STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Common Stock. FCX’s authorized shares of capital stock total 1.85 billion shares, consisting of 1.8 billion shares of common stock and 50 million shares of preferred stock.

In December 2010, FCX’s Board of Directors declared a two-for-one split of its common stock in the form of a stock dividend on issued and outstanding shares. Common shareholders of record at the close of business on January 15, 2011, received one additional share of common stock for every share they owned as of that date. The additional shares were issued on February 1, 2011, and increased the number of shares outstanding to approximately 945 million from approximately 472 million. The par value of FCX’s common stock remains at $0.10 per share. FCX’s common stock began trading on a post-split basis on February 2, 2011. All references to shares of common stock and per share amounts have been retroactively adjusted to reflect the two-for-one stock split, unless otherwise noted.

In February 2009, FCX completed a public offering of 53.6 million shares of FCX common stock at an average price of $14.00 per share, which generated gross proceeds of $750 million (net proceeds of approximately $740 million).

In July 2008, FCX’s Board of Directors approved an increase in the open-market share purchase program for up to 30 million shares. During 2008, on a pre-split basis, FCX acquired 6.3 million shares for $500 million ($79.15 per share average) and 23.7 million shares remain available under this program. During September 2008, because of the financial turmoil and the decline in copper and molybdenum prices, FCX suspended its purchases of shares under its open-market share purchase program. The timing of future purchases of FCX’s common stock is dependent on many factors, including FCX’s operating results, cash flows and financial position; copper, molybdenum and gold prices; the price of FCX’s common stock; and general economic and market conditions.

In December 2008, FCX’s Board of Directors suspended the cash dividend on FCX’s common stock; accordingly, there were no common stock dividends paid in 2009. In October 2009, FCX’s Board of Directors reinstated a cash dividend on FCX’s common stock at an annual rate of $0.30 per share beginning in 2010. FCX’s Board of Directors authorized an increase in the cash dividend on FCX’s common stock to an annual rate of $0.60 per share in April 2010 and then to an annual rate of $1.00 per share in October 2010. In December 2010, FCX's Board of Directors declared a supplemental common stock dividend of $0.50 per share, which was paid on December 30, 2010, to common shareholders of record at the close of business on December 20, 2010. In April 2011, FCX's Board of Directors declared a supplemental common stock dividend $0.50 per share, which was paid on June 1, 2011, to common shareholders of record at the close of business on May 15, 2011. On December 28, 2011, FCX declared a regular quarterly dividend of $0.25 per share, which was paid on February 1, 2012, to common shareholders of record at the close of business on January 13, 2012. The Board of Directors will continue to review FCX’s financial policy on an ongoing basis.

Preferred Stock. On March 28, 2007, FCX sold 28.75 million shares of 6¾% Mandatory Convertible Preferred Stock, with a liquidation preference of $100 per share, for net proceeds of $2.8 billion. The 6¾% Mandatory Convertible Preferred Stock were automatically converted on May 1, 2010, into shares of FCX common stock. The conversion rate was adjustable upon the occurrence of certain events, including the payment in any quarter of common stock dividends exceeding $0.15625 per share, and, for shares converted on May 1, 2010, depended on the applicable average market price of FCX’s common stock over the 20-trading-day period ending on the third trading day prior to May 1, 2010. Holders could elect to convert at any time prior to May 1, 2010, at a conversion rate equal to 2.7432 shares of FCX common stock. During 2010, a total of 28,749,560 outstanding shares of FCX’s 6¾% Mandatory Convertible Preferred Stock were converted into 78.9 million shares of FCX common stock (conversion rate equal to 2.7432 shares of FCX common stock).

In March 2004, FCX sold 1.1 million shares of 5½% Convertible Perpetual Preferred Stock for net proceeds of $1.1 billion. The conversion rate was adjustable upon the occurrence of certain events, including the payment in any quarter of common stock dividends exceeding $0.10 per share. As a result of the quarterly and supplemental common stock dividends paid through August 31, 2009, each share of preferred stock was convertible into 43.061 shares of FCX common stock, equivalent to a conversion price of approximately $23.22 per common share. In December 2008, through privately negotiated transactions, FCX induced conversion of 268,331 shares of its 5½% Convertible Perpetual Preferred Stock with a liquidation preference of $268 million into 11.5 million shares of FCX common stock. To induce conversion of these shares, FCX issued to the holders an additional 2.0 million shares of FCX common stock valued at $22 million, which was recorded as losses on induced conversions in the consolidated statements of operations. In September 2009, FCX called for redemption the remaining outstanding shares of its 5½% Convertible Perpetual Preferred Stock. Of the 831,554 shares outstanding at the time of the call, 830,529 shares were converted into 35.8 million shares of FCX common stock, and the remaining 1,025 shares were redeemed for approximately $1 million in cash.

