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Freeport-McMoran, hit by plunging copper and other commodity prices, now must make fair-value inventory adjustments for year since Phelps Dodge acquisition.
Stephen Taub, CFO.com | US
December 3, 2008
The collapse in metals prices has taken a huge toll on Freeport-McMoRan Copper & Gold Inc.
The world's largest copper and gold miner, which Wednesday announced major production cutbacks and the suspension of its dividend, also said it recorded charges to operating income for lower-of-cost-or-market (LCM) inventory adjustments at certain of its North America copper mines of $22 million — $14 million to net income — for the first nine months of 2008. The adjustments primarily relate to the work in process stockpiles, which were recorded at fair value at the time of its March 2007 acquisition of Phelps Dodge.
Freeport noted that since Sept. 30 copper and molybdenum prices have fallen dramatically, affecting its operations severely.
Freeport pointed out that when it bought Phelps Dodge, acquired inventories, including mill and leach stockpiles, were recorded at fair value based on market prices and the outlook for future prices at the acquisition date.
It explained that accounting rules require that inventories be recorded at LCM.
In addition, Freeport warned if current weak economic conditions continue, it will be required to record significant impairments of long-lived assets, including goodwill in the fourth quarter, associated with the acquisition of Phelps Dodge.
It noted that at the end of the September quarter the carrying value of goodwill associated with its acquisition of Phelps Dodge totaled $6 billion, which primarily relates to the requirement to recognize a deferred tax liability for the difference between assigned values and the tax bases of assets acquired and liabilities assumed.
It explained that its impairment tests for long-lived assets and goodwill require it to make assumptions, including near and long-term metal price assumptions (primarily for copper and molybdenum); estimates of input costs such as energy, labor and sulfuric acid; proven and probable reserve estimates, including any costs to develop the reserves and the timing of producing the reserves; and the use of appropriate current discount rates.