United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from   to

Commission file number: 001-11307-01

Freeport-McMoRan Inc.

(Exact name of registrant as specified in its charter)

Delaware		74-2480931
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

333 North Central Avenue
Phoenix	,	AZ				85004-2189
(Address of principal executive offices)						(Zip Code)

(602) 366-8100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.10 per share	FCX	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes  ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes  ☐ No

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

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

On October 31, 2019, there were issued and outstanding 1,450,913,690 shares of the registrant’s common stock, par value $0.10 per share.

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Freeport-McMoRan Inc.

TABLE OF CONTENTS

	Page
Part I. Financial Information	3
Item 1. Financial Statements:	3
Consolidated Balance Sheets (Unaudited)	3
Consolidated Statements of Operations (Unaudited)	4
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)	5
Consolidated Statements of Cash Flows (Unaudited)	6
Consolidated Statements of Equity (Unaudited)	7
Notes to Consolidated Financial Statements (Unaudited)	9
Report of Independent Registered Public Accounting Firm	32
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3. Quantitative and Qualitative Disclosures About Market Risk	71
Item 4. Controls and Procedures	71
Part II. Other Information	71
Item 1. Legal Proceedings	71
Item 1A. Risk Factors	71
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 4. Mine Safety Disclosures	72
Item 6. Exhibits	72
Signature	S-1

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Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements.

Freeport-McMoRan Inc.

CONSOLIDATED BALANCE SHEETS (Unaudited)

	September 30, 2019				December 31, 2018
	(In millions)
ASSETS
Current assets:
Cash and cash equivalents	$	2,247			$	4,217
Trade accounts receivable	731				829
Income and other tax receivables	263				493
Inventories:
Materials and supplies, net	1,619				1,528
Mill and leach stockpiles	1,302				1,453
Product	1,513				1,778
Other current assets	672				422
Total current assets	8,347				10,720
Property, plant, equipment and mine development costs, net	29,330				28,010
Long-term mill and leach stockpiles	1,300				1,314
Other assets	1,966				2,172
Total assets	$	40,943			$	42,216
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	2,755			$	2,625
Current portion of environmental and asset retirement obligations	488				449
Dividends payable	73				73
Accrued income taxes	61				165
Current portion of debt	4				17
Total current liabilities	3,381				3,329
Long-term debt, less current portion	9,915				11,124
Deferred income taxes	4,245				4,032
Environmental and asset retirement obligations, less current portion	3,558				3,609
Other liabilities	2,302				2,230
Total liabilities	23,401				24,324
Equity:
Stockholders’ equity:
Common stock	158				158
Capital in excess of par value	25,880				26,013
Accumulated deficit	(12,289		)		(12,041		)
Accumulated other comprehensive loss	(570		)		(605		)
Common stock held in treasury	(3,735		)		(3,727		)
Total stockholders’ equity	9,444				9,798
Noncontrolling interests	8,098				8,094
Total equity	17,542				17,892
Total liabilities and equity	$	40,943			$	42,216

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

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Freeport-McMoRan Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2019				2018				2019				2018
	(In millions, except per share amounts)
Revenues	$	3,153			$	4,908			$	10,491			$	14,944
Cost of sales:
Production and delivery	2,665				3,069				8,584				8,790
Depreciation, depletion and amortization	322				458				1,021				1,351
Metals inventory adjustments	41				—				100				2
Total cost of sales	3,028				3,527				9,705				10,143
Selling, general and administrative expenses	106				101				315				341
Mining exploration and research expenses	25				27				83				72
Environmental obligations and shutdown costs	20				8				85				76
Net loss (gain) on sales of assets	12				(70		)		(13		)		(126		)
Total costs and expenses	3,191				3,593				10,175				10,506
Operating (loss) income	(38		)		1,315				316				4,438
Interest expense, net	(123		)		(143		)		(401		)		(436		)
Net (loss) gain on early extinguishment of debt	(21		)		—				(27		)		8
Other income, net	33				14				52				63
(Loss) income from continuing operations before income taxes and equity in affiliated companies’ net earnings	(149		)		1,186				(60		)		4,073
Provision for income taxes	(91		)		(522		)		(181		)		(1,543		)
Equity in affiliated companies’ net earnings	5				4				7				5
Net (loss) income from continuing operations	(235		)		668				(234		)		2,535
Net income (loss) from discontinued operations	1				(4		)		2				(19		)
Net (loss) income	(234		)		664				(232		)		2,516
Net loss (income) attributable to noncontrolling interests	27				(108		)		(16		)		(399		)
Net (loss) income attributable to common stockholders	$	(207	)		$	556			$	(248	)		$	2,117
Basic net (loss) income per share attributable to common stockholders:
Continuing operations	$	(0.15	)		$	0.38			$	(0.17	)		$	1.47
Discontinued operations	—				—				—				(0.01		)
	$	(0.15	)		$	0.38			$	(0.17	)		$	1.46
Diluted net (loss) income per share attributable to common stockholders:
Continuing operations	$	(0.15	)		$	0.38			$	(0.17	)		$	1.46
Discontinued operations	—				—				—				(0.01		)
	$	(0.15	)		$	0.38			$	(0.17	)		$	1.45
Weighted-average common shares outstanding:
Basic	1,452				1,450				1,451				1,449
Diluted	1,452				1,458				1,451				1,458
Dividends declared per share of common stock	$	0.05			$	0.05			$	0.15			$	0.15

 

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

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Freeport-McMoRan Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2019				2018				2019				2018
	(In millions)
Net (loss) income	$	(234	)		$	664			$	(232	)		$	2,516
Other comprehensive income, net of taxes:
Defined benefit plans:
Amortization of unrecognized amounts included in net periodic benefit costs	11				13				35				36
Foreign exchange losses	—				(1		)		—				(2		)
Other comprehensive income	11				12				35				34
Total comprehensive (loss) income	(223		)		676				(197		)		2,550
Total comprehensive loss (income) attributable to noncontrolling interests	28				(109		)		(16		)		(399		)
Total comprehensive (loss) income attributable to common stockholders	$	(195	)		$	567			$	(213	)		$	2,151

