Fair Value Measurement

9 Months Ended

Sep. 30, 2020

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 2020.

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 Gulf of Mexico (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, 2020
	Carrying		Fair Value
	Amount		Total		NAV		Level 1		Level 2		Level 3
Assets
Investment securities:a,b
U.S. core fixed income fund	$	29	$	29	$	29	$	—	$	—	$	—

Equity securities	6		6		—		6		—		—
Total	35		35		29		6		—		—

Legally restricted funds:a
U.S. core fixed income fund	64		64		64		—		—		—
Corporate bonds	43		43		—		—		43		—
Government bonds and notes	42		42		—		—		42		—
Government mortgage-backed securities	33		33		—		—		33		—
Asset-backed securities	15		15		—		—		15		—
Money market funds	9		9		—		9		—		—
Collateralized mortgage-backed securities	4		4		—		—		4		—
Municipal bonds	1		1		—		—		1		—
Total	211		211		64		9		138		—

Derivatives:
Embedded derivatives in provisional sales/purchase contracts in a gross asset positionc	51		51		—		—		51		—

Copper futures and swap contractsc	13		13		—		12		1		—
Copper forward contractsc	1		1		—		1		—		—



Total	65		65		—		13		52		—

Contingent consideration for the sale of the
Deepwater GOM oil and gas propertiesa	113		84		—		—		—		84



Liabilities
Derivatives:c
Embedded derivatives in provisional sales/purchase contracts in a gross liability position	20		20		—		—		20		—










Long-term debt, including current portiond	10,030		10,735		—		—		10,735		—


	At December 31, 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	43		43		—		—		43		—
Government bonds and notes	36		36		—		—		36		—
Corporate bonds	33		33		—		—		33		—
Asset-backed securities	14		14		—		—		14		—
Collateralized mortgage-backed securities	7		7		—		—		7		—
Money market funds	3		3		—		3		—		—
Municipal bonds	1		1		—		—		1		—
Total	196		196		59		3		134		—

Derivatives:
Embedded derivatives in provisional sales/purchase contracts in a gross asset positionc	68		68		—		—		68		—
Copper futures and swap contractsc	6		6		—		5		1		—

Contingent consideration for the sale of onshore
California oil and gas propertiesa	11		11		—		—		11		—
Total	85		85		—		5		80		—

Contingent consideration for the sale of the
Deepwater GOM oil and gas propertiesa	122		108		—		—		—		108



Liabilities
Derivatives:c
Embedded derivatives in provisional sales/purchase contracts in a gross liability position	20		20		—		—		20		—

Copper forward contracts	1		1		—		—		1		—


Total	21		21		—		—		21		—




Long-term debt, including current portiond	9,826		10,239		—		—		10,239		—

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 $103 million at September 30, 2020, and $100 million at December 31, 2019, and (ii) other assets of $148 million at September 30, 2020, and $157 million at December 31, 2019, 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.

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.

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. 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.

In 2016, FCX completed the sale of its onshore California oil and gas properties, which 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. Based on current and forecasted oil prices for the remainder of 2020, FCX has concluded the fair value of the last tranche of this contingent consideration derivative approximates zero at September 30, 2020. The fair value of the contingent consideration derivative was $11 million (included in other assets in the consolidated balance sheets) at December 31, 2019. 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 was realized in 2018 and collected in first-quarter 2019 (included in proceeds from sales of assets in the consolidated statements of cash flows) because the average Brent crude oil price exceeded $70 per barrel for 2018. Contingent consideration of $50 million was not realized in 2019 because the average Brent crude oil price did not exceed $70 per barrel for 2019. The fair value at December 31, 2019, was calculated based on average commodity price forecasts through the applicable maturity date using a Monte-Carlo simulation model. The model used various observable inputs, including Brent crude oil forward prices, volatilities and discount rates. As a result, this contingent consideration asset was classified within Level 2 of the fair value hierarchy.

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 is being received over time as future cash flows are realized from a third-party production handling agreement for an offshore platform, with the related payments commencing in third-quarter 2018. The contingent consideration included in (i) other current assets totaled $12 million at September 30, 2020, and $18 million at December 31, 2019, and (ii) other assets totaled $101 million at September 30, 2020, and $104 million at December 31, 2019. 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.

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, 2020, as compared with those techniques used at December 31, 2019.

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 2020 follows (in millions):



Fair value at January 1, 2020	$	108
Net unrealized loss related to assets still held at the end of the period	(15)
Settlements	(9)
Fair value at September 30, 2020	$	84

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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