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 for 2018.

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 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 14) follows:



	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 position^c	23		23		—		—		23		—
Contingent consideration for the sales of TFHL
and onshore California oil and gas properties^a	73		73		—		—		73		—
Total	96		96		—		—		96		—

Contingent consideration for the sale of the
Deepwater GOM oil and gas properties^a	143		127		—		—		—		127



Liabilities
Derivatives:^c
Embedded derivatives in provisional copper,
gold and cobalt sales/purchase contracts
in a gross asset position	$	39	$	39	$	—	$	—	$	39	$	—
Copper futures and swap contracts	9		9		—		7		2		—
Total	48		48		—		7		41		—

Long-term debt, including current portion^d	11,141		10,238		—		—		10,238		—



	At December 31, 2017
	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	5		5		—		5		—		—
Total	30		30		25		5		—		—

Legally restricted funds:^a
U.S. core fixed income fund	55		55		55		—		—		—
Government bonds and notes	40		40		—		—		40		—
Corporate bonds	32		32		—		—		32		—
Government mortgage-backed securities	27		27		—		—		27		—
Asset-backed securities	15		15		—		—		15		—
Money market funds	11		11		—		11		—		—
Collateralized mortgage-backed securities	8		8		—		—		8		—
Municipal bonds	1		1		—		—		1		—
Total	189		189		55		11		123		—

Derivatives:
Embedded derivatives in provisional copper,
gold and cobalt sales/purchase contracts
in a gross asset position^c	155		155		—		—		155		—
Copper futures and swap contracts^c	11		11		—		9		2		—
Copper forward contracts^c	1		1		—		—		1		—
Contingent consideration for the sales of TFHL
and onshore California oil and gas properties^a	108		108		—		—		108		—
Total	275		275		—		9		266		—

Contingent consideration for the sale of the
Deepwater GOM oil and gas properties^a	150		134		—		—		—		134

Liabilities
Derivatives:^c
Embedded derivatives in provisional copper,
gold and cobalt sales/purchase contracts
in a gross liability position	$	55	$	55	$	—	$	—	$	55	$	—
Copper forward contracts	2		2		—		1		1		—
Total	57		57		—		1		56		—


Long-term debt, including current portion^d	13,229		13,381		—		—		13,381		—


a.	Current portion included in other current assets and long-term portion included in other assets.

Excludes time deposits (which approximated fair value) included in (i) other current assets of $109 million at December 31, 2018, and $52 million at December 31, 2017, and (ii) other assets of $126 million at December 31, 2018, and $123 million at December 31, 2017, primarily associated with an assurance bond to support PT-FI’s commitment for the development of a new smelter in Indonesia (refer to Note 13 for further discussion) and PT-FI’s closure and reclamation guarantees (refer to Note 12 for further discussion).


c.	Refer to Note 14 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).

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

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.

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. 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.

FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales are valued using only 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 14 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 14 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.

The fair value of contingent consideration for the sales of TFHL and onshore California oil and gas properties (refer to Note 2 for further discussion) is 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.

The fair value of contingent consideration for the sale of Deepwater GOM oil and gas properties (refer to Note 2 for further discussion) is 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.

Long-term debt, including current portion, is 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 calculation that may not be indicative of NRV or reflective of future fair values. Furthermore, while FCX believes its valuation techniques are appropriate and consistent with those used by 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 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, for the years ended December 31 follows:



	2018			2017			2016
Balance at beginning of year	$	134		$	135		$	—
Net unrealized (losses) gains related to assets still held at the end of the year	—			(1		)	135
Settlements	(7		)	—			—
Balance at the end of the year	$	127		$	134		$	135

Refer to Notes 1, 2 and 5 for a discussion of the fair value estimates associated with other assets acquired and liabilities assumed related to the PT-FI divestment, which were determined based on inputs not observable in the market and thus represent Level 3 measurements.