organizing campaigns, strikes, or lockouts that could adversely affect our operations. For example, in October 2014, a large percentage of Grasberg open-pit operators did not report to their scheduled shifts and during third-quarter 2016, PT-FI experienced labor productivity issues and a 10-day work stoppage that began in late September 2016. These labor productivity issues have continued during fourth-quarter 2016 and early 2017, and could be heightened by the workforce reductions that began in February 2017. Significant reductions in productivity or protracted work stoppages at one or more of our operations could significantly reduce our production and sales volumes, which could adversely affect our cash flow, results of operations and financial condition.
Indonesia has long faced separatist movements and civil and religious strife in a number of provinces. Several separatist groups have sought increased political independence for the province of Papua, where our Grasberg minerals district is located. In Papua, there have been sporadic attacks on civilians by separatists and sporadic but highly publicized conflicts between separatists and the Indonesian military. In addition, illegal miners have periodically clashed with police who have attempted for years to move them away from our facilities. Social, economic and political instability in Papua could materially and adversely affect us if it results in damage to our property or interruption of our Indonesia operations.
In 2009, a series of shooting incidents occurred within the PT-FI project area, including along the road leading to our mining and milling operations. The shooting incidents have continued on a sporadic basis with the last incident occurring on January 1, 2015. During this time, there were 20 fatalities and 59 injuries to our employees, contractor employees, government security personnel and civilians. To date, no one person or group has claimed responsibility for the shootings. The safety of our workforce is a critical concern, and PT-FI continues to work with the Indonesian government to address security issues. The investigation of these incidents is ongoing. We also continue to limit the use of the road leading to our mining and milling operations to secured convoys.
We cannot predict whether additional incidents will occur that could disrupt or suspend our Indonesian operations. If other disruptive incidents occur, they could adversely affect our results of operations and financial condition in ways that we cannot predict at this time.
Our mining operations depend on the availability of secure water supplies.
Our mining operations require physical availability and secure legal rights to significant quantities of water for mining and ore processing activities, and related support facilities. Most of our North and South America mining operations are in areas where competition for water supplies is significant. Continuous production at our mines is dependent on many factors, including our ability to maintain our water rights and claims, and the continuing physical availability of the water supplies.
In Arizona, where our operations use both surface and ground water, we are a participant in an active general stream adjudication in which the Arizona courts have been attempting, for over 40 years, to quantify and prioritize surface water claims for the Gila River, one of the state's largest river systems, which primarily affects our Morenci, Safford and Sierrita mines. The adjudication is addressing the state law claims of thousands of competing users, including us, as well as significant federal water claims that are potentially adverse to the state law claims of both surface water and groundwater users. Groundwater is treated differently from surface water under Arizona law, which historically allowed land owners to pump unlimited quantities of subsurface water, subject only to the requirement of putting it to "reasonable use." However, court decisions in the adjudication have concluded that underground water is often hydrologically connected to surface water so that it actually is surface water and is therefore subject to the Arizona doctrine of prior appropriation, as a result of which it would be subject to the adjudication and potentially unavailable to groundwater pumpers in the absence of valid surface water claims, which historic groundwater pumpers typically do not have. Any re-characterization of groundwater as surface water could affect the ability of consumers, farmers, ranchers, municipalities, and industrial users like us to continue to access water supplies that have been relied on for decades. Because we are a user of both groundwater and surface water in Arizona, we are an active participant in the adjudication proceeding.
Water for our Cerro Verde operation in Peru comes from renewable sources through a series of storage reservoirs on the Rio Chili watershed that collects water primarily from seasonal precipitation. As a result of occasional drought conditions, temporary supply shortages are possible that could affect our Cerro Verde operations. In January 2016, the Peruvian government declared a temporary state of emergency with respect to the water supply in the Rio Chili Basin because of drought conditions. As a result, the Cerro Verde water rights from the Rio Chili were temporarily decreased during February 2016.
Water for our El Abra mining operation in Chile comes from the continued pumping of groundwater from the Salar de Ascotán aquifer. In 2010, El Abra obtained regulatory approval for the continued pumping of groundwater from the Salar de Ascotán aquifer for its sulfide processing plant, which began operations in 2011. The agreement to pump from this aquifer is subject to continued monitoring of the aquifer level to ensure that environmentally sensitive areas are not impacted by our pumping. If impact occurs, we would have to reduce pumping to restore water levels, which could have an adverse effect on production from El Abra.
Although we typically have sufficient water for our Indonesian operations, lower rainfall resulting from El Niño weather conditions affected operations in the second half of 2015 and may do so again in the future.
Although each of our mining operations currently has access to sufficient water supplies to support current operational demands, as discussed above some supplies are subject to adjudication proceedings, the outcome of which we cannot predict, and the availability of additional supplies that may be required for potential future expansions is uncertain. While we are taking actions to acquire additional back-up water supples, such supplies may not be available at acceptable cost, or at all, so that the loss of a water right or currently available water supply could force us to curtail operations or force premature closures, thereby increasing and/or accelerating costs or foregoing profitable operations.
In addition to the usual risks encountered in the mining industry, our Indonesia mining operations involve additional risks because they are located in very remote areas and on unusually difficult terrain.
The Grasberg minerals district is located in steep mountainous terrain in a remote area of Indonesia. These conditions have required us to overcome special engineering difficulties and develop extensive infrastructure facilities. In addition, the area receives considerable rainfall, which has led to periodic floods and mudslides. The mine site is also in an active seismic area and has experienced earth tremors from time to time. Our insurance may not sufficiently cover an unexpected natural or operating disaster.
Underground mining operations can be particularly dangerous, and in May 2013, a tragic accident, which resulted in 28 fatalities and 10 injuries, occurred at PT-FI when the rock structure above the underground ceiling of a training facility collapsed. PT-FI temporarily suspended mining and processing activities at the Grasberg complex to conduct inspections and resumed open-pit mining and concentrating activities on June 24, 2013, and underground operations on July 9, 2013. No assurance can be given that similar events will not occur in the future.
We must continually replace reserves depleted by production, but our exploration activities may not result in additional discoveries.
Our existing mineral reserves will be depleted over time by production from our operations. Because our profits are primarily derived from our mining operations, our ability to replenish our mineral reserves is essential to our long-term success. Our exploration projects involve many risks, require substantial expenditures and may not result in the discovery of additional deposits that can be produced profitably. We may not be able to discover, enhance, develop or acquire reserves in sufficient quantities to maintain or grow our current reserve levels, which could negatively affect our cash flow, results of operations and financial condition.
Development projects are inherently risky and may require more capital than anticipated, which could adversely affect our business.
Consolidated capital expenditures are expected to approximate $1.8 billion for 2017, including $1.1 billion for major projects primarily associated with underground development activities at Grasberg and $0.7 billion for sustaining capital. Refer to the risk factor "Because our Grasberg mining operation in Indonesia is a significant operating asset, our business may continue to be adversely affected by political, economic and social uncertainties in Indonesia" for further discussion of regulatory matters in Indonesia that may impact future investments in PT-FI's underground development projects.
There are many risks and uncertainties inherent in all development projects. The economic feasibility of development projects is based on many factors, including the accuracy of estimated reserves, estimated capital and operating costs, and estimated future prices of the relevant commodity. The capital expenditures and time required to develop new mines or other projects are considerable, and changes in costs or timing can adversely affect project economics.
New development projects have no operating history upon which to base estimates of future cash flow. The actual costs, production rates and economic returns of our development projects may differ materially from our estimates, which may have a material adverse impact on our cash flows, results of operations and financial condition.
Our operations are subject to extensive regulations, some of which require permits and other approvals. These regulations increase our costs and in some circumstances may delay or suspend our operations.
Our operations are subject to extensive and complex laws and regulations that are subject to change and to changing interpretation by governmental agencies and other bodies vested with broad supervisory authority. As a natural resource company, compliance with environmental legal requirements is an integral and costly part of our business. For additional information, see "Environmental risks" below. We are also subject to extensive regulation of worker health and safety, including the requirements of the U.S. Occupational Safety and Health Act and similar laws of other jurisdictions. In the U.S., the operation of our mines is subject to regulation by the U.S. Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977. MSHA inspects our mines on a regular basis and issues citations and orders when it believes a violation has occurred. If such inspections result in an alleged violation, we may be subject to fines and penalties and, in instances of alleged significant violations, our mining operations could be subject to temporary or extended closures.
Many other governmental bodies regulate other aspects of our operations, and our failure to comply with these legal requirements can result in substantial penalties. In addition, new laws and regulations or changes to existing laws and regulations and new interpretations of existing laws and regulations by courts or regulatory authorities occur regularly, but are difficult to predict. Any such variations could have a material adverse effect on our cash flow, results of operations and financial condition.
Our business may be adversely affected by information technology disruptions.
Cybersecurity incidents are increasing in frequency, evolving in nature and include, but are not limited to, installation of malicious software, unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. We have experienced cybersecurity incidents in the past and may experience them in the future. We believe we have implemented appropriate measures to mitigate potential risks. However, given the unpredictability of the timing, nature and scope of information technology disruptions, we could be subject to manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our cash flow, results of operations and financial condition.
Environmental risks
Our operations are subject to complex, evolving and increasingly stringent environmental laws and regulations. Compliance with environmental regulatory requirements involves significant costs and may constrain existing operations or expansion opportunities.
Our operations, both in the U.S. and internationally, are subject to extensive environmental laws and regulations governing the generation, storage, treatment, transportation and disposal of hazardous substances; solid waste disposal; air emissions; wastewater discharges; remediation, restoration and reclamation of environmental contamination, including mine closures and reclamation; well plug and abandonment requirements; protection of endangered and protected species and designation of critical habitats; and other related matters. In addition, we must obtain regulatory permits and approvals to start, continue and expand operations.
Our Miami, Arizona smelter processes approximately half of the aggregate copper concentrate produced by our North America copper mines. EPA regulations require us to invest in new pollution control equipment to reduce sulfur dioxide (SO2) to meet both regional haze requirements and to allow the state of Arizona to demonstrate compliance with EPA's SO2 ambient air quality standards. The deadline for the smelter to install the SO2 pollution
control equipment to comply with the regional haze rules is January 1, 2018. Arizona regulators have promulgated rules for complying with the national ambient air quality standards, which must be approved by the EPA to become effective, but it is possible that they will be effective prior to January 1, 2018. In order to meet both regulatory requirements, we expect capital expenditures to approximate $250 million, and we expect those expenditures to be made through 2018. If these expenditures are delayed or deferred for technical, financial or any other reasons, we may be forced to curtail production at the Miami smelter, which would require us to export concentrate rather than process it ourselves and to purchase sulphuric acid that would otherwise be generated during the smelting process, which would result in increased production costs.
Laws such as CERCLA and similar state laws may expose us to joint and several liability for environmental damages caused by our operations, or by previous owners or operators of properties we acquired or are currently operating or at sites where we sent materials for processing, recycling or disposal. As discussed in more detail in the next risk factor, we have substantial obligations for environmental remediation on mining properties previously owned or operated by FMC and certain of its affiliates. Noncompliance with these laws and regulations could result in material penalties or other liabilities. In addition, compliance with these laws may from time to time result in delays in or changes to our development or expansion plans. Compliance with these laws and regulations imposes substantial costs, which we expect will continue to increase over time because of increased regulatory oversight, adoption of increasingly stringent environmental standards, as well as other factors.
New or revised environmental regulatory requirements are frequently proposed, many of which result in substantially increased costs for our business, including those regarding financial assurance in the financial risk factor above. In addition, in 2015, the EPA promulgated rules that could reclassify certain mineral processing materials as "hazardous waste" under the federal Resource Conservation and Recovery Act and subject the industry to significant new and costly waste management requirements. These rules are currently being challenged by multiple parties in court; however, if the legal challenges are unsuccessful, and the regulatory agencies reclassify certain mineral processing materials as “hazardous waste," costs at our U.S. copper and molybdenum processing facilities could materially increase.
The EPA has also adopted rules that bring remote “tributaries” into the regulatory definition of “waters of the United States” that are protected by the Clean Water Act, thereby imposing significant additional restrictions on waterway discharges and land uses, and is in many ways aggressively attempting to expand its regulatory authority over air quality, water quality and solid wastes, among other things. These rules are being litigated by multiple parties. Regulations are also being considered at various governmental levels to increase federal financial responsibility requirements both for mine closure and reclamation and for oil and gas decommissioning, and to increase regulation of or prohibit hydraulic fracturing. Adoption of these or similar new environmental regulations or more stringent application of existing regulations may materially increase our costs, threaten certain operating activities and constrain our expansion opportunities.
In February 2016, the Department of the Interior's Fish & Wildlife Service (FWS) adopted final rules that broaden the regulatory definitions of "critical habitat" and "destruction or adverse modification," both of which are integral to the FWS's implementation of the Endangered Species Act, which protects federally-listed endangered and threatened species. The new rules increase FWS's discretion to limit uses of land and water courses that may become suitable habitat for listed species in the future, or that are occasionally used by protected species. The new rules may limit the ability of landowners, including us, to obtain federal permits or authorizations needed for expansion of our operations, and may also affect our ability to obtain, retain or deliver water to some operations.
We incurred environmental capital expenditures and other environmental costs (including our joint venture partners' shares) to comply with applicable environmental laws and regulations that affect our operations totaling $0.4 billion in each of 2016, 2015 and 2014. For 2017, we expect to incur approximately $0.6 billion of aggregate environmental capital expenditures and other environmental costs, which includes expenditures for the Miami smelter pollution control equipment discussed above. The timing and amounts of estimated payments could change as a result of changes in regulatory requirements, changes in scope and costs of reclamation and plug and abandonment activities, the settlement of environmental matters and the rate at which actual spending occurs on continuing matters.
We incur significant costs for remediating environmental conditions on properties that have not been operated in many years.
FMC and its subsidiaries, and many of their affiliates and predecessor companies, have been involved in exploration, mining, milling, smelting and manufacturing in the U.S. for more than a century. Activities that occurred in the late 19th century and the 20th century prior to the advent of modern environmental laws were not subject to environmental regulation and were conducted before American industrial companies fully understood the long-term effects of their operations on the surrounding environment.
With the passage of CERCLA in 1980, companies like FMC became legally responsible for remediating hazardous substances released into the environment from properties owned or operated by them as well as properties where they arranged for disposal of such substances, irrespective of when the release to the environment occurred or who caused it. That liability is often asserted on a joint and several basis with other prior and subsequent owners, operators and arrangers, meaning that each owner or operator of the property is, and each arranger may be, held fully responsible for the remediation, although in many cases some or all of the other responsible parties no longer exist, do not have the financial ability to respond or cannot be found. As a result, because of our acquisition of FMC in 2007, many of the subsidiary companies we now own are potentially responsible for a wide variety of environmental remediation projects throughout the U.S., and we expect to spend substantial sums annually for many years to address those remediation issues. We are also subject to claims where the release of hazardous substances is alleged to have damaged natural resources. At December 31, 2016, we had more than 100 active remediation projects in 26 U.S. states. In addition, FMC and certain affiliates and predecessor companies were parties to agreements relating to the transfer of businesses or properties that contained indemnification provisions relating to environmental matters, and from time to time these provisions become the source of claims against us.
At December 31, 2016, we had $1.2 billion recorded in our consolidated balance sheet for environmental obligations attributable to CERCLA or analogous state programs and for estimated future costs associated with environmental matters at closed facilities or closed portions of operating facilities. Our environmental obligation estimates are primarily based upon:
•
Our knowledge and beliefs about complex scientific and historical facts and circumstances that in many cases occurred many decades ago;
•
Our beliefs and assumptions regarding the nature, extent and duration of remediation activities that we will be required to undertake and the estimated costs of those remediation activities, which are subject to varying interpretations; and
•
Our beliefs regarding the requirements that are imposed on us by existing laws and regulations and, in some cases, the clarification of uncertain regulatory requirements that could materially affect our environmental obligation estimates.
Significant adjustments to these estimates are likely to occur in the future as additional information becomes available. The actual environmental costs may exceed our current and future accruals for these costs, and any such changes could be material.
In addition, remediation standards imposed by the EPA and state environmental agencies have generally become more stringent over time and may become even more stringent in the future. Imposition of more stringent remediation standards, particularly for arsenic and lead in soils, poses a risk that additional remediation work could be required at our active remediation sites and at sites that we have already remediated to the satisfaction of the responsible governmental agencies, and may increase the risk of toxic tort litigation.
Refer to Note 12 for further discussion of our environmental obligations.
Our Indonesia mining operations create difficult and costly environmental challenges, and future changes in environmental laws, or unanticipated environmental impacts from those operations, could require us to incur increased costs.
Mining operations on the scale of our Indonesia operations involve significant environmental risks and challenges. Our primary challenge is to dispose of the large amount of crushed and ground rock material, called tailings, that results from the process by which we physically separate the copper-, gold- and silver-bearing materials from the
ore that we mine. Our tailings management plan, which has been approved by the Indonesian government, uses the unnavigable river system in the highlands near our mine to transport the tailings to an engineered area in the lowlands where the tailings and natural sediments are managed in a deposition area. Lateral levees have been constructed to help contain the footprint of the tailings and to limit their impact in the lowlands.
Another major environmental challenge is managing overburden, which is the rock that must be moved aside in the mining process to reach the ore. In the presence of air, water and naturally occurring bacteria, some overburden can generate acid rock drainage, or acidic water containing dissolved metals that, if not properly managed, can adversely affect the environment. In addition, overburden stockpiles are subject to erosion caused by the large amounts of rainfall, with the eroded stockpile material eventually being deposited in the lowlands tailings management area; this additional material, while predicted in our environmental studies, influences the deposition of finer tailings material in the estuary.
From time to time, certain Indonesian government officials have raised questions with respect to our tailings and overburden management plans, including a suggestion that we implement a pipeline system rather than the river transport system for tailings management and disposition. Because our Indonesia mining operations are remotely located in steep mountainous terrain and in an active seismic area, a pipeline system would be costly, difficult to construct and maintain, and more prone to catastrophic failure, and could therefore involve significant potentially adverse environmental issues. Based on our own studies and others conducted by third parties, we do not believe that a pipeline system is necessary or practical.
Regulation of greenhouse gas emissions and climate change issues may increase our costs and adversely affect our operations.
Carbon-based energy is a significant input in our operations, and our revenues include sales of oil, natural gas liquids and natural gas, and other carbon-based energy products. The potential physical impacts of climate change on our operations are highly uncertain, and would vary by operation based on particular geographic circumstances. As a result of the Paris Agreement reached during the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change in 2015, a number of governments have pledged "Nationally Determined Contributions" to control and reduce greenhouse gas emissions. In the U.S., EPA has finalized regulations governing greenhouse gas emissions from new, modified, and existing power plants. While these rules are being challenged in court, increased regulation of greenhouse gas emissions may increase our costs.
Other risks
Our holding company structure may impact our ability to service debt and our stockholders’ ability to receive dividends.
We are a holding company with no material assets other than the capital stock and intercompany receivables of our subsidiaries. As a result, our ability to repay our indebtedness and pay dividends is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, loan, debt repayment or otherwise. Our subsidiaries do not have any obligation to make funds available to us to repay our indebtedness or pay dividends. Dividends from subsidiaries that are not wholly owned are shared with other equity owners. Cash at our international operations is also typically subject to foreign withholding taxes upon repatriation into the U.S.
In addition, our subsidiaries may not be able to, or be permitted to, make distributions to us or repay loans to us, to enable us to repay our indebtedness or pay dividends. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal restrictions, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. Certain of our subsidiaries are parties to credit agreements that restrict their ability to make distributions or loan repayments to us if such subsidiary is in default under such agreements, to repay any subordinated loan we may make to such subsidiary unless specified conditions are met, or to transfer substantially all of the assets of such subsidiary without the consent of the lenders.
Our rights to participate in any distribution of our subsidiaries' assets upon their liquidation, reorganization or insolvency would generally be subject to the prior claims of the subsidiaries' creditors, including any trade creditors.
Anti-takeover provisions in our charter documents and Delaware law may make an acquisition of us more difficult.
Anti-takeover provisions in our charter documents and Delaware law may make an acquisition of us more difficult. These provisions:
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Authorize the Board to issue preferred stock without stockholder approval and to designate the rights, preferences and privileges of each class; if issued, such preferred stock would increase the number of outstanding shares of our capital stock and could include terms that may deter an acquisition of us;
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Establish advance notice requirements for nominations to the Board or for proposals that can be presented at stockholder meetings;
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Limit who may call stockholder meetings; and
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Require the approval of the holders of two thirds of our outstanding common stock to enter into certain business combination transactions, subject to certain exceptions, including if the consideration to be received by our common stockholders in the transaction is deemed to be a fair price.
These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors other than the candidates nominated by the Board.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders from consummating a merger with, or acquisition of, us.
These provisions may deter an acquisition of us that might otherwise be attractive to stockholders.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 3. Legal Proceedings.
We are involved in numerous legal proceedings that arise in the ordinary course of our business or are associated with environmental issues arising from legacy operations conducted over the years by Freeport Minerals Corporation (FMC) and its affiliates. We are also involved periodically in reviews, inquiries, investigations and other proceedings initiated by or involving government agencies, some of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Management does not believe, based on currently available information, that the outcome of any legal proceeding will have a material adverse effect on our financial condition; although individual outcomes could be material to our operating results for a particular period, depending on the nature and magnitude of the outcome and the operating results for the period. Below is a discussion of our material water rights legal proceedings. Refer to Note 12 for discussion of our other material legal proceedings.
Water Rights Legal Proceedings
Our operations in the western United States (U.S.) require significant secure quantities of water for mining, ore processing and related support facilities. Continuous operation of our mines is dependent on, among other things, our ability to maintain our water rights and claims and the continuing physical availability of the water supplies. In the arid western U.S., where certain of our mines are located, water rights are often contested, and disputes over water rights are generally time-consuming, expensive and not necessarily dispositive unless they resolve both actual and potential claims. The loss of a water right, or a currently available water supply could force us to curtail operations, or force premature closures, thereby increasing and/or accelerating costs or foregoing profitable operations.
At our North America operations, certain of our water supplies are supported by surface water rights, which give us the right to use public waters for a statutorily defined beneficial use at a designated location. In Arizona, where our
operations use both surface and groundwater, we are a participant in an active general stream adjudication in which the Arizona courts have been attempting, for over 40 years, to quantify and prioritize surface water claims for the Gila River, one of the state's largest river systems, which primarily affect our Morenci, Safford, and Sierrita mines. The adjudication is addressing the state law claims of thousands of competing users, including us, as well as significant federal water claims that are potentially adverse to the state law claims of both surface water and groundwater users. Groundwater is treated differently from surface water under Arizona law, which historically allowed land owners to pump unlimited quantities of subsurface water, subject only to the requirement of putting it to "reasonable use." However, court decisions in the adjudication have concluded that underground water is often hydrologically connected to surface water so that it actually is surface water and is therefore subject to the Arizona doctrine of prior appropriation, as a result of which it would be subject to the adjudication and potentially unavailable to groundwater pumpers in the absence of valid surface water claims, which historic groundwater pumpers typically do not have. Any re-characterization of groundwater as surface water could affect the ability of consumers, farmers, ranchers, municipalities, and industrial users like us to continue to access water supplies that have been relied on for decades. Because we are a user of both groundwater and surface water in Arizona, we are an active participant in the adjudication proceeding.
In Re The General Adjudication of All Rights to Use Water in the Gila River System and Sources, Maricopa County, Superior Court, Cause Nos. W-1 (Salt), W-2 (Verde), W-3 (Upper Gila), and W-4 (San Pedro). This case was originally initiated in 1974 with the filing of a petition with the Arizona State Land Department and was consolidated and transferred to the Maricopa County Superior Court in 1981. The principal parties, in addition to us, include: the state of Arizona; the Gila Valley Irrigation District; the Franklin Irrigation District; the San Carlos Irrigation and Drainage District; the Salt River Project; the San Carlos Apache Tribe; the Gila River Indian Community (GRIC); and the U.S. on behalf of those tribes, on its own behalf, and on behalf of the White Mountain Apache Tribe, the Fort McDowell Mohave-Apache Indian Community, the Salt River Pima-Maricopa Indian Community, and the Payson Community of Yavapai Apache Indians.
Prior to January 1, 1983, various Indian tribes filed suits in the U.S. District Court in Arizona claiming superior rights to water being used by many other water users, including us, and claiming damages for prior use in derogation of their allegedly superior rights. These federal proceedings have either been stayed pending the Arizona Superior Court adjudications or have been settled.
The Maricopa County Superior Court issued a decision in 2005 in the Gila River adjudication that directed the Arizona Department of Water Resources (ADWR) to prepare detailed recommendations regarding the delineation of the “sub-flow” zone of the San Pedro River Basin, a tributary of the Gila River. According to the court, the sub-flow zone is the subsurface area adjacent to the river where the court may find that groundwater is connected to the surface water such that groundwater pumping may reduce surface flows in violation of rights of holders of surface water rights. Although we have minimal interests in the San Pedro River Basin, a decision that re-characterizes groundwater in that basin as surface water may set a precedent for other river systems in Arizona that could have material implications for many commercial, industrial, municipal and agricultural users of groundwater, including our Arizona operations.
ADWR produced its recommendations in June 2009 which were objected to by numerous parties. Following this and other court rulings in 2012 and 2013, ADWR submitted a revised report in 2014. The court held hearings in 2015 to address the parties' comments and objections, and the issue is currently under advisement with the court. Also in 2014, ADWR submitted a proposal for the next projects that it believes should be undertaken in the case, including the development of procedures for "cone of depression" analyses to determine whether a well located outside of the subflow zone creates a cone of depression that intersects the subflow zone and causes a drawdown in the subflow of the river. Based on the cone of depression analyses, wells outside of the subflow zone could be subject to the jurisdiction of the adjudication court, which might then require the owners of those wells to either demonstrate a valid surface water claim to support the pumping, refrain from pumping or pay damages. On January 27, 2017, ADWR issued a report containing its recommendations on cone of depression methodologies, and on January 31, 2017, the Special Master issued an order initiating proceedings on the Cone of Depression Test Methodology developed by ADWR. Parties have until March 6, 2017, to file objections to the proposed methodology contained in ADWR’s report. A status conference has been set for March 15, 2017, to schedule any proceedings necessary to resolve any objections filed to the ADWR report.
As part of the Gila River adjudication, the U.S. has asserted numerous claims for express and implied "reserved" surface water and groundwater rights on non-Indian federal lands throughout Arizona. These claims are related to reservations of federal land for specific purposes (e.g., national parks, military bases and wilderness areas). Unlike
state law-based water rights, federal reserved water rights are given priority in the prior appropriation system based on the date the land was reserved, not the date that water was first used on the land. In addition, federal reserved water rights, if recognized by the court, may enjoy greater protection from groundwater pumping than is accorded to state law-based water rights.
Because federal reserved water rights have not yet been quantified, the task of determining how much water each federal reservation may use has been left to the Gila River adjudication court. Several “contested cases” to quantify reserved water rights for particular federal reservations in Arizona are currently pending in the adjudication. For instance, In re Aravaipa Canyon Wilderness Area is a contested case to resolve the U.S.'s claims to water for the Aravaipa Canyon Wilderness Area. These claims went to trial in 2015 and the parties are awaiting a decision. In Re Fort Huachuca concerns the U.S.'s claims to water for an Army base. Trial began in October 2016 and has been continued into February 2017. In Re Redfield Canyon Wilderness Area and In Re San Pedro Riparian National Conservation Area concern the U.S.'s claims to two other federal reservations, and these cases are expected to go to trial in 2017.
In multiple instances, the U.S. asserts a right to all water in a particular watershed that was not effectively appropriated under state law prior to the establishment of the federal reservation. This creates risks for both surface water users and groundwater users because such expansive claims may severely impede current and future uses of water within the same watershed. Federal reserved rights present additional risks to water users aside from the significant quantities of water claimed by the U.S. Of particular significance, federal reserved rights enjoy greater protection from groundwater pumping than is accorded to state law-based water rights.
Because there are numerous federal reservations in watersheds across Arizona, the reserved water right claims of the U.S. pose a significant risk to multiple operations, including Morenci and Safford in the Upper Gila River watershed, and Sierrita in the Santa Cruz watershed. Because federal reserved water rights may adversely affect water uses at each of these operations, we have been actively involved in litigation over these claims.
Given the legal and technical complexity of these adjudications, their long history, and their long-term legal, economic and political implications, it is difficult to predict the timing or the outcome of these proceedings. If we are unable to satisfactorily resolve the issues being addressed in the adjudications, our ability to pump groundwater could be diminished or curtailed, and our operations at Morenci, Safford and Sierrita mines could be adversely affected unless we are able to acquire alternative resources.
Item 4. Mine Safety Disclosures.
The safety and health of all employees is our highest priority. Management believes that safety and health considerations are integral to, and compatible with, all other functions in the organization and that proper safety and health management will enhance production and reduce costs. Our approach towards the health and safety of our workforce is to continuously improve performance through implementing robust management systems and providing adequate training, safety incentive and occupational health programs.
Our objective is zero work place injuries and occupational illnesses. We measure progress toward achieving our objective against regularly established benchmarks, including measuring company-wide Total Recordable Incident Rates (TRIR). Our TRIR (including contractors) was 0.64 per 200,000 man-hours worked in 2016 and 0.56 per 200,000 man-hours worked in both 2015 and 2014. The metal mining sector industry average reported by the U.S. Mine Safety and Health Administration (MSHA) was 2.02 per 200,000 man-hours worked in 2015 and 2.23 per 200,000 man-hours worked in 2014. The metal mining sector industry average for 2016 was not available at the time of this filing.
Refer to Exhibit 95.1 for mine safety disclosures required in accordance with Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K.
Executive Officers of the Registrant.
Certain information as of February 15, 2017, about our executive officers is set forth in the following table and accompanying text:
Name
Age
Position or Office
Richard C. Adkerson
Vice Chairman of the Board, President and Chief Executive Officer
Kathleen L. Quirk
Executive Vice President, Chief Financial Officer and Treasurer
Harry M. "Red" Conger, IV
President and Chief Operating Officer - Americas
Michael J. Arnold
Executive Vice President and Chief Administrative Officer
Richard C. Adkerson has served as Vice Chairman of the Board since June 2013, President since January 2008 and also from April 1997 to March 2007, Chief Executive Officer since December 2003 and a director since October 2006. Mr. Adkerson previously served as Chief Financial Officer from October 2000 to December 2003. Mr. Adkerson served as Co-Chairman of the Board of McMoRan Exploration Co. (MMR) from September 1998 until FCX's acquisition of MMR in 2013.
Kathleen L. Quirk has served as Executive Vice President since March 2007, Chief Financial Officer since December 2003 and Treasurer since February 2000. Ms. Quirk previously served as Senior Vice President from December 2003 to March 2007. Ms. Quirk served as Senior Vice President of MMR from April 2002 and as Treasurer from January 2000 until FCX's acquisition of MMR in 2013.