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

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Freeport-McMoRan Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended
	September 30,
	2019				2018
	(In millions)
Cash flow from operating activities:
Net (loss) income	$	(232	)		$	2,516
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion and amortization	1,021				1,351
Metals inventory adjustments	100				2
Net gain on sales of assets	(13		)		(126		)
Stock-based compensation	52				70
Net charges for environmental and asset retirement obligations, including accretion	160				206
Payments for environmental and asset retirement obligations	(164		)		(179		)
Net charges for defined pension and postretirement plans	79				59
Pension plan contributions	(58		)		(60		)
Net loss (gain) on early extinguishment of debt	27				(8		)
Deferred income taxes	71				202
(Income) loss on disposal of discontinued operations	(2		)		19
Dividends received from PT Smelting	33				—
Change in long-term mill and leach stockpiles	(5		)		54
Charges for PT Freeport Indonesia (PT-FI) surface water tax settlement	28				—
Charges for PT-FI export duty matter	155				—
Charges for Cerro Verde royalty dispute	40				—
Payments for Cerro Verde royalty dispute	(126		)		(32		)
Other, net	22				5
Changes in working capital and other tax payments:
Accounts receivable	210				321
Inventories	229				(326		)
Other current assets	15				(16		)
Accounts payable and accrued liabilities	(45		)		(2		)
Accrued income taxes and timing of other tax payments	(285		)		(131		)
Net cash provided by operating activities	1,312				3,925
Cash flow from investing activities:
Capital expenditures:
North America copper mines	(641		)		(413		)
South America	(176		)		(188		)
Indonesia	(992		)		(695		)
Molybdenum mines	(11		)		(6		)
Other	(97		)		(89		)
Proceeds from sales of assets	102				10
Intangible water rights and other, net	(10		)		(91		)
Net cash used in investing activities	(1,825		)		(1,472		)
Cash flow from financing activities:
Proceeds from debt	1,681				475
Repayments of debt	(2,917		)		(2,410		)
Cash dividends and distributions paid:
Common stock	(218		)		(145		)
Noncontrolling interests	(79		)		(241		)
Contributions from noncontrolling interests	133				—
Stock-based awards net (payments) proceeds	(7		)		4
Debt financing costs and other, net	(23		)		(23		)
Net cash used in financing activities	(1,430		)		(2,340		)
Net (decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents	(1,943		)		113
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year	4,455				4,710
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	2,512			$	4,823

 

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

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Freeport-McMoRan Inc.

CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)

THREE MONTHS ENDED SEPTEMBER 30

	Stockholders’ Equity
	Common Stock											Accum-ulated Deficit				Accumu- lated Other Compre- hensive Loss				Common Stock Held in Treasury							Total Stock-holders’ Equity
	Number of Shares			At Par Value				Capital in Excess of Par Value												Number of Shares			At Cost								Non- controlling Interests				Total Equity
	(In millions)
Balance at June 30, 2019	1,582			$	158			$	25,949			$	(12,082	)		$	(582	)		131			$	(3,734	)		$	9,709			$	8,108			$	17,817
Stock-based compensation, including the tender of shares	—			—				9				—				—				—			(1		)		8				1				9
Dividends	—			—				(72		)		—				—				—			—				(72		)		—				(72		)
Contributions from noncontrolling interests	—			—				16				—				—				—			—				16				17				33
Adjustment for deferred taxes	—			—				(22		)		—				—				—			—				(22		)		—				(22		)
Net loss attributable to common stockholders	—			—				—				(207		)		—				—			—				(207		)		—				(207		)
Net loss attributable to noncontrolling interests	—			—				—				—				—				—			—				—				(27		)		(27		)
Other comprehensive income (loss)	—			—				—				—				12				—			—				12				(1		)		11
Balance at September 30, 2019	1,582			$	158			$	25,880			$	(12,289	)		$	(570	)		131			$	(3,735	)		$	9,444			$	8,098			$	17,542

	Stockholders’ Equity
	Common Stock											Accum-ulated Deficit				Accumu- lated Other Compre- hensive Loss				Common Stock Held in Treasury							Total Stock-holders’ Equity
	Number of Shares			At Par Value				Capital in Excess of Par Value												Number of Shares			At Cost								Non- controlling Interests				Total Equity
	(In millions)
Balance at June 30, 2018	1,579			$	158			$	26,667			$	(13,161	)		$	(464	)		130			$	(3,726	)		$	9,474			$	3,368			$	12,842
Stock-based compensation, including the tender of shares	—			—				9				—				—				—			—				9				—				9
Dividends	—			—				(73		)		—				—				—			—				(73		)		—				(73		)
Adoption of new accounting standard for reclassification of income taxes	—			—				—				79				(79		)		—			—				—				—				—
Net income attributable to common stockholders	—			—				—				556				—				—			—				556				—				556
Net income attributable to noncontrolling interests	—			—				—				—				—				—			—				—				108				108
Other comprehensive income	—			—				—				—				11				—			—				11				1				12
Balance at September 30, 2018	1,579			$	158			$	26,603			$	(12,526	)		$	(532	)		130			$	(3,726	)		$	9,977			$	3,477			$	13,454

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Freeport-McMoRan Inc.

CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30

	Stockholders’ Equity
	Common Stock											Accum-ulated Deficit				Accumu- lated Other Compre- hensive Loss				Common Stock Held in Treasury							Total Stock-holders’ Equity
	Number of Shares			At Par Value				Capital in Excess of Par Value												Number of Shares			At Cost								Non- controlling Interests				Total Equity
	(In millions)
Balance at December 31, 2018	1,579			$	158			$	26,013			$	(12,041	)		$	(605	)		130			$	(3,727	)		$	9,798			$	8,094			$	17,892
Exercised and issued stock-based awards	3			—				1				—				—				—			—				1				—				1
Stock-based compensation, including the tender of shares	—			—				42				—				—				1			(8		)		34				1				35
Dividends	—			—				(218		)		—				—				—			—				(218		)		(70		)		(288		)
Changes in noncontrolling interests	—			—				(1		)		—				—				—			—				(1		)		(11		)		(12		)
Contributions from noncontrolling interests	—			—				65				—				—				—			—				65				68				133
Adjustment for deferred taxes	—			—				(22		)		—				—				—			—				(22		)		—				(22		)
Net loss attributable to common stockholders	—			—				—				(248		)		—				—			—				(248		)		—				(248		)
Net income attributable to noncontrolling interests	—			—				—				—				—				—			—				—				16				16
Other comprehensive income	—			—				—				—				35				—			—				35				—				35
Balance at September 30, 2019	1,582			$	158			$	25,880			$	(12,289	)		$	(570	)		131			$	(3,735	)		$	9,444			$	8,098			$	17,542

