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Freeport Takes a Whopping $13.1B Charge

Related to its 2007 acquisition of Phelps Dodge, the writedown reduces the carrying value of inventories, long-lived assets, and goodwill from the $25.8b deal.
Stephen Taub, CFO.com | US
January 27, 2009

Freeport-McMoRan Copper & Gold Inc.'s fourth-quarter results included a $13.1-billion charge related to its March 2007 acquisition of Phelps Dodge.

The mining giant said the writeoff was needed to primarily reduce the carrying value of inventories, long-lived assets, and goodwill related to the earlier $25.8 billion deal. When the deal initially closed, Freeport-McMoran allocated $39.6 billion to assets acquired, including $6.2 billion for goodwill.

Since then, though, commodity prices have plummeted. For example, metal price projections used to estimate fair values of the net assets acquired in the acquisition of Phelps Dodge included near-term prices of about $3 per pound for copper declining over an eight-year period to $1.20 per pound.

The writedown ballooned Freeport's fourth-quarter loss to $13.9 billion, or $36.78 a share, compared with the prior year's net income of $414 million, or $1.05 a share.

The company said that its impairment evaluations on Dec. 31, 2008, were based on price assumptions reflecting prevailing copper futures prices of roughly $1.40 to $1.50 per pound for three years and a long-term average price of $1.60 per pound. It also said it had earlier assumed a $26-per-pound price for molybdenum declining over a five-year period to $8 per pound, reflecting price expectations at that time. In its year-end impairment assessment, molybdenum prices were assumed to average $8 per pound.

During the fourth quarter of 2008, the company's annual impairment evaluation of goodwill resulted in the recognition of impairment charges to reduce the carrying values of long-lived assets, other than goodwill, by $10.9 billion and to eliminate the carrying value of goodwill of $6.




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