Harry M. "Red" Conger, IV has served as Chief Operating Officer - Americas since July 2015, and as President - Americas since 2007. Mr. Conger has also served as President and Chief Operating Officer - Rod and Refining since 2014. He served as Chief Operating Officer - Africa Mining from July 2015 to December 2016. Prior to 2007, he served in a number of senior operations positions at Phelps Dodge Corporation.
Michael J. Arnold has served as Executive Vice President since March 2007 and Chief Administrative Officer since December 2003.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Unregistered Sales of Equity Securities
None.
Common Stock
Our common shares trade on the New York Stock Exchange (NYSE) under the symbol “FCX.” The FCX share price is reported daily in the financial press under “FMCG” in most listings of NYSE securities. The table below shows the NYSE composite tape common share price ranges during 2016 and 2015:
At February 15, 2017, there were 14,665 holders of record of our common stock.
Common Stock Dividends
In February 2012, the FCX Board of Directors (the Board) authorized an increase in the cash dividend on our common stock to an annual rate of $1.25 per share ($0.3125 per share quarterly). The Board declared a one-time special cash dividend of $0.1105 per share related to the settlement of the shareholder derivative litigation, which was paid in August 2015. In March 2015, the Board reduced the annual common stock dividend to $0.20 per share ($0.05 per share quarterly), and in December 2015, the Board suspended the annual common stock dividend. Accordingly, there were no common stock dividends paid in 2016.
Below is a summary of FCX common stock dividends declared and paid during 2015:
The declaration of dividends is at the discretion of our Board and will depend upon our financial results, cash requirements, future prospects and other factors deemed relevant by our Board. Additionally, in connection with the February 2016 amendment to the revolving credit facility, we are not permitted to pay dividends on our common stock on or prior to March 31, 2017. The Board reviews its financial policy on an ongoing basis.
Issuer Purchases of Equity Securities
The following table sets forth information with respect to shares of FCX common stock purchased by us during the three months ended December 31, 2016:
a.
On July 21, 2008, the Board approved an increase in our open-market share purchase program for up to 30 million shares. The program does not have an expiration date.
Item 6. Selected Financial Data.
FREEPORT-McMoRan INC.
SELECTED FINANCIAL AND OPERATING DATA
The selected consolidated financial data shown above is derived from our audited consolidated financial statements. These historical results are not necessarily indicative of results that you can expect for any future period. You should read this data in conjunction with Items 7. and 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risks (MD&A) and
Item 8. Financial Statements and Supplementary Data.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Freeport-McMoRan Inc.’s (the Company’s) management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of the end of the fiscal year covered by this annual report on Form 10-K. In making this assessment, our management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on its assessment, management concluded that, as of December 31, 2016, our Company’s internal control over financial reporting is effective based on the COSO criteria.
Ernst & Young LLP, an independent registered public accounting firm, who audited the Company’s consolidated financial statements included in this Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting, which is included herein.
/s/ Richard C. Adkerson
/s/ Kathleen L. Quirk
Richard C. Adkerson
Kathleen L. Quirk
Vice Chairman of the Board,
Executive Vice President,
President and Chief Executive Officer
Chief Financial Officer and Treasurer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan INC.
We have audited Freeport-McMoRan Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Freeport-McMoRan Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Freeport-McMoRan Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Freeport-McMoRan Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, equity and cash flows for each of the three years in the period ended December 31, 2016 and our report dated February 24, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Phoenix, Arizona
February 24, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan INC.
We have audited the accompanying consolidated balance sheets of Freeport-McMoRan Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, equity and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Freeport-McMoRan Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Freeport-McMoRan Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Phoenix, Arizona
February 24, 2017
FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
FREEPORT-McMoRan INC.
CONSOLIDATED BALANCE SHEETS
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF EQUITY
FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
FREEPORT-McMoRan INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements of Freeport-McMoRan Inc. (FCX) include the accounts of those subsidiaries where it directly or indirectly has more than 50 percent of the voting rights and has the right to control significant management decisions. The most significant entities that FCX consolidates include its 90.64 percent-owned subsidiary PT Freeport Indonesia (PT-FI), and the following wholly owned subsidiaries: Freeport Minerals Corporation (FMC), Atlantic Copper, S.L.U. (Atlantic Copper) and FCX Oil & Gas LLC (FM O&G, formerly FCX Oil & Gas Inc.).
FCX acquired mining assets in North America, South America and Africa when it acquired Phelps Dodge Corporation (now known as FMC) in 2007. FCX acquired oil and gas operations when it acquired Plains Exploration & Production Company (PXP) and McMoRan Exploration Co. (MMR), collectively known as FM O&G, in 2013. During 2014 and 2016, FCX completed sales of certain of its operating assets. Refer to Note 2 for further discussion.
FCX’s unincorporated joint ventures with Rio Tinto plc (Rio Tinto), Sumitomo Metal Mining Arizona, Inc. (Sumitomo) and SMM Morenci, Inc. (an affiliate of Sumitomo Metal Mining Co., Ltd.) are reflected using the proportionate consolidation method (refer to Note 3 for further discussion). Investments in unconsolidated companies owned 20 percent or more are recorded using the equity method. Investments in companies owned less than 20 percent, and for which FCX does not exercise significant influence, are carried at cost. All significant intercompany transactions have been eliminated. Dollar amounts in tables are stated in millions, except per share amounts.
Business Segments. FCX has organized its continuing mining operations into four primary divisions - North America copper mines, South America mining, Indonesia mining and Molybdenum mines, and operating segments that meet certain thresholds are reportable segments. For oil and gas operations, FCX determines its operating segments on a country-by-country basis. FCX's reportable segments include the Morenci, Cerro Verde and Grasberg copper mines, the Rod & Refining operations and the United States (U.S.) Oil & Gas operations. Refer to Note 16 for further discussion.
Use of Estimates. The preparation of FCX’s financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of management estimates include reserve estimation (minerals, and oil and natural gas); timing of transfers of oil and gas properties not subject to amortization into the full cost pool; asset lives for depreciation, depletion and amortization; environmental obligations; asset retirement obligations; estimates of recoverable copper in mill and leach stockpiles; deferred taxes and valuation allowances; reserves for contingencies and litigation; asset impairment, including estimates used to derive future cash flows associated with those assets; pension benefits; and valuation of derivative instruments. Actual results could differ from those estimates.
Functional Currency. The functional currency for the majority of FCX's foreign operations is the U.S. dollar. For foreign subsidiaries whose functional currency is the U.S. dollar, monetary assets and liabilities denominated in the local currency are translated at current exchange rates, and non-monetary assets and liabilities, such as inventories, property, plant, equipment and mine development costs, are translated at historical rates. Gains and losses resulting from translation of such account balances are included in other income (expense), as are gains and losses from foreign currency transactions. Foreign currency gains (losses) totaled $32 million in 2016, $(90) million in 2015 and $(2) million in 2014.
Cash Equivalents. Highly liquid investments purchased with maturities of three months or less are considered cash equivalents.
Inventories. Inventories include mill and leach stockpiles, materials and supplies, and product inventories. Beginning in third-quarter 2015 because of the adoption of new accounting guidance, inventories are stated at the lower of weighted-average cost or net realizable value (NRV).
Mill and Leach Stockpiles. Mill and leach stockpiles are work-in-process inventories for FCX's mining operations. Mill and leach stockpiles have been extracted from an ore body and are available for copper recovery. Mill stockpiles contain sulfide ores and recovery of metal is through milling, concentrating and smelting and refining or, alternatively, by concentrate leaching. Leach stockpiles contain oxide ores and certain secondary sulfide ores and recovery of metal is through exposure to acidic solutions that dissolve contained copper and deliver it in solution to extraction processing facilities (i.e., solution extraction and electrowinning (SX/EW)). The recorded cost of mill and leach stockpiles includes mining and haulage costs incurred to deliver ore to stockpiles, depreciation, depletion, amortization and site overhead costs. Material is removed from the stockpiles at a weighted-average cost per pound.
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 grade of the 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, once entered into the production process, can be produced into copper concentrate almost immediately.
Expected copper recovery rates for leach stockpiles are determined using small-scale laboratory tests, small- to large-scale column testing (which simulates the production process), historical trends and other factors, including mineralogy of the ore and rock type. Total copper recovery in leach stockpiles can vary significantly from a low percentage to more than 90 percent depending on several variables, including processing methodology, processing variables, mineralogy and particle size of the rock. For newly placed material on active stockpiles, as much as 80 percent of the total copper recovery may occur during the first year, and the remaining copper may be recovered over many years.
Processes and recovery rates for mill and leach stockpiles are monitored regularly, and recovery rate estimates are adjusted periodically as additional information becomes available and as related technology changes. Adjustments to recovery rates will typically result in a future impact to the value of the material removed from the stockpiles at a revised weighted-average cost per pound of recoverable copper.
Product Inventories. Product inventories include raw materials, work-in-process and finished goods. Raw materials are primarily unprocessed concentrate at Atlantic Copper's smelting and refining operations. Work-in-process inventories are primarily copper concentrate at various stages of conversion into anode and cathode at Atlantic Copper's operations. Atlantic Copper’s in-process inventories are valued at the weighted-average cost of the material fed to the smelting and refining process plus in-process conversion costs. Finished goods for mining operations represent salable products (e.g., copper and molybdenum concentrate, copper anode, copper cathode, copper rod, copper wire, molybdenum oxide, and high-purity molybdenum chemicals and other metallurgical products). Finished goods are valued based on the weighted-average cost of source material plus applicable conversion costs relating to associated process facilities. Costs of finished goods and work-in-process (i.e., not raw materials) inventories include labor and benefits, supplies, energy, depreciation, depletion, amortization, site overhead costs and other necessary costs associated with the extraction and processing of ore, including, depending on the process, mining, haulage, milling, concentrating, smelting, leaching, solution extraction, refining, roasting and chemical processing. Corporate general and administrative costs are not included in inventory costs.
Property, Plant, Equipment and Mine Development Costs. Property, plant, equipment and mine development costs are carried at cost. Mineral exploration costs, as well as drilling and other costs incurred for the purpose of converting mineral resources to proven and probable reserves or identifying new mineral resources at development or production stage properties, are charged to expense as incurred. Development costs are capitalized beginning after proven and probable mineral reserves have been established. Development costs include costs incurred resulting from mine pre-production activities undertaken to gain access to proven and probable reserves, including shafts, adits, drifts, ramps, permanent excavations, infrastructure and removal of overburden. Additionally, interest expense allocable to the cost of developing mining properties and to constructing new facilities is capitalized until assets are ready for their intended use.
Expenditures for replacements and improvements are capitalized. Costs related to periodic scheduled maintenance (i.e., turnarounds) are charged to expense as incurred. Depreciation for mining and milling life-of-mine assets, infrastructure and other common costs is determined using the unit-of-production (UOP) method based on total estimated recoverable proven and probable copper reserves (for primary copper mines) and proven and probable molybdenum reserves (for primary molybdenum mines). Development costs and acquisition costs for proven and probable mineral reserves that relate to a specific ore body are depreciated using the UOP method based on estimated recoverable proven and probable mineral reserves for the ore body benefited. Depreciation, depletion and amortization using the UOP method is recorded upon extraction of the recoverable copper or molybdenum from the ore body, at which time it is allocated to inventory cost and then included as a component of cost of goods sold. Other assets are depreciated on a straight-line basis over estimated useful lives of up to 39 years for buildings and three to 30 years for machinery and equipment, and mobile equipment.
Included in property, plant, equipment and mine development costs is value beyond proven and probable mineral reserves (VBPP), primarily resulting from FCX’s acquisition of FMC in 2007. The concept of VBPP may be interpreted differently by different mining companies. FCX’s VBPP is attributable to (i) mineralized material, which includes measured and indicated amounts, that FCX believes could be brought into production with the establishment or modification of required permits and should market conditions and technical assessments warrant, (ii) inferred mineral resources and (iii) exploration potential.
Carrying amounts assigned to VBPP are not charged to expense until the VBPP becomes associated with additional proven and probable mineral reserves and the reserves are produced or the VBPP is determined to be impaired. Additions to proven and probable mineral reserves for properties with VBPP will carry with them the value assigned to VBPP at the date acquired, less any impairment amounts. Refer to Note 5 for further discussion.
Impairment of Long-Lived Mining Assets. FCX assesses the carrying values of its long-lived mining assets for impairment when events or changes in circumstances indicate that the related carrying amounts of such assets may not be recoverable. In evaluating long-lived mining assets for recoverability, estimates of pre-tax undiscounted future cash flows of FCX’s individual mines are used. An impairment is considered to exist if total estimated undiscounted future cash flows are less than the carrying amount of the asset. Once it is determined that an impairment exists, an impairment loss is measured as the amount by which the asset carrying value exceeds its fair value. The estimated undiscounted cash flows used to assess recoverability of long-lived assets and to measure the fair value of FCX’s mining operations are derived from current business plans, which are developed using near-term price forecasts reflective of the current price environment and management’s projections for long-term average metal prices. In addition to near- and long-term metal price assumptions, other key assumptions include estimates of commodity-based and other input costs; proven and probable mineral reserves estimates, including the timing and cost to develop and produce the reserves; VBPP estimates; and the use of appropriate discount rates. FCX believes its estimates and models used to determine fair value are similar to what a market participant would use. As quoted market prices are unavailable for FCX’s individual mining operations, fair value is determined through the use of after-tax discounted estimated future cash flows (i.e., Level 3 measurement).
Oil and Gas Properties. FCX follows the full cost method of accounting specified by the U.S. Securities and Exchange Commission's (SEC) rules whereby all costs associated with oil and gas property acquisition, exploration and development activities are capitalized into a cost center on a country-by-country basis. Such costs include internal general and administrative costs, such as payroll and related benefits and costs directly attributable to employees engaged in acquisition, exploration and development activities. General and administrative costs associated with production, operations, marketing and general corporate activities are charged to expense as incurred. Capitalized costs, along with estimated future costs to develop proved reserves and asset retirement costs that are not already included in oil and gas properties, net of related salvage value, are amortized to expense under the UOP method using engineers' estimates of the related, by-country proved oil and natural gas reserves.
The costs of unproved oil and gas properties are excluded from amortization until the properties are evaluated. Costs are transferred into the amortization base on an ongoing basis as the properties are evaluated and proved oil and natural gas reserves are established or if impairment is determined. Unproved oil and gas properties are assessed periodically, at least annually, to determine whether impairment has occurred. FCX assesses unproved oil and gas properties for impairment on an individual basis or as a group if properties are individually insignificant. The assessment considers the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of proved reserves, the economic viability of development if proved reserves are assigned and other current market conditions. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of
the associated leasehold costs are transferred to the full cost pool and are then subject to amortization. Including amounts determined to be impaired, FCX transferred $4.9 billion of costs associated with unevaluated properties to the full cost pool in 2016, $6.4 billion in 2015 and $2.5 billion in 2014. The transfer of costs into the amortization base involves a significant amount of judgment and may be subject to changes over time based on drilling plans and results, geological and geophysical evaluations, the assignment of proved oil and natural gas reserves, availability of capital and other factors. Costs not subject to amortization consist primarily of capitalized costs incurred for undeveloped acreage and wells in progress pending determination, together with capitalized interest for these projects. The ultimate evaluation of the properties occurs over a period of several years. Following the completion of the sales of oil and gas properties discussed in Note 2, FCX had no unproved oil and gas properties in the consolidated balance sheets at December 31, 2016. Interest costs totaling $7 million in 2016, $58 million in 2015 and $88 million in 2014 were capitalized on oil and gas properties not subject to amortization and in the process of development.
Proceeds from the sale of oil and gas properties are accounted for as reductions to capitalized costs unless the reduction causes a significant change in proved reserves, which absent other factors, is generally described as a 25 percent or greater change, and significantly alters the relationship between capitalized costs and proved reserves attributable to a cost center, in which case a gain or loss is recognized.
Impairment of Oil and Gas Properties. Under the SEC full cost accounting rules, FCX reviews the carrying value of its oil and gas properties in the full cost pool for impairment 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:
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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
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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 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 and natural gas 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.”
In 2016, 2015 and 2014, net capitalized costs with respect to FCX's proved oil and gas properties exceeded the related ceiling test limitation; therefore, impairment charges of $4.3 billion were recorded in 2016, $13.1 billion in 2015 and $3.7 billion in 2014, primarily because of the lower twelve-month average of the first-day-of-the-month historical reference oil price and reserve revisions. The twelve-month average WTI reference oil price was $42.75 per barrel at December 31, 2016, compared with $50.28 per barrel at December 31, 2015, and $94.99 per barrel at December 31, 2014.
Goodwill. Goodwill has an indefinite useful life and is not amortized, but rather is tested for impairment at least annually during the fourth quarter, 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 value. Impairment occurs when the carrying amount of goodwill exceeds its implied fair value. FCX generally uses a discounted cash flow model to determine if the carrying value of a reporting unit, including goodwill, is less than the fair value of the reporting unit. FCX's approach to allocating goodwill includes the identification of the reporting unit it believes has contributed to the excess purchase price and includes consideration of the reporting unit's potential for future growth. Goodwill of $1.9 billion arose in 2013 with FCX's acquisitions of PXP and MMR, and was allocated to the U.S. oil and gas reporting unit. When a sale of oil and gas properties occurs, goodwill is allocated to that property based on the relationship of the fair value of the property sold to the total reporting unit's fair value.
A summary of changes in the carrying amount of goodwill follows:
During fourth-quarter 2014, FCX conducted a goodwill impairment assessment because of the significant decline in oil prices, which resulted in an impairment charge of $1.7 billion for the full carrying value of goodwill. Crude oil prices and FCX's estimates of oil reserves at December 31, 2014, represented the most significant assumptions used in FCX's evaluation of goodwill (i.e., Level 3 measurement). Forward strip Brent oil prices used in FCX's estimates at December 31, 2014, ranged from approximately $62 per barrel to $80 per barrel for the years 2015 through 2021, compared with a range from approximately $90 per barrel to $98 per barrel at the acquisition date.
Deferred Mining Costs. Stripping costs (i.e., the costs of removing overburden and waste material to access mineral deposits) incurred during the production phase of a mine are considered variable production costs and are included as a component of inventory produced during the period in which stripping costs are incurred. Major development expenditures, including stripping costs to prepare unique and identifiable areas outside the current mining area for future production that are considered to be pre-production mine development, are capitalized and amortized using the UOP method based on estimated recoverable proven and probable reserves for the ore body benefited. However, where a second or subsequent pit or major expansion is considered to be a continuation of existing mining activities, stripping costs are accounted for as a current production cost and a component of the associated inventory.
Environmental Obligations. Environmental expenditures are charged to expense or capitalized, depending upon their future economic benefits. Accruals for such expenditures are recorded when it is probable that obligations have been incurred and the costs can be reasonably estimated. Environmental obligations attributed to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (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 obligations 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 FMC that were initially recorded at estimated fair values (refer to Note 12 for further discussion), environmental obligations are recorded on an undiscounted basis. Where the available information is sufficient to estimate the amount of the obligation, 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 consolidated financial statements until they become probable. Legal costs associated with environmental remediation (such as fees to outside law firms for work relating to determining the extent and type of remedial actions and the allocation of costs among PRPs) are included as part of the estimated obligation.
Environmental obligations assumed in the acquisition of FMC, which were initially recorded at fair value and estimated on a discounted basis, are accreted to full value over time through charges to interest expense. Adjustments arising from changes in amounts and timing of estimated costs and settlements may result in increases and decreases in these obligations and are calculated in the same manner as they were initially estimated. Unless these adjustments qualify for capitalization, changes in environmental obligations are charged to operating income when they occur.
FCX performs a comprehensive review of its environmental obligations annually and also reviews changes in facts and circumstances associated with these obligations at least quarterly.
Asset Retirement Obligations. FCX records the fair value of estimated asset retirement obligations (AROs) associated with tangible long-lived assets in the period incurred. Retirement obligations associated with long-lived assets are those for which there is a legal obligation to settle under existing or enacted law, statute, written or oral contract or by legal construction. These obligations, which are initially estimated based on discounted cash flow estimates, are accreted to full value over time through charges to cost of sales. In addition, asset retirement costs (ARCs) are capitalized as part of the related asset’s carrying value and are depreciated over the asset’s respective useful life.
For mining operations, reclamation costs for disturbances are recognized as an ARO and as a related ARC (included in property, plant, equipment and mine development costs) in the period of the disturbance and depreciated primarily on a UOP basis. FCX’s AROs for mining operations consist primarily of costs associated with mine reclamation and closure activities. These activities, which are site specific, generally include costs for earthwork, revegetation, water treatment and demolition.
For oil and gas properties, the fair value of the legal obligation is recognized as an ARO and as a related ARC (included in oil and gas properties) in the period in which the well is drilled or acquired and is amortized on a UOP basis together with other capitalized costs. Substantially all of FCX’s oil and gas leases require that, upon termination of economic production, the working interest owners plug and abandon non-producing wellbores; remove platforms, tanks, production equipment and flow lines; and restore the wellsite.
At least annually, FCX reviews its ARO estimates for changes in the projected timing of certain reclamation and closure/restoration costs, changes in cost estimates and additional AROs incurred during the period. Refer to Note 12 for further discussion.
Redeemable Noncontrolling Interest - PXP. FCX assumed ownership of Plains Offshore Operations Inc. (Plains Offshore) in connection with its acquisition of PXP in 2013. In 2011, PXP had issued (i) 450,000 shares of Plains Offshore (a consolidated subsidiary of FM O&G) 8% Convertible Preferred Stock (Preferred Stock) for gross proceeds of $450 million and (ii) non-detachable warrants with an exercise price of $20 per share to purchase in aggregate 9.1 million shares of Plains Offshore's common stock. In 2011, Plains Offshore also issued 87 million shares of Plains Offshore Class A common stock, which was to be held in escrow until the conversion and cancellation of the Preferred Stock or the exercise of the warrants. In January 2014, Plains Offshore issued (i) 24,000 shares of Preferred Stock for gross proceeds of $24 million and (ii) non-detachable warrants with an exercise price of $20 per share to purchase in aggregate 0.5 million shares of Plains Offshore's common stock. Plains Offshore held certain of FM O&G's oil and gas properties and assets located in the Gulf of Mexico (GOM) in water depths of 500 feet or more, including the Lucius oil field and the Phobos discovery, but excluding the properties acquired by PXP in 2012 from BP Exploration & Production Inc., BP America Production Company and Shell Offshore Inc. The Preferred Stock represented a 20 percent equity interest in Plains Offshore and was entitled to a dividend of 8 percent per annum, payable quarterly, of which 2 percent could be deferred.
In connection with the December 2016 sale of the Deepwater GOM oil and gas properties, FCX settled the Preferred Stock obligation. Refer to Note 2 for further discussion.
The Preferred Stock of Plains Offshore was classified as temporary equity because of its redemption features and was therefore reported outside of permanent equity in FCX's consolidated balance sheets.
Revenue Recognition. FCX sells its products pursuant to sales contracts entered into with its customers. Revenue for all FCX’s products is recognized when title and risk of loss pass to the customer and when collectibility is reasonably assured. The passing of title and risk of loss to the customer are based on terms of the sales contract, generally upon shipment or delivery of product.
Revenues from FCX’s concentrate and cathode sales are recorded based on a provisional sales price or a final sales price calculated in accordance with the terms specified in the relevant sales contract. Revenues from concentrate sales are recorded net of treatment and all refining charges and the impact of derivative contracts. Moreover, because a portion of the metals contained in copper concentrate is unrecoverable as a result of the smelting process, FCX’s revenues from concentrate sales are also recorded net of allowances based on the quantity and value of these unrecoverable metals. These allowances are a negotiated term of FCX’s contracts and vary by customer. Treatment and refining charges represent payments or price adjustments to smelters and refiners that are generally fixed.
Under the long-established structure of sales agreements prevalent in the mining industry, copper contained in concentrate and cathode are generally provisionally priced at the time of shipment. The provisional prices are finalized in a specified future month (generally one to four months from the shipment date) based on quoted monthly average spot copper prices on the London Metal Exchange (LME) or the Commodity Exchange Inc. (COMEX), a division of the New York Mercantile Exchange (NYMEX). FCX receives market prices based on prices in the specified future month, which results in price fluctuations recorded to revenues until the date of settlement. FCX records revenues and invoices customers at the time of shipment based on then-current LME or COMEX prices, which results in an embedded derivative (i.e., a pricing mechanism that is finalized after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale of the metals contained in the concentrate or cathode at the then-current LME or COMEX price. FCX applies the normal purchases and normal sales scope exception in accordance with derivatives and hedge accounting guidance to the host contract in its concentrate or cathode sales agreements since these contracts do not allow for net settlement and always result in physical delivery. The embedded derivative does not qualify for hedge accounting and is adjusted to fair value through earnings each period, using the period-end forward prices, until the date of final pricing.
Gold sales are priced according to individual contract terms, generally the average London Bullion Market Association (London) price for a specified month near the month of shipment.
The majority of FCX’s molybdenum sales are priced based on the average published Metals Week price, plus conversion premiums for products that undergo additional processing, such as ferromolybdenum and molybdenum chemical products, for the month prior to the month of shipment. FCX has also incorporated changes in the commercial pricing structure for its molybdenum-based chemical products to enable continuation of chemical-grade production.
PT-FI concentrate sales and Sociedad Minera Cerro Verde S.A.A. (Cerro Verde) metal sales are subject to certain royalties, which are recorded as a reduction to revenues. Cerro Verde is a subsidiary of FMC. In addition, PT-FI concentrate sales are also subject to export duties since 2014, which are recorded as a reduction to revenues. Refer to Note 13 for further discussion.
Oil and gas revenue from FCX's interests in producing wells is recognized upon delivery and passage of title, net of any royalty interests or other profit interests in the produced product. Oil sales are primarily under contracts with prices based upon regional benchmarks. Gas sales are generally priced daily based on prices in the spot market. Gas revenue is recorded using the sales method for gas imbalances. If FCX's sales of production volumes for a well exceed its portion of the estimated remaining recoverable reserves of the well, a liability is recorded. No receivables are recorded for those wells on which FCX has taken less than its ownership share of production unless the amount taken by other parties exceeds the estimate of their remaining reserves. There were no material gas imbalances at December 31, 2016.
Stock-Based Compensation. Compensation costs for share-based payments to employees are measured at fair value and charged to expense over the requisite service period for awards that are expected to vest. The fair value of stock options is determined using the Black-Scholes-Merton option valuation model. The fair value for stock-settled restricted stock units (RSUs) is based on FCX's stock price on the date of grant. Shares of common stock are issued at the vesting date for stock-settled RSUs. The fair value of performance share units (PSUs) are determined using a Monte-Carlo simulation model. The fair value for liability-classified awards (i.e., cash-settled stock appreciation rights (SARs), cash-settled RSUs and cash-settled PSUs) is remeasured each reporting period using the Black-Scholes-Merton option valuation model for SARs and FCX's stock price for cash-settled RSUs and cash-settled PSUs. FCX has elected to recognize compensation costs for stock option awards and SARs that vest over several years on a straight-line basis over the vesting period, and for RSUs and cash-settled PSUs on the graded-vesting method over the vesting period. Refer to Note 10 for further discussion.
Earnings Per Share. FCX calculates its basic earnings per share under the two-class method and calculates its diluted earnings per share using the more dilutive of the two-class method or the treasury stock method. Basic and diluted net loss per share of common stock were computed by dividing net loss attributable to common stockholders (after deducting accumulated dividends to participating securities) by the weighted-average shares of common stock outstanding during the year. All potentially dilutive shares of common stock have been excluded from the computation of weighted-average shares of common stock outstanding since their inclusion would be anti-dilutive because of the net loss reported for each year.
A reconciliation of net loss and weighted-average shares of common stock outstanding for purposes of calculating basic and diluted net (loss) income per share for the years ended December 31 follows:
a.
Excludes approximately 12 million shares of common stock in 2016, 9 million in 2015 and 10 million in 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 year are excluded from the computation of diluted net loss per share of common stock. Stock options for 46 million shares of common stock were excluded in 2016, 45 million in 2015 and 31 million in 2014.
New Accounting Standards. In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) that provides a single comprehensive revenue recognition model, which will replace most existing revenue recognition guidance, and also requires expanded disclosures. The core principle of the model is that revenue is recognized when control of goods or services has been transferred to customers at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, and interim reporting periods within that reporting period. FCX will adopt this ASU January 1, 2018, and currently expects to apply the modified retrospective approach under which any cumulative effect adjustment would be recorded to retained earnings as of the adoption date. FCX has not yet completed its final review of the impact of this guidance; however, based on the terms of its sales contracts, FCX currently does not anticipate a material impact on its revenue recognition policies or processes. FCX continues to review the impact of the new guidance on its financial reporting and disclosures.
In August 2014, FASB issued an ASU that requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued and to provide certain disclosures depending on the result of the evaluation. This ASU is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. FCX adopted this ASU for its year ended December 31, 2016.
In May 2015, FASB issued an ASU that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value (NAV) per share (or its equivalent) as a practical expedient. FCX adopted this ASU effective January 1, 2016, and the prior period disclosures have been restated to remove these investments from the levels within the fair value hierarchy.
In January 2016, FASB issued an ASU that amends the current guidance on the classification and measurement of financial instruments. This ASU makes limited changes to existing guidance and amends certain disclosure requirements. For public entities, this ASU is effective for interim and annual periods beginning after December 15, 2017. Early adoption is not permitted, except for the provision on recording fair value changes for financial liabilities under the fair value option. FCX is currently evaluating the impact this ASU will have on its financial reporting and disclosures, but at this time does not expect the adoption of this ASU will have a material impact on its financial statements.
In February 2016, FASB issued an ASU that will require lessees to recognize most leases on the balance sheet. This ASU allows lessees to make an accounting policy election to not recognize a lease asset and liability for leases with a term of 12 months or less and do not have a purchase option that is expected to be exercised. For public entities, this ASU is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. This ASU must be applied using the modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. FCX is currently evaluating the impact this guidance will have on its financial statements.
In March 2016, FASB issued an ASU that simplifies various aspects of the accounting for share-based payment transactions, including the income tax consequences, statutory tax withholding requirements, an accounting policy election for forfeitures and the classification on the statement of cash flows. For public entities, this ASU is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. Each of the amendments in this ASU provides specific transition requirements. FCX will adopt this ASU effective January 1, 2017, and adoption will not have a material impact on its financial statements. This ASU requires recognition of excess tax benefits and tax deficiencies in the income statement prospectively beginning in the first quarter of 2017, which could result in fluctuations in FCX's quarterly effective tax rate depending on how many awards vest or are exercised in a quarter, as well as the volatility of FCX's stock price.
In June 2016, FASB issued an ASU that changes the impairment model for most financial assets and certain other instruments, and will also require expanded disclosures. For public entities, this ASU is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The provisions of the ASU must be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. FCX is currently evaluating the impact this ASU will have on its financial statements.