	Stockholders’ Equity
	Common Stock											Accum-ulated Deficit				Accumu- lated Other Compre- hensive Loss				Common Stock Held in Treasury							Total Stock-holders’ Equity
	Number of Shares			At Par Value				Capital in Excess of Par Value												Number of Shares			At Cost								Non- controlling Interests				Total Equity
	(In millions)
Balance at December 31, 2017	1,578			$	158			$	26,751			$	(14,722	)		$	(487	)		130			$	(3,723	)		$	7,977			$	3,319			$	11,296
Exercised and issued stock-based awards	1			—				8				—				—				—			—				8				—				8
Stock-based compensation, including the tender of shares	—			—				62				—				—				—			(3		)		59				—				59
Dividends	—			—				(218		)		—				—				—			—				(218		)		(241		)		(459		)
Adoption of new accounting standard for reclassification of income taxes	—			—				—				79				(79		)		—			—				—				—				—
Net income attributable to common stockholders	—			—				—				2,117				—				—			—				2,117				—				2,117
Net income attributable to noncontrolling interests	—			—				—				—				—				—			—				—				399				399
Other comprehensive income	—			—				—				—				34				—			—				34				—				34
Balance at September 30, 2018	1,579			$	158			$	26,603			$	(12,526	)		$	(532	)		130			$	(3,726	)		$	9,977			$	3,477			$	13,454

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

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Freeport-McMoRan Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1. GENERAL INFORMATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and disclosures required by generally accepted accounting principles (GAAP) in the United States (U.S.). Therefore, this information should be read in conjunction with Freeport-McMoRan Inc.’s (FCX) consolidated financial statements and notes contained in its annual report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K). The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. All such adjustments are, in the opinion of management, of a normal recurring nature, except for the adjustment discussed in Note 12. Operating results for the nine-month period ended September 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Property, Plant, Equipment and Mine Development Costs. The following is an update to FCX’s property, plant, equipment and mine development costs accounting policy included in Note 1 of its 2018 Form 10-K. 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. For underground mines certain costs related to panel development, such as undercutting and drawpoint development, are also capitalized as mine development costs until production reaches design capacity for the mine. After reaching design capacity, the mine transitions to the production phase and panel development costs are allocated to inventory and then included as a component of cost of goods sold.

Attribution of PT Freeport Indonesia (PT-FI) Net Income or Loss. FCX has concluded that the attribution of PT-FI’s net income or loss from the date of the divestment transaction (i.e., December 21, 2018) through December 31, 2022 (the Initial Period), should be based on the economics replacement agreement, which provides for FCX and the other pre-transaction PT-FI shareholders (i.e., PT Indonesia Asahan Aluminium (Persero) (PT Inalum) and PT Indonesia Papua Metal Dan Mineral (PTI)) to retain the economics of the revenue and cost sharing arrangements under PT-FI’s joint venture formerly with Rio Tinto Plc (refer to Note 2 of FCX’s 2018 Form 10-K). The economics replacement agreement entitles FCX to approximately 81 percent of PT-FI dividends paid during the Initial Period, with the remaining 19 percent paid to the noncontrolling interests. PT-FI’s net loss in third-quarter 2019 totaled $24 million, of which $20 million was attributed to FCX, and for the first nine months of 2019 totaled $28 million, of which $23 million was attributed to FCX. PT-FI’s cumulative net loss since the December 21, 2018, transaction date through September 30, 2019, totaled $164 million, of which $133 million was attributed to FCX.

The above-described attribution of PT-FI’s net income or loss applies only through the Initial Period. Beginning January 1, 2023, the attribution of PT-FI’s net income or loss will be based on equity ownership percentages (48.76 percent for FCX, 26.24 percent for PT Inalum and 25.00 percent for PTI). For all of its other partially owned consolidated subsidiaries, FCX attributes net income or loss based on equity ownership percentages.

Agreement to Sell a Portion of Cobalt Business. In second-quarter 2019, FCX entered into an agreement to sell its cobalt refinery in Kokkola, Finland, and related cobalt cathode precursor business (consisting of approximately $201 million of assets and $76 million of liabilities at September 30, 2019) for total consideration of approximately $150 million, plus working capital at the time of closing. FCX and the current noncontrolling interest partners in Freeport Cobalt will retain the remaining cobalt business, which is a producer of cobalt fine powders, chemicals, catalysts, ceramics and pigments. The transaction is expected to close by year-end 2019. Lundin Mining Corporation, which is one of the noncontrolling interest partners, is entitled to receive 30 percent of the proceeds from this transaction. In addition to customary closing conditions, including regulatory approvals, prior to completing the transaction, Freeport Cobalt is required to be segregated into two separate businesses.

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NOTE 2. EARNINGS PER SHARE

FCX calculates its basic net (loss) income per share of common stock under the two-class method and calculates its diluted net (loss) income per share of common stock using the more dilutive of the two-class method or the treasury-stock method. Basic net (loss) income per share of common stock was computed by dividing net (loss) income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. Diluted net (loss) income per share of common stock was calculated by including the basic weighted-average shares of common stock outstanding adjusted for the effects of all potential dilutive shares of common stock, unless their effect would be anti-dilutive.

