We are a leading international mining company with headquarters in Phoenix, Arizona. We are one of the world’s largest copper, gold and molybdenum mining companies in terms of reserves and production. Our portfolio of assets includes the Grasberg minerals district in Indonesia, which contains the largest single recoverable copper reserve and the largest single gold reserve of any mine in the world based on the latest available reserve data provided by third-party industry consultants; significant mining operations in North and South America; and the Tenke Fungurume minerals district in the Democratic Republic of Congo (DRC). We also operate Atlantic Copper, our wholly owned copper smelting and refining unit in Spain.
As a mining company, our principal assets are our reserves. At December 31, 2009, consolidated recoverable proven and probable reserves totaled 104.2 billion pounds of copper, 37.2 million ounces of gold, 2.59 billion pounds of molybdenum, 270.4 million ounces of silver and 0.78 billion pounds of cobalt. Approximately 33 percent of our copper reserves were in Indonesia, approximately 33 percent were in South America, approximately 26 percent were in North America and approximately eight percent were in Africa. Approximately 96 percent of our gold reserves were in Indonesia, with the majority of our remaining gold reserves located in South America. Our molybdenum reserves are primarily in North America (approximately 80 percent), with our remaining molybdenum reserves in South America (refer to “Ore Reserves”).
Our mining revenues for 2009 include sales of copper (approximately 75 percent), gold (approximately 17 percent) and molybdenum (approximately five percent). We currently have six operating copper mines in North America, four in South America, the Grasberg minerals district in Indonesia and the Tenke Fungurume minerals district in the DRC. We also have one operating primary molybdenum mine in North America. During 2009, approximately 61 percent of our consolidated copper production was from our Grasberg, Morenci and Cerro Verde mines, and more than half of our mined copper was sold in concentrate, approximately 25 percent as cathodes and approximately 21 percent as rod (principally from our North America operations). We also produce gold as a by-product at our copper mines, primarily at the Grasberg minerals district in Indonesia, which accounted for approximately 96 percent of our consolidated gold production for 2009. For 2009, approximately 50 percent of our consolidated molybdenum production was from the Henderson molybdenum mine and approximately 46 percent was produced as a by-product at our North America copper mines. Refer to “Mines” for further discussion of our mining operations.
Prior to March 19, 2007, we operated our Grasberg mine in Indonesia and Atlantic Copper. On March 19, 2007, we acquired Phelps Dodge, a fully integrated producer of copper and molybdenum with mines in North and South America, and several development projects, including Tenke Fungurume in the DRC. After completion of the Phelps Dodge acquisition, our business strategy was focused on repaying acquisition-related debt, defining the potential of our resources and developing expansion and growth plans to deliver additional volumes to a growing marketplace. During 2007, we repaid $10.0 billion in term loans using a combination of equity proceeds and internally generated cash flows. Because of the significant reduction in debt and historically high prices for copper, gold and molybdenum, our financial policy during most of 2008 was designed to use our cash flow to invest in growth projects with anticipated high rates of return and to return excess cash flows to stockholders in the form of dividends and share purchases. The dramatic declines in copper and molybdenum prices in late 2008 and the deterioration of the economic and credit environment limited our ability to invest in growth projects and required us to make adjustments to our near-term plans in late 2008 and early 2009 (refer to Note 2 for further discussion). However, during 2009 copper prices improved from the January 2009 low of $1.38 per pound to $3.33 per pound on December 31, 2009, and subsequently closed at $3.11 per pound on January 29, 2010. Rising copper prices, along with higher volumes from the Grasberg mine and lower costs at our North America mines, enabled us to enhance our financial and liquidity position during 2009, allowing us to manage volatile conditions effectively, reduce debt and reinstate cash dividends to stockholders, while maintaining our future growth opportunities.
In North America, we currently have six operating copper mines – Morenci, Sierrita, Bagdad, Safford and Miami in Arizona, and Tyrone in New Mexico. In addition to copper, the Morenci, Sierrita and Bagdad mines produce molybdenum as a by-product. Although we currently are not conducting mining operations at our Chino mine in New Mexico, we continue to produce copper from leaching operations.
In South America, we have four operating copper mines – Cerro Verde in Peru, and Candelaria, Ojos del Salado and El Abra in Chile. In addition to copper, the Cerro Verde mine produces molybdenum concentrate as a by-product and the Candelaria and Ojos del Salado mines produce gold and silver as by-products.
In Indonesia, PT Freeport Indonesia operates the Grasberg minerals district. Our Grasberg minerals district also produces significant quantities of gold and silver as by-products. PT Freeport Indonesia also owns 25 percent of PT Smelting, a smelting and refining company in Gresik, Indonesia.