NOTE 2. DISPOSITIONS AND ACQUISITIONS
TF Holdings Limited - Discontinued Operations. FCX had a 70 percent interest in TF Holdings Limited (TFHL), and TFHL owns 80 percent of Tenke Fungurume Mining S.A. (TFM or Tenke) located in the Democratic Republic of Congo (DRC). On November 16, 2016, FCX completed the sale of its interest in TFHL to China Molybdenum Co., Ltd. (CMOC) for $2.65 billion in cash (before closing adjustments) and contingent consideration of up to $120 million in cash, consisting of $60 million if the average copper price exceeds $3.50 per pound and $60 million if the average cobalt price exceeds $20 per pound, both during calendar years 2018 and 2019. One-half of the proceeds from this transaction was used to repay borrowings under FCX's unsecured bank term loan. The contingent consideration is considered a derivative, and at December 31, 2016, the fair value was $13 million and was recorded in other assets on the consolidated balance sheets and reduced the loss on disposal, which is reflected in net (loss) income from discontinued operations. Future changes in the fair value of the contingent consideration derivative will be recorded in discontinued operations.
In October 2016, La Générale des Carrières et des Mines (Gécamines), which is wholly owned by the DRC government and holds a 20 percent non-dilutable interest in TFM, filed an arbitration proceeding with the International Chamber of Commerce (ICC) International Court of Arbitration challenging the sale of TFHL. In January 2017, a settlement agreement was entered into with Gécamines that resolved all claims brought by Gécamines against FCX, including the arbitration proceeding. The parties to the settlement are FCX, CMOC, Lundin Mining Corporation (Lundin), TFHL, TFM, BHR Newwood Investment Management Limited and Gécamines. The settlement resulted in a charge of $33 million to the 2016 loss on disposal.
In accordance with accounting guidance, FCX reported the results of operations of TFHL as discontinued operations in the consolidated statements of operations because the disposal represents a strategic shift that had a major effect on operations, and presented the assets and liabilities of TFHL as held for sale in the consolidated balance sheets for all periods presented. The consolidated statements of comprehensive loss were not impacted by discontinued operations as TFHL did not have any other comprehensive (loss) income, and the consolidated statements of cash flows are reported on a combined basis without separately presenting discontinued operations.
The carrying amounts of TFHL's major classes of assets, liabilities and noncontrolling interests, which were held for sale in the consolidated balance sheets at December 31, 2015, follow:
a.
Amount differs from the totals on FCX's consolidated balance sheets because of other assets held for sale.
Net (loss) income from discontinued operations in the consolidated statements of operations consists of the following:
a.
In accordance with accounting guidance, amounts are net of eliminations of intercompany sales totaling $157 million in 2016, $114 million in 2015 and $121 million in 2014.
b.
In accordance with accounting guidance, depreciation, depletion and amortization is not recognized subsequent to classification as assets held for sale, which occurred in May 2016.
c.
In accordance with accounting guidance, interest associated with FCX's unsecured bank term loan that was required to be repaid as a result of the sale of TFHL has been allocated to discontinued operations.
d.
Includes a charge of $33 million associated with the settlement agreement entered into with Gécamines, partly offset by a gain of $13 million for the fair value of contingent consideration.
Cash flows from discontinued operations included in the consolidated statements of cash flows follow:
FCX has also agreed to negotiate exclusively with CMOC (until February 28, 2017) to enter into a definitive agreement to sell its interest in Freeport Cobalt for $100 million and the Kisanfu exploration project in the DRC for $50 million in separate transactions. Freeport Cobalt includes the large-scale cobalt refinery in Kokkola, Finland, and the related sales and marketing business, in which FCX owns an effective 56 percent interest. Kisanfu is a copper and cobalt exploration project, located near Tenke, in which FCX holds a 100 percent interest. The assets and liabilities of Freeport Cobalt and Kisanfu are classified as held for sale in the consolidated balance sheets, and a $110 million estimated loss on disposal was included in net gain on sales of assets in 2016 in the consolidated statements of operations.
Oil and Gas Operations. On December 30, 2016, FM O&G completed the sale of its onshore California oil and gas properties to Sentinel Peak Resources California LLC (Sentinel) for cash consideration of $592 million (before closing adjustments from the July 1, 2016, effective date) and contingent consideration of up to $150 million, consisting of $50 million per year for 2018, 2019 and 2020 if the price of Brent crude oil averages over $70 per barrel in each of these calendar years. The contingent consideration is considered a derivative, and at December 31, 2016, the fair value was $33 million, which was recorded in other assets on the consolidated balance sheets and included in the gain on the sale. Future changes in the fair value of the contingent consideration derivative will be recorded in operating income. Sentinel assumed abandonment obligations associated with the properties.
On December 15, 2016, FM O&G completed the sale of its Deepwater GOM oil and gas properties to Anadarko Petroleum Corporation (Anadarko) for cash consideration of $2.0 billion (before closing adjustments from the August 1, 2016, effective date) and up to $150 million in contingent payments. The contingent payments were recorded under the loss recovery approach, whereby contingent gains are recorded up to the amount of any loss on
the sale, and was included in other assets ($150 million) on the consolidated balance sheets and reduced the loss on the sale. The contingent payments will be received over time as Anadarko realizes future cash flows in connection with a third-party production handling agreement for an offshore platform. Anadarko assumed abandonment obligations associated with these properties. A portion of the proceeds from this transaction was used to repay FCX's remaining outstanding borrowings under its unsecured bank term loan.
Under the full cost accounting rules, the sales of the Deepwater GOM and onshore California oil and gas properties required gain (loss) recognition (net loss of $9 million, which was net of $150 million for contingent payments associated with the Deepwater GOM sale and $33 million for the fair value of contingent consideration from the onshore California sale) because of their significance to the full cost pool.
In connection with the sale of the Deepwater GOM oil and gas properties, FM O&G entered into an agreement to amend the terms of the Plains Offshore Preferred Stock that was reported as redeemable noncontrolling interest on FCX's consolidated balance sheets. The amendment provided FM O&G the right to call these securities for $582 million. FM O&G exercised this option in December 2016 and recorded a $199 million gain on redemption to retained earnings.
On July 25, 2016, FM O&G sold its Haynesville shale assets for cash consideration of $87 million, before closing adjustments. On June 17, 2016, FM O&G sold certain oil and gas royalty interests to Black Stone Minerals, L.P. for cash consideration of $102 million, before closing adjustments. Under the full cost accounting rules, the proceeds from these transactions were recorded as a reduction of capitalized oil and gas properties, with no gain or loss recognition.
In 2014, FCX completed the acquisition of Deepwater GOM oil and gas interests, including (i) an interest in the Vito oil discovery in the Mississippi Canyon area and a significant lease position in the Vito Basin area for $496 million, and (ii) interests in the Lucius and Heidelberg oil fields and several exploration leases for $918 million. These Deepwater GOM acquisitions were funded primarily by the like-kind exchange escrow from the sale of the Eagle Ford shale assets discussed below.
Also in 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 $84 million of deferred tax expense recorded 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 GOM oil and gas interests, as discussed above. The remaining proceeds were used to repay debt.
Morenci. On May 31, 2016, FCX sold a 13 percent undivided interest in its Morenci unincorporated joint venture to SMM Morenci, Inc. for $1.0 billion in cash. FCX recorded a $576 million gain on the transaction and used losses to offset cash taxes on the transaction. A portion of the proceeds from the transaction was used to repay borrowings under FCX's unsecured bank term loan and revolving credit facility.
The Morenci unincorporated joint venture was owned 85 percent by FCX and 15 percent by Sumitomo. As a result of the transaction, the unincorporated joint venture is owned 72 percent by FCX, 15 percent by Sumitomo and 13 percent by SMM Morenci, Inc.
Timok. On May 2, 2016, FMC sold an interest in the Timok exploration project in Serbia to Global Reservoir Minerals Inc. (now known as Nevsun Resources, Ltd.) for consideration of $135 million in cash and contingent consideration of up to $107 million payable to FCX in stages upon achievement of defined development milestones. As a result of this transaction, FCX recorded a gain of $133 million in 2016, and no amounts were recorded for contingent consideration under the loss recovery approach. A portion of the proceeds from the transaction was used to repay borrowings under FCX's unsecured bank term loan.
Candelaria and Ojos del Salado. On November 3, 2014, FCX completed the sale of its 80 percent ownership interests in the Candelaria and Ojos del Salado copper mining operations and supporting infrastructure located in Chile to Lundin for $1.8 billion in cash, before closing adjustments, and contingent consideration of up to $200 million. Contingent consideration is calculated as five percent of net copper revenues in any annual period over the ensuing five years when the average realized copper price exceeds $4.00 per pound. Excluding contingent consideration (for which no amounts were recorded under the loss recovery approach), after-tax net proceeds totaled $1.5 billion, and FCX recorded a gain of $671 million associated with this transaction. The transaction had an effective date of June 30, 2014. FCX used the proceeds from this transaction to repay indebtedness.
This sale did not meet the criteria for classification as a discontinued operation. The following table provides balances of the major classes of assets and liabilities for the Candelaria and Ojos del Salado mines at November 3, 2014:
For the period from January 1, 2014, to November 3, 2014, net income before income taxes was $270 million and net income attributable to common stockholders was $144 million for the Candelaria and Ojos del Salado mines.
NOTE 3. OWNERSHIP IN SUBSIDIARIES AND JOINT VENTURES
Ownership in Subsidiaries. FMC is a fully integrated producer of copper and molybdenum, with mines in North America and South America. At December 31, 2016, FMC’s operating mines in North America were Morenci, Bagdad, Safford, Sierrita and Miami located in Arizona; Tyrone and Chino located in New Mexico; and Henderson and Climax located in Colorado. FCX has a 72 percent interest (subsequent to the sale of a 13 percent undivided interest on May 31, 2016) in Morenci (refer to “Joint Ventures - Sumitomo”) and owns 100 percent of the other North America mines. At December 31, 2016, operating mines in South America were Cerro Verde (53.56 percent owned) located in Peru and El Abra (51 percent owned) located in Chile. At December 31, 2016, FMC’s net assets totaled $15.8 billion and its accumulated deficit totaled $14.1 billion. FCX had no loans outstanding to FMC at December 31, 2016.
FCX’s direct ownership in PT-FI totals 81.28 percent. PT Indocopper Investama, an Indonesian company, owns 9.36 percent of PT-FI, and FCX owns 100 percent of PT Indocopper Investama. Refer to "Joint Ventures - Rio Tinto" for discussion of the unincorporated joint ventures. At December 31, 2016, PT-FI's net assets totaled $6.4 billion and its retained earnings totaled $6.1 billion. FCX had $88 million in intercompany loans outstanding to PT-FI at December 31, 2016.
FCX owns 100 percent of the outstanding Atlantic Copper common stock. At December 31, 2016, Atlantic Copper’s net liabilities totaled $25 million and its accumulated deficit totaled $436 million. FCX had $290 million in intercompany loans outstanding to Atlantic Copper at December 31, 2016.
FCX owns 100 percent of FM O&G, which, as of December 31, 2016, has a portfolio of oil and gas assets that includes oil and natural gas production onshore in South Louisiana and on the GOM shelf, oil production offshore California and natural gas production from the Madden area in central Wyoming. At December 31, 2016, FM O&G’s net liabilities totaled $13.4 billion and its accumulated deficit totaled $25.0 billion. FCX had $9.1 billion in intercompany loans outstanding to FM O&G at December 31, 2016.
Joint Ventures. FCX has the following unincorporated joint ventures.
Rio Tinto. PT-FI and Rio Tinto have established an unincorporated joint venture pursuant to which Rio Tinto has a 40 percent interest in PT-FI’s Contract of Work (COW) and the option to participate in 40 percent of any other future exploration projects in Papua, Indonesia.
Pursuant to the joint venture agreement, Rio Tinto has a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver through 2022 in Block A of PT-FI’s COW, and, after 2022, a 40 percent interest in all production from Block A. All of PT-FI’s proven and probable reserves and all its mining operations are located in the Block A area. PT-FI receives 100 percent of production and related revenues from reserves established as of December 31, 1994 (27.1 billion pounds of copper, 38.4 million ounces of gold and 75.8 million ounces of silver), divided into annual portions subject to reallocation for events causing changes in the anticipated production schedule. Production and related revenues exceeding those annual amounts (referred to as incremental expansion revenues) are shared 60 percent PT-FI and 40 percent Rio Tinto. Operating, nonexpansion capital and administrative costs are shared 60 percent PT-FI and 40 percent Rio Tinto based on the ratio of (i) the incremental expansion revenues to (ii) total revenues from production from Block A, with PT-FI responsible for the rest of such costs. PT-FI will continue to receive 100 percent of the cash flow from specified annual amounts of copper, gold and silver through 2022 calculated by reference to its proven and probable reserves as of December 31, 1994, and 60 percent of all remaining cash flow. Expansion capital costs are shared 60 percent PT-FI and 40 percent Rio Tinto. The payable to Rio Tinto for its share of joint venture cash flows was $10 million at both December 31, 2016 and 2015.
Sumitomo and SMM Morenci, Inc. FCX owns a 72 percent undivided interest in Morenci via an unincorporated joint venture. The remaining 28 percent is owned by Sumitomo (15 percent) and SMM Morenci, Inc. (13 percent). Each partner takes in kind its share of Morenci’s production. FMC purchased 165 million pounds of Morenci’s copper cathode from Sumitomo and SMM Morenci, Inc. at market prices for $362 million during 2016. FCX had a receivable from Sumitomo and SMM Morenci, Inc. of $15 million at December 31, 2016, and a receivable from Sumitomo of $10 million at December 31, 2015.
NOTE 4. INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES
The components of inventories follow:
a.
Materials and supplies inventory was net of obsolescence reserves totaling $29 million at December 31, 2016, and $26 million at December 31, 2015.
b.
Estimated metals in stockpiles not expected to be recovered within the next 12 months.
FCX recorded charges for adjustments to metals inventory carrying values of $36 million for 2016, primarily for molybdenum because of lower molybdenum prices, $338 million ($215 million for copper inventories and $123 million for molybdenum inventories) for 2015 and $6 million for 2014 (refer to Note 16 for metals inventory adjustments by business segment).
NOTE 5. PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT COSTS, NET
The components of net property, plant, equipment and mine development costs follow:
FCX recorded $1.6 billion for VBPP in connection with the FMC acquisition in 2007 (excluding $634 million associated with mining operations that were sold or included in assets held for sale) and transferred $640 million to proven and probable mineral reserves prior to 2015 (none in 2016 and 2015). Cumulative impairments of VBPP total $485 million, which were primarily recorded in 2008.
Capitalized interest, which primarily related to FCX's mining operations' capital projects, totaled $92 million in 2016, $157 million in 2015 and $148 million in 2014.
In response to market conditions, beginning in the second half of 2015, FCX made adjustments to its operating plans for its mining operations. Operating plans for the North America copper mines were revised to reduce operating and capital costs, and adjust production to reflect market conditions; operations at the El Abra mine in Chile were adjusted to reduce mining and stacking rates by approximately 50 percent to achieve lower operating and labor costs, defer capital expenditures and extend the life of the existing operation; and the Henderson molybdenum mine in Colorado operated at reduced rates during 2016, resulting in an approximate 65 percent reduction in its annual production volumes.
In connection with the decline in copper and molybdenum prices in 2015 and the revised operating plans discussed above, FCX evaluated its long-lived assets (other than indefinite-lived intangible assets) for impairment during 2015 and as of December 31, 2015, as described in Note 1. FCX’s evaluations of its copper mines at December 31, 2015, were based on near-term price assumptions reflecting prevailing copper future prices, which ranged from $2.15 per pound to $2.17 per pound for COMEX and from $2.13 per pound to $2.16 per pound for LME, and a long-term average price of $3.00 per pound. FCX's evaluations of its molybdenum mines at December 31, 2015, were based on near-term price assumptions that were consistent with then-current market prices for molybdenum and a long-term average price of $10.00 per pound.
FCX’s evaluations 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 $37 million in 2015, net of a revision to Tyrone's ARO.
During 2016, FCX concluded there were no events or changes in circumstances that would indicate that the carrying amount of its long-lived mining assets might not be recoverable. Additionally, copper and molybdenum prices have improved. The LME copper spot price of $2.50 per pound at December 31, 2016, was 17 percent higher than the LME spot price of $2.13 per pound at December 31, 2015, and the weekly average price for molybdenum of $6.74 per pound at December 31, 2016, was 29 percent higher than the weekly average price of $5.23 per pound at December 31, 2015.
NOTE 6. OTHER ASSETS
The components of other assets follow:
a.
Refer to Note 12 for further discussion.
b.
Intangible assets were net of accumulated amortization totaling $37 million at December 31, 2016, and $61 million at December 31, 2015.
c.
Relates to PT-FI's commitment for smelter development in Indonesia (refer to Note 13 for further discussion).
d.
FCX's 25 percent ownership in PT Smelting (smelter and refinery in Gresik, Indonesia) is recorded using the equity method. Amounts were reduced by unrecognized profits on sales from PT-FI to PT Smelting totaling $39 million at December 31, 2016, and $14 million at December 31, 2015. Trade accounts receivable from PT Smelting totaled $283 million at December 31, 2016, and $160 million at December 31, 2015.
e.
Refer to Note 2 for further discussion.
f.
Includes $173 million at December 31, 2016, and $169 million at December 31, 2015, held in trusts for AROs related to properties in New Mexico (refer to Note 12 for further discussion).
g.
Includes tax overpayments and refunds not expected to be realized within the next 12 months (primarily at PT-FI and Cerro Verde).
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities follow:
a.
Third-party interest paid, net of capitalized interest, was $743 million in 2016, $570 million in 2015 and $637 million (including $3 million for discontinued operations) in 2014.
b.
Refer to Note 9 for long-term portion.
NOTE 8. DEBT
FCX's debt at December 31, 2016, included additions of $179 million ($210 million at December 31, 2015) for unamortized fair value adjustments (primarily from the 2013 oil and gas acquisitions), and is net of reductions of $100 million ($129 million at December 31, 2015) for unamortized net discounts and unamortized debt issuance costs. The components of debt follow:
Bank Term Loan. In February 2013, FCX entered into an agreement for a $4.0 billion unsecured bank term loan (Term Loan) in connection with the acquisitions of PXP and MMR. Upon closing the PXP acquisition, FCX borrowed $4.0 billion under the Term Loan, and FM O&G LLC (a wholly owned subsidiary of FM O&G and the successor entity of PXP) joined the Term Loan as a borrower.
During 2016, FCX paid off the balance of the Term Loan with a portion of the proceeds from sales of assets (refer to Note 2 for further discussion).
Revolving Credit Facility. In May 2014, FCX, PT-FI and FM O&G LLC amended the senior unsecured $3.0 billion revolving credit facility to extend the maturity date one year to May 31, 2019, and increase the aggregate facility amount from $3.0 billion to $4.0 billion, with $500 million available to PT-FI. FCX, PT-FI and FM O&G LLC had entered into the $3.0 billion revolving credit facility on May 31, 2013 (upon completion of the acquisition of PXP). In February and December 2015, FCX modified the revolving credit facility to amend the maximum total leverage ratio. In February 2016, FCX amended its revolving credit facility, which included (i) modification of the maximum
leverage ratio and the minimum interest expense coverage ratio and (ii) a commitment reduction from $4.0 billion to $3.5 billion.
At December 31, 2016, FCX had no borrowings outstanding and $43 million of letters of credit issued under the revolving credit facility, resulting in availability of approximately $3.5 billion, of which $1.5 billion could be used for additional letters of credit.
Interest on the revolving credit facility (London Interbank Offered Rate (LIBOR) plus 2.50 percent or an alternate base rate (ABR) plus 1.50 percent at December 31, 2016) is determined by reference to FCX's credit ratings.
Lines of Credit. At December 31, 2016, FCX had no borrowings outstanding on its uncommitted and short-term lines of credit with certain financial institutions. These unsecured lines of credit allow FCX to borrow at a spread over LIBOR or the respective financial institution's cost of funds with terms and pricing that are generally more favorable than FCX's revolving credit facility.
Cerro Verde Credit Facility. In March 2014, Cerro Verde entered into a five-year, $1.8 billion senior unsecured credit facility that is nonrecourse to FCX and the other shareholders of Cerro Verde. Interest on amounts drawn under the term loan is based on LIBOR plus a spread (1.90 percent at December 31, 2016) based on Cerro Verde’s total net debt to EBITDA ratio as defined in the agreement. At December 31, 2016, term loan borrowings under the facility totaled $1.4 billion. The credit facility amortizes in four installments in amounts necessary for the aggregate borrowings and outstanding letters of credit not to exceed 85 percent of the $1.8 billion commitment on September 30, 2017, 70 percent on March 31, 2018, and 35 percent on September 30, 2018, with the remaining balance due on the maturity date of March 10, 2019. The interest rate on Cerro Verde's credit facility was 2.67 percent at December 31, 2016.
Cerro Verde Shareholder Loans. In December 2014, Cerro Verde entered into loan agreements with three of 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 LIBOR plus the current spread on Cerro Verde’s 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. At December 31, 2016, the outstanding balance on the Cerro Verde shareholder loans was $261 million (excluding $345 million from FMC, which is eliminated in consolidation). The weighted-average interest rate on the Cerro Verde shareholder loans was 3.10 percent at December 31, 2016.
Senior Notes issued by FCX. In December 2016, FCX completed an exchange offer and consent solicitation associated with FM O&G LLC senior notes. Holders representing 89 percent of the outstanding FM O&G LLC senior notes tendered their notes and received new FCX senior notes. Each series of newly issued FCX senior notes have an interest rate that is identical to the interest rate of the applicable series of FM O&G LLC senior notes. The newly issued FCX senior notes are senior unsecured obligations of FCX and rank equally in right of payment with all other existing and future senior unsecured indebtedness of FCX. These new FCX senior notes have not been registered with the SEC under the Securities Act of 1933, as amended, or any state or foreign securities law. The 6.125% Senior Notes due 2019, 6½% Senior Notes due 2020 and 6.625% Senior Notes due 2021 are redeemable at specified redemption prices. The 6.75% Senior Notes due 2022 and 67/8% Senior Notes due 2023 are redeemable in whole or in part, at the option of FCX, at make-whole redemption prices prior to February 1, 2018, and February 15, 2020, respectively, and at specified redemption prices thereafter. A summary of the tenders follows:
The principal amounts were increased by $151 million to reflect the remaining unamortized acquisition-date fair market value adjustments associated with the PXP acquisition. In addition, FCX paid $14 million in cash consideration for FM O&G LLC’s senior notes that were tendered, which reduced the book value of the new FCX senior notes. These adjustments and cash consideration are being amortized over the term of these senior notes and recorded as a net reduction of interest expense.
In November 2014, FCX sold $750 million of 2.30% Senior Notes due 2017, $600 million of 4.00% Senior Notes due 2021, $850 million of 4.55% Senior Notes due 2024 and $800 million of 5.40% Senior Notes due 2034 for total net proceeds of $2.97 billion. In March 2013, in connection with the financing of FCX's acquisitions of PXP and MMR, FCX issued $6.5 billion of unsecured senior notes in four tranches. FCX sold $1.5 billion of 2.375% Senior Notes due March 2018, $1.0 billion of 3.100% Senior Notes due March 2020, $2.0 billion of 3.875% Senior Notes due March 2023 and $2.0 billion of 5.450% Senior Notes due March 2043 for total net proceeds of $6.4 billion. In February 2012, FCX sold $500 million of 2.15% Senior Notes due 2017 and $2.0 billion of 3.55% Senior Notes due 2022 for total net proceeds of $2.47 billion.
The 2.15% Senior Notes due 2017, 2.30% Senior Notes due 2017, 2.375% Senior Notes due 2018, 3.100% Senior Notes due 2020 and 4.00% Senior Notes due 2021 are redeemable in whole or in part, at the option of FCX, at a make-whole redemption price. The senior notes listed below are redeemable in whole or in part, at the option of FCX, at a make-whole redemption price prior to the dates stated below, and beginning on the dates stated below at 100 percent of principal.
These senior notes rank equally with FCX's other existing and future unsecured and unsubordinated indebtedness.
Senior Notes issued by FM O&G LLC. In May 2013, in connection with the acquisition of PXP, FCX assumed unsecured senior notes with a stated value of $6.4 billion, which was increased by $716 million to reflect the acquisition-date fair market value of these senior notes. After redemptions and the 2016 exchange offer and consent solicitation discussed above, as of December 31, 2016, the stated value of these senior notes totaled $251 million, which was increased by $16 million to reflect the remaining unamortized acquisition-date fair market value adjustments that are being amortized over the term of these senior notes and recorded as a reduction of interest expense. The 6.125% Senior Notes due 2019, 6½% Senior Notes due 2020, 6.625% Senior Notes due 2021 and 6.75% Senior Notes due 2022 are redeemable at specified redemption prices. The 67/8% Senior Notes due 2023 are redeemable in whole or in part, at the option of FM O&G LLC, at make-whole redemption prices prior to February 15, 2018, and at specified redemption prices thereafter.
Exchanges and Early Extinguishment of Debt. During 2016, FCX redeemed certain senior notes in exchange for its common stock (refer to Note 10 for further discussion) and purchased certain senior notes in open-market transactions. A summary of these debt extinguishments follows:
Partially offsetting the $54 million gain was $28 million in losses, primarily related to deferred debt issuance costs for the Term Loan that was repaid and costs associated with the December 2016 senior note exchange offer and consent solicitation.
A summary of debt extinguishments during 2014 resulting from redemptions and tender offers follows:
Partially offsetting the net $77 million gain was $4 million in losses, primarily associated with the modification of FCX's revolving credit facility in May 2014.
Guarantees. In connection with the acquisition of PXP, FCX guaranteed the PXP senior notes, and the guarantees by certain PXP subsidiaries were released. Refer to Note 17 for a discussion of FCX’s senior notes guaranteed by FM O&G LLC.
Restrictive Covenants. FCX's revolving credit facility contains customary affirmative covenants and representations, and also a number of negative covenants that, among other things, restrict, subject to certain exceptions, the ability of FCX’s subsidiaries that are not borrowers or guarantors to incur additional indebtedness (including guarantee obligations) and FCX’s ability or the ability of FCX’s subsidiaries to: create liens on assets; enter into sale and leaseback transactions; engage in mergers, liquidations and dissolutions; and sell assets. FCX's revolving credit facility also contains financial ratios governing maximum total leverage and minimum interest coverage. Following the February 2016 amendment, FCX's leverage ratio (Net Debt/EBITDA, as defined in the credit agreement) cannot exceed 4.25x in 2017 and 3.75x thereafter. Additionally, under the February 2016 amendments, many of the exceptions to the subsidiary indebtedness restrictions and the lien restrictions were narrowed significantly through March 31, 2017. In addition, on or prior to March 31, 2017, FCX is not permitted to pay dividends on its common stock or make other restricted payments. The pricing under the amended revolving credit facility also changed and is a function of credit ratings and the leverage ratio. FCX’s senior notes contain limitations on liens. At December 31, 2016, FCX was in compliance with all of its covenants.
Maturities. Maturities of debt instruments based on the principal amounts and terms outstanding at December 31, 2016, total $1.2 billion in 2017, $2.3 billion in 2018, $1.1 billion in 2019, $1.6 billion in 2020, $862 million in 2021 and $8.8 billion thereafter.
NOTE 9. OTHER LIABILITIES, INCLUDING EMPLOYEE BENEFITS
The components of other liabilities follow:
a.
Refer to Note 7 for current portion.
Pension Plans. Following is a discussion of FCX’s pension plans.
FMC Plans. FMC has U.S. trusteed, non-contributory pension plans covering substantially all of its U.S. employees and some employees of its international subsidiaries hired before 2007. The applicable FMC plan design determines the manner in which benefits are calculated for any particular group of employees. Benefits are calculated based on final average monthly compensation and years of service or based on a fixed amount for each year of service. Non-bargained FMC employees hired after December 31, 2006, are not eligible to participate in the FMC U.S. pension plan.
FCX’s funding policy for these plans provides that contributions to pension trusts shall be at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended, for U.S. plans; or, in the case of international plans, the minimum legal requirements that may be applicable in the various countries. Additional contributions also may be made from time to time.
FCX’s policy for determining asset-mix targets for the FMC plan assets held in a master trust (Master Trust) includes the periodic development of asset and liability studies to determine expected long-term rates of return and expected risk for various investment portfolios. FCX’s retirement plan administration and investment committee considers these studies in the formal establishment of asset-mix targets. FCX’s investment objective emphasizes the need to maintain a well-diversified investment program through both the allocation of the Master Trust assets among asset classes and the selection of investment managers whose various styles are fundamentally complementary to one another and serve to achieve satisfactory rates of return. Diversification, by asset class and by investment manager, is FCX’s principal means of reducing volatility and exercising prudent investment judgment. FCX’s present target asset allocation approximates 46 percent equity investments (primarily global equities), 43 percent fixed income (primarily long-term treasury STRIPS or "separate trading or registered interest and principal securities"; long-term U.S. treasury/agency bonds; global fixed income securities; long-term, high-credit quality corporate bonds; high-yield and emerging markets fixed income securities; and fixed income debt securities) and 11 percent alternative investments (private real estate, real estate investment trusts and private equity).
The expected rate of return on plan assets is evaluated at least annually, taking into consideration asset allocation, historical returns on the types of assets held in the Master Trust and the current economic environment. Based on these factors, FCX expects the pension assets will earn an average of 7.0 percent per annum beginning January 1, 2017. The 7.0 percent estimation was based on a passive return on a compound basis of 6.5 percent and a premium for active management of 0.5 percent reflecting the target asset allocation and current investment array.
For estimation purposes, FCX assumes the long-term asset mix for these plans generally will be consistent with the current mix. Changes in the asset mix could impact the amount of recorded pension income or expense, the funded status of the plans and the need for future cash contributions. A lower-than-expected return on assets also would decrease plan assets and increase the amount of recorded pension expense in future years. When calculating the expected return on plan assets, FCX uses the market value of assets.
Among the assumptions used to estimate the pension benefit obligation is a discount rate used to calculate the present value of expected future benefit payments for service to date. The discount rate assumption for FCX’s U.S. plans is designed to reflect yields on high-quality, fixed-income investments for a given duration. The determination of the discount rate for these plans is based on expected future benefit payments for service to date together with the Mercer Pension Discount Curve - Above Mean Yield. The Mercer Pension Discount Curve - Above Mean Yield is constructed from the bonds in the Mercer Pension Discount Curve that have a yield higher than the regression mean yield curve. The Mercer Pension Discount Curve consists of spot (i.e., zero coupon) interest rates at one-half year increments for each of the next 30 years and is developed based on pricing and yield information for high-quality corporate bonds. Changes in the discount rate are reflected in FCX’s benefit obligation and, therefore, in future pension costs.