Reconciliations of net (loss) income and weighted-average shares of common stock outstanding for purposes of calculating basic and diluted net (loss) income per share follow (in millions, except per share amounts):

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2019				2018				2019				2018
Net (loss) income from continuing operations	$	(235	)		$	668			$	(234	)		$	2,535
Net loss (income) from continuing operations attributable to noncontrolling interests	27				(108		)		(16		)		(399		)
Undistributed earnings allocated to participating securities	(3		)		(4		)		(3		)		(5		)
Net (loss) income from continuing operations attributable to common stockholders	(211		)		556				(253		)		2,131
Net income (loss) from discontinued operations attributable to common stockholders	1				(4		)		2				(19		)
Net (loss) income attributable to common stockholders	$	(210	)		$	552			$	(251	)		$	2,112
Basic weighted-average shares of common stock outstanding	1,452				1,450				1,451				1,449
Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs)	—			a	8				—			a	9			a
Diluted weighted-average shares of common stock outstanding	1,452				1,458				1,451				1,458
Basic net (loss) income per share attributable to common stockholders:
Continuing operations	$	(0.15	)		$	0.38			$	(0.17	)		$	1.47
Discontinued operations	—				—				—				(0.01		)
	$	(0.15	)		$	0.38			$	(0.17	)		$	1.46
Diluted net (loss) income per share attributable to common stockholders:
Continuing operations	$	(0.15	)		$	0.38			$	(0.17	)		$	1.46
Discontinued operations	—				—				—				(0.01		)
	$	(0.15	)		$	0.38			$	(0.17	)		$	1.45

a.	Excludes approximately 10 million shares of common stock in third-quarter 2019, 11 million for the first nine months of 2019 and 2 million for the first nine months of 2018 associated with outstanding stock options with exercise prices less than the average market price of FCX’s common stock and RSUs that were anti-dilutive.

Outstanding stock options with exercise prices greater than the average market price of FCX’s common stock during the period are excluded from the computation of diluted net (loss) income per share of common stock. Stock options for 43 million shares of common stock in third-quarter 2019, 38 million shares in third-quarter 2018, 42 million shares for the first nine months of 2019 and 35 million shares for the first nine months of 2018 were excluded.

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NOTE 3. INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES

The components of inventories follow (in millions):

	September 30, 2019				December 31, 2018
Current inventories:
Total materials and supplies, neta	$	1,619			$	1,528
Mill stockpiles	$	200			$	282
Leach stockpiles	1,102				1,171
Total current mill and leach stockpiles	$	1,302			$	1,453
Raw materials (primarily concentrate)	$	292			$	260
Work-in-process	79				192
Finished goods	1,142				1,326
Total product	$	1,513			$	1,778
Long-term inventories:
Mill stockpiles	$	223			$	265
Leach stockpiles	1,077				1,049
Total long-term mill and leach stockpilesb	$	1,300			$	1,314

a.	Materials and supplies inventory was net of obsolescence reserves totaling $26 million at September 30, 2019, and $24 million at December 31, 2018.

b.	Estimated metals in stockpiles not expected to be recovered within the next 12 months.

FCX recorded charges of $41 million in third-quarter 2019, primarily for copper inventories, and $100 million for the first nine months of 2019, primarily for cobalt inventories ($58 million) and copper inventories ($41 million), to adjust metals inventory carrying values to net realizable value because of lower market prices (refer to Note 9 for metals inventory adjustments by business segment).

NOTE 4. INCOME TAXES

Variations in the relative proportions of jurisdictional income result in fluctuations to FCX’s consolidated effective income tax rate. Geographic sources of FCX’s benefit from (provision for) income taxes follow (in millions):

	Nine Months Ended
	September 30,
	2019				2018
U.S. operations	$	73		a	$	2
International operations	(254		)		(1,545		)
Total	$	(181	)	b	$	(1,543	)

a.	Includes tax credits totaling $24 million primarily associated with state law changes and settlement of state income tax examinations.

b.	Includes net tax charges totaling $49 million primarily to adjust deferred taxes on historical balance sheet items in accordance with tax accounting principles.

FCX’s consolidated effective income tax rate was 302 percent for the first nine months of 2019 and was 38 percent for the first nine months of 2018. FCX's consolidated effective income tax rate is a function of the combined effective tax rates for the jurisdictions in which FCX operates. Because FCX's U.S. jurisdiction generated net losses in the first nine months of 2019 that will not result in a realized tax benefit, applicable accounting rules require FCX to adjust its estimated annual effective tax rate to exclude the impact of U.S. net losses.

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NOTE 5. DEBT AND EQUITY

The components of debt follow (in millions):

		September 30, 2019				December 31, 2018
Senior notes and debentures:
Issued by FCX		$	8,600			$	9,594
Issued by Freeport Minerals Corporation (FMC)		357				358
Cerro Verde credit facility		825				1,023
Other		137				166
Total debt		9,919				11,141
Less current portion of debt		(4		)		(17		)
Long-term debt		$	9,915			$	11,124

Revolving Credit Facility. At September 30, 2019, FCX had no borrowings outstanding and $13 million in letters of credit issued under its revolving credit facility, resulting in availability of approximately $3.5 billion, of which approximately $1.5 billion could be used for additional letters of credit.

 

On May 2, 2019, FCX’s $3.5 billion revolving credit facility was amended to extend $3.26 billion of the facility by one year to April 20, 2024. The remaining $240 million matures on April 20, 2023. In addition, the revolving credit facility was amended to modify the calculation of the total debt component used to determine the total leverage ratio by increasing the amount of unrestricted cash that may be applied to reduce the amount of total debt. There were no other substantive modifications to the revolving credit facility.

Senior Notes.  On March 27, 2019, FCX redeemed all of its outstanding $1.0 billion aggregate principal amount of 3.100% Senior Notes due 2020. Holders of these senior notes received the principal amount together with the redemption premium and accrued and unpaid interest up to the redemption date. As a result of this redemption, FCX recorded a loss on early extinguishment of debt totaling $5 million in first-quarter 2019.

On August 15, 2019, FCX completed the sale of $600 million of 5.00% Senior Notes due 2027 and $600 million of 5.25% Senior Notes due 2029 for total net proceeds of $1.187 billion. Interest on these senior notes is payable semiannually on March 1 and September 1 of each year. These senior notes rank equally with FCX’s other existing and future unsecured and unsubordinated indebtedness. FCX used the net proceeds from this offering to fund the make-whole redemption of all of its outstanding 6.875% Senior Notes due 2023, and the concurrent tender offers to purchase a portion of its 4.00% Senior Notes due 2021 and its 3.55% Senior Notes due 2022, and the payment of accrued and unpaid interest, premiums, fees and expenses in connection with these transactions. As a result of these transactions, FCX recorded a loss on early extinguishment of debt totaling $21 million in third-quarter 2019 as follows (in millions):

	Principal Amount				Net Adjustments				Book Value				Redemption/Tender Value				Loss
FCX 6.875% Senior Notes due 2023	$	728			$	34			$	762			$	768			$	6
FCX 4.00% Senior Notes due 2021	405				(2		)		403				418				15
FCX 3.55% Senior Notes due 2022	12				—				12				12				—
	$	1,145			$	32			$	1,177			$	1,198			$	21

Cerro Verde Credit Facility.  In March 2019, Cerro Verde prepaid $200 million on its credit facility, which resulted in a $1 million loss on early extinguishment of debt in first-quarter 2019.

