Financial Instruments (Unaudited)

3 Months Ended

Mar. 31, 2013

Financial Instruments [Abstract]

Financial Instruments

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 forward, futures and swap 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 March 31, 2013, FCX had no price protection contracts relating to its mine production. A discussion of FCX’s derivative commodity 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 New York Mercantile Exchange (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 and swap contracts and then liquidating the copper futures contracts and settling the copper swap contracts during the month of shipment, which generally results in FCX receiving the COMEX average copper price in the month of shipment. 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-month periods ended March 31, 2013 and 2012, resulting from hedge ineffectiveness. At March 31, 2013, FCX held copper futures and swap contracts that qualified for hedge accounting for 57 million pounds at an average contract price of $3.54 per pound, with maturities through March 2014.

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 (firm sales commitments) follows (in millions):

	Three Months Ended
	March 31,
	2013			2012
Copper futures and swap contracts:
Unrealized (losses) gains:
Derivative financial instruments	$	(12	)	$	18
Hedged item	12			(18		)
Realized (losses) gains:
Matured derivative financial instruments	(2		)	10

Derivatives Not Designated as Hedging Instruments

Embedded Derivatives. As described in Note 1 to FCX’s annual report on Form 10-K for the year ended December 31, 2012, under “Revenue Recognition,” certain FCX copper concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on the London Metal Exchange (LME) price (copper) or the COMEX price (copper) and the London Bullion Market Association (London PM) price (gold) at the time of shipment as specified in the contract. Similarly, FCX purchases copper under contracts that provide for provisional pricing. FCX applies the normal purchases and normal sales scope exception in accordance with derivatives and hedge accounting guidance to the host sales agreements since the contracts do not allow for net settlement and always result in physical delivery. Sales and purchases with a provisional sales price contain an embedded derivative (i.e., the price settlement mechanism that is settled after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale or purchase of the metals contained in the concentrates or cathodes at the then-current LME or COMEX price (copper) or the London PM price (gold) as defined in the contract. Mark-to-market price fluctuations recorded through the settlement date are reflected in revenues for sales contracts and in cost of sales as production and delivery costs for purchase contracts.

A summary of FCX’s embedded derivatives at March 31, 2013, follows:

	Open Positions	Average Price Per Unit				Maturities Through
		Contract		Market
Embedded derivatives in provisional sales contracts:
Copper (millions of pounds)	491	$	3.57	$	3.41	August 2013
Gold (thousands of ounces)	105	1,606		1,601		July 2013
Embedded derivatives in provisional purchase contracts:
Copper (millions of pounds)	124	3.57		3.42		July 2013

Copper Forward Contracts. Atlantic Copper, FCX’s wholly owned smelting and refining unit in Spain, enters into forward copper 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 March 31, 2013, Atlantic Copper held net forward copper sales contracts for 16 million pounds at an average contract price of $3.48 per pound, with maturities through June 2013.

A summary of the realized and unrealized gains (losses) recognized in income before income taxes and equity in affiliated companies’ net earnings for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, follows (in millions):

	Three Months Ended
	March 31,
	2013			2012
Embedded derivatives in provisional sales contractsa	$	(83	)	$	184
Copper forward contractsb	3			11

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 derivative financial instruments recorded on the consolidated balance sheets follows (in millions):

	March 31, 2013		December 31, 2012
Derivatives designated as hedging instruments
Commodity contracts:
Copper futures and swap contracts:a
Asset positionb	$	—	$	5
Liability positionc	8		1
Derivatives not designated as hedging instruments
Commodity contracts:
Embedded derivatives in provisional sales/purchase contracts:d
Gross amounts in an asset position	$	19	$	36
Less gross amounts offset in the balance sheet	—		8
Net amounts in an asset position	$	19	$	28
Gross amounts in a liability position	$	79	$	27
Less gross amounts offset in the balance sheet	—		8
Net amounts in a liability position	$	79	$	19
Copper forward contracts:
Asset positionb	$	1	$	—

a. FCX paid $10 million to brokers at March 31, 2013, and $7 million at December 31, 2012, for margin requirements (recorded in other current assets).

b. Amounts recorded in other current assets. 

c. Amounts recorded in accounts payable and accrued liabilities. 

d. These derivatives are the only derivatives that are offset in the balance sheet in accordance with accounting guidance. Based on the respective contract, embedded derivatives on provisional sales/purchases are netted with the corresponding outstanding receivable/payable balances. At March 31, 2013, the net amounts were in a net liability position of $60 million, of which a credit of $43 million was netted against trade accounts receivable, and a credit of $17 million was included in accounts payable and accrued liabilities. At December 31, 2012, the net amounts were in a net asset position of $9 million, of which a debit of $15 million was included in trade accounts receivable, and a credit of $6 million was included in accounts payable and accrued liabilities.

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 March 31, 2013, FCX did not have significant credit exposure associated with derivative transactions.

Other Financial Instruments.  Other financial instruments include cash and cash equivalents, accounts receivable, investment securities, trust assets, accounts payable and accrued liabilities, and long-term debt. The carrying value for cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximates fair value because of their short-term nature and generally negligible credit losses (refer to Note 8 for the fair values of investment securities, trust assets and long-term debt).

A summary of cash and cash equivalents follows (in millions):

	March 31, 2013		December 31, 2012
Money market funds	$	8,367	$	2,991
Time deposits	697		514
Overnight repurchase agreementa	300		—
Cash in banks	231		200
Total cash and cash equivalents	$	9,595	$	3,705

a. In the first quarter of 2013, FCX entered into an overnight repurchase agreement with a financial institution. In connection with the agreement, FCX purchases an undivided interest in U.S. government treasury and/or agency securities at market value, and the financial institution agrees to repurchase the securities on demand (the following business day) at the original purchase price plus a designated interest rate. FCX does not participate in the actual return on the underlying securities. Because of its short-term, highly liquid nature, and the insignificant risk of changes in value, FCX considers this financial instrument a cash equivalent.