Other FCX Plans. In 2004, FCX established an unfunded Supplemental Executive Retirement Plan (SERP) for its two most senior executive officers. The SERP provides for retirement benefits payable in the form of a joint and survivor annuity or an equivalent lump sum, which is determined on January 1 of the year in which the participant completed 25 years of credited service. The annuity will equal a percentage of the executive’s highest average compensation for any consecutive three-year period during the five years immediately preceding 25 years of credited service. The SERP benefit will be reduced by the value of all benefits paid or due under any defined benefit or defined contribution plan sponsored by FM Services Company, FCX’s wholly owned subsidiary, FCX or its predecessor, but not including accounts funded exclusively by deductions from participant’s pay. One of the executive officers retired in December 2015 and received a lump sum payment of $27 million in 2016.
PT-FI Plan. PT-FI has a defined benefit pension plan denominated in Indonesian rupiah covering substantially all of its Indonesian national employees. PT-FI funds the plan and invests the assets in accordance with Indonesian pension guidelines. The pension obligation was valued at an exchange rate of 13,369 rupiah to one U.S. dollar on December 31, 2016, and 13,726 rupiah to one U.S. dollar on December 31, 2015. Indonesian labor laws require that companies provide a minimum level of benefits to employees upon employment termination based on the reason for termination and the employee’s years of service. PT-FI’s pension benefit disclosures include benefits related to this law. PT-FI’s expected rate of return on plan assets is evaluated at least annually, taking into consideration its long-range estimated return for the plan based on the asset mix. Based on these factors, PT-FI expects its pension assets will earn an average of 7.75 percent per annum beginning January 1, 2017. The discount rate assumption for PT-FI's plan is based on the Mercer Indonesian zero coupon bond yield curve derived from the Indonesian Government Security Yield Curve. Changes in the discount rate are reflected in PT-FI's benefit obligation and, therefore, in future pension costs.
Plan Information. FCX uses a measurement date of December 31 for its plans. Information for those plans where the accumulated benefit obligations exceed the fair value of plan assets follows:
Information on the FCX (including FMC’s plans) and PT-FI plans as of December 31 follows:
a.
Resulted from the 2015 revised mine operating plans and reductions in the workforce (refer to Note 5 for further discussion).
b.
Employer contributions for 2017 are expected to approximate $140 million for the FCX plans and $32 million for the PT-FI plan (based on a December 31, 2016, exchange rate of 13,369 Indonesian rupiah to one U.S. dollar).
The weighted-average assumptions used to determine net periodic benefit cost and the components of net periodic benefit cost for FCX’s pension plans for the years ended December 31 follow:
a.
The assumptions shown relate only to the FMC plans.
The weighted-average assumptions used to determine net periodic benefit cost and the components of net periodic benefit cost for PT-FI’s pension plan for the years ended December 31 follow:
Included in accumulated other comprehensive loss are the following amounts that have not been recognized in net periodic pension cost as of December 31:
Actuarial losses in excess of 10 percent of the greater of the projected benefit obligation or market-related value of plan assets are amortized over the expected average remaining future service period of the current active participants. The amount expected to be recognized in 2017 net periodic pension cost for actuarial losses is $50 million.
FCX does not expect to have any plan assets returned to it in 2017. Plan assets are classified within a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), then to significant observable inputs (Level 2) and the lowest priority to significant unobservable inputs (Level 3).
Effective January 1, 2016, FCX retrospectively adopted the ASU associated with investments for which fair value is measured using the NAV per share as a practical expedient. As a result, investments valued using NAV per share are shown in the tables below in a column separate from the levels within the fair value hierarchy. A summary of the fair value for pension plan assets associated with the FCX plans follows:
Following is a description of the pension plan asset categories and the valuation techniques used to measure fair value. There have been no changes to the techniques used to measure fair value.
Commingled/collective funds are managed by several fund managers and are valued at the NAV per unit of the fund. For most of these funds, the majority of the underlying assets are actively traded securities. These funds (except the real estate property fund) require up to a 60-day notice for redemptions. The real estate property fund is valued at NAV using information from independent appraisal firms, who have knowledge and expertise about the current market values of real property in the same vicinity as the investments. Redemptions of the real estate property fund are allowed once per quarter, subject to available cash.
Fixed income investments include government and corporate bonds held directly by the Master Trust. Fixed income securities are valued using a bid-evaluation price or a mid-evaluation price and, as such, are classified within Level 2 of the fair value hierarchy. 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.
Private equity investments are valued at NAV using information from general partners and have inherent restrictions on redemptions that may affect the ability to sell the investments at their NAV in the near term.
A summary of the fair value hierarchy for pension plan assets associated with the PT-FI plan follows:
a.
Cash consists primarily of short-term time deposits.
Following is a description of the valuation techniques used for pension plan assets measured at fair value associated with the PT-FI plan. There have been no changes to the techniques used to measure fair value.
Common stocks, government bonds and mutual funds 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.
The techniques described above may produce a fair value calculation that may not be indicative of NRV 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 the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The expected benefit payments for FCX’s and PT-FI’s pension plans follow:
a.
Based on a December 31, 2016, exchange rate of 13,369 Indonesian rupiah to one U.S. dollar.
Postretirement and Other Benefits. FCX also provides postretirement medical and life insurance benefits for certain U.S. employees and, in some cases, employees of certain 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 service.
The benefit obligation (funded status) for the postretirement medical and life insurance benefit plans consisted of a current portion of $16 million (included in accounts payable and accrued liabilities) and a long-term portion of $138 million (included in other liabilities) at December 31, 2016, and a current portion of $15 million and a long-term portion of $144 million at December 31, 2015. The discount rate used to determine the benefit obligation for these plans, which was determined on the same basis as FCX's pension plans, was 3.80 percent at December 31, 2016, and 4.10 percent at December 31, 2015. Expected benefit payments for these plans total $16 million for 2017, $15 million for 2018, $15 million for 2019, $14 million for 2020, $13 million for 2021 and $55 million for 2022 through 2026.
The net periodic benefit cost charged to operations for FCX's postretirement benefits totaled $4 million in 2016, $6 million in 2015 and $7 million in 2014 (primarily for interest costs). The discount rate used to determine net periodic benefit cost and the components of net periodic benefit cost for FCX’s postretirement benefits was 4.10 percent in 2016, 3.60 percent in 2015 and 4.30 percent in 2014. The medical-care trend rates assumed the first year trend rate was 8.00 percent at December 31, 2016, which declines over the next 15 years with an ultimate trend rate of 4.25 percent.
FCX has a number of postemployment plans covering severance, long-term disability income, continuation of health and life insurance coverage for disabled employees or other welfare benefits. The accumulated postemployment benefit consisted of a current portion of $5 million (included in accounts payable and accrued liabilities) and a long-term portion of $34 million (included in other liabilities) at December 31, 2016, and a current portion of $4 million and a long-term portion of $30 million at December 31, 2015. In connection with the retirement of one of its executive officers in December 2015, FCX recorded a charge to selling, general and administrative expenses of $16 million.
FCX also sponsors savings plans for the majority of its U.S. employees. The plans allow employees to contribute a portion of their pre-tax income in accordance with specified guidelines. These savings plans are principally qualified 401(k) plans for all U.S. salaried and non-bargained hourly employees. In these plans, participants exercise control and direct the investment of their contributions and account balances among various investment options. FCX contributes to these plans at varying rates and matches a percentage of employee pre-tax deferral contributions up to certain limits, which vary by plan. For employees whose eligible compensation exceeds certain levels, FCX provides an unfunded defined contribution plan, which had a liability balance of $47 million (all of which was included in other liabilities) at December 31, 2016, and $78 million ($35 million included in accounts payable and accrued liabilities and $43 million included in other liabilities) at December 31, 2015.
The costs charged to operations for employee savings plans totaled $78 million in 2016 (of which $4 million was capitalized to oil and gas properties), $98 million in 2015 (of which $13 million was capitalized to oil and gas properties) and $79 million in 2014 (of which $11 million was capitalized to oil and gas properties). FCX has other employee benefit plans, certain of which are related to FCX’s financial results, which are recognized in operating costs.
Restructuring Charges. In early 2016, FCX restructured its oil and gas business to reduce costs and in late 2016, FCX sold the majority of its remaining oil and gas properties. As a result, FCX recorded $85 million to selling, general and administrative expenses and $6 million to production costs for net restructuring-related costs in 2016.
Because of a decline in commodity prices, FCX made adjustments to its operating plans for its mining operations in 2015 (refer to Note 5 for further discussion). As a result of these revisions to its mining operating plans, FCX recorded restructuring charges to production costs in 2015 of $45 million primarily for employee severance and benefit costs, and $22 million for special retirement benefits.
NOTE 10. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
FCX’s authorized shares of capital stock total 3.05 billion shares, consisting of 3 billion shares of common stock and 50 million shares of preferred stock.
Common Stock. In November 2016, FCX completed a $1.5 billion registered at-the-market equity offering of common stock that was announced on July 27, 2016. FCX sold 116.5 million shares of its common stock at an average price of $12.87 per share, which generated gross proceeds of $1.5 billion (net proceeds of $1.48 billion after $15 million of commissions and expenses).
During 2016, FCX issued 48.1 million shares of its common stock (with a value of $540 million, excluding $5 million of commissions paid by FCX) in connection with the settlement of two drilling rig contracts.
Also during 2016, FCX negotiated private exchange transactions exempt from registration under the Securities Act of 1933, as amended, whereby 27.7 million shares of FCX's common stock were issued (with an aggregate value of $311 million), in exchange for $369 million principal amount of FCX’s senior notes.
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 December 31, 2015, FCX sold 205.7 million shares of its common stock at an average price of $9.53 per share under these programs, which generated gross proceeds of $1.96 billion (net proceeds of $1.94 billion after $20 million of commissions and expenses). From January 1, 2016, through January 5, 2016, FCX sold 4.3 million shares of its common stock, which generated proceeds of $29 million (after $0.3 million of commissions and expenses). FCX used the proceeds to repay indebtedness.
The Board declared a one-time special cash dividend of $0.1105 per share related to the settlement of the shareholder derivative litigation (refer to Note 12 for further discussion), which was paid in August 2015. In response to the impact of lower commodity prices, the Board authorized a decrease in the cash dividend on FCX’s common stock from an annual rate of $1.25 per share to an annual rate of $0.20 per share in March 2015, and then suspended the cash dividend in December 2015. The declaration of dividends is at the discretion of the Board and will depend on FCX's financial results, cash requirements, future prospects and other factors deemed relevant by the Board. Under its revolving credit facility, as amended, FCX is not permitted to pay dividends on common stock on or prior to March 31, 2017.
Accumulated Other Comprehensive Loss. A summary of changes in the balances of each component of accumulated other comprehensive loss, net of tax, follows:
a.
Includes net actuarial losses, net of noncontrolling interest, totaling $252 million for 2014, $7 million for 2015 and $79 million for 2016.
b.
Includes tax benefits (provision) totaling $89 million for 2014, $2 million for 2015 and $(11) million for 2016.
c.
Includes amortization primarily related to actuarial losses, net of taxes, of $14 million for 2014, $16 million for 2015 and $4 million for 2016.
Stock Award Plans. FCX currently has awards outstanding under various stock-based compensation plans. The stockholder-approved 2016 Stock Incentive Plan (the 2016 Plan) provides for the issuance of stock options, SARs, restricted stock, RSUs, PSUs and other stock-based awards for up to 72 million common shares. As of December 31, 2016, 71.9 million shares were available for grant under the 2016 Plan, and no shares were available under other plans.
Stock-Based Compensation Cost. Compensation cost charged against earnings for stock-based awards for the years ended December 31 follows:
a. Charges in the U.S. are not currently expected to generate a future tax benefit.
Stock Options and SARs. Stock options granted under the plans generally expire 10 years after the date of grant and vest in 25 percent annual increments beginning one year from the date of grant. The award agreements provide that participants will receive the following year’s vesting upon retirement. Therefore, on the date of grant, FCX accelerates one year of amortization for retirement-eligible employees. Stock options granted prior to February 2012 provide for accelerated vesting if there is a change of control (as defined in the award agreements). Stock options granted after that date provide for accelerated vesting only upon certain qualifying terminations of employment within one year following a change of control. SARs generally expire within five years after the date of grant and vest in one-third annual increments beginning one year from the date of grant. SARs are similar to stock options, but are settled in cash rather than in shares of common stock and are classified as liability awards.
A summary of options and SARs outstanding as of December 31, 2016, including 1,034,153 SARs, and activity during the year ended December 31, 2016, follows:
The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option valuation model. The fair value of each SAR is determined using the Black-Scholes-Merton option valuation model and remeasured at each reporting date until the date of settlement. Expected volatility is based on implied volatilities from traded options on FCX’s common stock and historical volatility of FCX’s common stock. FCX uses historical data to estimate future option and SAR exercises, forfeitures and expected life. When appropriate, separate groups of employees who have similar historical exercise behavior are considered separately for valuation purposes. The expected dividend rate is calculated using the annual dividend (excluding supplemental dividends) at the date of grant. The risk-free interest rate is based on Federal Reserve rates in effect for bonds with maturity dates equal to the expected term of the option or SAR.
Information related to stock options during the years ended December 31 follows:
a. Rounds to less than $1 million.
As of December 31, 2016, FCX had $19 million of total unrecognized compensation cost related to unvested stock options expected to be recognized over a weighted-average period of approximately 1.9 years.
Stock-Settled PSUs and RSUs. Beginning in 2014, FCX's executive officers were granted PSUs that vest after three years. For the PSU's granted in 2016, the final number of shares to be issued to the executive officers will be determined based on (i) FCX's achievement of certain financial and operational performance metrics and (ii) FCX's total shareholder return compared to the shareholder return of a peer group. The total grant date target for the 2016 PSU grant was 1.5 million shares, of which the executive officers will earn (i) between 0 percent and 175 percent of the target shares based on achievement of financial and operating metrics and (ii) +/- 25 percent of the target shares based on FCX's total shareholder return compared to the peer group. For the PSU's granted to the executive officers in 2014 and 2015, the final number of shares to be issued to the executive officers will be based on FCX’s total shareholder return compared to the total shareholder return of a peer group. The total grant date target shares related to the PSU grants were 755 thousand in 2015 and 344 thousand in 2014, of which the executive officers will earn from 0 percent to 200 percent.
All of FCX's executive officers are retirement eligible, and for the 2016, 2015 and 2014 awards, FCX charged the cost of the PSU awards to expense in the year of grant because they are non-forfeitable.
FCX grants RSUs that vest over a period of three years to certain employees. FCX also grants RSU's to its directors. Beginning in December 2015, RSUs granted to directors vest on the first anniversary of the grant. Prior to December 2015, RSUs granted to directors generally vest over a period of four years. The fair value of the RSUs is amortized over the vesting period or the period until the director becomes retirement eligible, whichever is shorter. Upon a director’s retirement, all of their unvested RSUs immediately vest. For retirement-eligible directors, the fair value of RSUs is recognized in earnings on the date of grant.
The award agreements provide for accelerated vesting of all RSUs held by directors if there is a change of control (as defined in the award agreements) and for accelerated vesting of all RSUs held by employees if they experience a qualifying termination within one year following a change of control.
Dividends attributable to RSUs and PSUs accrue and are paid if the award vests. In addition, for those awards granted prior to 2015, interest accrues on accumulated dividends and is paid if the stock-settled RSUs vest. A summary of outstanding stock-settled RSUs and PSUs as of December 31, 2016, and activity during the year ended December 31, 2016, follows:
a. Excludes 993 thousand PSUs granted in 2016 for which the performance metrics have not yet been established.
The total fair value of stock-settled RSUs and PSUs granted was $37 million during 2016, $46 million during 2015 and $67 million during 2014. The total intrinsic value of stock-settled RSUs vested was $22 million during both 2016 and 2015 and $15 million during 2014. As of December 31, 2016, FCX had $15 million of total unrecognized compensation cost related to unvested stock-settled RSUs expected to be recognized over approximately 1.9 years.
Cash-Settled PSUs and RSUs. In 2015, certain members of FM O&G's senior management were granted cash-settled PSUs that vest over three years. The total grant date target related to the 2015 cash-settled PSU grant was 582 thousand shares, of which FM O&G's senior management will earn from 50 percent to 200 percent.
Cash-settled RSUs are similar to stock-settled RSUs, but are settled in cash rather than in shares of common stock. These cash-settled RSUs generally vest over periods ranging from three to five years of service. The award agreements for cash-settled RSUs provide for accelerated vesting upon certain qualifying terminations of employment within one year following a change of control (as defined in the award agreements).
The cash-settled PSUs and RSUs are classified as liability awards, and the fair value of these awards is remeasured each reporting period until the vesting dates.
Dividends attributable to cash-settled RSUs and PSUs accrue and are paid if the award vests. In addition, for those awards granted prior to 2015, interest accrues on accumulated dividends and is paid if the cash-settled RSUs vest. A summary of outstanding cash-settled RSUs and PSUs as of December 31, 2016, and activity during the year ended December 31, 2016, follows:
The total grant-date fair value of cash-settled RSUs was $4 million during 2016, $44 million during 2015 and $68 million during 2014. The intrinsic value of cash-settled RSUs vested was $15 million during 2016 and $24 million during 2015. The accrued liability associated with cash-settled RSUs and PSUs consisted of a current portion of $23 million (included in accounts payable and accrued liabilities) and a long-term portion of $4 million (included in other liabilities) at December 31, 2016, and a current portion of $10 million and a long-term portion of $8 million at December 31, 2015.
Other Information. The following table includes amounts related to exercises of stock options and vesting of RSUs during the years ended December 31:
a.
Under terms of the related plans, upon exercise of stock options and vesting of RSUs, employees may tender FCX shares to pay the exercise price and/or the minimum required taxes.
b.
Rounds to less than $1 million.
NOTE 11. INCOME TAXES
Geographic sources of losses before income taxes and equity in affiliated companies’ net earnings (losses) for the years ended December 31 consist of the following:
Income taxes are provided on the earnings of FCX’s material foreign subsidiaries under the assumption that these earnings will be distributed. FCX has not provided deferred income taxes for other differences between the book and tax carrying amounts of its investments in material foreign subsidiaries as FCX considers its ownership positions to be permanent in duration, and quantification of the related deferred tax liability is not practicable.
FCX’s (provision for) benefit from income taxes for the years ended December 31 consists of the following:
a.
Benefit related to changes in Peruvian tax rules.
b.
Adjustments include net provisions of $1.2 billion associated with an increase in the beginning of the year valuation allowance related to the impairment of U.S. oil and gas properties and $0.2 billion resulting from the termination of PT-FI's Delaware domestication.
c.
Benefit from the use of operating loss carryforwards.
A reconciliation of the U.S. federal statutory tax rate to FCX’s effective income tax rate for the years ended December 31 follows:
a.
Includes tax charges totaling $1.6 billion in 2016 and $3.3 billion in 2015 as a result of the impairment to U.S. oil and gas properties to establish valuation allowances against U.S. federal and state deferred tax assets that will not generate a future benefit.
b.
Reflects a loss under U.S. federal income tax law related to the impairment of investments in oil and gas properties.
c.
Includes a net tax charge of $16 million in 2014 related to a change in U.S. federal income tax law.
d.
Includes a net tax benefit related to changes in Peruvian tax rules of $13 million.
e.
Includes a net tax charge of $221 million related to the sale of the Candelaria and Ojos del Salado mines.
f.
Includes tax charges related to changes in Chilean and Peruvian tax rules of $54 million and $24 million, respectively.
FCX paid federal, state, local and foreign income taxes totaling $203 million in 2016 (including $27 million for discontinued operations), $893 million in 2015 (including $187 million for discontinued operations) and $1.5 billion in 2014 (including $11 million for discontinued operations). FCX received refunds of federal, state, local and foreign income taxes of $247 million in 2016, $334 million in 2015 and $257 million in 2014.
The components of deferred taxes follow:
Tax Attributes. At December 31, 2016, FCX had U.S. foreign tax credit carryforwards of $2.1 billion that will expire between 2017 and 2026, and U.S. minimum tax credit carryforwards of $444 million that can be carried forward indefinitely, but may be used only to the extent that regular tax exceeds the alternative minimum tax in any given year.
At December 31, 2016, FCX had (i) U.S. federal net operating loss carryforwards of $6.6 billion that expire in 2036, (ii) U.S. federal capital loss carryforwards of $119 million that expire in 2021, (iii) U.S. state net operating loss carryforwards of $10.0 billion that expire between 2017 and 2036 and (iv) Spanish net operating loss carryforwards of $518 million that can be carried forward indefinitely. In addition, as of December 31, 2016, FCX has offset $5.3 billion of foreign source income with U.S. source losses. Under existing U.S. tax law, FCX has the ability to re-characterize $5.3 billion of future U.S. source income into foreign source income. While utilization of U.S. foreign tax credits is dependent upon FCX generating future U.S. tax liabilities within the carryforward period, this re-sourcing may permit FCX to utilize up to $1.9 billion of the $2.1 billion foreign tax credit carryforwards that would otherwise expire unused. The ability to re-characterize US sourced income into foreign sourced income carries forward indefinitely until such time as the $5.3 billion has been fully utilized.
Valuation Allowance. On the basis of available information at December 31, 2016, including positive and negative evidence, FCX has provided valuation allowances for certain of its deferred tax assets where it believes it is more likely than not that some portion or all of such assets will not be realized. Valuation allowances totaled $6.1 billion at December 31, 2016, and covered all of FCX's U.S. foreign tax credit carryforwards, U.S. federal net operating loss carryforwards, U.S. federal capital loss carryforwards, foreign net operating loss carryforwards, and substantially all of FCX's U.S. minimum tax credit carryforwards and U.S. state net operating loss carryforwards. Valuation allowances totaled $4.2 billion at December 31, 2015, and covered all of FCX's U.S. foreign tax credit carryforwards, U.S. minimum tax credit carryforwards, foreign net operating loss carryforwards, and substantially all of FCX's U.S. federal and state net operating loss carryforwards.
The valuation allowance related to FCX’s U.S. foreign tax credits totaled $2.1 billion at December 31, 2016. FCX has operations in tax jurisdictions where statutory income taxes and withholding taxes combine to fully offset U.S. federal income tax liability due upon repatriation of foreign earnings. As a result, FCX continues to generate foreign tax credits for which no benefit is expected to be realized. In addition, any foreign income taxes currently accrued or paid on unremitted foreign earnings may result in additional future foreign tax credits for which no benefit is expected to be realized upon repatriation of the related earnings.
The valuation allowance related to FCX’s U.S. federal minimum tax credit carryforwards totaled $371 million at December 31, 2016. U.S. minimum tax credit carryforwards can be carried forward indefinitely, but can only be
used to the extent that U.S. regular tax liability exceeds U.S. alternative minimum tax liability in any given year. FCX does not currently expect to generate U.S. regular tax liability in excess of U.S. alternative minimum tax liability. A valuation allowance has not been provided against $72 million of U.S. federal minimum tax credits that FCX estimate are refundable during the three year period ending December 31, 2019.
The valuation allowance related to FCX’s U.S. federal, state and foreign net operating loss carryforwards totaled $2.9 billion at December 31, 2016. The valuation allowance related to FCX’s U.S. federal and state deferred tax assets totaled $574 million at December 31, 2016. Deferred tax assets represent future deductions for which a benefit will only be realized to the extent these deductions offset future income. FCX develops an estimate of which future tax deductions will be realized and provides a valuation allowance to the extent these deductions are not realized in future periods.
Valuation allowances will continue to be carried on U.S. foreign tax credit carryforwards, U.S. federal minimum tax credit carryforwards and U.S. federal, state and foreign net operating losses until such time that (i) FCX generates taxable income against which any of the assets or carryforwards can be used, (ii) forecasts of future income provide sufficient positive evidence to support reversal of the valuation allowances or (iii) FCX identifies a prudent and feasible means of securing the benefit of the assets or carryforwards that can be implemented.
The $1.9 billion net increase in the valuation allowances during 2016 primarily related to a $1.6 billion increase to valuation allowances associated with impairments of U.S. oil and gas properties.
Recent Events. In December 2016, the Peruvian parliament passed tax legislation that, in part, modified the applicable tax rates established in its December 2014 tax legislation, which progressively decreased the corporate income tax rate from 30 percent in 2014 to 26 percent in 2019 and thereafter, and also increased the dividend tax rate on distributions from 4.1 percent in 2014 to 9.3 percent in 2019 and thereafter. Under the December 2016 tax legislation, effective January 1, 2017, the corporate income tax rate is 29.5 percent, and the dividend tax rate on distributions of earnings is 5 percent. Cerro Verde's current mining stability agreement subjects FCX to a stable income tax rate of 32 percent through the expiration of the agreement on December 31, 2028. The tax rate on dividend distributions is not stabilized by the agreement.
During 2015, PT-FI's Delaware domestication was terminated. As a result, PT-FI is no longer a U.S. income tax filer, and tax attributes related to PT-FI, which were fully reserved with a related valuation allowance, are no longer available for use in FCX's U.S. federal consolidated income tax return. There was no resulting net impact to FCX's consolidated statement of operations. PT-FI remains a limited liability company organized under Indonesian law.
In September 2014, the Chilean legislature approved a tax reform package that implemented a dual tax system, which was amended in January 2016. Under previous rules, FCX’s share of income from Chilean operations was subject to an effective 35 percent tax rate allocated between income taxes and dividend withholding taxes. Under the amended tax reform package, FCX's Chilean operation is subject to the "Partially-Integrated System," resulting in FCX’s share of income from El Abra being subject to progressively increasing effective tax rates of 35 percent through 2019 and 44.5 percent in 2020 and thereafter.
In 2010, the Chilean legislature approved an increase in mining royalty taxes to help fund earthquake reconstruction activities, education and health programs. Mining royalty taxes at FCX’s El Abra mine are 4 percent for the years 2013 through 2017. Beginning in 2018 and through 2023, rates will move to a sliding scale of 5 to 14 percent (depending on a defined operational margin).
Uncertain Tax Positions. FCX accounts for uncertain income tax positions using a threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FCX’s policy associated with uncertain tax positions is to record accrued interest in interest expense and accrued penalties in other income and expenses rather than in the provision for income taxes.
A summary of the activities associated with FCX’s reserve for unrecognized tax benefits for the years ended December 31 follows:
The total amount of accrued interest associated with unrecognized tax benefits included in the consolidated balance sheets was $19 million at December 31, 2016, $16 million at December 31, 2015 and $15 million at December 31, 2014. There were no penalties associated with unrecognized tax benefits for the three years ended December 31, 2016.
The reserve for unrecognized tax benefits of $101 million at December 31, 2016, included $95 million ($68 million net of income tax benefits and valuation allowances) that, if recognized, would reduce FCX’s provision for income taxes. Changes to the reserve for unrecognized tax benefits associated with current year tax positions were primarily related to uncertainties associated with FCX's cost recovery methods, benefits available from net operating losses and tax treatment of social welfare and debt payments. Changes in the reserve for unrecognized tax benefits associated with prior year tax positions were primarily related to uncertainties associated with cost recovery methods and deductibility of social welfare payments. Changes to the reserve for unrecognized tax benefits associated with the lapse of statute of limitations were primarily related to cost recovery methods. There continues to be uncertainty related to the timing of settlements with taxing authorities, but if additional settlements are agreed upon during the year 2017, FCX could experience a change in its reserve for unrecognized tax benefits.
FCX or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The tax years for FCX's major tax jurisdictions that remain subject to examination are as follows:
NOTE 12. CONTINGENCIES
Environmental. FCX subsidiaries are subject to various national, state and local environmental laws and regulations that govern emissions of air pollutants; discharges of water pollutants; generation, handling, storage and disposal of hazardous substances, hazardous wastes and other toxic materials; and remediation, restoration and reclamation of environmental contamination. FCX subsidiaries that operate in the U.S. also are subject to potential liabilities arising under CERCLA and similar state laws that impose responsibility on current and previous owners and operators of a facility for the remediation of hazardous substances released from the facility into the environment, including damages to natural resources, in some cases irrespective of when the damage to the environment occurred or who caused it. Remediation liability also extends to persons who arranged for the disposal of hazardous substances or transported the hazardous substances to a disposal site selected by the transporter. These liabilities are often shared on a joint and several basis, meaning that each responsible party is fully responsible for the remediation, if some or all of the other historical owners or operators no longer exist, do not have the financial ability to respond or cannot be found. As a result, because of FCX’s acquisition of FMC in 2007, many of the subsidiary companies FCX now owns are responsible for a wide variety of environmental remediation projects throughout the U.S., and FCX expects to spend substantial sums annually for many years to address those remediation issues. Certain FCX subsidiaries have been advised by the U.S. Environmental Protection Agency (EPA), the Department of the Interior, the Department of Agriculture and various state agencies that, under CERCLA or similar state laws and regulations, they may be liable for costs of responding to environmental
conditions at a number of sites that have been or are being investigated to determine whether releases of hazardous substances have occurred and, if so, to develop and implement remedial actions to address environmental concerns. FCX is also subject to claims where the release of hazardous substances is alleged to have damaged natural resources (NRD) and to litigation by individuals allegedly exposed to hazardous substances. As of December 31, 2016, FCX had more than 100 active remediation projects, including NRD claims, in 26 U.S. states.
A summary of changes in estimated environmental obligations for the years ended December 31 follows:
a.
Represents accretion of the fair value of environmental obligations assumed in the 2007 acquisition of FMC, which were determined on a discounted cash flow basis.
b.
Reductions primarily reflect revisions for changes in the anticipated scope and timing of projects and other noncash adjustments.
Estimated future environmental cash payments (on an undiscounted and unescalated basis) total $129 million in 2017, $108 million in 2018, $90 million in 2019, $95 million in 2020, $103 million in 2021 and $1.8 billion thereafter. The amount and timing of these estimated payments will change as a result of changes in regulatory requirements, changes in scope and timing of remediation activities, the settlement of environmental matters and as actual spending occurs.
At December 31, 2016, FCX’s environmental obligations totaled $1.2 billion, including $1.1 billion recorded on a discounted basis for those obligations assumed in the FMC acquisition at fair value. On an undiscounted and unescalated basis, these obligations totaled $2.3 billion. FCX estimates it is reasonably possible that these obligations could range between $2.1 billion and $2.6 billion on an undiscounted and unescalated basis.
At December 31, 2016, the most significant environmental obligations were associated with the Pinal Creek site in Arizona; the Newtown Creek site in New York City; historical smelter sites principally located in Arizona, Kansas, New Jersey, Oklahoma and Pennsylvania; and uranium mining sites in the western U.S. The recorded environmental obligations for these sites totaled $1.1 billion at December 31, 2016. FCX may also be subject to litigation brought by private parties, regulators and local governmental authorities related to these historical sites. A discussion of these sites follows.
Pinal Creek. The Pinal Creek site was listed under the Arizona Department of Environmental Quality’s (ADEQ) Water Quality Assurance Revolving Fund program in 1989 for contamination in the shallow alluvial aquifers within the Pinal Creek drainage near Miami, Arizona. Since that time, environmental remediation was performed by members of the Pinal Creek Group (PCG), consisting of FMC Miami, Inc. (Miami), a wholly owned subsidiary of FCX, and two other companies. Pursuant to a 2010 settlement agreement, Miami agreed to take full responsibility for future groundwater remediation at the Pinal Creek site, with limited exceptions. Remediation work consisting of both capping (earthwork) and groundwater extraction and treatment continues and is expected to continue for many years in the future.