Interest Expense, Net. Consolidated interest costs (before capitalization) totaled $163 million in third-quarter 2019, $167 million in third-quarter 2018, $508 million for the first nine months of 2019 and $508 million for the first nine months of 2018. Capitalized interest added to property, plant, equipment and mine development costs, net, totaled $40 million in third-quarter 2019, $24 million in third-quarter 2018, $107 million for the first nine months of 2019 and $72 million for the first nine months of 2018.

Common Stock.  On September 25, 2019, FCX declared a quarterly cash dividend of $0.05 per share on its common stock, which was paid on November 1, 2019, to common stockholders of record as of October 15, 2019.

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NOTE 6. FINANCIAL INSTRUMENTS

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

Commodity Contracts.  From time to time, FCX has entered into derivative contracts to hedge the market risk associated with fluctuations in the prices of commodities it purchases and sells. Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. As of September 30, 2019, and December 31, 2018, FCX had no price protection contracts relating to its mine production. A discussion of FCX’s derivative contracts and programs follows.

Derivatives Designated as Hedging Instruments – Fair Value Hedges

Copper Futures and Swap Contracts. Some of FCX’s U.S. copper rod customers request a fixed market price instead of the Commodity Exchange Inc. (COMEX) 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 resulting from hedge ineffectiveness during the nine-month periods ended September 30, 2019 and 2018. At September 30, 2019, FCX held copper futures and swap contracts that qualified for hedge accounting for 72 million pounds at an average contract price of $2.66 per pound, with maturities through August 2021.

A summary of (losses) gains recognized in revenues for derivative financial instruments related to commodity contracts that are designated and qualify as fair value hedge transactions, including the unrealized gains (losses) on the related hedged item follows (in millions):

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2019				2018				2019				2018
Copper futures and swap contracts:
Unrealized (losses) gains:
Derivative financial instruments	$	(2	)		$	7			$	3			$	(12	)
Hedged item – firm sales commitments	2				(7		)		(3		)		12
Realized losses:
Matured derivative financial instruments	(8		)		(19		)		(9		)		(17		)

Derivatives Not Designated as Hedging Instruments

Embedded Derivatives. Certain FCX concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on the London Metal Exchange (LME) copper price or the COMEX copper price and the London Bullion Market Association (LBMA) gold price at the time of shipment as specified in the contract. FCX receives market prices based on prices in the specified future month, which results in price fluctuations recorded in revenues until the date of settlement. FCX records revenues and invoices customers at the time of shipment based on then-current LME or COMEX copper prices and the LBMA gold prices as specified in the contracts, 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 copper price, and the LBMA gold 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 LME or COMEX copper forward prices and the adjusted LBMA gold prices, until the date of final pricing. Similarly, FCX purchases copper and cobalt 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 inventory for purchase contracts.

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A summary of FCX’s embedded derivatives at September 30, 2019, follows:

	Open Positions			Average Price Per Unit								Maturities Through
				Contract				Market
Embedded derivatives in provisional sales contracts:
Copper (millions of pounds)	424			$	2.63			$	2.59			February 2020
Gold (thousands of ounces)	150			1,510				1,491				November 2019
Embedded derivatives in provisional purchase contracts:
Copper (millions of pounds)	97			2.63				2.59				January 2020
Cobalt (millions of pounds)	6			9.81				12.18				December 2019

Copper Forward Contracts. Atlantic Copper, FCX’s wholly owned smelting and refining unit in Spain, enters into copper forward contracts designed to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match. These economic hedge transactions are intended to hedge against changes in copper prices, with the mark-to-market hedging gains or losses recorded in cost of sales. At September 30, 2019, Atlantic Copper held net copper forward purchase contracts for 1 million pounds at an average contract price of $2.65 per pound, with maturities through November 2019.

Summary of (Losses) Gains. A summary of the realized and unrealized (losses) gains recognized in operating income for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, follows (in millions):

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2019				2018				2019				2018
Embedded derivatives in provisional sales contracts:a
Copper	$	(57	)		$	(93	)		$	(57	)		$	(242	)
Gold and other metals	6				(25		)		17				(37		)
Copper forward contractsb	—				9				(3		)		17

a.	Amounts recorded in revenues.

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

Unsettled Derivative Financial Instruments

A summary of the fair values of unsettled commodity derivative financial instruments follows (in millions):

		September 30, 2019				December 31, 2018
Commodity Derivative Assets:
Derivatives designated as hedging instruments:
Copper futures and swap contracts		$	—			$	—
Derivatives not designated as hedging instruments:
Embedded derivatives in provisional copper, gold and cobalt
sales/purchase contracts		6				23
Total derivative assets		$	6			$	23
Commodity Derivative Liabilities:
Derivatives designated as hedging instruments:
Copper futures and swap contracts		$	6			$	9
Derivatives not designated as hedging instruments:
Embedded derivatives in provisional copper, gold and cobalt
sales/purchase contracts		36				39
Total derivative liabilities		$	42			$	48

FCX’s commodity contracts have netting arrangements with counterparties with which the right of offset exists, and it is FCX’s policy to generally offset balances by contract on its balance sheet. FCX’s embedded derivatives on provisional sales/purchase contracts are netted with the corresponding outstanding receivable/payable balances.

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A summary of these unsettled commodity contracts that are offset in the balance sheets follows (in millions):

		Assets								Liabilities
		September 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
Gross amounts recognized:
Embedded derivatives in provisional
sales/purchase contracts		$	6			$	23			$	36			$	39
Copper derivatives		—				—				6				9
		6				23				42				48
Less gross amounts of offset:
Embedded derivatives in provisional
sales/purchase contracts		1				7				1				7
Copper derivatives		—				—				—				—
		1				7				1				7
Net amounts presented in balance sheet:
Embedded derivatives in provisional
sales/purchase contracts		5				16				35				32
Copper derivatives		—				—				6				9
		$	5			$	16			$	41			$	41
Balance sheet classification:
Trade accounts receivable		$	—			$	3			$	17			$	24
Accounts payable and accrued liabilities		5				13				24				17
		$	5			$	16			$	41			$	41

Credit Risk.  FCX is exposed to credit loss when financial institutions with which it has entered into derivative transactions (commodity, foreign exchange and interest rate swaps) are unable to pay. To minimize the risk of such losses, FCX uses counterparties that meet certain credit requirements and periodically reviews the creditworthiness of these counterparties. FCX does not anticipate that any of the counterparties it deals with will default on their obligations. As of September 30, 2019, the maximum amount of credit exposure associated with derivative transactions was $5 million.