Stock Award Plans. FCX currently has awards outstanding under its stock-based compensation plans, including two FMC plans resulting from the acquisition. As of December 31, 2011, only two of the plans, both of which are stockholder approved (which are discussed below), have awards available for grant.

The 2003 Stock Incentive Plan (the 2003 Plan) provides for the issuance of stock options, SARs, restricted stock, restricted stock units and other stock-based awards. The 2003 Plan allows FCX to grant awards for up to 16 million common shares to eligible participants. In 2006, FCX’s stockholders approved the 2006 Stock Incentive Plan (the 2006 Plan), and FCX’s stockholders approved amendments to the plan in 2007 primarily to increase the number of shares available for grants and in 2010 to permit grants to outside directors. The 2006 Plan provides for the issuance of stock options, SARs, restricted stock, restricted stock units and other stock-based awards for up to 74 million common shares. As of December 31, 2011, shares available for grant totaled 37.2 million under the 2006 Plan and less than 500 shares under the 2003 Plan.

In connection with the FMC acquisition, former FMC stock options and restricted stock awards were converted into 1,613,190 FCX stock options and 174,782 FCX restricted stock awards, which retain the terms by which they were originally granted under FMC’s plans. The stock options carry a maximum term of 10 years with 1,344,268 stock options vested upon the acquisition of FMC and 268,922 stock options that vested ratably over a three-year period or the period until the participant became retirement-eligible, whichever was shorter. Restricted stock awards generally became fully vested in five years, with a majority of these shares having graded-vesting features in which 25 percent of the shares would vest on the third and fourth anniversaries of the award and the remaining 50 percent in the fifth year. In February 2010, the former FMC restricted stock agreements were amended to accelerate the vesting period of the restricted stock awards that were converted upon the acquisition of FMC; therefore, these restricted stock awards (excluding the cash portion that resulted from the conversion of these restricted stock awards at the time of the acquisition) became fully vested. The fair value of the restricted stock awards was determined based on the quoted market price at the time of the acquisition.

Stock-Based Compensation Cost. Compensation cost charged against earnings for stock-based awards for the years ended December 31 follows:



	2011			2010			2009
Stock options awarded to employees (including directors)	$	84		$	84		$	67
Stock options awarded to nonemployees	1			5			5
Restricted stock units awarded to employees
(including directors)	32			30			29
Restricted stock awards to employees	—			1			2
SARs	(2		)	2			4
Total stock-based compensation cost^a	115			122			107
Tax benefit	(42		)	(45		)	(41		)
Noncontrolling interests’ share	(4		)	(3		)	(3		)
Impact on net income	$	69		$	74		$	63


a.	Amounts are before Rio Tinto’s share of the cost of employee exercises of in-the-money stock options, which decreased consolidated selling, general and administrative expenses by $3 million in 2011, $4 million in 2010 and $2 million in 2009.

FCX did not capitalize any stock-based compensation costs to property, plant, equipment and development costs during the years ended December 31, 2011, 2010 and 2009.

Options and SARs. Stock options and SARs 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 plans and award agreements provide that participants will receive the following year’s vesting after retirement and provide for accelerated vesting if there is a change in control (as defined in the plans). Therefore, FCX accelerates one year of amortization for retirement-eligible employees.

A summary of options outstanding as of December 31, 2011, including 69,672 SARs, and changes during the year ended December 31, 2011, follows:



	Number of Options		Weighted- Average Option Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Balance at January 1	26,930,444		$	30.22
Granted	4,230,500		55.43
Exercised	(3,044,174	)	21.88
Expired/Forfeited	(149,625	)	37.61
Balance at December 31	27,967,145		34.90		6.9	$	152

Vested and exercisable at December 31	13,560,645		$	33.10	5.7	$	65

Summaries of options outstanding, including SARs, and changes during the years ended December 31 follow:



	2010				2009
	Number of Options		Weighted- Average Option Price		Number of Options		Weighted- Average Option Price
Balance at January 1	24,921,594		$	27.59	19,705,894		$	32.49
Granted	8,303,000		36.15		7,302,000		12.94
Exercised	(6,081,650	)	27.54		(1,571,874	)	20.15
Expired/Forfeited	(212,500	)	30.29		(514,426	)	30.29
Balance at December 31	26,930,444		30.22		24,921,594		27.59