Newtown Creek. From the 1930s until 1964, Phelps Dodge Refining Corporation (PDRC), a subsidiary of FCX, operated a copper smelter, and from the 1930s until 1984 operated a copper refinery, on the banks of Newtown Creek (the creek), which is a 3.5-mile-long waterway that forms part of the boundary between Brooklyn and Queens in New York City. Heavy industrialization along the banks of the creek and discharges from the City of New York’s sewer system over more than a century resulted in significant environmental contamination of the waterway. In 2010, EPA notified PDRC, four other companies and the City of New York that EPA considers them to be PRPs under CERCLA. The notified parties began working with EPA to identify other PRPs, and EPA proposed that the notified parties perform a remedial investigation/feasibility study (RI/FS) at their expense and reimburse EPA for its oversight costs. EPA is not expected to propose a remedy until after the RI/FS is completed. Additionally, in 2010,
EPA designated the creek as a Superfund site, and in 2011, PDRC and five other parties entered an Administrative Order on Consent (AOC) to perform the RI/FS to assess the nature and extent of environmental contamination in the creek and identify potential remedial options. The parties' RI/FS work under the AOC and their efforts to identify other PRPs are ongoing. The draft RI was submitted to EPA in November 2016, and the draft FS is expected to be submitted to EPA in late 2019. Remedial design could possibly begin in 2022, with the actual remediation construction starting several years later. The actual costs of fulfilling this remedial obligation and the allocation of costs among PRPs are uncertain and subject to change based on the results of the RI/FS, the remediation remedy ultimately selected by EPA and related allocation determinations. The overall cost and the portion ultimately allocated to PDRC could be material to FCX and significantly exceed the amount currently reserved for this contingency.
Historical Smelter Sites. FCX subsidiaries and their predecessors at various times owned or operated copper, zinc and lead smelters or refineries in states including Arizona, Indiana, Kansas, Missouri, New Jersey, Oklahoma and Pennsylvania. For some of these former processing sites, certain FCX subsidiaries have been advised by EPA or state agencies that they may be liable for costs of investigating and, if appropriate, remediating environmental conditions associated with these former processing facilities. At other sites, certain FCX subsidiaries have entered into state voluntary remediation programs to investigate and, if appropriate, remediate onsite and offsite conditions associated with the facilities. The historical processing sites are in various stages of assessment and remediation. At some of these sites, disputes with local residents and elected officials regarding alleged health effects or the effectiveness of remediation efforts have resulted in litigation of various types, and similar litigation at other sites is possible.
From 1920 until 1986, United States Metal Refining Company (USMR), an indirect wholly owned subsidiary of Cyprus Amax Minerals Company, owned and operated a copper smelter and refinery in the Borough of Carteret, New Jersey. Since the early 1980s, the site has been the subject of environmental investigation and remediation, primarily under the supervision of the New Jersey Department of Environmental Protection. On January 30, 2017, a class action titled Juan Duarte, Betsy Duarte and N.D., Infant, by Parents and Natural Guardians Juan Duarte and Betsy Duarte, Leroy Nobles and Betty Nobles, on behalf of themselves and all others similarly situated v. United States Metals Refining Company, Freeport-McMoRan Copper & Gold Inc. and Amax Realty Development, Inc., Docket No. 734-17, was filed in the Superior Court of New Jersey against USMR, FCX, and Amax Realty Development, Inc. The suit alleges that USMR generated and disposed of smelter waste at the site and allegedly released contaminants onsite and offsite through discharges to surface water and air emissions over a period of decades and seeks unspecified damages for economic losses, including loss of property value, medical monitoring, punitive damages and other damages. FCX intends to vigorously defend this matter.
Uranium Mining Sites. During a period between 1940 and the early 1970s, certain FCX subsidiaries and their predecessors were involved in uranium exploration and mining in the western U.S., primarily on federal and tribal lands in the Four Corners region of the southwest. Similar exploration and mining activities by other companies have also caused environmental impacts warranting remediation, and EPA and local authorities are currently evaluating the need for significant cleanup activities in the region. To date, FCX has undertaken remediation work at a limited number of sites associated with these predecessor entities. During 2014, FCX initiated reconnaissance work at a limited number of historic mining sites on federal lands, which continued in 2016; approximately 50 percent of FCX's known federal sites have been initially evaluated. FCX expects to increase those activities over the next several years in order to identify sites for possible future investigation and remediation. During 2014, FCX also initiated discussions with federal and tribal representatives regarding a potential phased program to investigate and remediate historic uranium sites on tribal lands in the Four Corners region. FCX continued discussions through 2016 with the Department of Justice regarding the federal government's share of liability on tribal lands. In January 2017, the Department of Justice, EPA, Navajo Nation, and two FCX-related subsidiaries reached an agreement regarding the financial contribution of the U.S. Government and the FCX subsidiaries and the scope of the environmental investigation and remediation work for the cleanup of 94 former uranium mining sites on tribal lands. The settlement terms are outlined in a proposed Consent Decree that was filed on January 17, 2017, in the U.S. District Court for the District of Arizona, and is subject to a 30-day public comment period and approval by the federal court. Under the Consent Decree, which the government valued at over $600 million, FCX will perform the environmental investigation and remediation work at 94 sites, and the United States will contribute $335 million into a trust fund to cover the government’s initial share of the costs. The program is expected to take more than 20 years to complete.
AROs. FCX’s ARO estimates are reflected on a third-party cost basis and are based on FCX’s legal obligation to retire tangible, long-lived assets. A summary of changes in FCX’s AROs for the years ended December 31 follows:
a.
Primarily reflects updates to the closure approach to reclaim an overburden stockpile in Indonesia.
b.
Revisions to cash flow estimates were primarily related to revised estimates for an overburden stockpile in Indonesia and at certain oil and gas properties.
c.
Primarily reflects the sale of certain oil and gas properties.
ARO costs may increase or decrease significantly in the future as a result of changes in regulations, changes in engineering designs and technology, permit modifications or updates, changes in mine plans, changes in drilling plans, settlements, inflation or other factors and as reclamation spending occurs. ARO activities and expenditures for mining operations generally are made over an extended period of time commencing near the end of the mine life; however, certain reclamation activities may be accelerated if legally required or if determined to be economically beneficial. The methods used or required to plug and abandon non-producing oil and gas wellbores, remove platforms, tanks, production equipment and flow lines, and restore wellsites could change over time.
Financial Assurance. New Mexico, Arizona, Colorado and other states, as well as federal regulations governing mine operations on federal land, require financial assurance to be provided for the estimated costs of mine reclamation and closure, including groundwater quality protection programs. FCX has satisfied financial assurance requirements by using a variety of mechanisms, primarily involving parent company performance guarantees and financial capability demonstrations, but also including trust funds, surety bonds, letters of credit and other collateral. The applicable regulations specify financial strength tests that are designed to confirm a company’s or guarantor’s financial capability to fund estimated reclamation and closure costs. The amount of financial assurance FCX is required to provide will vary with changes in laws, regulations, reclamation and closure requirements, and cost estimates. At December 31, 2016, FCX’s financial assurance obligations associated with these U.S. mine closure and reclamation/restoration costs totaled $1.1 billion, of which $687 million was in the form of guarantees issued by FCX and financial capability demonstrations of FCX. At December 31, 2016, FCX had trust assets totaling $173 million (included in other assets), which are legally restricted to be used to satisfy its financial assurance obligations for its mining properties in New Mexico. In addition, FCX has financial assurance obligations for its oil and gas properties associated with plugging and abandoning wells and facilities totaling $704 million. Where oil and gas guarantees associated with the Bureau of Ocean Energy Management do not include a stated cap, the amounts reflect management's estimates of the potential exposure.
New Mexico Environmental and Reclamation Programs. FCX’s New Mexico operations are regulated under the New Mexico Water Quality Act and regulations adopted by the Water Quality Control Commission (WQCC). In connection with discharge permits, the New Mexico Environment Department (NMED) has required each of these operations to submit closure plans for NMED’s approval. The closure plans must include measures to assure meeting applicable groundwater quality standards following the closure of discharging facilities and to abate groundwater or surface water contamination to meet applicable standards. In 2013, the WQCC adopted Supplemental Permitting Requirements for Copper Mining Facilities, which became effective on December 1, 2013, and specify closure requirements for copper mine facilities. The rules were adopted after an extensive stakeholder process in which FCX participated and were jointly supported by FCX and NMED. The rules are currently being challenged in the New Mexico Supreme Court by certain environmental organizations and the New Mexico Attorney General. Finalized closure plan requirements, including those resulting from application of the 2013 rules or the application of different standards if the rules are invalidated by the New Mexico Supreme Court, could result in material increases in closure costs for FCX's New Mexico operations.
FCX’s New Mexico operations also are subject to regulation under the 1993 New Mexico Mining Act (the Mining Act) and the related rules that are administered by the Mining and Minerals Division (MMD) of the New Mexico Energy, Minerals and Natural Resources Department. Under the Mining Act, mines are required to obtain approval of plans describing the reclamation to be performed following cessation of mining operations. At December 31, 2016, FCX had accrued reclamation and closure costs of $471 million for its New Mexico operations. As stated above, additional accruals may be required based on the state’s periodic review of FCX’s updated closure plans and any resulting permit conditions, and the amount of those accruals could be material.
Arizona Environmental and Reclamation Programs. FCX’s Arizona properties are subject to regulatory oversight in several areas. ADEQ has adopted regulations for its aquifer protection permit (APP) program that require permits for, among other things, certain facilities, activities and structures used for mining, leaching, concentrating and smelting, and require compliance with aquifer water quality standards at an applicable point of compliance well or location during both operations and closure. The APP program also may require mitigation and discharge reduction or elimination of some discharges.
An application for an APP requires a proposed closure strategy that will meet applicable groundwater protection requirements following cessation of operations and an estimate of the cost to implement the closure strategy. An APP may specify closure requirements, which may include post-closure monitoring and maintenance. A more detailed closure plan must be submitted within 90 days after a permitted entity notifies ADEQ of its intent to cease operations. A permit applicant must demonstrate its financial ability to meet the closure costs approved by ADEQ. In 2014, the state enacted legislation requiring closure costs for facilities covered by APPs to be updated no more frequently than every five years and financial assurance mechanisms to be updated no more frequently than every two years. While some closure cost updates have occurred in the normal course as modifications to APPs, ADEQ has not yet formally notified FCX regarding the timetable for updating other closure cost estimates and financial assurance mechanisms for FCX's Arizona mine sites. In 2016, ADEQ approved a closure plan update for Sierrita, which resulted in increased closure costs. FCX may be required to begin updating its closure cost estimates at other Arizona sites in 2017.
Portions of Arizona mining facilities that operated after January 1, 1986, also are subject to the Arizona Mined Land Reclamation Act (AMLRA). AMLRA requires reclamation to achieve stability and safety consistent with post-mining land use objectives specified in a reclamation plan. Reclamation plans must be approved by the State Mine Inspector and must include an estimate of the cost to perform the reclamation measures specified in the plan along with financial assurance. During 2016, Safford submitted an update to its reclamation plan, which increased its reclamation costs. FCX will continue to evaluate options for future reclamation and closure activities at its operating and non-operating sites, which are likely to result in adjustments to FCX’s ARO liabilities, and those adjustments could be material. At December 31, 2016, FCX had accrued reclamation and closure costs of $316 million for its Arizona operations.
Colorado Reclamation Programs. FCX's Colorado operations are regulated by the Colorado Mined Land Reclamation Act (Reclamation Act) and regulations promulgated thereunder. Under the Reclamation Act, mines are required to obtain approval of plans for reclamation of lands affected by mining operations to be performed during mining or upon cessation of mining operations. During 2016, at the request of the Colorado Division of Reclamation Mining & Safety (DRMS), the Climax mine submitted a revised cost estimate for its current reclamation plan, which is not expected to materially change the closure plan cost. As of December 31, 2016, FCX had accrued reclamation and closure costs of $66 million for its Colorado operations.
Chilean Reclamation and Closure Programs. In July 2011, the Chilean senate passed legislation regulating mine closure, which establishes new requirements for closure plans. FCX's El Abra operation submitted updated closure cost estimates based on the existing approved closure plan in November 2014, which were approved in August 2015. At December 31, 2016, FCX had accrued reclamation and closure costs of $55 million for its El Abra operation.
Peruvian Reclamation and Closure Programs. Cerro Verde is subject to regulation under the Mine Closure Law administered by the Peruvian Ministry of Energy and Mines. Under the closure regulations, mines must submit a closure plan that includes the reclamation methods, closure cost estimates, methods of control and verification, closure and post-closure plans, and financial assurance. The latest closure plan and cost estimate for the Cerro Verde mine expansion were submitted to the Peruvian regulatory authorities in November 2013, which were
approved in August 2014. At December 31, 2016, Cerro Verde had accrued reclamation and closure costs of $114 million.
Indonesian Reclamation and Closure Programs. The ultimate amount of reclamation and closure costs to be incurred at PT-FI’s operations will be determined based on applicable laws and regulations and PT-FI’s assessment of appropriate remedial activities in the circumstances, after consultation with governmental authorities, affected local residents and other affected parties and cannot currently be projected with precision. Some reclamation costs will be incurred during mining activities, while the remaining reclamation costs will be incurred at the end of mining activities, which are currently estimated to continue for approximately 25 years. During 2014, PT-FI updated its closure approach for an overburden stockpile, which resulted in an increase in the ARO of $403 million. At the end of 2016, PT-FI revised its estimates for the overburden stockpile to address ongoing erosion that occurred during 2016, a design change that increased the volume and updated cost estimates reflecting more recent productivity and costs at the overburden stockpile, which resulted in an increase in the ARO of $372 million. At December 31, 2016, PT-FI had accrued reclamation and closure costs of $998 million.
PT-FI has designated a cash fund ($22 million balance at December 31, 2016, which is included in other assets) to pay mine closure and reclamation costs or satisfy a portion of Indonesian financial requirements.
In December 2009, PT-FI submitted its revised mine closure plan to the Department of Energy and Mineral Resources for review and addressed comments received during the course of this review process. In December 2010, the Indonesian government issued a regulation regarding mine reclamation and closure, which requires a company to provide a mine closure guarantee in the form of a time deposit placed in a state-owned bank in Indonesia. In accordance with its COW, PT-FI is working with the Department of Energy and Mineral Resources to review these requirements, including discussion of other options for the mine closure guarantee.
Oil and Gas Properties. Substantially all of FM O&G's oil and gas leases require that, upon termination of economic production, the working interest owners plug and abandon non-producing wellbores, remove equipment and facilities from leased acreage, and restore land in accordance with applicable local, state and federal laws. Following several sales transactions in 2016, FM O&G remaining operating areas include the GOM shelf, offshore California, the Gulf Coast and the Rocky Mountain area as of December 31, 2016. FM O&G AROs cover approximately 600 wells and 134 platforms and other structures. At December 31, 2016, FM O&G had accrued $589 million associated with its AROs.
Litigation. FCX is involved in numerous legal proceedings that arise in the ordinary course of business or are associated with environmental issues arising from legacy operations conducted over the years by FMC and its affiliates as discussed in this note under “Environmental.” FCX is also involved periodically in reviews, inquiries, investigations and other proceedings initiated by or involving government agencies, some of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Management does not believe, based on currently available information, that the outcome of any legal proceeding will have a material adverse effect on FCX's financial condition, although individual outcomes could be material to FCX's operating results for a particular period, depending on the nature and magnitude of the outcome and the operating results for the period.
Asbestos Claims. Since approximately 1990, FMC and various subsidiaries have been named as defendants in a large number of lawsuits that claim personal injury either from exposure to asbestos allegedly contained in electrical wire products produced or marketed many years ago or from asbestos contained in buildings and facilities located at properties owned or operated by FMC affiliates, or from alleged asbestos in talc products. Many of these suits involve a large number of codefendants. Based on litigation results to date and facts currently known, FCX believes there is a reasonable possibility that losses may have been incurred related to these matters; however, FCX also believes that the amounts of any such losses, individually or in the aggregate, are not material to its consolidated financial statements. There can be no assurance, however, that future developments will not alter this conclusion.
Tax and Other Matters. FCX's operations are in multiple jurisdictions where uncertainties arise in the application of complex tax regulations. Some of these tax regimes are defined by contractual agreements with the local government, while others are defined by general tax laws and regulations. FCX and its subsidiaries are subject to reviews of its income tax filings and other tax payments, and disputes can arise with the taxing authorities over the interpretation of its contracts or laws. The final taxes paid may be dependent upon many factors, including negotiations with taxing authorities. In certain jurisdictions, FCX must pay a portion of the disputed amount to the local government in order to formally appeal the assessment. Such payment is recorded as a receivable if FCX believes the amount is collectible.
Cerro Verde Royalty Dispute. SUNAT, the Peru national tax authority, has assessed mining royalties on ore processed by the Cerro Verde concentrator, which commenced operations in late 2006. These assessments cover the period December 2006 to December 2007, each of the years 2008 through 2010, and the period January 2011 to September 2011.
In July 2013, the Peruvian Tax Tribunal issued two decisions affirming SUNAT's assessments for the period December 2006 through December 2008. In September 2013, Cerro Verde filed judiciary appeals related to the assessments because it believes that its 1998 stability agreement exempts from royalties all minerals extracted from its mining concession, irrespective of the method used for processing those minerals. With respect to the judiciary appeal related to assessments for the year 2008, on December 17, 2014, Peru's Eighteenth Contentious Administrative Court, which specializes in taxation matters, rendered its decision upholding Cerro Verde's position and declaring the Tax Tribunal's resolution invalid. On December 31, 2014, SUNAT and the Tax Tribunal appealed this decision. On January 29, 2016, Peru’s Sixth Contentious Administrative Chamber of the Appellate Court nullified the decision of the Eighteenth Contentious Administrative Court. On February 23, 2016, Cerro Verde appealed the decision to the Peruvian Supreme Court. On April 14, 2016, Peru’s Twentieth Contentious Administrative Court, which specializes in taxation matters, rendered its decision upholding the Peruvian Tax Tribunal’s July 2013 decision affirming SUNAT’s assessments for the period December 2006 through December 2007. On May 2, 2016, Cerro Verde appealed this decision to Peru’s Twentieth Contentious Administrative Court.
Although FCX believes Cerro Verde's interpretation of the stability agreement is correct, if Cerro Verde is ultimately found responsible for these assessments, it may also be liable for penalties and interest, which accrues at rates that range from approximately 7 percent to 18 percent based on the year accrued and the currency in which the amounts would be payable.
In October 2013, SUNAT served Cerro Verde with a demand for payment totaling $146 million (based on the exchange rate as of December 31, 2016, including interest and penalties) based on the Peruvian Tax Tribunal’s decisions for the period December 2006 through December 2008. As permitted by law, Cerro Verde requested and was granted an installment payment program that deferred payment for six months and thereafter required 66 equal monthly payments. Through December 31, 2016, Cerro Verde has made payments totaling $96 million (based on the exchange rate as of December 31, 2016) under the installment program, which are included in other assets in the consolidated balance sheets.
In July 2013, a hearing on SUNAT's assessment for 2009 was held, but no decision had been issued by the Peruvian Tax Tribunal for that year. The aggregate amount of the assessment for 2009 totals $80 million (based on the exchange rate as of December 31, 2016), including estimated accumulated interest and penalties.
In April 2016, SUNAT issued assessments for the year 2010 and the period January 2011 to September 2011, which totals $162 million (based on the exchange rate as of December 31, 2016), including estimated accumulated interest and penalties. Cerro Verde has contested the assessments.
SUNAT may make additional assessments for mining royalties and associated penalties and interest for the period from October 2011 through December 2013, which Cerro Verde will contest. No assessments can be issued for years after 2013, as Cerro Verde began paying royalties on all of its production in January 2014 under its new 15-year stability agreement. As of December 31, 2016, FCX estimates the total exposure associated with these mining royalties for the period from December 2006 through December 2013 approximates $544 million (based on the exchange rate as of December 31, 2016), including estimated accumulated interest and penalties. No amounts have been recorded for these assessments as of December 31, 2016, because Cerro Verde believes its 1998 stability agreement exempts it from these royalties and believes any payments will be recoverable.
Other Peruvian Tax Matters. Cerro Verde has also received assessments from SUNAT for additional taxes, penalties and interest related to various audit exceptions for income and other taxes. Cerro Verde has filed or will file objections to the assessments because it believes it has properly determined and paid its taxes.
A summary of these assessments follows:
As of December 31, 2016, Cerro Verde had paid $181 million (included in other assets) on these disputed tax assessments, which it believes is collectible. No amounts have been accrued for these assessments.
Indonesia Tax Matters. PT-FI has received assessments from the Indonesian tax authorities for additional taxes and interest related to various audit exceptions for income and other taxes. PT-FI has filed objections to the assessments because it believes it has properly determined and paid its taxes. A summary of these assessments follows:
Required estimated income tax payments for 2014 significantly exceeded PT-FI’s 2014 reported income tax liability, which resulted in a $284 million overpayment. During second-quarter 2016, the Indonesian tax authorities issued tax assessments for 2014 of $156 million and agreed to refund $128 million associated with income tax overpayments made by PT-FI in 2014 (included in income and other tax receivables). PT-FI filed objections for $152 million of the tax assessments in 2016 (included in other assets).
As of December 31, 2016, PT-FI had paid $355 million (of which $331 million was included in other assets) on disputed tax assessments, which it believes are collectible. In addition, PT-FI has $109 million (included in other assets) for overpayments of 2015 income taxes.
In December 2009, PT-FI was notified by Indonesian tax authorities that it was obligated to pay value-added taxes on certain goods imported after the year 2000. In December 2014, PT-FI paid $269 million for value-added taxes for the period from November 2005 through the year 2009 and sought a refund. In March 2016, PT-FI collected a cash refund of $196 million and $38 million was offset against other tax liabilities. The remaining balance of the amount originally paid was reduced by currency exchange and other losses.
PT-FI received assessments from the local regional tax authority in Papua, Indonesia, for additional taxes and penalties related to surface water taxes for the period from January 2011 through December 2016. PT-FI has filed or will file appeals with the Indonesia Tax Court. In January 2017, the Indonesia Tax Court issued a ruling against PT-FI with respect to assessments for additional taxes and penalties for the period from January 2011 through July 2015 in the amount of $376 million (based on the exchange rate as of December 31, 2016, and including $227 million in penalties). The aggregate amount of assessments received from August 2015 through December 2016 was an additional $93 million, including penalties (based on the exchange rate as of December 31, 2016). PT-FI continues to believe that its COW exempts it from these payments, and that PT-FI has the right to contest these assessments by appeal to the Indonesia Supreme Court and/or by instituting dispute resolution proceedings under the COW. Local regional tax law requires payment of these assessments to be made one month after the written rulings (i.e., March 2017). PT-FI intends to contest these assessments by filing an appeal to the Indonesia Supreme Court, and based on advice from outside legal counsel, believes that it is probable that the Indonesia Supreme
Court will hear the appeal and will rule in favor of PT-FI. As of February 24, 2017, PT-FI has not paid and does not intend to pay amounts to the local regional tax authority related to these assessments for additional taxes and penalties. Additionally, PT-FI provided formal notice to the Indonesian government of an impending dispute listing the government's breaches and violations of the COW, including the imposition of surface water taxes in excess of the restriction imposed by the COW. If the local regional tax authority subsequently issues a warning letter and coercive warrant and payment is not made, under the laws in Papua, the local regional tax authority has the legal authority to take certain actions, including expropriation of assets or other measures. PT-FI does not believe that the threat of seizure of PT-FI assets is imminent. If the local regional tax authority were to force PT-FI to make these payments through the threat of expropriation of assets or other measures, such amounts may not be recoverable from the local regional tax authority and may result in a charge to operating income. FCX estimates the total exposure associated with these additional taxes and penalties, based on the exchange rate as of December 31, 2016, totals $469 million. No amounts have been recorded for these assessments as of December 31, 2016.
Letters of Credit, Bank Guarantees and Surety Bonds. Letters of credit and bank guarantees totaled $281 million at December 31, 2016, primarily for the Cerro Verde royalty dispute (refer to discussion above), environmental and asset retirement obligations, workers’ compensation insurance programs, tax and customs obligations, and other commercial obligations. In addition, FCX had surety bonds totaling $371 million at December 31, 2016, associated with environmental and asset retirement obligations ($290 million), self-insurance bonds for workers’ compensation ($24 million) and other bonds ($57 million).
Insurance. FCX purchases a variety of insurance products to mitigate potential losses, which typically have specified deductible amounts or self-insured retentions and policy limits. FCX generally is self-insured for U.S. workers’ compensation, but purchases excess insurance up to statutory limits. An actuarial analysis is performed twice a year on the various casualty insurance programs covering FCX's U.S.-based mining operations, including workers’ compensation, to estimate expected losses. At December 31, 2016, FCX's liability for expected losses under these insurance programs totaled $58 million, which consisted of a current portion of $7 million (included in accounts payable and accrued liabilities) and a long-term portion of $51 million (included in other liabilities). In addition, FCX has receivables of $17 million (a current portion of $2 million included in other accounts receivable and a long-term portion of $15 million included in other assets) for expected claims associated with these losses to be filed with insurance carriers.
FCX's oil and gas operations are subject to all of the risks normally incident to the production of oil and gas, including well blowouts, cratering, explosions, oil spills, releases of gas or well fluids, fires, pollution and releases of toxic gas, each of which could result in damage to or destruction of oil and gas wells, production facilities or other property or injury to persons. Although FCX maintains insurance coverage considered to be customary in the oil and gas industry, FCX is not fully insured against all risks either because insurance is not available or because of high premium costs. FCX is self-insured for named windstorms in the GOM. FCX's insurance policies provide limited coverage for losses or liabilities relating to pollution, with broader coverage for sudden and accidental occurrences.
NOTE 13. COMMITMENTS AND GUARANTEES
Operating Leases. FCX leases various types of properties, including offices and equipment. Future minimum rentals under non-cancelable leases at December 31, 2016, total $45 million in 2017, $36 million in 2018, $22 million in 2019, $20 million in 2020, $19 million in 2021 and $109 million thereafter. Minimum payments under operating leases have not been reduced by aggregate minimum sublease rentals, which are minimal. Total aggregate rental expense under operating leases was $71 million in 2016, $71 million in 2015 and $76 million in 2014.
Contractual Obligations. Based on applicable prices at December 31, 2016, FCX has unconditional purchase obligations of $3.4 billion, primarily comprising the procurement of copper concentrate ($1.4 billion), cobalt ($0.8 billion), electricity ($0.5 billion) and transportation services ($0.4 billion). Some of FCX’s unconditional purchase obligations are settled based on the prevailing market rate for the service or commodity purchased. In some cases, the amount of the actual obligation may change over time because of market conditions. Obligations for copper concentrate provide for deliveries of specified volumes to Atlantic Copper at market-based prices. Obligations for cobalt provide for deliveries of specified volumes to Freeport Cobalt at market-based prices. Electricity obligations are primarily for long-term power purchase agreements in North America and contractual minimum demand at the South America mines. Transportation obligations are primarily for South America contracted ocean freight.
FCX’s unconditional purchase obligations by year total $1.8 billion in 2017, $718 million in 2018, $314 million in 2019, $263 million in 2020, $45 million in 2021 and $342 million thereafter. During the three-year period ended December 31, 2016, FCX fulfilled its minimum contractual purchase obligations.
Mining Contracts - Indonesia. FCX is entitled to mine in Indonesia under the COW between PT-FI and the Indonesian government. The original COW was entered into in 1967 and was replaced with the current COW in 1991. The initial term of the current COW expires in 2021 but can be extended by PT-FI for two 10-year periods subject to Indonesian government approval, which pursuant to the COW cannot be withheld or delayed unreasonably.
The copper royalty rate payable by PT-FI under its COW, prior to modifications discussed below as a result of the July 2014 Memorandum of Understanding (MOU), varied from 1.5 percent of copper net revenue at a copper price of $0.90 or less per pound to 3.5 percent at a copper price of $1.10 or more per pound. The COW royalty rate for gold and silver sales was at a fixed rate of 1.0 percent.
A large part of the mineral royalties under Indonesian government regulations is designated to the provinces from which the minerals are extracted. In connection with its fourth concentrator mill expansion completed in 1998, PT-FI agreed to pay the Indonesian government additional royalties (royalties not required by the COW) to provide further support to the local governments and to the people of the Indonesian province of Papua. The additional royalties were paid on production exceeding specified annual amounts of copper, gold and silver generated when PT-FI’s milling facilities operated above 200,000 metric tons of ore per day. The additional royalty for copper equaled the COW royalty rate, and for gold and silver equaled twice the COW royalty rates. Therefore, PT-FI’s royalty rate on copper net revenues from production above the agreed levels was double the COW royalty rate, and the royalty rates on gold and silver sales from production above the agreed levels were triple the COW royalty rates.
In January 2014, the Indonesian government published regulations that among other things imposed a progressive export duty on copper concentrate and restricted concentrate exports after January 12, 2017. PT-FI’s COW authorizes it to export concentrate and specifies the taxes and other fiscal terms available to its operations. The COW states that PT-FI shall not be subject to taxes, duties or fees subsequently imposed or approved by the Indonesian government except as expressly provided in the COW. Additionally, PT-FI complied with the requirements of its COW for local processing by arranging for the construction and commissioning of Indonesia's only copper smelter and refinery, which is owned by PT Smelting (refer to Note 6).
In July 2014, PT-FI entered into a MOU with the Indonesian government, in which, subject to concluding an agreement to extend PT-FI's operations beyond 2021 on acceptable terms, PT-FI agreed to construct new smelter capacity in Indonesia and to divest an additional 20.64 percent interest in PT-FI at fair market value. Under the MOU, PT-FI provided a $115 million assurance bond to support its commitment for smelter development, agreed to increase royalty rates to 4.0 percent for copper and 3.75 percent for gold from the previous rates of 3.5 percent for copper and 1.0 percent for gold, and agreed to pay export duties until certain smelter development milestones were met (initially set at 7.5 percent, declining to 5.0 percent when smelter development progress exceeds 7.5 percent and eliminated when development progress exceeds 30 percent). The MOU also anticipated an amendment of the COW within six months to address other matters; however, no terms of the COW other than those relating to the smelter bond, increased royalties and export duties were changed. In January 2015, the MOU was extended to July 25, 2015, and it expired on that date. The Indonesian government has continued to impose the increased royalty rates, export duties and smelter assurance bond. PT-FI's royalties totaled $131 million in 2016, $114 million in 2015 and $115 million in 2014, and export duties totaled $95 million in 2016, $109 million in 2015 and $77 million in 2014.