Other Financial Instruments.  Other financial instruments include cash and cash equivalents, restricted cash, restricted cash equivalents, accounts receivable, investment securities, legally restricted funds, accounts payable and accrued liabilities, dividends payable and long-term debt. The carrying value for cash and cash equivalents (which included time deposits of $1.3 billion at September 30, 2019, and $2.3 billion at December 31, 2018), restricted cash, restricted cash equivalents, accounts receivable, accounts payable and accrued liabilities, and dividends payable approximates fair value because of their short-term nature and generally negligible credit losses (refer to Note 7 for the fair values of investment securities, legally restricted funds and long-term debt).

In addition, as of September 30, 2019, FCX has contingent consideration assets related to the 2016 asset sales of TF Holdings Limited (TFHL), onshore California oil and gas properties and Deepwater Gulf of Mexico (GOM) oil and gas properties (refer to Note 7 for the related fair values and to Note 2 of FCX’s 2018 Form 10-K for further discussion of these instruments).

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents. The following table provides a reconciliation of total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows (in millions):

		September 30, 2019				December 31, 2018
Balance sheet components:
Cash and cash equivalents		$	2,247			$	4,217
Restricted cash and restricted cash equivalents included in:
Other current assets		100				110
Other assets		165				128
Total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows		$	2,512			$	4,455

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NOTE 7. 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) and the lowest priority to unobservable inputs (Level 3). FCX did not have any significant transfers in or out of Level 3 during third-quarter 2019.

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 summary of the carrying amount and fair value of FCX’s financial instruments (including those measured at net asset value (NAV) as a practical expedient), other than cash and cash equivalents, restricted cash, restricted cash equivalents, accounts receivable, accounts payable and accrued liabilities, and dividends payable (refer to Note 6) follows (in millions):

	At September 30, 2019
	Carrying				Fair Value
	Amount				Total				NAV				Level 1				Level 2				Level 3
Assets
Investment securities:a,b
U.S. core fixed income fund	$	27			$	27			$	27			$	—			$	—			$	—
Equity securities	4				4				—				4				—				—
Total	31				31				27				4				—				—
Legally restricted funds:a
U.S. core fixed income fund	59				59				59				—				—				—
Government mortgage-backed securities	41				41				—				—				41				—
Government bonds and notes	38				38				—				—				38				—
Corporate bonds	35				35				—				—				35				—
Asset-backed securities	12				12				—				—				12				—
Collateralized mortgage-backed securities	6				6				—				—				6				—
Money market funds	4				4				—				4				—				—
Municipal bonds	1				1				—				—				1				—
Total	196				196				59				4				133				—
Derivatives:
Embedded derivatives in provisional copper, gold and cobalt sales/purchase contracts in a gross asset positionc	6				6				—				—				6				—
Contingent consideration for the sales of TFHL
and onshore California oil and gas propertiesa	67				67				—				—				67				—
Total	$	73			$	73			$	—			$	—			$	73			$	—
Contingent consideration for the sale of the
Deepwater GOM oil and gas propertiesa	128				110				—				—				—				110
Liabilities
Derivatives:c
Embedded derivatives in provisional copper, gold and cobalt sales/purchase contracts in a gross liability position	$	36			$	36			$	—			$	—			$	36			$	—
Copper futures and swap contracts	6				6				—				5				1				—
Total	42				42				—				5				37				—
Long-term debt, including current portiond	9,919				9,872				—				—				9,872				—

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	At December 31, 2018
	Carrying				Fair Value
	Amount				Total				NAV				Level 1				Level 2				Level 3
Assets
Investment securities:a,b
U.S. core fixed income fund	$	25			$	25			$	25			$	—			$	—			$	—
Equity securities	4				4				—				4				—				—
Total	29				29				25				4				—				—
Legally restricted funds:a
U.S. core fixed income fund	55				55				55				—				—				—
Government mortgage-backed securities	38				38				—				—				38				—
Government bonds and notes	36				36				—				—				36				—
Corporate bonds	28				28				—				—				28				—
Asset-backed securities	11				11				—				—				11				—
Collateralized mortgage-backed securities	7				7				—				—				7				—
Money market funds	5				5				—				5				—				—
Municipal bonds	1				1				—				—				1				—
Total	181				181				55				5				121				—
Derivatives:
Embedded derivatives in provisional copper, gold and cobalt sales/purchase contracts in a gross asset positionc	23				23				—				—				23				—
Contingent consideration for the sales of TFHL
and onshore California oil and gas propertiesa	73				73				—				—				73				—
Total	96				96				—				—				96				—
Contingent consideration for the sale of the
Deepwater GOM oil and gas propertiesa	143				127				—				—				—				127
Liabilities
Derivatives:c
Embedded derivatives in provisional copper, gold and cobalt sales/purchase contracts in a gross liability position	$	39			$	39			$	—			$	—			$	39			$	—
Copper futures and swap contracts	9				9				—				7				2				—
Total	48				48				—				7				41				—
Long-term debt, including current portiond	11,141				10,238				—				—				10,238				—

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 $100 million at September 30, 2019, and $109 million at December 31, 2018, and (ii) other assets of $164 million at September 30, 2019, and $126 million at December 31, 2018, primarily associated with an assurance bond to support PT-FI’s commitment for the development of a new smelter in Indonesia and PT-FI’s closure and reclamation guarantees.

c.	Refer to Note 6 for further discussion and balance sheet classifications.

d.	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 (which are usually within one business day of notice).

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.

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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.