In Africa, we operate the Tenke Fungurume minerals district. In addition to copper, the Tenke Fungurume mine produces cobalt hydroxide. Copper production commenced in March 2009, and Tenke achieved targeted copper production rates in September 2009. We are continuing to address start-up and quality issues in the cobalt circuit and sustained targeted cobalt production rates are expected to be reached during 2010.
We produce molybdenum at our wholly owned Henderson molybdenum mine in Colorado, which is the largest primary producer of molybdenum in the world. Additionally, we own the Climax molybdenum mine in Colorado which is currently on care-and-maintenance status.
Copper, in the form of copper cathode, is an internationally traded commodity, and its prices are determined by the major metals exchanges – New York Mercantile Exchange (COMEX), the London Metals Exchange (LME) and the Shanghai Futures Exchange (SHFE). Prices on these exchanges generally reflect the worldwide balance of copper supply and demand and can be volatile and cyclical.
Our copper ores are generally processed either by smelting and refining or by solution extraction and electrowinning (SX/EW). Ore subject to the smelting process is crushed and further treated to produce a copper concentrate with an average copper content of about 30 percent. Copper concentrate is then smelted (subjected to extreme heat) to produce copper anodes, which weigh between 800 and 900 pounds each and have an average copper content of 99.5 percent. The anodes are further treated by electrolytic refining to produce copper cathodes, which weigh between 100 and 350 pounds each and have a copper content of 99.99 percent.
In the SX/EW process, copper is extracted from ore by dissolving it with a weak sulphuric acid solution. The copper content of the solution is increased in two additional solution-extraction stages and then the copper-bearing solution undergoes an electrowinning process to produce cathode that is 99.99 percent copper.
We are one of the world’s leading producers of copper concentrate, cathode and continuous cast copper rod. During 2009, approximately 61 percent of our consolidated copper production was from our Grasberg, Morenci and Cerro Verde mines, and more than half of our mined copper was sold in concentrate, approximately 25 percent as cathodes and approximately 21 percent as rod (principally from our North America operations).
Copper Concentrate. In 2009, we produced copper concentrate at seven mines, of which PT Freeport Indonesia is our largest producer. Approximately 50 percent of PT Freeport Indonesia’s concentrate production in 2009 was refined at affiliated smelters, Atlantic Copper and PT Smelting.
Copper concentrate was also produced at our Morenci, Sierrita and Bagdad mines in Arizona, and was generally shipped to our Miami smelter in Arizona. In South America, we produced copper concentrate at our Cerro Verde mine in Peru and our Candelaria and Ojos del Salado mines in Chile. We are initiating activities to restart the Morenci mill, which was temporarily idled in February 2009, to process available sulfide material currently being mined.
Copper Cathode. In 2009, we produced copper cathode at two electrolytic refineries and ten mines. Our refineries are located in El Paso, Texas, and Huelva, Spain. PT Smelting also produces copper cathode. We produced SX/EW cathode from our Morenci, Sierrita, Bagdad, Chino, Safford, Tyrone and Miami mines in North America and our Cerro Verde and El Abra mines in South America. In 2009, we began SX/EW production at our Tenke Fungurume mine in the DRC.
Continuous Cast Copper Rod. We manufacture continuous cast copper rod at our facilities in El Paso, Texas; Norwich, Connecticut and Miami, Arizona.
Other Copper Products. We produce specialty copper products at our Bayway operations in Elizabeth, New Jersey. These products include specialty copper alloys in the forms of rod, bar and strip. We manufacture electrode wire for use in welding steel cans at our Norwich, Connecticut and El Paso, Texas, facilities. We also produce copper sulfate pentahydrate for use in agricultural and industrial applications at our facility in Sierrita, Arizona.
North America. The majority of the copper produced at our North America copper mines and refined in our El Paso refinery is consumed at our rod plants in El Paso, Texas; Norwich, Connecticut and Miami, Arizona. The remainder of our North America copper production is sold in the form of copper cathode or copper concentrate to third parties. Generally, copper rod and cathode are sold to wire and cable fabricators and brass mills under United States (U.S.) dollar-denominated, annual contracts. Cathode and rod contract prices are generally based on the prevailing COMEX monthly average spot price for the month of shipment and include a premium.
South America. Production from our South America copper mines is generally sold as copper concentrate or copper cathode under U.S. dollar-denominated, annual and multi-year contracts. Cerro Verde sells approximately 70 percent of its production as concentrate and the rest as cathode. Some of Cerro Verde’s cathode is sold under annual contract terms to South American customers. Approximately 22 percent of Cerro Verde’s and 11 percent of Candelaria’s 2009 concentrate production was sold at market rates to Atlantic Copper. A majority of our Ojos del Salado concentrate production is sold to local Chilean smelters. El Abra’s cathode production is sold primarily under annual or multi-year contracts to Asian or European rod or brass mill customers, or to merchants. The remainder of the cathode and concentrate production is primarily sold under long-term contracts to external customers, largely located in Asia, with the balance sold on a spot basis.