In October 2015, the Indonesian government provided a letter of assurance to PT-FI indicating that it would revise regulations allowing it to approve the extension of operations beyond 2021, and provide the same rights and the same level of legal and fiscal certainty provided under its current COW.
In January and February 2017, the Indonesian government issued new regulations to address exports of unrefined metals, including copper concentrate and anode slimes, and other matters related to the mining sector. The new regulations permit the continuation of copper concentrate exports for a five-year period through January 2022, subject to various conditions, including conversion from a contract of work to a special operating license (known as an IUPK, which provides virtually none of the protections of a contract of work), commitment to completion of smelter construction in five years and payment of export duties to be determined by the Ministry of Finance. In addition, the new regulations enable application for extension of operating rights five years before expiration of the
IUPK and require foreign IUPK holders to divest 51 percent to Indonesian interests no later than the tenth year of production. Export licenses would be valid for one-year periods, subject to review every six months, depending on smelter construction progress.
The January 2017 regulations permit the export of anode slimes, which is necessary for PT Smelting to continue operating. PT Smelting is seeking to renew its anode slimes export license; however, we cannot predict when PT Smelting’s anode slimes export license may be renewed. In addition, a labor strike at PT Smelting has resulted in a shutdown of its operations since January 19, 2017. Although PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity, on February 10, 2017, PT-FI was forced to suspend production as a result of limited storage capacity at PT-FI and PT Smelting. PT Smelting has indicated that it expects to resume operations in March 2017. Delays in PT Smelting obtaining its anode slimes export license or restarting operations could further impact PT-FI's operations.
Following the issuance of the January and February 2017 regulations and discussions with the government, PT-FI advised the Indonesian government that it was prepared to convert its COW to an IUPK, subject to obtaining an investment stability agreement providing equivalent rights with the same level of legal and fiscal certainty enumerated under its COW, and provided that the COW would remain in effect until it is replaced by a mutually satisfactory alternative. PT-FI also committed to commence construction of a new smelter during a five-year timeframe after approval of the extension of its long-term operating rights.
Under its COW, PT-FI has specified rights to export copper concentrate without restriction or payment of export duties. PT-FI has requested that concentrate exports be permitted without the imposition of export duties while the new license and stability agreement are negotiated. The Indonesia government has indicated that in order to export its concentrate production, PT-FI would be required to immediately convert to an IUPK, forgo its current rights to fiscal and legal certainty and commit to a new smelter prior to completing a long-term investment stability agreement. PT-FI has advised the Indonesian government that attempts to enforce the new regulations on PT-FI violates its COW and that it is unwilling to terminate its COW unless replaced by a mutually acceptable form of agreement providing fiscal and legal assurances to support its long-term investment plans in Papua, Indonesia.
As of February 24, 2017, PT-FI has not obtained approval to export concentrate and production remains suspended. PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity (assuming that PT Smelting's export license is approved and its operations are resumed in March 2017). PT-FI has begun to significantly adjust its cost structure, reduce its workforce and spending with local suppliers, and suspend investments in its underground development projects and new smelter.
On February 17, 2017, pursuant to the COW’s dispute resolution provisions, PT-FI provided formal notice to the Indonesian government of an impending dispute listing the government’s breaches and violations of the COW, including, but not limited to, (i) restrictions on PT-FI’s basic right to export mining products in violation of the COW, (ii) imposition of export duties other than those taxes and other charges expressly provided for in the COW, (iii) imposition of surface water taxes in excess of the restrictions imposed by the COW (refer to Note 12 for further discussion of these assessments), (iv) requirement for PT-FI to build a smelter, while such requirements are not contained in the COW, (v) unreasonable withholding and delay in granting approval of two successive ten-year extensions of the term of the COW, and (vi) imposition of divestment requirements that are not provided for in the COW.
Other. In 2016, FCX negotiated the termination and settlement of FM O&G's drilling rig contracts with Noble Drilling (U.S.) LLC (Noble) and Rowan Companies plc (Rowan). Under the settlement with Noble, FCX issued 48.1 million shares of its common stock (representing a value of $540 million) during second-quarter 2016, and Noble immediately sold these shares. Under the settlement with Rowan, FCX paid $215 million in cash during 2016. FCX also agreed to provide contingent payments of up to $75 million to Noble and up to $30 million to Rowan, depending on the average price of crude oil over the 12-month period ending June 30, 2017. The fair value of these contingent payments totaled $23 million (included in accounts payable and accrued liabilities) as of December 2016. In January 2017, FCX paid $6 million to early settle a portion of the Rowan contingent payments, which was included in the fair value at December 31, 2016. As a result of the settlements, FM O&G was released from a total of $1.1 billion in payment obligations under its three drilling rig contracts.
Community Development Programs. FCX has adopted policies that govern its working relationships with the communities where it operates. These policies are designed to guide its practices and programs in a manner that respects basic human rights and the culture of the local people impacted by FCX’s operations. FCX continues to make significant expenditures on community development, education, training and cultural programs.
In 1996, PT-FI established the Freeport Partnership Fund for Community Development (Partnership Fund) through which PT-FI has made available funding and technical assistance to support community development initiatives in the area of health, education and economic development of the area. PT-FI has committed through 2018 to provide one percent of its annual revenue for the development of the local people in its area of operations through the Partnership Fund. PT-FI charged $33 million in 2016, $27 million in 2015 and $31 million in 2014 to cost of sales for this commitment.
Guarantees. FCX provides certain financial guarantees (including indirect guarantees of the indebtedness of others) and indemnities.
Prior to its acquisition by FCX, FMC and its subsidiaries have, as part of merger, acquisition, divestiture and other transactions, from time to time, indemnified certain sellers, buyers or other parties related to the transaction from and against certain liabilities associated with conditions in existence (or claims associated with actions taken) prior to the closing date of the transaction. As part of these transactions, FMC indemnified the counterparty from and against certain excluded or retained liabilities existing at the time of sale that would otherwise have been transferred to the party at closing. These indemnity provisions generally now require FCX to indemnify the party against certain liabilities that may arise in the future from the pre-closing activities of FMC for assets sold or purchased. The indemnity classifications include environmental, tax and certain operating liabilities, claims or litigation existing at closing and various excluded liabilities or obligations. Most of these indemnity obligations arise from transactions that closed many years ago, and given the nature of these indemnity obligations, it is not possible to estimate the maximum potential exposure. Except as described in the following sentence, FCX does not consider any of such obligations as having a probable likelihood of payment that is reasonably estimable, and accordingly, has not recorded any obligations associated with these indemnities. With respect to FCX’s environmental indemnity obligations, any expected costs from these guarantees are accrued when potential environmental obligations are considered by management to be probable and the costs can be reasonably estimated.
NOTE 14. 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 derivatives contracts to hedge the market risk associated with fluctuations in the prices of commodities it purchases and sells. Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. As 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, all of which had matured by December 31, 2015. As part of the terms of the agreement to sell FM O&G's onshore California oil and gas properties, FM O&G entered into derivative contracts during October 2016, all of which were assumed by Sentinel at the time of the sale in December 2016. As of December 31, 2016 and 2015, 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 COMEX average copper price in the month of shipment. FCX hedges this price exposure in a manner that allows it to receive the COMEX average price in the month of shipment while the customers pay the fixed price they requested. FCX accomplishes this by entering into copper futures or swap contracts. Hedging gains or losses from these copper futures and swap contracts are recorded in revenues. FCX did not have any significant gains or losses during the three years ended December 31, 2016, resulting from hedge ineffectiveness. At December 31, 2016, FCX held copper futures and swap contracts that qualified for hedge accounting for 42 million pounds at an average contract price of $2.35 per pound, with maturities through April 2018.
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 for the years ended December 31 follows:
Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. As described in Note 1 under “Revenue Recognition,” certain FCX copper concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on the LME copper price or the COMEX copper price and the London gold price at the time of shipment as specified in the contract. Similarly, FCX purchases copper under contracts that provide for provisional pricing. 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. Mark-to-market price fluctuations associated with embedded derivatives for discontinued operations, which were minimal, are included in discontinued operations for all periods presented in these financial statements. A summary of FCX’s embedded derivatives at December 31, 2016, follows:
Crude Oil and Natural Gas Contracts. As a result of the acquisition of the oil and gas business, FCX had derivative contracts that consisted of crude oil options, and crude oil and natural gas swaps. These derivatives were not designated as hedging instruments and were recorded at fair value with the mark-to-market gains and losses recorded in revenues. The crude oil options were entered into by PXP to protect the realized price of a portion of expected future sales in order to limit the effects of crude oil price decreases. The remaining contacts matured in 2015, and FCX had no outstanding crude oil or natural gas derivative contracts as of December 31, 2016 or 2015.
As part of the terms of the agreement to sell the onshore California oil and gas properties, FM O&G entered into derivative contracts during October 2016 to hedge (i) approximately 72 percent of its forecasted crude oil sales through 2020 with fixed-rate swaps for 19.4 million barrels from November 2016 through December 2020 at a price of $56.04 per barrel and costless collars for 5.2 million barrels from January 2018 through December 2020 at a put price of $50.00 per barrel and a call price of $63.69 per barrel, and (ii) approximately 48 percent of its forecasted natural gas purchases through 2020 with fixed-rate swaps for 28.9 million British thermal units (MMBtu) from November 2016 through December 2020 at a price of $3.1445 per MMBtu related to these onshore California properties. Sentinel assumed these contracts at the time of the sale in December 2016. These derivative contracts were not designated as hedges for accounting purposes, and were recorded at fair value with the mark-to-market gains and losses recorded in revenues (oil contracts) and production costs (natural gas contracts).
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 December 31, 2016, Atlantic Copper held net copper forward purchase contracts for 3 million pounds at an average contract price of $2.57 per pound, with maturities through February 2017.
Summary of Gains (Losses). A summary of the realized and unrealized gains (losses) recognized in operating loss for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, for the years ended December 31 follows:
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:
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 the 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:
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 December 31, 2016, the maximum amount of credit exposure associated with derivative transactions was $118 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, and long-term debt. The carrying value for cash and cash equivalents (which included time deposits of $64 million at December 31, 2016, and $34 million at December 2015), accounts receivable, restricted cash, and accounts payable and accrued liabilities, approximates fair value because of their short-term nature and generally negligible credit losses (refer to Note 15 for the fair values of investment securities, legally restricted funds and long-term debt).
In addition, FCX has contingent consideration related to its sales of assets (refer to Note 15 for the fair value and Note 2 for further discussion of these instruments) and contingent liabilities related to the settlement of FM O&G’s drilling rig contracts (refer to Note 15 for the fair value and Note 13 for further discussion of these instruments).
NOTE 15. 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 2016.
Effective January 1, 2016, FCX retrospectively adopted the ASU associated with investments for which fair value is measured using the NAV per share as a practical expedient. As a result, investments valued using NAV per share are shown in the tables below in a column separate from the levels within the fair value hierarchy. A summary of the carrying amount and fair value of FCX’s financial instruments, other than cash and cash equivalents, accounts receivable, restricted cash, and accounts payable and accrued liabilities follows. FCX's financial instruments are recorded on the consolidated balance sheets at fair value except for contingent consideration associated with the sale of the Deepwater GOM oil and gas properties (which was recorded under the loss recovery approach) and debt.
a.
Current portion included in other current assets and long-term portion included in other assets.
b.
Excludes time deposits (which approximated fair value) included in (i) other current assets of $28 million at December 31, 2016 and 2015, and (ii) other assets of $122 million at December 31, 2016, and $118 million at December 31, 2015, primarily associated with an assurance bond to support PT-FI's commitment for smelter development in Indonesia (refer to Note 13 for further discussion).
c.
Refer to Note 14 for further discussion and balance sheet classifications.
d.
Included in accounts payable and accrued liabilities.
e.
Recorded at cost except for debt assumed in acquisitions, which are recorded at fair value at the respective acquisition dates.
Valuation Techniques. The U.S. core fixed income fund is valued at NAV. The fund strategy seeks total return consisting of income and capital appreciation primarily by investing in a broad range of investment-grade debt securities, including U.S. government obligations, corporate bonds, mortgage-backed securities, asset-backed securities and money market instruments. There are no restrictions on redemptions (usually within one business day of notice).
Money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.
Equity securities are valued at the closing price reported on the active market on which the individual securities are traded and, as such, are classified within Level 1 of the fair value hierarchy.
Fixed income securities (government securities, corporate bonds, asset-backed securities, collateralized mortgage-backed securities and municipal bonds) are valued using a bid-evaluation price or a mid-evaluation price. A bid-evaluation price is an estimated price at which a dealer would pay for a security. A mid-evaluation price is the average of the estimated price at which a dealer would sell a security and the estimated price at which a dealer would pay for a security. These evaluations are based on quoted prices, if available, or models that use observable inputs and, as such, are classified within Level 2 of the fair value hierarchy.
FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales are valued using only quoted monthly LME or COMEX copper forward prices and the London gold forward price at each reporting date based on the month of maturity (refer to Note 14 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 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 14 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.
The fair value of contingent consideration for the sales of TFHL and onshore California oil and gas properties (refer to Note 2 for further discussion) is calculated based on average commodity price forecasts through applicable maturity dates using a Monte Carlo simulation model. The models use various observable inputs, including Brent crude oil forward prices, historical copper and cobalt prices, volatilities, discount rates and settlement terms. As a result, these contingent consideration assets are classified within Level 2 of the fair value hierarchy.
The fair value of contingent consideration for the sale of Deepwater GOM oil and gas properties (refer to Note 2 for further discussion) is calculated based on a discounted cash flow model using inputs that include third-party reserve estimates, production rates, production timing and discount rates. Because significant inputs are not observable in the market, the contingent consideration is classified within Level 3 of the fair value hierarchy.
The fair value of contingent payments for the settlements of drilling rig contracts (refer to Note 13 for further discussion) is calculated based on the average price forecasts of WTI crude oil over the 12-month period ending June 30, 2017, using a mean-reverting model. The model uses various observable inputs, including WTI crude oil forward prices, volatilities, discount rate and settlement terms. As a result, these contingent payments are classified within Level 2 of the fair value hierarchy.
Long-term debt, including current portion, is valued using available market quotes and, as such, is classified within Level 2 of the fair value hierarchy.
The techniques described above may produce a fair value calculation that may not be indicative of NRV 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 December 31, 2016.
A summary of the changes in the fair value of FCX's Level 3 instruments for the years ended December 31 follows:
a.
Includes net realized gains (losses) of $87 million recorded in revenues in 2015 and $(41) million in 2014, and $1 million of interest expense associated with deferred premiums in both 2015 and 2014.
b.
Reflects contingent consideration associated with the sale of the Deepwater GOM oil and gas properties in December 2016 (see Note 2 for further discussion).
c.
Includes unrealized gains recorded in revenues of $432 million and $2 million of interest expense associated with deferred premiums.
d.
Includes interest payments of $4 million in 2015 and $5 million in 2014.
Refer to Notes 1 and 5 for a discussion of the fair value estimates utilized in the impairment assessments for mining operations, which were determined using inputs not observable in the market and thus represent Level 3 measurements. Refer to Note 1 for the discussion of the fair value estimate utilized in the goodwill impairment assessment, which was determined primarily using inputs not observable in the market and thus represents a Level 3 measurement.
NOTE 16. BUSINESS SEGMENT INFORMATION
Product Revenues. FCX revenues attributable to the products it produced for the years ended December 31 follow:
a.
Amounts are net of treatment and refining charges totaling $652 million in 2016, $485 million in 2015 and $374 million in 2014.
Geographic Area. Information concerning financial data by geographic area follows:
a.
Long-lived assets exclude deferred tax assets and intangible assets.
b.
Decrease in 2016 is primarily because of impairment charges related to oil and gas properties and asset dispositions, and decrease in 2015 is primarily because of impairment charges related to oil and gas properties (refer to Notes 1 and 2 for further discussion).
c.
Includes long-lived assets held for sale totaling $4.4 billion at December 31, 2015, and $4.3 billion at December 31, 2014, primarily associated with discontinued operations. Refer to Note 2 for further discussion.
a.
Revenues are attributed to countries based on the location of the customer.
Major Customers and Affiliated Companies. No customer accounted for 10 percent or more of FCX's consolidated revenues during the years ended December 31, 2016 and 2015. Oil and gas sales to Phillips 66 Company totaled $2.5 billion (12 percent of FCX's consolidated revenues) during the year ended December 31, 2014.
Consolidated revenues include sales to the noncontrolling interest owners of FCX's South America mining operations totaling $1.0 billion in both 2016 and 2015 and $1.6 billion in 2014, and PT-FI's sales to PT Smelting totaling $1.4 billion in 2016, $1.1 billion in 2015 and $1.8 billion in 2014.
Labor Matters. As of December 31, 2016, approximately half of FCX's global labor force was covered by collective bargaining agreements, and approximately one-third of FCX's global labor force is covered by agreements that expired and are currently being negotiated or will expire within one year.
Business Segments. FCX has organized its continuing mining operations into four primary divisions - North America copper mines, South America mining, Indonesia mining and Molybdenum mines, and operating segments that meet certain thresholds are reportable segments. For oil and gas operations, FCX determines its operating segments on a country-by-country basis. Separately disclosed in the following tables are FCX's reportable segments, which include the Morenci, Cerro Verde and Grasberg copper mines, the Rod & Refining operations and the U.S. Oil & Gas operations.
Intersegment sales between FCX’s mining operations are based on similar arm's-length transactions with third parties at the time of the sale. Intersegment sales may not be reflective of the actual prices ultimately realized because of a variety of factors, including additional processing, timing of sales to unaffiliated customers and transportation premiums. In addition, intersegment sales from Tenke to FCX's other consolidated subsidiaries have been eliminated in discontinued operations (refer to Note 2).
FCX defers recognizing profits on sales from its mines to other divisions, including Atlantic Copper (FCX's wholly owned smelter and refinery in Spain) and on 25 percent of PT-FI's sales to PT Smelting (PT-FI's 25-percent-owned smelter and refinery in Indonesia), until final sales to third parties occur. Quarterly variations in ore grades, the timing of intercompany shipments and changes in product prices result in variability in FCX's net deferred profits and quarterly earnings.
FCX allocates certain operating costs, expenses and capital expenditures to its operating divisions and individual segments. However, not all costs and expenses applicable to an operation are allocated. U.S. federal and state income taxes are recorded and managed at the corporate level (included in Corporate, Other & Eliminations), whereas foreign income taxes are recorded and managed at the applicable country level. In addition, most mining exploration and research activities are managed on a consolidated basis, and those costs along with some selling, general and administrative costs are not allocated to the operating divisions or individual segments. Accordingly, the following segment information reflects management determinations that may not be indicative of what the actual financial performance of each operating division or segment would be if it was an independent entity.
North America Copper Mines. FCX has seven operating copper mines in North America - Morenci, Bagdad, Safford, Sierrita and Miami in Arizona, and Tyrone and Chino in New Mexico. The North America copper mines include open-pit mining, sulfide ore concentrating, leaching and SX/EW operations. A majority of the copper produced at the North America copper mines is cast into copper rod by FCX’s Rod & Refining operations. In addition to copper, certain of FCX's North America copper mines also produce molybdenum concentrate and silver.
The Morenci open-pit mine, located in southeastern Arizona, produces copper cathode and copper concentrate. In addition to copper, the Morenci mine also produces molybdenum concentrate. The Morenci mine produced 46 percent of FCX’s North America copper during 2016.
South America Mining. South America mining includes two operating copper mines - Cerro Verde in Peru and El Abra in Chile. These operations include open-pit mining, sulfide ore concentrating, leaching and SX/EW operations.
On November 3, 2014, FCX completed the sale of its 80 percent ownership interests in the Candelaria mine and the Ojos del Salado mine, both reported as components of other South America mines. South America mining includes the results of the Candelaria and Ojos del Salado mines through the sale date. Refer to Note 2 for further discussion.
The Cerro Verde open-pit copper mine, located near Arequipa, Peru, produces copper cathode and copper concentrate. In addition to copper, the Cerro Verde mine also produces molybdenum concentrate and silver. The Cerro Verde mine produced 83 percent of FCX’s South America copper during 2016.
Indonesia Mining. Indonesia mining includes PT-FI’s Grasberg minerals district that produces copper concentrate, which contains significant quantities of gold and silver.
Molybdenum Mines. Molybdenum mines include the wholly owned Henderson underground mine and Climax open-pit mine in Colorado. The Henderson and Climax mines produce high-purity, chemical-grade molybdenum concentrate, which is typically further processed into value-added molybdenum chemical products.
Rod & Refining. The Rod & Refining segment consists of copper conversion facilities located in North America, and includes a refinery, three rod mills and a specialty copper products facility, which are combined in accordance with segment reporting aggregation guidance. These operations process copper produced at FCX’s North America copper mines and purchased copper into copper cathode, rod and custom copper shapes. At times these operations refine copper and produce copper rod and shapes for customers on a toll basis. Toll arrangements require the tolling customer to deliver appropriate copper-bearing material to FCX’s facilities for processing into a product that is returned to the customer, who pays FCX for processing its material into the specified products.
Atlantic Copper Smelting & Refining. Atlantic Copper smelts and refines copper concentrate and markets refined copper and precious metals in slimes. During 2016, Atlantic Copper purchased approximately 13 percent of its concentrate requirements from the North America copper mines, approximately 7 percent from the South America mining operations and approximately 3 percent from the Indonesia mining operations at market prices, with the remainder purchased from third parties.
Other Mining & Eliminations. Other Mining & Eliminations include the Miami smelter (a smelter at FCX's Miami, Arizona, mining operation), Freeport Cobalt (a cobalt chemical refinery in Kokkola, Finland), molybdenum conversion facilities in the U.S. and Europe, four non-operating copper mines in North America (Ajo, Bisbee and Tohono in Arizona, and Cobre in New Mexico) and other mining support entities.
U.S. Oil & Gas Operations. As of December 31, 2016, FCX's U.S. Oil & Gas operations include oil and natural gas production onshore in South Louisiana and on the GOM shelf, oil production offshore California and natural gas production from the Madden area in central Wyoming. In January 2017, FCX entered into an agreement to sell its property interests in the Madden area. All of the U.S. operations are considered one operating and reportable segment.
Financial Information by Business Segment
a.
Includes the results of the Deepwater GOM and onshore California oil and gas properties prior to their sale in December 2016.
b.
Includes revenues from FCX's molybdenum sales company, which includes sales of molybdenum produced by the Molybdenum mines and by certain of the North and South America copper mines.
c.
Includes net mark-to-market (losses) gains of $(35) million in 2016 and $87 million in 2015 associated with oil derivative contracts. The 2016 oil derivative contracts were entered into as part of the terms to sell the onshore California oil and gas properties.
d.
The year 2016 includes charges of $16 million at Cerro Verde for social commitments and $17 million at Indonesia for asset impairment. The year 2015 includes asset impairment and restructuring charges totaling $145 million, including $99 million at other North America copper mines, and restructuring charges totaling $13 million at South America mines, $7 million at Molybdenum mines, $3 million at Rod & Refining, $20 million at Other Mining & Eliminations and $3 million at Corporate, Other & Eliminations.
e.
Includes net charges for oil and gas operations totaling $1.0 billion in 2016 and $188 million in 2015, primarily for drillship settlements/idle rig and contract termination costs, inventory adjustments other asset impairments and net charges.
f.
Reflects impairment charges for international oil and gas properties primarily in Morocco.
g.
Includes $85 million for net restructuring charges at oil and gas operations.
h.
Includes (i) assets held for sale totaling $4.9 billion at December 31, 2015, and (ii) capital expenditures totaling $73 million in 2016 and $229 million in 2015 associated with discontinued operations. Refer to Note 2 for a summary of the results of discontinued operations.
i.
Excludes international oil and gas capital expenditures totaling $47 million in 2016 and $100 million in 2015, primarily related to the Morocco oil and gas properties, which are included in Corporate, Other & Eliminations.
j.
Reflects net reductions for provisional pricing adjustments to prior open sales.
a.
Includes the results of the Candelaria and Ojos del Salado mines prior to their sale in November 2014.
b.
Includes the results of Eagle Ford shale assets prior to their sale in June 2014.
c.
Includes revenues from FCX's molybdenum sales company, which included sales of molybdenum produced by the Molybdenum mines and by certain of the North and South America copper mines.
d.
Includes net mark-to-market gains associated with crude oil and natural gas derivative contracts totaling $505 million.
e.
Includes charges at U.S. Oil & Gas operations totaling $46 million primarily for idle/terminated rig costs and inventory adjustments.
f.
Includes the gain and related income tax provision associated with the sale of the Candelaria and Ojos del Salado mines.
g.
Includes (i) assets held for sale totaling $4.8 billion and (ii) capital expenditures totaling $159 million associated with discontinued operations. Refer to Note 2 for a summary of the results of discontinued operations.
h.
Excludes international oil and gas capital expenditures totaling $19 million, primarily related to Morocco oil and gas properties, which are included in Corporate, Other & Eliminations.
NOTE 17. GUARANTOR FINANCIAL STATEMENTS
All of the senior notes issued by FCX and discussed in Note 8 are fully and unconditionally guaranteed on a senior basis jointly and severally by FM O&G LLC, as guarantor, which is a 100-percent-owned subsidiary of FM O&G and FCX. The guarantee is an unsecured obligation of the guarantor and ranks equal in right of payment with all existing and future indebtedness of FM O&G LLC, including indebtedness under the revolving credit facility. The guarantee ranks senior in right of payment to all of FM O&G LLC's existing and future subordinated indebtedness and is effectively subordinated in right of payment to (i) FM O&G LLC's future secured indebtedness to the extent of the value of the assets securing the indebtedness and (ii) any debt of FM O&G LLC's subsidiaries. The indentures governing the senior notes provide that FM O&G LLC's guarantee may be released or terminated for certain obligations under the following circumstances: (i) all or substantially all of the equity interests or assets of FM O&G LLC are sold to a third party; or (ii) FM O&G LLC no longer has any obligations under any FM O&G senior notes or any refinancing thereof and no longer guarantees any obligations of FCX under the revolving credit facility or any other senior debt or, in each case, any refinancing thereof.
The following condensed consolidating financial information includes information regarding FCX, as issuer, FM O&G LLC, as guarantor, and all other non-guarantor subsidiaries of FCX. Included are the condensed consolidating balance sheets at December 31, 2016 and 2015, and the related condensed consolidating statements of comprehensive (loss) income and the condensed consolidating statements of cash flows for the years ended December 31, 2016, 2015 and 2014, which should be read in conjunction with FCX's notes to the consolidated financial statements:
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2016
a.
All U.S. related deferred income taxes are recorded at the parent company.
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2015
a.
All U.S. related deferred income taxes are recorded at the parent company.
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
a.
Includes charges totaling $1.5 billion at the FM O&G LLC Guarantor and $2.8 billion at the non-guarantor subsidiaries related to impairment of FCX's oil and gas properties pursuant to full cost accounting rules.
a.
Includes impairment charges totaling $4.2 billion at the FM O&G LLC Guarantor and $8.9 billion at the non-guarantor subsidiaries related to FCX's oil and gas properties pursuant to full cost accounting rules.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
a.
Includes impairment charges totaling $1.9 billion at the FM O&G LLC Guarantor and $3.5 billion at the non-guarantor subsidiaries related to ceiling test impairment charges for FCX's oil and gas properties pursuant to full cost accounting rules and a goodwill impairment charge.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2016
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2015
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2014
NOTE 18. SUBSEQUENT EVENTS
FCX evaluated events after December 31, 2016, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.
NOTE 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
a.
Includes charges for net noncash mark-to-market losses associated with crude oil and natural gas derivative contracts totaling $41 million ($41 million to net income (loss) attributable to common stockholders or $0.03 per share) in the fourth quarter and for the year 2016, $48 million ($30 million to net loss attributable to common stockholders or $0.03 per share) in first-quarter 2015, $95 million ($59 million to net loss attributable to common stockholders or $0.06 per share) in second-quarter 2015, $74 million ($46 million to net loss attributable to common stockholders or $0.04 per share) in third-quarter 2015, $102 million ($63 million to net loss attributable to common stockholders or $0.05 per share) in fourth-quarter 2015 and $319 million ($198 million to net loss attributable to common stockholders or $0.18 per share) for the year 2015.
b.
The 2016 periods include charges at oil and gas operations impacting operating (loss) income and net (loss) income attributable to common stockholders of $201 million ($0.16 per share) in the first quarter, $729 million ($0.57 per share) in the second quarter, $50 million ($0.03 per share) in the third quarter, $142 million ($0.09 per share) in the fourth quarter and $1.1 billion ($0.84 per share) for the year, primarily for drillship settlements/idle rig costs, inventory adjustments and other asset impairments and restructuring charges. The 2015 periods include charges at oil and gas operations of $17 million ($10 million to net loss attributable to common stockholders or $0.01 per share) in the first quarter, $22 million ($14 million to net loss attributable to common stockholders or $0.01 per share) in the second quarter, $21 million ($13 million to net loss attributable to common stockholders or $0.01 per share) in the third quarter, $129 million ($81 million to net loss attributable to common stockholders or $0.07 per share) in the fourth quarter and $188 million ($117 million to net loss attributable to common stockholders or $0.11 per share) for the year, primarily for other asset impairments, inventory adjustments, idle/terminated rig costs and prior year mineral tax assessments related to the California properties.
c.
The 2016 periods include charges impacting operating (loss) income and net (loss) income attributable to common stockholders for metals inventory adjustments totaling $5 million (less than $0.01 per share) in the first quarter, $2 million (less than $0.01 per share) in the second quarter, $20 million ($0.01 per share) in the third quarter, $9 million ($0.01 per share) in the fourth quarter and $36 million ($0.03 per share) for the year. The 2015 periods include charges for metal inventory adjustments of $4 million ($3 million to net loss attributable to common stockholders or less than $0.01 per share) in the first quarter, $59 million ($38 million to net loss attributable to common stockholders or $0.04 per share) in the second quarter, $91 million ($58 million to net loss attributable to common stockholders or $0.05 per share) in the third quarter, $184
million ($118 million to net loss attributable to common stockholders or $0.10 per share) in the fourth quarter and $338 million ($217 million to net loss attributable to common stockholders or $0.20 per share) for the year.
d.
The 2016 periods include charges impacting operating (loss) income and net (loss) income attributable to common stockholders to reduce the carrying value of oil and gas properties pursuant to full cost accounting rules of $3.8 billion ($3.03 per share) in the first quarter, $291 million ($0.23 per share) in the second quarter, $239 million ($0.18 per share) in the third quarter and $4.3 billion ($3.28 per share) for the year. The 2015 periods include charges to reduce the carrying value of oil and gas properties pursuant to full cost accounting rules of $3.1 billion ($2.4 billion to net loss attributable to common stockholders or $2.31 per share) in the first quarter, $2.7 billion ($2.0 billion to net loss attributable to common stockholders or $1.90 per share) in the second quarter, $3.7 billion ($3.5 billion to net loss attributable to common stockholders or $3.25 per share) in the third quarter, $3.7 billion ($3.7 billion to net loss attributable to common stockholders or $3.18 per share) in the fourth quarter and $13.1 billion ($11.6 billion to net loss attributable to common stockholders or $10.72 per share) for the year.
e.