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

FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales are valued using quoted monthly LME or COMEX copper forward prices and the adjusted LBMA gold prices at each reporting date based on the month of maturity (refer to Note 6 for further discussion); however, FCX’s contracts themselves are not traded on an exchange. FCX’s embedded derivatives on provisional cobalt purchases are valued using quoted monthly LME cobalt forward prices or average published Metals Bulletin cobalt prices subject to certain adjustments as specified by the terms of the contracts, at each reporting date based on the month of maturity. 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 6 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.

As reported in Note 2 of FCX’s 2018 Form 10-K, in November 2016, FCX’s sale of its interest in TFHL included 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 the 24-month period beginning January 1, 2018. The fair value of the contingent consideration derivative associated with the sale of TFHL was $59 million at September 30, 2019 (included in other current assets in the consolidated balance sheet), and $57 million at December 31, 2018 (included in other assets). Future changes in the fair value of this contingent consideration derivative will continue to be recorded in discontinued operations. Also in 2016, FCX’s sale of its onshore California oil and gas properties included 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 fair value of the contingent consideration derivative (included in other assets in the consolidated balance sheets) associated with the sale of the onshore California oil and gas properties was $8 million at September 30, 2019, and $16 million at December 31, 2018. Future changes in the fair value of this contingent consideration derivative will continue to be recorded in operating income. Also, contingent consideration of $50 million associated with the onshore California oil and gas properties was realized in 2018 and collected in first-quarter 2019 (included in proceeds from sales of oil and gas properties in the consolidated statements of cash flows) because the average Brent crude oil price exceeded $70 per barrel for 2018 and was included in other current assets in the consolidated balance sheet at December 31, 2018. These fair values were 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.

As reported in Note 2 of FCX’s 2018 Form 10-K, in December 2016, FCX’s sale of its Deepwater GOM oil and gas properties included up to $150 million in contingent consideration that was recorded at the total amount under the loss recovery approach. The contingent consideration will be received over time as future cash flows are realized in connection with a third-party production handling agreement for an offshore platform. The first collection occurred in third-quarter 2018. The contingent consideration included in (i) other current assets totaled $18 million at September 30, 2019, and $27 million at December 31, 2018, and (ii) other assets totaled $110 million at September 30, 2019, and $116 million at December 31, 2018. The fair value of this contingent consideration was calculated based on a discounted cash flow model using inputs that include third-party estimates for reserves, production rates and 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.

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Long-term debt, including current portion, is primarily 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 that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while FCX believes its valuation techniques are appropriate and consistent with other market participants, the use of different techniques or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the techniques used at September 30, 2019, as compared with those techniques used at December 31, 2018.

A summary of the changes in the fair value of FCX’s Level 3 instrument, contingent consideration for the sale of the Deepwater GOM oil and gas properties, during the first nine months of 2019 follows (in millions):

Fair value at January 1, 2019	$	127
Net unrealized loss related to assets still held at the end of the period	(1		)
Settlements	(16		)
Fair value at September 30, 2019	$	110

NOTE 8. CONTINGENCIES AND COMMITMENTS

Litigation

Louisiana Parishes Coastal Erosion Cases. In September 2019, affiliates of FCX reached an agreement in principle to settle all 13 cases filed in Louisiana state courts by six south Louisiana parishes (Cameron, Jefferson, Plaquemines, St. Bernard, St. John the Baptist and Vermilion) and the parties that have intervened in the litigation, including the state of Louisiana, through the Attorney General and separately through the Louisiana Department of Natural Resources in support of the parishes’ claims, alleging that certain oil and gas exploration and production operations and sulphur mining and production operations of the FCX affiliates damaged coastal wetlands and caused significant land loss along the Louisiana coast.

The maximum out-of-pocket settlement payment will be $23.5 million with the initial payment of $15 million to be paid upon execution of the settlement agreement. The initial payment will be held in trust and later deposited into a newly formed Coastal Zone Recovery Fund (the Fund) once the state of Louisiana passes enabling legislation to establish the Fund. The settlement agreement will also require the FCX affiliates to pay into the Fund twenty annual installments of $4.25 million beginning in 2023 provided the state of Louisiana passes the enabling legislation. The first two of those annual installments are conditioned only on the enactment of the enabling legislation within three years of execution of the settlement agreement, but all subsequent installments are also conditioned on the FCX affiliates receiving simultaneous reimbursement on a dollar-for-dollar basis from the proceeds of environmental credit sales generated by the Fund, resulting in the $23.5 million maximum total payment obligation. The settlement agreement is currently expected to be executed during fourth-quarter 2019 and will need to be executed by all parties, including authorized representatives of the six south Louisiana parishes originally plaintiffs in the suit and certain other non-plaintiff Louisiana parishes and the state of Louisiana. Upon execution of the settlement agreement, the FCX affiliates will be fully released and dismissed from all 13 pending cases. The agreement in principle does not include any admission of liability by FCX or its affiliates. FCX recorded a charge in third-quarter 2019 for the initial payment of $15 million, which will be paid upon execution of the settlement agreement.

There were no significant updates to previously reported legal proceedings included in Note 12 of FCX’s 2018 Form 10-K, other than the asbestos and talc claims matter below, which was updated in Note 8 of FCX’s quarterly report on Form 10-Q for the quarters ended March 31, 2019, and June 30, 2019, and below.

Asbestos and Talc Claims. As previously disclosed, there has been a significant increase in the number of cases alleging the presence of asbestos contamination in talc-based personal care products and in cases alleging exposure to talc products that are not alleged to be contaminated with asbestos. The primary targets have been the producers of those products, but defendants in many of these cases also include talc miners. Cyprus Amax Minerals Company (CAMC), an indirect wholly owned subsidiary of FCX, and Cyprus Mines Corporation (Cyprus Mines), a wholly owned subsidiary of CAMC, are among those targets. Cyprus Mines was engaged in talc mining from 1964 until 1992 when it exited its talc business by conveying it to a third party in two related transactions. Those transactions involved (i) a transfer by Cyprus Mines of the assets of its talc business to a newly formed subsidiary that assumed all pre-sale and post-sale talc liabilities, subject to limited reservations, and (ii) a sale of the

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stock of that subsidiary to the third party. In 2011, the third party sold that subsidiary to Imerys Talc America (Imerys), an affiliate of Imerys S.A.