Our South America sales are priced based on the LME monthly average spot price. Cathode sales are generally priced in the month of arrival at the buyer’s facilities and generally include a premium. Substantially all of our concentrate sales are priced in the third calendar month following the month of arrival at the buyer’s facilities. Revenues from South America concentrate sales are recorded net of treatment and refining charges. Treatment and refining charges are fees paid to smelters and refiners and are generally negotiated annually. Moreover, because a portion of the metals contained in copper concentrates is unrecoverable from the smelting process, our revenues from concentrate sales are also recorded net of allowances based on the quantity and value of these unrecoverable metals. These allowances are a negotiated term of our contracts and vary by customer.
Indonesia. PT Freeport Indonesia sells its production in the form of copper concentrate, which contains significant quantities of by-product gold and silver, under U.S. dollar-denominated sales agreements. During 2009, approximately half of PT Freeport Indonesia’s production was sold to Atlantic Copper and PT Smelting. PT Freeport Indonesia sells substantially all of its budgeted production of copper concentrates under long-term contracts. In general, most of its concentrate sales are priced on the basis of the LME average spot price for either the first, second or third calendar month following the month of arrival at the buyer’s facilities.
PT Freeport Indonesia has a long-term contract to provide Atlantic Copper with approximately 55 percent of its current concentrate requirements at market prices.
PT Freeport Indonesia’s contract with PT Smelting provides for the supply of 100 percent of the copper concentrate requirements necessary to produce 205,000 metric tons of copper annually (essentially the smelter’s original design capacity) on a priority basis.
PT Freeport Indonesia’s sales to PT Smelting represented approximately 13 percent of our consolidated revenues in 2009, approximately eight percent in 2008 and approximately 11 percent in 2007. No other customer accounted for more than 10 percent of our consolidated revenues in any of the three years ended December 31, 2009.
Revenues from our Indonesia concentrate sales are recorded net of royalties (refer to “Mines – Indonesia – Contracts of Work”), and treatment and refining charges (including price participation charges, if applicable, based on the market prices of metals). Similar to our South America mines, Indonesia concentrate sales are net of allowances for unrecoverable metals. PT Freeport Indonesia sells a small amount of copper concentrates in the spot market.
Africa. Copper produced at our Tenke Fungurume mining district is generally sold as copper cathode under U.S. dollar denominated contracts priced based on the LME monthly average spot price for the month after the month of shipment.
Europe. Atlantic Copper sells copper cathode directly to rod and brass mills, primarily located in Europe. Atlantic Copper has occasionally sold copper cathode to merchants. Copper cathode is generally sold under annual contracts and priced based on the LME average spot price for the month of arrival at the buyer’s facilities.
Gold Products and Sales
We also produce gold as a by-product, primarily at the Grasberg minerals district, which accounted for approximately 96 percent of our consolidated gold production in 2009. Gold is primarily sold as a component of our copper concentrate or in slimes, which are a by-product of the smelting and refining process. Gold generally is priced at the average London Bullion Market Association price for a specified month near the month of shipment.
Molybdenum Products and Sales
We are the world’s largest producer of molybdenum and molybdenum-based chemicals. In addition to production from our Henderson molybdenum mine, we produce by-product molybdenum at our Morenci, Sierrita and Bagdad mines in Arizona and at our Cerro Verde mine in Peru. For 2009, approximately half of our consolidated molybdenum production was from the Henderson molybdenum mine and approximately 46 percent was produced as a by-product at the North America mines.
The majority of our molybdenum concentrates are processed in our own conversion facilities. Technical-grade oxide is produced from molybdenum concentrates in Sierrita, Arizona; Fort Madison, Iowa and Rotterdam, the Netherlands. Ferromolybdenum is produced from technical-grade oxide in Stowmarket, United Kingdom through a metallothermic reduction process. High-quality molybdenum concentrates are converted into molybdenum chemicals at Fort Madison, Iowa and Rotterdam, the Netherlands. Molybdenum generally is priced based on the average Platts Metals Week price for the month of shipment. Approximately 90 percent of our expected 2010 molybdenum sales are expected to be priced at prevailing market prices.
Other Products and Sales
We produce cobalt as a cobalt hydroxide intermediate by-product of copper production at the Tenke Fungurume mine in the DRC and silver as a component of our copper concentrate or in slimes. Cobalt hydroxide intermediate product is priced based on a discount to the average monthly price published by Metal Bulletin for a specified month near the month of shipment and silver generally is priced at the average London Bullion Market Association price for a specified month near the month of shipment. Sales of cobalt and silver, along with other by-product metals such as rhenium and magnetite, do not represent a significant component of our total revenues.