Includes net gains (losses) on sales of assets of $749 million ($744 million to net loss attributable to common stockholders or $0.59 per share) in second-quarter 2016, $13 million ($13 million to net income attributable to common stockholders or $0.01 per share) in third-quarter 2016, $(113) million ($(108) million to net income attributable to common stockholders or $(0.08) per share) in fourth-quarter 2016 and $649 million ($649 million to net loss attributable to common stockholders or $0.49 per share) for the year 2016, primarily associated with the Morenci and Timok transactions, partly offset with losses associated with the potential Freeport Cobalt and Kisanfu transactions and the sales of oil and gas properties (refer to Note 2 for further discussion). Net gains on sales of assets for 2015 totaled $39 million ($25 million to net loss attributable to common stockholders or $0.02 per share) in the first quarter and for the year associated with the sale of the Luna Energy power facility.
f.
The 2016 periods include charges from mining operations of $17 million ($9 million to net income attributable to common stockholders or $0.01 per share) in the third quarter, $16 million ($5 million to net income attributable to common stockholders or less than $0.01 per share) in the fourth quarter and $33 million ($14 million to net loss attributable to common stockholders or $0.01 per share) for the year, primarily for a PT-FI asset retirement and Cerro Verde social commitments. The 2015 periods include charges from mining operations of $92 million ($56 million to net loss attributable to common stockholders or $0.05 per share) in the third quarter, $53 million ($34 million to net loss attributable to common stockholders or $0.03 per share) in the fourth quarter and $145 million ($90 million to net loss attributable to common stockholders or $0.08 per share) for the year associated with asset impairment, restructuring and other net charges.
g.
Includes net (losses) gains on exchanges and early extinguishment of debt totaling $(3) million (less than ($0.01) per share) in the first quarter, $39 million ($0.03 per share) in the second quarter, $15 million ($0.01 per share) in the third quarter, $(25) million ($(0.02) per share) in the fourth quarter and $26 million ($0.02 per share) for the year. Refer to Note 8 for further discussion.
h.
Reflects the results of TFHL and includes charges for allocated interest expense associated with the portion of the Term Loan that was required to be repaid as a result of the sale of FCX's interest in TFHL, which was completed on November 16, 2016. The 2016 periods also include charges for the loss on disposal of $177 million ($0.14 per share) in the second quarter, $5 million (less than $0.01 per share) in the third quarter, $16 million ($0.01 per share) in the fourth quarter and $198 million ($0.15 per share) for the year. Refer to Note 2 for further discussion of discontinued operations.
i.
Includes a gain on redemption of noncontrolling interest for the settlement of FCX's preferred stock obligation at its Plains Offshore subsidiary (refer to Notes 1 and 2 for further discussion) totaling $199 million ($0.14 per share in the fourth quarter and $0.15 per share for the year).
j.
Includes a gain of $92 million ($0.09 per share) in the second quarter and for the year associated with the net proceeds received from insurance carriers and other third parties related to the shareholder derivative litigation settlement.
NOTE 20. SUPPLEMENTARY MINERAL RESERVE INFORMATION (UNAUDITED)
Recoverable proven and probable reserves have been calculated as of December 31, 2016, in accordance with Industry Guide 7 as required by the Securities Exchange Act of 1934. FCX’s proven and probable reserves may not be comparable to similar information regarding mineral reserves disclosed in accordance with the guidance in other countries. Proven and probable reserves were determined by the use of mapping, drilling, sampling, assaying and evaluation methods generally applied in the mining industry, as more fully discussed below. The term “reserve,” as used in the reserve data presented here, means that part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination. The term “proven reserves” means reserves for which (i) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; (ii) grade and/or quality are computed from the results of detailed sampling; and (iii) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is sufficiently defined that size, shape, depth and mineral content of reserves are well established. The term “probable reserves” means reserves for which quantity and grade are computed from information similar to that used for proven reserves but the sites for sampling are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
FCX’s reserve estimates are based on the latest available geological and geotechnical studies. FCX conducts ongoing studies of its ore bodies to optimize economic values and to manage risk. FCX revises its mine plans and estimates of proven and probable mineral reserves as required in accordance with the latest available studies.
Estimated recoverable proven and probable reserves at December 31, 2016, were determined using long-term average prices of $2.00 per pound for copper, $1,000 per ounce for gold and $10 per pound for molybdenum. For the three-year period ended December 31, 2016, LME spot copper prices averaged $2.60 per pound, London PM gold prices averaged $1,226 per ounce and the weekly average price for molybdenum quoted by Metals Week averaged $8.18 per pound.
The recoverable proven and probable reserves presented in the table below represent the estimated metal quantities from which FCX expects to be paid after application of estimated metallurgical recovery rates and smelter recovery rates, where applicable. Recoverable reserves are that part of a mineral deposit that FCX estimates can be economically and legally extracted or produced at the time of the reserve determination.
a.
Consolidated recoverable copper reserves included 2.2 billion pounds in leach stockpiles and 1.0 billion pounds in mill stockpiles.
b.
Recoverable proven and probable reserves reflect estimates of minerals that can be recovered through the end of 2041 (refer to Note 13 for discussion of PT-FI's COW).
c.
Consolidated reserves represent estimated metal quantities after reduction for joint venture partner interests at the Morenci mine in North America and the Grasberg minerals district in Indonesia (refer to Note 3 for further discussion of FCX's joint ventures). Excluded from the table above were FCX’s estimated recoverable proven and probable reserves of 281.8 million ounces of silver in North America, South America and Indonesia, which were determined using a long-term average price of $15 per ounce.
d.
Net equity interest reserves represent estimated consolidated metal quantities further reduced for noncontrolling interest ownership (refer to Note 3 for further discussion of FCX's ownership in subsidiaries). Excluded from the table above were FCX’s estimated recoverable proven and probable reserves of 226.0 million ounces of silver in North America, South America and Indonesia.
a.
Excludes material contained in stockpiles.
b.
Includes estimated recoverable metals contained in stockpiles.
c.
Amounts not shown because of rounding.
d.
Recoverable proven and probable reserves reflect estimates of minerals that can be recovered through the end of 2041 (refer to Note 13 for discussion of PT-FI's COW).
e.
Consolidated reserves represent estimated metal quantities after reduction for joint venture partner interests at the Morenci mine in North America and the Grasberg minerals district in Indonesia. Refer to Note 3 for further discussion of FCX's joint ventures.
f.
Net equity interest reserves represent estimated consolidated metal quantities further reduced for noncontrolling interest ownership. Refer to Note 3 for further discussion of FCX's ownership in subsidiaries.
NOTE 21. SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
Costs Incurred. A summary of the costs incurred for FCX's oil and gas acquisition, exploration and development activities for the years ended December 31 follows:
These amounts included increases (decreases) in AROs of $37 million in 2016, $(80) million in 2015 and $(27) million in 2014, capitalized general and administrative expenses of $78 million in 2016, $124 million in 2015 and $143 million in 2014, and capitalized interest of $7 million in 2016, $58 million in 2015 and $88 million in 2014.
Capitalized Costs. The aggregate capitalized costs subject to amortization for oil and gas properties and the aggregate related accumulated amortization as of December 31 follow:
a.
Includes charges of $4.3 billion in 2016, $13.1 billion in 2015 and $3.7 billion in 2014 to reduce the carrying value of oil and gas properties pursuant to full cost accounting rules.
The average amortization rate per barrel of oil equivalents (BOE) was $17.58 in 2016, $33.46 in 2015 and $39.74 in 2014.
Costs Not Subject to Amortization. Including amounts determined to be impaired, FCX transferred $4.9 billion of costs associated with unevaluated properties to the full cost pool in 2016. Sales of unevaluated properties totaled $1.6 billion in 2016. Following FCX's disposition of its Deepwater GOM and onshore California oil and gas properties in fourth-quarter 2016, the carrying value of all of FCX's remaining oil and gas properties is included in the amortization base at December 31, 2016.
Results of Operations for Oil and Gas Producing Activities. The results of operations from oil and gas producing activities for the years ended December 31, 2016, 2015 and 2014, presented below exclude non-oil and gas revenues, general and administrative expenses, goodwill impairment, interest expense and interest income. Income tax benefit was determined by applying the statutory rates to pre-tax operating results:
a.
Includes $926 million in charges related to drillship settlements/idle rig and contract termination costs.
b.
FCX has provided a full valuation allowance on losses associated with oil and gas activities in 2016.
Proved Oil and Natural Gas Reserve Information. The following information summarizes the net proved reserves of oil (including condensate and natural gas liquids (NGLs)) and natural gas and the standardized measure as described below. All of FCX's oil and natural gas reserves are located in the U.S.
Management believes the reserve estimates presented herein are reasonable and prepared in accordance with guidelines established by the SEC as prescribed in Regulation S-X, Rule 4-10. However, there are numerous uncertainties inherent in estimating quantities and values of proved reserves and in projecting future rates of production and the amount and timing of development expenditures, including many factors beyond FCX's control. Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Because all oil and natural gas reserve estimates are to some degree subjective, the quantities of oil and natural gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures, and future crude oil and natural gas sales prices may all differ from those assumed in these estimates. In addition, different reserve engineers may make different estimates of reserve quantities and cash flows based upon the same available data. Therefore, the standardized measure of discounted future net cash flows (Standardized Measure) shown below represents estimates only and should not be construed as the current market value of the estimated reserves attributable to FCX's oil and gas properties. In this regard, the information set forth in the following tables includes revisions of reserve estimates attributable to proved properties acquired from PXP and MMR, and reflect additional information from subsequent development activities, production history of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in product prices.
Decreases in the prices of crude oil and natural gas could have an adverse effect on the carrying value of the proved reserves, reserve volumes and FCX's revenues, profitability and cash flows. FCX's reference prices for reserve determination are the WTI spot price for crude oil and the Henry Hub price for natural gas. As of February 2017, the twelve-month average of the first-day-of-the-month historical reference price for crude oil has increased from $42.75 per barrel at December 31, 2016, to $45.99 per barrel, while the comparable price for natural gas has increased from $2.48 per MMBtu at December 31, 2016, to $2.65 per MMBtu.
The market price for GOM crude oil differs from WTI as a result of a large portion of FCX's production being sold under a Heavy Louisiana Sweet based pricing. Approximately 59 percent of FCX's December 31, 2016, oil and natural gas reserve volumes are attributable to properties in the GOM where oil price realizations are generally higher because of these marketing contracts.
Estimated Quantities of Oil and Natural Gas Reserves. The following table sets forth certain data pertaining to proved, proved developed and proved undeveloped reserves, all of which are in the U.S., for the years ended December 31, 2016, 2015 and 2014.
a.
MMBbls = million barrels; Bcf = billion cubic feet; MMBOE = million BOE
b.
Includes NGL proved reserves of 1 MMBbls (all developed) at December 31, 2016, 9 MMBbls (6 MMBbls of developed and 3 MMBbls of undeveloped) at December 31, 2015, and 10 MMBbls (7 MMBbls of developed and 3 MMBbls of undeveloped) at December 31, 2014.
For the year ended December 31, 2015, FCX had a total of 17 MMBOE of extensions and discoveries, including 14 MMBOE in the Deepwater GOM, primarily associated with the continued successful development at Horn Mountain and 3 MMBOE in the Haynesville shale assets resulting from continued successful drilling that extended and developed FCX's proved acreage. For the year ended December 31, 2014, FCX had a total of 16 MMBOE of extensions and discoveries, including 8 MMBOE in the Deepwater GOM, primarily associated with the continued successful development at Horn Mountain and 5 MMBOE in the Haynesville shale resulting from continued successful drilling that extended and developed FCX's proved acreage.
For the year ended December 31, 2015, FCX had net negative revisions of 102 MMBOE primarily related to lower oil and gas price realizations. For the year ended December 31, 2014, FCX had net positive revisions of 13 MMBOE primarily related to improved gas price realizations in both the Haynesville shale assets and Madden field, as well as continued improved performance in the Eagle Ford shale assets prior to the disposition, partially offset by the downward revisions of certain proved undeveloped reserves resulting from deferred development plans, as well as lower oil price realizations and higher steam-related operating expenses resulting from higher natural gas prices at certain onshore California properties.
Excluding the impact of crude oil derivative contracts, the average realized sales prices used in FCX's reserve reports as of December 31, 2016, were $34.26 per barrel of crude oil and $2.40 per one thousand cubic feet (Mcf) of natural gas. As of December 31, 2015, the average realized sales prices used in FCX's reserve report were $47.80 per barrel of crude oil and $2.55 per Mcf.
For the year ended December 31, 2014, FCX acquired reserves in-place totaling 16 MMBOE from the acquisition of interests in the Deepwater GOM, including interests in the Lucius and Heidelberg oil fields.
For the year ended December 31, 2016, FCX sold reserves in-place totaling 187 MMBOE primarily representing all of its Deepwater GOM, onshore California and Haynesville properties. For the year ended December 31, 2014, FCX sold reserves in-place totaling 62 MMBOE primarily related to its Eagle Ford shale assets.
Standardized Measure. The Standardized Measure (discounted at 10 percent) from production of proved oil and natural gas reserves has been developed in accordance with SEC guidelines. FCX estimated the quantity of proved oil and natural gas reserves and the future periods in which they are expected to be produced based on year-end economic conditions. Estimates of future net revenues from FCX's proved oil and gas properties and the present value thereof were made using the twelve-month average of the first-day-of-the-month historical reference prices as adjusted for location and quality differentials, which are held constant throughout the life of the oil and gas properties, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations (excluding the impact of crude oil derivative contracts). Future gross revenues were reduced by estimated future operating costs (including production and ad valorem taxes) and future development and abandonment costs, all of which were based on current costs in effect at December 31, 2016, 2015 and 2014, and held constant throughout the life of the oil and gas properties. Future income taxes were calculated by applying the statutory federal and state income tax rate to pre-tax future net cash flows, net of the tax basis of the respective oil and gas properties and utilization of FCX's available tax carryforwards related to its oil and gas operations.
The Standardized Measure related to proved oil and natural gas reserves as of December 31 follows:
a.
Includes estimated asset retirement costs of $0.4 billion at December 31, 2016, $1.9 billion at December 31, 2015, and $1.8 billion at December 31, 2014.
A summary of the principal sources of changes in the Standardized Measure for the years ended December 31 follows:
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Our chief executive officer and chief financial officer, with the participation of management, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this annual report on Form 10-K. Based on their evaluation, they have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.
(b) Changes in internal controls. There has been no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
(c) Management’s annual report on internal control over financial reporting and the report thereon of Ernst & Young LLP are included herein under Item 8. “Financial Statements and Supplemental Data.”
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information set forth under the captions “Information About Director Nominees” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our definitive proxy statement to be filed with the United States Securities and Exchange Commission (SEC), relating to our 2017 annual meeting of stockholders, is incorporated herein by reference. The information required by Item 10 regarding our executive officers appears in a separately captioned heading after Item 4. "Executive Officers of the Registrant" in Part I of this report.
Item 11. Executive Compensation.
The information set forth under the captions “Director Compensation” and “Executive Officer Compensation” of our definitive proxy statement to be filed with the SEC, relating to our 2017 annual meeting of stockholders, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Only our 2016 Stock Incentive Plan (2016 plan), which was previously approved by our stockholders, has shares of our common stock available for future grant. However, we have equity compensation plans pursuant to which awards have previously been made that could result in issuance of our common stock to employees and non-employees as compensation, including two plans that were assumed in connection with the acquisition of Plains Exploration & Production Company (Plains Exploration) under which stock-settled restricted stock units (RSUs) were previously issued, seven plans that were assumed in connection with the acquisition of McMoRan Exploration Co. under which stock-settled RSUs and nonqualified stock options were previously issued, and one plan that was assumed in connection with the acquisition of Phelps Dodge Corporation (Phelps Dodge) under which nonqualified stock options were previously issued.
The following table presents information regarding our equity compensation plans as of December 31, 2016.
a.
Includes shares of our common stock issuable upon the vesting of 4,316,763 RSUs and 5,178,000 performance share units(PSUs) at maximum performance levels, and the termination of deferrals with respect to 1,119,800 RSUs that were vested as of December 31, 2016. These awards are not reflected in column (b) because they do not have an exercise price. The number of securities to be issued in column (a) does not include 1,430 outstanding stock appreciation rights (SARs), which were granted under the plan but are payable solely in cash. The number of securities to be issued in column (a) also does not include RSUs granted under our phantom stock plan, which are payable solely in cash.
b.
Represents securities to be issued under awards assumed in our acquisitions of Plains Exploration, McMoRan Exploration Co. and Phelps Dodge. Includes shares issuable upon the vesting of 181,448 RSUs that were assumed in prior acquisitions. These awards are not reflected in column (b) because they do not have an exercise price. The number of securities to be issued in column (a) does not include 1,032,723 outstanding SARs and 338,489 RSUs, which were assumed in prior acquisitions and are payable solely in cash.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information set forth under the caption “Certain Transactions” of our definitive proxy statement to be filed with the SEC, relating to our 2017 annual meeting of stockholders, is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information set forth under the caption “Independent Registered Public Accounting Firm” of our definitive proxy statement to be filed with the SEC, relating to our 2017 annual meeting of stockholders, is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1). Financial Statements.
The consolidated statements of operations, comprehensive loss, cash flows and equity, and the consolidated balance sheets are included as part of Item 8. “Financial Statements and Supplementary Data.”
(a)(2). Financial Statement Schedules.
Reference is made to the Index to Financial Statements appearing on page hereof.
(a)(3). Exhibits.
Reference is made to the Exhibit Index beginning on page E-1 hereof.
Item 16. 10-K Summary.
Not applicable.
GLOSSARY OF TERMS
Following is a glossary of selected terms used throughout the FCX Form 10-K that are technical in nature:
Mining
Adits. A horizontal passage leading into a mine for the purposes of access or drainage.
Agitation-leach plant. A processing plant that recovers copper and other metals by passing a slurry of finely ground ores mixed with acidic solutions through a series of continuously stirred tanks.
Alluvial aquifers. A water-bearing deposit of loosely arranged gravel, sand or silt left behind by a river or other flowing water.
Anode. A positively charged metal sheet, usually lead, on which oxidation occurs. During the electro-refining process, the anode are impure copper sheets from the smelting process that require further processing to produce refined copper cathode.
Azurite. A bluish supergene copper mineral and ore found in the oxidized portions of copper deposits often associated with malachite.
Bench. The horizontal floor cuttings along which mining progresses in an open-pit mine. As the pit progresses to lower levels, safety benches are left in the walls to catch any falling rock.
Blasthole stoping. An underground mining method that extracts the ore zone in large vertical rooms. The ore is broken by blasting using large-diameter vertical drill holes.
Block cave. A general term used to describe an underground mining method where the extraction of ore depends largely on the action of gravity. By continuously removing a thin horizontal layer at the bottom mining level of the ore column, the vertical support of the ore column is removed and the ore then caves by gravity.
Bornite. A red-brown isometric mineral comprising copper, iron and sulfur.
Brochantite. A greenish-black copper mineral occurring in the oxidation zone of copper sulfide deposits.
Cathode. Refined copper produced by electro-refining of impure copper or by electrowinning.
Chalcocite. A grayish copper sulfide mineral, usually found as a supergene in copper deposits formed from the re-deposition of copper minerals that were solubilized from the oxide portion of the deposit.
Chalcopyrite. A brass-yellow sulfide of mineral copper and iron.
Chrysocolla. A bluish-green to emerald-green oxide copper mineral that forms incrustations and thin seams in oxidized parts of copper-mineral veins; a source of copper and an ornamental stone.
Cobalt. A tough, lustrous, nickel-white or silvery-gray metallic element often associated with nickel and copper ores from which it is obtained as a by-product.
Concentrate. The resulting product from the concentrating process that is composed predominantly of copper sulfide or molybdenum sulfide minerals. Further processing might include smelting and electro-refining, or roasting.
Concentrating. The process by which ore is separated into metal concentrate through crushing, milling and flotation.
Concentrator. A process plant used to separate targeted minerals from gangue and produce a mineral concentrate that can be marketed or processed by additional downstream processes to produce salable metals or mineral products. Term is used interchangeably with Mill.
Contained copper. The percentage of copper in a mineral sample before the reduction of amounts unable to be recovered during the metallurgical process.
Covellite. A metallic, indigo-blue supergene mineral found in copper deposits.
Crushed-ore leach pad. A slightly sloping pad upon which leach ores are placed in lifts for processing.
Cutoff grade. The minimum percentage of copper contained in the ore for processing. When percentages are below this grade, the material would be routed to a high-lift or waste stockpile. When percentages are above grade, the material would be processed using concentrating or leaching methods for higher recovery.
Disseminations. A mineral deposit in which the desired minerals occur as scattered particles in the rock that has sufficient quantity to be considered an ore deposit.
Electrolytic refining. The purification of metals by electrolysis. A large piece of impure copper is used as the anode with a thin strip of pure copper as the cathode.
Electrowinning. A process that uses electricity to plate copper contained in an electrolyte solution into copper cathode.
Flotation. A concentrating process in which valuable minerals attach themselves to bubbles of an oily froth for separation as concentrate. The gangue material from the flotation process reports as a tailing product.
Grade. The relative quality or percentage of metal content.
Leach stockpiles. A quantity of leachable ore placed on a leach pad or in another suitable location that permits leaching and collection of solutions that contain solubilized metal.
Leaching. The process of extracting copper using a chemical solution to dissolve copper contained in ore.
Malachite. A bright-green copper mineral (ore) that often occurs with azurite in oxidized zones of copper deposits.
Metric ton. The equivalent of 2,204.62 pounds.
Mill stockpile. Millable ore that has been mined, and is available for future processing.
Mine-for-leach. A mining operation focused on mining only leachable ores.
Mineralization. The process by which a mineral is introduced into a rock, resulting in concentration of minerals that may form a valuable or potentially valuable deposit.
Molybdenite. A black, platy, disulfide of molybdenum. It is the most common ore of molybdenum.
Ore body. A continuous, well-defined mass of mineralized material of sufficient ore content to make extraction economically feasible.
Oxide. In mining, oxide is used as an ore classification relating to material that usually leaches well but does not perform well in a concentrator. Oxide minerals in mining refer to an oxidized form.
Paste backfill. A slurry of paste material produced from railings with engineered cement and water content that is used to fill underground mined out stopes.
Porphyry. A deposit in which minerals of copper, molybdenum, gold or, less commonly, tungsten and tin are disseminated or occur in stock-work of small veinlets within a large mass of hydro-thermally altered igneous rock. The host rock is commonly an intrusive porphyry, but other rocks intruded by a porphyry can also be hosts for ore minerals.
Production level. With respect to underground mining, the elevation of the underground works that permit extraction/transport of the ore to a common point, shaft or plant.
Pseudomalachite. A dark-green monoclinic copper mineral.
Roasting. The heating of sulfide ores to oxidize sulfides to facilitate further processing.
Run-of-Mine (ROM). Leachable ore that is mined and directly placed on a leach pad without utilizing any further processes to reduce particle size prior to leaching.
Skarn. A Swedish mining term for silicate gangue of certain iron ore and sulfide deposits of Archaean age, particularly those that have replaced limestone and dolomite. Its meaning has been generally expanded to include
lime-bearing silicates, of any geologic age, derived from nearly pure limestone and dolomite with the introduction of large amounts of silicon, aluminum, iron and magnesium.
Smelting. The process of melting and oxidizing concentrate to separate copper and precious metals from metallic and non-metallic impurities, including iron, silica, alumina and sulfur.
Solution extraction. A process that transfers copper from a copper-bearing ore to an organic solution, then to an electrolyte. The electrolyte is then pumped to a tankhouse where the copper is extracted, using electricity, into a copper cathode (refer to the term Electrowinning), together referred to as solution extraction/electrowinning (SX/EW).
Spot price. The current price at which a commodity can be bought or sold at a specified time and place.
Stope. An underground mining method that is usually applied to highly inclined or vertical veins. Ore is extracted by driving horizontally upon it in a series of workings, one immediately over the other. Each horizontal working is called a stope because when a number of them are in progress, each working face under attack assumes the shape of a flight of stairs.
Sulfide. A mineral compound containing sulfur and a metal. Copper sulfides can be concentrated or leached, depending on the mineral type.
Tailing. The material remaining after economically recoverable metals and minerals have been extracted.
Tolling. The process of converting customer-owned material into specified products, which is then returned to the customer.
Oil and Gas
Barrel or Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume (used in reference to crude oil or other liquid hydrocarbons).
Blowouts. Accidents resulting from loss of hydraulic well control while conducting drilling operations.
Barrel of Oil Equivalent or BOE. One stock tank barrel equivalent of oil, calculated by converting gas volumes to equivalent oil barrels at a ratio of 6 thousand cubic feet to 1 barrel of oil.
British thermal unit or Btu. One British thermal unit is the amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
Completion. The installation of permanent equipment for production of oil or gas, or, in the case of a dry well, the reporting to the appropriate authority that the well has been abandoned.
Condensate. A mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure, but that, when produced, is in the liquid phase at surface pressure and temperature.
Cratering. The collapse of the circulation system dug around the drilling rig for the prevention of blowouts.
Developed oil and gas reserves. Developed oil and gas reserves are reserves of any category that can be expected to be recovered: (i) through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.
Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.
Differential. An adjustment to the price of oil or natural gas from an established spot market price to reflect differences in the quality and/or location of oil or gas.
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening impervious, strata, or laterally by local geologic barriers, or by both. Reservoirs that are associated by being in overlapping or adjacent fields may be treated as a single or common operational
field. The geological terms "structural feature" and "stratigraphic condition" are intended to identify localized geological features as opposed to the broader terms of basins, trends, provinces, areas-of-interest, etc.
Gross well or gross acre. A well or acre in which the registrant owns a working interest. The numbers of gross wells is the total number of wells in which the registrant owns a working interest.
Net well or net acre. Deemed to exist when the sum of the fractional ownership working interests in gross wells or acres equals one. The number of net wells or acres is the sum of the fractional working interests owned in gross wells or acres expressed as whole numbers and fractions of whole numbers.
Natural gas liquids or NGLs. Hydrocarbons (primarily ethane, propane, butane and natural gasolines) which have been extracted from wet natural gas and become liquid under various combinations of increasing pressure and lower temperature.
Shale. A fine-grained, clastic sedimentary rock composed of mud that is a mix of flakes of clay minerals and tiny fragments of other minerals.
Standardized measure. The present value, discounted at 10 percent per year, of estimated future net revenues from the production of proved reserves, computed by applying sales prices used in estimating proved oil and natural gas reserves to the year-end quantities of those reserves in effect as of the dates of such estimates and held constant throughout the productive life of the reserves (except for consideration of future price changes to the extent provided by contractual arrangements in existence at year-end), and deducting the estimated future costs to be incurred in developing, producing and abandoning the proved reserves (computed based on year-end costs and assuming continuation of existing economic conditions). Future income taxes are calculated by applying the appropriate year-end statutory federal and state income tax rates, with consideration of future tax rates already legislated, to pre-tax future net cash flows, net of the tax basis of the properties involved and utilization of available tax carryforwards related to proved oil and natural gas reserves.
Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil or gas regardless of whether the acreage contains proved reserves.
Undeveloped oil and gas reserves. Undeveloped oil and natural gas reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.
Working interest. An interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil and gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations.
For additional information regarding the definitions contained in this Glossary, or for other oil and gas definitions, refer to Rule 4-10 of Regulation S-X.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 24, 2017.
Freeport-McMoRan Inc.
By:/s/ Richard C. Adkerson
Richard C. Adkerson
Vice Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities indicated on February 24, 2017.
/s/ Richard C. Adkerson
Vice Chairman of the Board, President and Chief Executive Officer
Richard C. Adkerson
(Principal Executive Officer)
/s/ Kathleen L. Quirk
Executive Vice President, Chief Financial Officer and Treasurer
Kathleen L. Quirk
(Principal Financial Officer)
*
Vice President and Controller - Financial Reporting
C. Donald Whitmire, Jr.
(Principal Accounting Officer)
*
Chairman of the Board
Gerald J. Ford
*
Director
Lydia H. Kennard
*
Director
Andrew Langham
*
Director
Jon C. Madonna
*
Director
Courtney Mather
*
Director
Dustan E. McCoy
*
Director
Frances Fragos Townsend
* By: /s/ Richard C. Adkerson
Richard C. Adkerson
Attorney-in-Fact
S - 1
FREEPORT-McMoRan INC.
Our financial statements and the notes thereto, and the report of Ernst & Young LLP included in our 2016 annual report are incorporated herein by reference.
Page
Report of Independent Registered Public Accounting Firm
Schedule II-Valuation and Qualifying Accounts
Schedules other than the one listed above have been omitted since they are either not required, not applicable or the required information is included in the financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
FREEPORT-McMoRan INC.
We have audited the consolidated financial statements of Freeport-McMoRan Inc. as of December 31, 2016 and 2015, and for each of the three years in the period ended December 31, 2016, and have issued our report thereon dated February 24, 2017 (included elsewhere in this Form 10-K). Our audits also included the financial statement schedule listed in the Index to Financial Statements of this Form 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this schedule based on our audits.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Phoenix, Arizona
February 24, 2017
F - 1
FREEPORT-McMoRan INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In millions)
a.
Relates to a valuation allowance for tax benefits primarily associated with actuarial losses for U.S. defined benefit plans included in other comprehensive loss.
b.
Represents amounts paid or adjustments to reserves based on revised estimates.
F - 2
FREEPORT-McMoRan INC.
EXHIBIT INDEX
Filed
Exhibit
with this
Incorporated by Reference
Number
Exhibit Title
Form 10-K
Form
File No.
Date Filed
2.1
Agreement and Plan of Merger dated as of November 18, 2006, by and among FCX, Phelps Dodge Corporation and Panther Acquisition Corporation.
8-K
333-139252
11/20/2006
2.2
Agreement and Plan of Merger by and among Plains Exploration & Production Company, FCX and IMONC LLC, dated as of December 5, 2012.
8-K
001-11307-01
12/6/2012
2.3
Agreement and Plan of Merger by and among McMoRan Exploration Co., FCX and INAVN Corp., dated as of December 5, 2012.
8-K
001-11307-01
12/6/2012
2.4
Stock Purchase Agreement, dated as of October 6, 2014, among LMC Candelaria SpA, LMC Ojos del Salado SpA and Freeport Minerals Corporation.
10-Q
001-11307-01
11/7/2014
2.5
Purchase Agreement dated February 15, 2016, between Sumitomo Metal Mining America Inc., Sumitomo Metal Mining Co., Ltd., Freeport-McMoRan Morenci Inc., Freeport Minerals Corporation, and FCX.
8-K
001-11307-01
2/16/2016
2.6
Stock Purchase Agreement dated May 9, 2016, among CMOC Limited, China Molybdenum Co., Ltd., Phelps Dodge Katanga Corporation and FCX.