Cyprus Mines has contractual indemnification rights, subject to limited reservations, against Imerys, which has historically acknowledged those indemnification obligations, and had taken responsibility for all cases tendered to it. However, on February 13, 2019, Imerys filed for Chapter 11 bankruptcy protection, which triggered an immediate automatic stay under the federal bankruptcy code prohibiting any party from continuing or initiating litigation or asserting new claims against Imerys. As a result, Imerys is no longer defending the talc lawsuits against Cyprus Mines and CAMC. In addition, Imerys has taken the position that it alone owns, and has the sole right to access, the proceeds of the legacy insurance coverage of Cyprus Mines and CAMC for talc liabilities. In late March 2019, Cyprus Mines and CAMC challenged this position and obtained emergency relief from the bankruptcy court to gain access to the insurance until the question of ownership and contractual access can be decided in an adversary proceeding before the bankruptcy court, which was previously scheduled for October 2019, but is being rescheduled for early 2020.

During first-quarter 2019, in a case pending at the time Imerys filed bankruptcy, a California jury entered a $29 million verdict against Johnson & Johnson and Cyprus Mines, of which approximately $2 million was attributed to Cyprus Mines. Taking advantage of the temporary access to the insurance authorized by the bankruptcy court, Cyprus Mines used the insurance to fully resolve the case. Cyprus Mines and the insurers also settled several other cases set for trial in recent months, and secured delays or dismissals in other cases. At September 30, 2019, Cyprus Mines had accrued approximately $5 million related to these cases. Multiple trials have been scheduled over the remainder of 2019 and the first half of 2020, and others may be scheduled prior to the adversary proceeding regarding the legacy insurance.

FCX believes that Cyprus Mines and CAMC each has strong defenses to legal liability and that both should have access to the legacy insurance to cover defense costs, settlements and judgments, at least until the bankruptcy court decides otherwise or the insurance is exhausted. At this time, FCX cannot estimate the range of possible loss associated with these proceedings, but it does not currently believe the amount of any such losses are material to its consolidated financial statements. However, there can be no assurance that future developments will not alter this conclusion.

Tax and Other Matters

As discussed in Note 12 of FCX’s 2018 Form 10-K, PT-FI received assessments from the local regional tax authorities in Papua, Indonesia, for additional taxes and penalties related to surface water taxes. In May 2019, PT-FI agreed to pay 1.394 trillion rupiah ($99 million based on the exchange rate at September 30, 2019), to settle historical disputes. In August 2019, PT-FI agreed to a revised payment schedule, paying 708.5 billion rupiah ($50 million) in October 2019, with the remaining 685.5 billion rupiah ($49 million based on the exchange rate at September 30, 2019) to be paid in February 2021. As a result of the May 2019 settlement, in second-quarter 2019, PT-FI recorded charges of $28 million to production and delivery costs ($69 million was previously accrued in 2018 for this matter). In accordance with PT-FI’s special mining license (IUPK), PT-FI is also obligated to pay surface water taxes of $15 million annually, beginning in 2019, which are recognized in production and delivery costs as incurred.

Refer to Note 12 for discussion of updates on PT-FI’s export duty matter and mine development cost tax matters.

On September 12, 2019, PT-FI received approval from the Indonesian government to increase its export quota from approximately 180,000 dry metric tons (DMT) of concentrate to approximately 680,000 DMT for the current export period, which expires March 8, 2020.

In March 2019, PT Smelting (PT-FI’s 25 percent-owned smelter and refinery in Indonesia) received an extension of its anode slimes export license through March 11, 2020.

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NOTE 9. BUSINESS SEGMENTS

FCX has organized its 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. Separately disclosed in the following tables are FCX’s reportable segments, which include the Morenci, Cerro Verde and Grasberg (Indonesia Mining) copper mines, the Rod & Refining operations and Atlantic Copper Smelting & Refining.

 

Intersegment sales between FCX’s business segments are based on terms similar to arms-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.

FCX defers recognizing profits on sales from its mines to other segments, including Atlantic Copper Smelting & Refining, and on 25 percent of PT-FI’s sales to PT Smelting, 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 Financial Information by Business Segment 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.

Product Revenues. FCX’s revenues attributable to the products it sold for the third quarters and first nine months of 2019 and 2018 follow (in millions):

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2019				2018				2019				2018
Copper:
Concentrate	$	952			$	1,743			$	3,251			$	5,093
Cathode	878				1,015				2,696				3,383
Rod and other refined copper products	537				561				1,560				1,899
Purchased coppera	210				256				872				776
Gold	415				1,073				1,111				2,814
Molybdenum	295				286				910				882
Otherb	202				381				697				1,179
Adjustments to revenues:
Treatment charges	(87		)		(162		)		(292		)		(433		)
Royalty expensec	(24		)		(75		)		(73		)		(217		)
Export dutiesd	(174		)		(52		)		(201		)		(153		)
Revenues from contracts with customers	3,204				5,026				10,531				15,223
Embedded derivativese	(51		)		(118		)		(40		)		(279		)
Total consolidated revenues	$	3,153			$	4,908			$	10,491			$	14,944

a.	FCX purchases copper cathode primarily for processing by its Rod & Refining operations.

b.	Primarily includes revenues associated with cobalt and silver.

c.	Reflects royalties on sales from PT-FI and Cerro Verde that will vary with the volume of metal sold and prices.

d.	Reflects PT-FI export duties. The third quarter and first nine months of 2019 include charges totaling $166 million primarily associated with an unfavorable Indonesia Supreme Court ruling related to certain disputed export duties (refer to Note 12).

e.	Refer to Note 6 for discussion of embedded derivatives related to FCX’s provisionally priced concentrate and cathode sales contracts.

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Financial Information by Business Segment

(In millions)
																																					Atlantic				Corporate,
	North America Copper Mines												South America																								Copper				Other
													Cerro												Indonesia				Molybdenum				Rod &				Smelting				& Elimi-				FCX
	Morenci				Other				Total				Verde				Other				Total				Mining				Mines				Refining				& Refining				nations				Total
Three Months Ended September 30, 2019
Revenues:
Unaffiliated customers	$	61			$	19			$	80			$	504			$	117			$	621			$	488		a	$	—			$	1,104			$	437			$	423		b	$	3,153
Intersegment	462				598				1,060				65				—				65				—				90				8				—				(1,223		)		—
Production and delivery	377				519				896				417				111				528				399