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option valuation model. 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 exercises, forfeitures and expected life of the options. When appropriate, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected dividend rate is calculated using the annual dividend (excludes 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 at the grant date. The weighted-average assumptions used to value stock option awards during the years ended December 31 follow:



	2011		2010		2009
Expected volatility	50.9	%	51.9	%	70.6	%
Expected life of options (in years)	4.34		4.61		4.37
Expected dividend rate	1.8	%	0.8	%	—	%
Risk-free interest rate	1.6	%	2.2	%	1.5	%

The weighted-average grant-date fair value of options granted was $20.58 per option during 2011, $15.33 per option during 2010 and $7.14 per option during 2009. The total intrinsic value of options exercised was $101 million during 2011, $129 million during 2010 and $24 million during 2009. The total fair value of options vested was $89 million during 2011, $61 million during 2010 and $70 million during 2009. As of December 31, 2011, FCX had $101 million of total unrecognized compensation cost related to unvested stock options expected to be recognized over a weighted-average period of 1.5 years.

The following table includes amounts related to exercises of stock options and SARs and vesting of restricted stock units and restricted stock awards during the years ended December 31:



	2011		2010		2009
FCX shares tendered to pay the exercise price
and/or the minimum required taxes^a	936,811		934,099		542,786
Cash received from stock option exercises	$	48	$	109	$	18
Actual tax benefit realized for tax deductions	45		50		21
Amounts FCX paid for employee taxes	45		28		12
Amounts FCX paid for exercised SARs	1		1		1


a.	Under terms of the related plans, upon exercise of stock options and vesting of restricted stock units and restricted stock awards, employees may tender FCX shares to FCX to pay the exercise price and/or the minimum required taxes.

Restricted Stock Units. FCX has an annual incentive plan for its executive officers that requires a portion of each executive officer's annual bonus be paid in restricted stock units. The maximum annual incentive award pool is a percentage of FCX’s consolidated operating cash flows adjusted for working capital for the preceding year and funding of the pool is subject to a performance condition. Grants of restricted stock units before 2012 vest ratably over three years and provide that the FCX executive officers will receive the following year’s vesting upon retirement provided the performance condition is met. The fair value of these restricted stock unit grants was estimated based on projected operating cash flows for the applicable year and was charged to expense ratably over three years, beginning with the year during which the cash flows were generated as performance of services commenced in the calendar year preceding the date of grant. In February 2012, the terms of restricted stock unit awards under the annual incentive plan were revised. Beginning with 2012 grants, the level of restricted stock units granted will continue to be based on FCX's consolidated operating cash flows adjusted for working capital for the preceding year, but the award will vest after three years subject to FCX attaining a five-year average return on investment (a performance condition defined in the award agreement) of at least six percent. The awards will also be subject to a 20 percent reduction if FCX performs below a group of its peers as defined in the award agreement. The fair value of the awards is estimated using an appropriate valuation model. The awards continue to vest after the recipients retirement or death; therefore, since all of FCX's executive officers are retirement eligible, FCX charges the cost of these awards to expense in the year the cash flows are generated as performance of services is only required in the calendar year preceding the date of grant.

FCX also granted other restricted stock units that vest over a period of up to five years. The plans and award agreements provide for accelerated vesting of all restricted stock units if there is a change of control (as defined in the plans) and provide that participants will receive the following year’s vesting after retirement (except for the restricted stock units with five year vesting that do not allow acceleration because of retirement). Dividends and interest on restricted stock units accrue and are paid upon the award’s vesting.

FCX grants restricted stock units to its directors. The restricted stock units vest over four years. The fair value of the restricted stock units is amortized over the four-year vesting period or the period until the director becomes retirement-eligible, whichever is shorter. Upon a director’s retirement, all of their unvested restricted stock units immediately vest. For retirement-eligible directors, the fair value of restricted stock units is recognized in earnings on the date of grant.

A summary of outstanding restricted stock units as of December 31, 2011, and activity during the year ended December 31, 2011, follows:



	Number of Restricted Stock Units		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Balance at January 1	2,140,914
Granted	381,636
Vested	(1,257,274	)
Forfeited	—
Balance at December 31	1,265,276		1.4	$	47

The total grant-date fair value of restricted stock units granted during the year ended December 31, 2011, was $21 million. The total intrinsic value of restricted stock units vested was $69 million during 2011, $50 million during 2010 and $22 million during 2009. As of December 31, 2011, FCX had $2 million of total unrecognized compensation cost related to unvested restricted stock units expected to be recognized over a weighted-average period of less than one year.