8-K
001-11307-01
2/9/2016
2.7
Purchase and Sale Agreement dated September 12, 2016, between Freeport-McMoRan Oil & Gas LLC, Freeport-McMoRan Exploration & Production LLC, Plains Offshore Operations Inc. and Anadarko US Offshore LLC.
10-Q
001-11307-01
11/9/2016
3.1
Amended and Restated Certificate of Incorporation of FCX, effective as of June 8, 2016.
8-K
001-11307-01
6/9/2016
3.2
Amended and Restated By-Laws of FCX, effective as of June 8, 2016.
8-K
001-11307-01
6/9/2016
4.1
Indenture dated as of February 13, 2012, between FCX and U.S. Bank National Association, as Trustee (relating to the 2.15% Senior Notes due 2017, the 3.55% Senior Notes due 2022, the 2.30% Senior Notes due 2017, the 4.00% Senior Notes due 2021, the 4.55% Senior Notes due 2024, and the 5.40% Senior Notes due 2034).
8-K
001-11307-01
2/13/2012
4.2
Second Supplemental Indenture dated as of February 13, 2012, between FCX and U.S. Bank National Association, as Trustee (relating to the 2.15% Senior Notes due 2017).
8-K
001-11307-01
2/13/2012
4.3
Third Supplemental Indenture dated as of February 13, 2012, between FCX and U.S. Bank National Association, as Trustee (relating to the 3.55% Senior Notes due 2022).
8-K
001-11307-01
2/13/2012
4.4
Fourth Supplemental Indenture dated as of May 31, 2013, among FCX, Freeport-McMoRan Oil & Gas LLC and U.S. Bank National Association, as Trustee (relating to the 2.15% Senior Notes due 2017, the 3.55% Senior Notes due 2022, the 2.30% Senior Notes due 2017, the 4.00% Senior Notes due 2021, the 4.55% Senior Notes due 2024, and the 5.40% Senior Notes due 2034).
8-K
001-11307-01
6/3/2013
4.5
Fifth Supplemental Indenture dated as of November 14, 2014 among FCX, Freeport-McMoRan Oil & Gas LLC and U.S. Bank National Association, as Trustee (relating to the 2.30% Senior Notes due 2017).
8-K
001-11307-01
11/14/2014
4.6
Sixth Supplemental Indenture dated as of November 14, 2014 among FCX, Freeport-McMoRan Oil & Gas LLC and U.S. Bank National Association, as Trustee (relating to the 4.00% Senior Notes due 2021).
8-K
001-11307-01
11/14/2014
4.7
Seventh Supplemental Indenture dated as of November 14, 2014 among FCX, Freeport-McMoRan Oil & Gas LLC and U.S. Bank National Association, as Trustee (relating to the 4.55% Senior Notes due 2024).
8-K
001-11307-01
11/14/2014
E - 1
FREEPORT-McMoRan INC.
EXHIBIT INDEX
Filed
Exhibit
with this
Incorporated by Reference
Number
Exhibit Title
Form 10-K
Form
File No.
Date Filed
4.8
Eighth Supplemental Indenture dated as of November 14, 2014 among FCX, Freeport-McMoRan Oil & Gas LLC and U.S. Bank National Association, as Trustee (relating to the 5.40% Senior Notes due 2034).
8-K
001-11307-01
11/14/2014
4.9
Indenture dated as of March 7, 2013, between FCX and U.S. Bank National Association, as Trustee (relating to the 2.375% Senior Notes due 2018, the 3.100% Senior Notes due 2020, the 3.875% Senior Notes due 2023, and the 5.450% Senior Notes due 2043).
8-K
001-11307-01
3/7/2013
4.10
Supplemental Indenture dated as of May 31, 2013, among FCX, Freeport-McMoRan Oil & Gas LLC and U.S. Bank National Association, as Trustee (relating to the 2.375% Senior Notes due 2018, the 3.100% Senior Notes due 2020, the 3.875% Senior Notes due 2023, and the 5.450% Senior Notes due 2043).
8-K
001-11307-01
6/3/2013
4.11
Indenture dated as of December 13, 2016, among FCX, Freeport-McMoRan Oil & Gas LLC, as guarantor, and U.S. Bank National Association, as Trustee (relating to the 6.125% Senior Notes due 2019, the 6.50% Senior Notes due 2020, the 6.625% Senior Notes due 2021, the 6.75% Senior Notes due 2022, and the 6.875% Senior Notes due 2023).
8-K
001-11307-01
12/13/2016
4.12
Indenture dated as of March 13, 2007, among Plains Exploration & Production Company, the Subsidiary Guarantors parties thereto, and Wells Fargo Bank, N.A., as Trustee (relating to the 6.625% Senior Notes due 2021, the 6.75% Senior Notes due 2022, the 6.125% Senior Notes due 2019, the 6.5% Senior Notes due 2020, and the 6.875% Senior Notes due 2023).
8-K
001-31470
3/13/2007
4.13
Twelfth Supplemental Indenture dated as of March 29, 2011 to the Indenture dated as of March 13, 2007, among Plains Exploration & Production Company, the Subsidiary Guarantors parties thereto and Wells Fargo Bank, N.A., as Trustee (relating to the 6.625% Senior Notes due 2021).
8-K
001-31470
3/29/2011
4.14
Thirteenth Supplemental Indenture dated as of November 21, 2011 to the Indenture dated as of March 13, 2007, among Plains Exploration & Production Company, the Subsidiary Guarantors parties thereto and Wells Fargo Bank, N.A., as Trustee (relating to the 6.75% Senior Notes due 2022).
8-K
001-31470
11/22/2011
4.15
Fourteenth Supplemental Indenture dated as of April 27, 2012 to the Indenture dated as of March 13, 2007, among Plains Exploration & Production Company, the Subsidiary Guarantors parties thereto and Wells Fargo Bank, N.A., as Trustee (relating to the 6.125% Senior Notes due 2019).
8-K
001-31470
4/27/2012
4.16
Sixteenth Supplemental Indenture dated as of October 26, 2012 to the Indenture dated as of March 13, 2007, among Plains Exploration & Production Company, the Subsidiary Guarantors parties thereto and Wells Fargo Bank, N.A., as Trustee (relating to the 6.5% Senior Notes due 2020).
8-K
001-31470
10/26/2012
4.17
Seventeenth Supplemental Indenture dated as of October 26, 2012 to the Indenture dated as of March 13, 2007, among Plains Exploration & Production Company, the Subsidiary Guarantors parties thereto and Wells Fargo Bank, N.A., as Trustee (relating to the 6.875% Senior Notes due 2023).
8-K
001-31470
10/26/2012
E - 2
FREEPORT-McMoRan INC.
EXHIBIT INDEX
Filed
Exhibit
with this
Incorporated by Reference
Number
Exhibit Title
Form 10-K
Form
File No.
Date Filed
4.18
Eighteenth Supplemental Indenture dated as of May 31, 2013 to the Indenture dated as of March 13, 2007, among Freeport-McMoRan Oil & Gas LLC, as Successor Issuer, FCX Oil & Gas Inc., as Co-Issuer, FCX, as Parent Guarantor, Plains Exploration & Production Company, as Original Issuer, and Wells Fargo Bank, N.A., as Trustee (relating to the 6.625% Senior Notes due 2021, the 6.75% Senior Notes due 2022, the 6.125% Senior Notes due 2019, the 6.5% Senior Notes due 2020, and the 6.875% Senior Notes due 2023).
8-K
001-11307-01
6/3/2013
4.19
Nineteenth Supplemental Indenture dated as of September 30, 2016 to the Indenture dated as of March 13, 2007, among Freeport-McMoRan Oil & Gas LLC, as Successor Issuer, FCX Oil & Gas Inc., as Co-Issuer, FMSTP Inc., as Additional Co-Issuer, FCX, as Parent Guarantor, and Wells Fargo Bank, N.A., as Trustee (relating to the 6.125% Senior Notes due 2019, the 6.50% Senior Notes due 2020, the 6.625% Senior Notes due 2021, the 6.75% Senior Notes due 2022 and the 6.875% Senior Notes due 2023).
10-Q
001-11307-01
11/9/2016
4.20
Twentieth Supplemental Indenture dated as of December 13, 2016 to the Indendture dated as of March 13, 2007, among Freeport-McMoRan Oil & Gas LLC, as Successor Issuer, FCX Oil & Gas LLC, as Co-Issuer, FMSTP Inc., as Additional Co-Issuer, FCX, as Parent Guarantor, and Wells Fargo Bank, N.A., as Trustee (relating to the 6.125% Senior Notes due 2019, the 6.50% Senior Notes due 2020, the 6.625% Senior Notes due 2021, the 6.75% Senior Notes due 2022 and the 6.875% Senior Notes due 2023).
8-K
001-11307-01
12/13/2016
4.21
Form of Indenture dated as of September 22, 1997, between Phelps Dodge Corporation and The Chase Manhattan Bank, as Trustee (relating to the 7.125% Senior Notes due 2027, the 9.50% Senior Notes due 2031, and the 6.125% Senior Notes due 2034).
S-3
333-36415
9/25/1997
4.22
Form of 7.125% Debenture due November 1, 2027 of Phelps Dodge Corporation issued on November 5, 1997, pursuant to the Indenture dated as of September 22, 1997, between Phelps Dodge Corporation and The Chase Manhattan Bank, as Trustee (relating to the 7.125% Senior Notes due 2027).
8-K
001-00082
11/3/1997
4.23
Form of 9.5% Note due June 1, 2031 of Phelps Dodge Corporation issued on May 30, 2001, pursuant to the Indenture dated as of September 22, 1997, between Phelps Dodge Corporation and First Union National Bank, as successor Trustee (relating to the 9.50% Senior Notes due 2031).
8-K
001-00082
5/30/2001
4.24
Form of 6.125% Note due March 15, 2034 of Phelps Dodge Corporation issued on March 4, 2004, pursuant to the Indenture dated as of September 22, 1997, between Phelps Dodge Corporation and First Union National Bank, as successor Trustee (relating to the 6.125% Senior Notes due 2034).
10-K
001-00082
3/7/2005
4.25
Supplemental Indenture dated as of April 4, 2007 to the Indenture dated as of September 22, 1997, among Phelps Dodge Corporation, as Issuer, Freeport-McMoRan Copper & Gold Inc., as Parent Guarantor, and U.S. Bank National Association, as Trustee (relating to the 7.125% Senior Notes due 2027, the 9.50% Senior Notes due 2031, and the 6.125% Senior Notes due 2034).
10-K
001-00082
2/26/2016
E - 3
FREEPORT-McMoRan INC.
EXHIBIT INDEX
Filed
Exhibit
with this
Incorporated by Reference
Number
Exhibit Title
Form 10-K
Form
File No.
Date Filed
4.26
Registration Rights Agreement dated as of December 13, 2016 among FCX, Freeport-McMoRan Oil & Gas LLC, as Guarantor, and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Dealer Managers, relating to the 6.125% Senior Notes due 2019.
8-K
001-11307-01
12/13/2016
4.27
Registration Rights Agreement dated as of December 13, 2016 among FCX, Freeport-McMoRan Oil & Gas LLC, as Guarantor, and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Dealer Managers, relating to the 6.50% Senior Notes due 2020.
8-K
001-11307-01
12/13/2016
4.28
Registration Rights Agreement dated as of December 13, 2016 among FCX, Freeport-McMoRan Oil & Gas LLC, as Guarantor, and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Dealer Managers, relating to the 6.625% Senior Notes due 2021.
8-K
001-11307-01
12/13/2016
4.29
Registration Rights Agreement dated as of December 13, 2016 among FCX, Freeport-McMoRan Oil & Gas LLC, as Guarantor, and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Dealer Managers, relating to the 6.75% Senior Notes due 2022.
8-K
001-11307-01
12/13/2016
4.30
Registration Rights Agreement dated as of December 13, 2016 among FCX, Freeport-McMoRan Oil & Gas LLC, as Guarantor, and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Dealer Managers, relating to the 6.875% Senior Notes due 2023.
8-K
001-11307-01
12/13/2016
10.1
Contract of Work dated December 30, 1991, between the Government of the Republic of Indonesia and PT Freeport Indonesia.
S-3
333-72760
11/5/2001
10.2
Memorandum of Understanding dated as of July 25, 2014, between the Directorate General of Mineral and Coal, the Ministry of Energy and Mineral Resources and PT Freeport Indonesia on Adjustment of the Contract of Work.
8-K
001-11307-01
7/8/2014
10.3
Extension dated as of January 23, 2015, to Memorandum of Understanding Between the Government of the Republic of Indonesia and PT Freeport Indonesia dated as of July 25, 2014.
10-K
001-11307-01
2/27/2015
10.4
Participation Agreement dated as of October 11, 1996, between PT Freeport Indonesia and P.T. RTZ-CRA Indonesia (a subsidiary of Rio Tinto PLC) with respect to a certain contract of work.
S-3
333-72760
11/5/2001
10.5
First Amendment dated April 30, 1999, Second Amendment dated February 22, 2006, Third Amendment dated October 7, 2009, Fourth Amendment dated November 14, 2013, and Fifth Amendment dated August 4, 2014, to the Participation Agreement dated as of October 11, 1996, between PT Freeport Indonesia and P.T. Rio Tinto Indonesia (formerly P.T. RTZ-CRA Indonesia).
10-K
001-11307-01
2/27/2015
10.6
Sixth Amendment dated September 17, 2015, to the Participation Agreement dated as of October 11, 1996, between PT Freeport Indonesia and P.T. Rio Tinto Indonesia.
10-Q
001-11307-01
11/6/2015
10.7
Seventh Amendment dated October 21, 2016, to the Participation Agreement dated as of October 11, 1996, between PT Freeport Indonesia and P.T. Rio Tinto Indonesia.
10-Q
001-11307-01
11/9/2016
10.8
Agreement dated as of October 11, 1996, to Amend and Restate Trust Agreement among PT Freeport Indonesia, FCX, the RTZ Corporation PLC (now Rio Tinto PLC), P.T. RTZ-CRA Indonesia, RTZ Indonesian Finance Limited and First Trust of New York, National Association, and The Chase Manhattan Bank, as Administrative Agent, JAA Security Agent and Security Agent.
8-K
001-09916
11/13/1996
FREEPORT-McMoRan INC.
EXHIBIT INDEX
Filed
Exhibit
with this
Incorporated by Reference
Number
Exhibit Title
Form 10-K
Form
File No.
Date Filed
10.9
Amendment dated July 21, 2015, to the Restated Trust Agreement dated as of October 11, 1996, among PT Freeport Indonesia, PT Rio Tinto Indonesia (formerly P.T. RTZ-CRA Indonesia), U.S. Bank National Association, as trustee, JP Morgan Chase Bank, N.A., as depository, and the Secured Creditors.
10-Q
001-11307-01
8/10/2015
10.10
Concentrate Purchase and Sales Agreement dated effective December 11, 1996, between PT Freeport Indonesia and PT Smelting.
S-3
333-72760
11/5/2001
10.11
Amendment No. 1, dated as of March 19, 1998, Amendment No. 2 dated as of December 1, 2000, Amendment No. 3 dated as of January 1, 2003, Amendment No. 4 dated as of May 10, 2004, Amendment No. 5 dated as of March 19, 2009, Amendment No. 6 dated as of January 1, 2011, and Amendment No. 7 dated as of October 29, 2012, to the Concentrate Purchase and Sales Agreement dated effective December 11, 1996, between PT Freeport Indonesia and PT Smelting.
10-K
001-00082
2/27/2015
10.12
Distribution Agreement, dated as of August 10, 2015, by and between FCX and J.P. Morgan Securities LLC.
8-K
001-11307-01
8/10/2015
10.13
Distribution Agreement, dated as of September 18, 2015, by and among FCX, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BNP Paribas Securities Corp., Citigroup Global Markets Inc., HSBC Securities (USA) Inc., Mizuho Securities USA Inc. and Scotia Capital (USA) Inc.
8-K
001-11307-01
9/18/2015
10.14
Distribution Agreement, dated as of May 16, 2016, by and among FCX, Noble Drilling (U.S.) LLC, J.P. Morgan Securities LLC and HSBC Securities (USA) Inc.
8-K
001-11307-01
5/16/2016
10.15
Distribution Agreement, dated as of July 27, 2016, by and among FCX, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BBVA Securities Inc., BMO Capital Markets Corp., BNP Paribas Securities Corp., BTIG, LLC, CIBC World Markets Corp., Citigroup Global Markets Inc., HSBC Securities (USA) Inc., Mizuho Securities USA Inc., MUFG Securities Americas Inc., RBC Capital Markets, LLC, Santander Investment Securities Inc., Scotia Capital (USA) Inc., SMBC Nikko Securities America, Inc., TD Securities (USA) LLC and Wells Fargo Securities, LLC.
8-K
001-11307-01
7/27/2016
10.16
Nomination and Standstill Agreement dated October 7, 2015, by and between FCX, Carl C. Icahn, High River Limited Partnership, Hopper Investments LLC, Barberry Corp., Icahn Partners Master Fund LP, Icahn Offshore LP, Icahn Partners LP, Icahn Onshore LP, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings L.P., Icahn Enterprises G.P. Inc., Beckton Corp., Andrew Langham and Courtney Mather.
8-K
001-11307-01
10/7/2015
10.17
Confidentiality Agreement dated October 7, 2015, by and between FCX, Carl C. Icahn, High River Limited Partnership, Hopper Investments LLC, Barberry Corp., Icahn Partners Master Fund LP, Icahn Offshore LP, Icahn Partners LP, Icahn Onshore LP, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings L.P., Icahn Enterprises G.P. Inc., Beckton Corp., Andrew Langham and Courtney Mather.
8-K
001-11307-01
10/7/2015
10.18
Third Amended and Restated Joint Venture and Shareholders Agreement dated as of December 11, 2003 among PT Freeport Indonesia, Mitsubishi Corporation, Nippon Mining & Metals Company, Limited and PT Smelting, as amended by the First Amendment dated as of September 30, 2005, and the Second Amendment dated as of April 30, 2008.
10-K
001-00082
2/27/2015
FREEPORT-McMoRan INC.
EXHIBIT INDEX
Filed
Exhibit
with this
Incorporated by Reference
Number
Exhibit Title
Form 10-K
Form
File No.
Date Filed
10.19
Participation Agreement, dated as of March 16, 2005, among Phelps Dodge Corporation, Cyprus Amax Minerals Company, a Delaware corporation, Cyprus Metals Company, a Delaware corporation, Cyprus Climax Metals Company, a Delaware corporation, Sumitomo Corporation, a Japanese corporation, Summit Global Management, B.V., a Dutch corporation, Sumitomo Metal Mining Co., Ltd., a Japanese corporation, Compañia de Minas Buenaventura S.A.A., a Peruvian sociedad anonima abierta, and Sociedad Minera Cerro Verde S.A.A., a Peruvian sociedad anonima abierta.
8-K
001-00082
3/22/2005
10.20
Shareholders Agreement, dated as of June 1, 2005, among Phelps Dodge Corporation, Cyprus Climax Metals Company, a Delaware corporation, Sumitomo Corporation, a Japanese corporation, Sumitomo Metal Mining Co., Ltd., a Japanese corporation, Summit Global Management B.V., a Dutch corporation, SMM Cerro Verde Netherlands, B.V., a Dutch corporation, Compañia de Minas Buenaventura S.A.A., a Peruvian sociedad anonima abierta, and Sociedad Minera Cerro Verde S.A.A., a Peruvian sociedad anonima abierta.
8-K
001-00082
6/7/2005
10.21
Term Loan Agreement dated as of February 14, 2013, among FCX, And Freeport-McMoRan Oil & Gas LLC, as borroweres, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, HSBC Bank USA, National Association, Mizuho Corporate Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and each of the lenders party thereto.
8-K
001-11307-01
2/19/2013
10.22
First Amendment dated as of February 27, 2015, to Term Loan Agreement dated as of February 14, 2013, among FCX and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, HSBC Bank USA, National Association, Mizuho Corporate Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and each of the lenders party thereto.
10-K
001-00082
2/27/2015
10.23
Second Amendment dated as of December 9, 2015 to the Term Loan Agreement dated as of February 14, 2013, as amended by the First Amendment dated as of February 27, 2015, among FCX and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, HSBC Bank USA, National Association, Mizuho Corporate Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and each of the lenders party thereto.
8-K
001-11307-01
12/9/2015
10.24
Amendment and Restatement Agreement dated as of February 26, 2016, relating to the Term Loan Agreement dated as of February 14, 2013, as amended, among FCX and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent and each of the lenders from time to time party thereto.
10-K
001-11307-01
2/26/2016
E - 4
E - 5
FREEPORT-McMoRan INC.
EXHIBIT INDEX
Filed
Exhibit
with this
Incorporated by Reference
Number
Exhibit Title
Form 10-K
Form
File No.
Date Filed
10.19
Participation Agreement, dated as of March 16, 2005, among Phelps Dodge Corporation, Cyprus Amax Minerals Company, a Delaware corporation, Cyprus Metals Company, a Delaware corporation, Cyprus Climax Metals Company, a Delaware corporation, Sumitomo Corporation, a Japanese corporation, Summit Global Management, B.V., a Dutch corporation, Sumitomo Metal Mining Co., Ltd., a Japanese corporation, Compañia de Minas Buenaventura S.A.A., a Peruvian sociedad anonima abierta, and Sociedad Minera Cerro Verde S.A.A., a Peruvian sociedad anonima abierta.
8-K
001-00082
3/22/2005
10.20
Shareholders Agreement, dated as of June 1, 2005, among Phelps Dodge Corporation, Cyprus Climax Metals Company, a Delaware corporation, Sumitomo Corporation, a Japanese corporation, Sumitomo Metal Mining Co., Ltd., a Japanese corporation, Summit Global Management B.V., a Dutch corporation, SMM Cerro Verde Netherlands, B.V., a Dutch corporation, Compañia de Minas Buenaventura S.A.A., a Peruvian sociedad anonima abierta, and Sociedad Minera Cerro Verde S.A.A., a Peruvian sociedad anonima abierta.
8-K
001-00082
6/7/2005
10.21
Term Loan Agreement dated as of February 14, 2013, among FCX, And Freeport-McMoRan Oil & Gas LLC, as borroweres, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, HSBC Bank USA, National Association, Mizuho Corporate Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and each of the lenders party thereto.
8-K
001-11307-01
2/19/2013
10.22
First Amendment dated as of February 27, 2015, to Term Loan Agreement dated as of February 14, 2013, among FCX and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, HSBC Bank USA, National Association, Mizuho Corporate Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and each of the lenders party thereto.
10-K
001-00082
2/27/2015
10.23
Second Amendment dated as of December 9, 2015 to the Term Loan Agreement dated as of February 14, 2013, as amended by the First Amendment dated as of February 27, 2015, among FCX and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, HSBC Bank USA, National Association, Mizuho Corporate Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and each of the lenders party thereto.
8-K
001-11307-01
12/9/2015
10.24
Amendment and Restatement Agreement dated as of February 26, 2016, relating to the Term Loan Agreement dated as of February 14, 2013, as amended, among FCX and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent and each of the lenders from time to time party thereto.
10-K
001-11307-01
2/26/2016
E - 6
FREEPORT-McMoRan INC.
EXHIBIT INDEX
Filed
Exhibit
with this
Incorporated by Reference
Number
Exhibit Title
Form 10-K
Form
File No.
Date Filed
10.25
Revolving Credit Agreement dated as of February 14, 2013, among FCX, PT Freeport Indonesia, and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent and the swingline lender, Bank of America, N.A., as syndication agent, BNP Paribas, Citibank, N.A., HSBC Bank USA, National Association, Mizuho Corporate Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and each of the lenders and issuing banks party thereto.
8-K
001-11307-01
2/19/2013
10.26
First Amendment dated as of May 30, 2014, to the Revolving Credit Agreement dated as of February 14, 2013, among FCX, PT Freeport Indonesia and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent and the swingline lender, Bank of America, N.A., as syndication agent, BNP Paribas, Citibank, N.A., HSBC Bank USA, National Association, Mizuho Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and each of the lenders and issuing banks party thereto.
8-K
001-11307-01
6/2/2014
10.27
Second Amendment dated as of February 27, 2015, to the Revolving Credit Agreement dated as of February 14, 2013, as amended by the First Amendment dated as of May 30, 2014, among FCX, PT Freeport Indonesia and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent and the swingline lender, Bank of America, N.A., as syndication agent, BNP Paribas, Citibank, N.A., HSBC Bank USA, National Association, Mizuho Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and each of the lenders and issuing banks party thereto.
10-K
001-00082
2/27/2015
10.28
Third Amendment dated as of December 9, 2015 to the Revolving Credit Agreement dated as of February 14, 2013, as amended by the First Amendment dated as of May 30, 2014 and the Second Amendment dated as of February 27, 2015, among FCX, PT Freeport Indonesia and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent and the swingline lender, Bank of America, N.A., as syndication agent, BNP Paribas, Citibank, N.A., HSBC Bank USA, National Association, Mizuho Corporate Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and each of the lenders and issuing banks party thereto.
8-K
001-11307-01
12/9/2015
10.29
Amendment and Restatement Agreement dated as of February 26, 2016, relating to the Revolving Credit Agreement dated as of February 14, 2013, as amended, among FCX, PT Freeport Indonesia and Freeport-McMoRan Oil & Gas LLC, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent and each of the lenders and issuing banks from time to time party thereto.
10-K
001-00082
2/26/2016
10.30*
Amended and Restated Employment Agreement dated February 27, 2014, between FCX and James C. Flores.
8-K
001-11307-01
3/3/2014
10.31*
Letter Agreement dated as of December 19, 2013, by and between FCX and Richard C. Adkerson.
8-K
001-11307-01
12/23/2013
10.32*
FCX Director Compensation.
10-K
001-00082
2/26/2016
E - 7
FREEPORT-McMoRan INC.
EXHIBIT INDEX
Filed
Exhibit
with this
Incorporated by Reference
Number
Exhibit Title
Form 10-K
Form
File No.
Date Filed
10.33*
Amended and Restated Executive Employment Agreement dated effective as of December 2, 2008, between FCX and Kathleen L. Quirk.
10-K
001-11307-01
2/26/2009
10.34*
Amendment to Amended and Restated Executive Employment Agreement dated December 2, 2008, by and between FCX and Kathleen L. Quirk, dated April 27, 2011.
8-K
001-11307-01
4/29/2011
10.35*
FCX Executive Services Program
X
10.36*
FCX Supplemental Executive Retirement Plan, as amended and restated.
8-K
001-11307-01
2/5/2007
10.37*
FCX Supplemental Executive Capital Accumulation Plan.
10-Q
001-11307-01
5/12/2008
10.38*
FCX Supplemental Executive Capital Accumulation Plan Amendment One.
10-Q
001-11307-01
5/12/2008
10.39*
FCX Supplemental Executive Capital Accumulation Plan Amendment Two.
10-K
001-11307-01
2/26/2009
10.40*
FCX Supplemental Executive Capital Accumulation Plan Amendment Three.
10-K
001-00082
2/27/2015
10.41*
FCX Supplemental Executive Capital Accumulation Plan Amendment Four.
10-K
001-00082
2/27/2015
10.42*
FCX 2005 Supplemental Executive Capital Accumulation Plan, as amended and restated effective January 1, 2015.
10-K
001-00082
2/27/2015
10.43*
FCX Amended and Restated 1999 Stock Incentive Plan, as amended and restated.
10-Q
001-11307-01
5/10/2007
10.44*
FCX 2003 Stock Incentive Plan, as amended and restated.
10-Q
001-11307-01
5/10/2007
10.45*
FCX 2004 Director Compensation Plan, as amended and restated.
10-Q
001-11307-01
8/6/2010
10.46*
FCX Amended and Restated 2006 Stock Incentive Plan.
10-K
001-11307-01
2/27/2014
10.47*
Form of Notice of Grant of Nonqualified Stock Options for grants under the FCX 1999 Stock Incentive Plan, the 2003 Stock Incentive Plan and the 2006 Stock Incentive Plan.
10-K
001-11307-01
2/29/2008
10.48*
Form of Notice of Grant of Nonqualified Stock Options and Restricted Stock Units under the 2006 Stock Incentive Plan (for grants made to non-management directors and advisory directors).
8-K
001-11307-01
6/14/2010
10.49*
Form of Nonqualified Stock Options Grant Agreement (effective February 2012).
10-K
001-11307-01
2/27/2012
10.50*
Form of Restricted Stock Unit Agreement (effective February 2012).
10-K
001-11307-01
2/27/2012
10.51*
Form of Nonqualified Stock Options Grant Agreement under the FCX stock incentive plans (effective February 2014).
10-K
001-11307-01
2/27/2014
10.52*
Form of Restricted Stock Unit Agreement under the FCX stock incentive plans (effective February 2014).
10-K
001-11307-01
2/27/2014
10.53*
Form of Performance Share Unit Agreement (effective February 2014).
8-K
001-11307-01
3/3/2014
10.54*
FCX Annual Incentive Plan (For Fiscal Years Ending 2014 - 2018).
8-K
001-11307-01
6/18/2014
10.55*
Form of Notice of Grant of Restricted Stock Units (for grants made to non-management directors).
X
10.56*
Form of Restricted Stock Unit Agreement under the FCX stock incentive plans (effective February 2015).
10-K
001-00082
2/27/2015
E - 8
FREEPORT-McMoRan INC.
EXHIBIT INDEX
Filed
Exhibit
with this
Incorporated by Reference
Number
Exhibit Title
Form 10-K
Form
File No.
Date Filed
10.57*
FCX 2016 Stock Incentive Plan
8-K
001-11307-01
6/9/2016
12.1
FCX Computation of Ratio of Earnings to Fixed Charges.
X
14.1
FCX Principles of Business Conduct.
X
21.1
Subsidiaries of FCX.
X
23.1
Consent of Ernst & Young LLP.
X
24.1
Certified resolution of the Board of Directors of FCX authorizing this report to be signed on behalf of any officer or director pursuant to a Power of Attorney.
X
24.2
Powers of Attorney pursuant to which this report has been signed on behalf of certain officers and directors of FCX.
X
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d - 14(a).
X
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d - 14(a).
X
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.
X
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350.
X
95.1
Mine Safety Disclosure.
X
101.INS
XBRL Instance Document.
X
101.SCH
XBRL Taxonomy Extension Schema.
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
X
101.LAB
XBRL Taxonomy Extension Label Linkbase.
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.
X
Note: Certain instruments with respect to long-term debt of FCX have not been filed as exhibits to this Annual Report on Form 10-K since the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of FCX and its subsidiaries on a consolidated basis. FCX agrees to furnish a copy of each such instrument upon request of the Securities and Exchange Commission.
* Indicates management contract or compensatory plan or arrangement.
# Pursuant to a request for confidential treatment, portions of this exhibit have been redacted from the publicly filed document and have been furnished separately to the Securities and Exchange Commission.
E - 9