The Quarterly
FCX Q3 2016 10-Q

Freeport Mcmoran Copper & Gold Inc (FCX) SEC Annual Report (10-K) for 2016

FCX Q1 2017 10-Q
FCX Q3 2016 10-Q FCX Q1 2017 10-Q


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

to

Commission File Number: 001-11307-01

Freeport-McMoRan Inc.

(Exact name of registrant as specified in its charter)

Delaware

74-2480931

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

333 North Central Avenue

Phoenix, Arizona

85004-2189

(Address of principal executive offices)

(Zip Code)

(602) 366-8100

(Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, par value $0.10 per share

New York Stock Exchange


Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act  ☑ Yes o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ☑ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ☑ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).            ☑ Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.    ☑ Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).                              o Yes ☑ No

The aggregate market value of common stock held by non-affiliates of the registrant was $19.8 billion on February 15, 2017 , and $14.6 billion on June 30, 2016.

Common stock issued and outstanding was 1,445,380,168 shares on February 15, 2017 , and 1,317,877,473 shares on June 30, 2016 .


DOCUMENTS INCORPORATED BY REFERENCE

Portions of our proxy statement for our 2017 annual meeting of stockholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this report.



FREEPORT-McMoRan INC.


TABLE OF CONTENTS

Page

Part I

1

Items 1. and 2. Business and Properties

1

Item 1A. Risk Factors

38

Item 1B. Unresolved Staff Comments

53

Item 3. Legal Proceedings

53

Item 4. Mine Safety Disclosures

55

Executive Officers of the Registrant

55

Part II

56

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters

and Issuer Purchases of Equity Securities

56

Item 6. Selected Financial Data

58

Items 7. and 7A. Management's Discussion and Analysis of Financial Condition and Results

of Operations and Quantitative and Qualitative Disclosures about Market Risk

62

Item 8. Financial Statements and Supplementary Data

106

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

188

Item 9A. Controls and Procedures

188

Item 9B. Other Information

188

Part III

188

Item 10. Directors, Executive Officers and Corporate Governance

188

Item 11. Executive Compensation

188

Item 12. Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters

188

Item 13. Certain Relationships and Related Transactions, and Director Independence

189

Item 14. Principal Accounting Fees and Services

189

Part IV

189

Item 15. Exhibits, Financial Statement Schedules

189

Item 16. Form 10-K Summary

189

Signatures

S-1

Index to Financial Statements

F-1

Exhibit Index

E-1




i

Table of Contents


PART I

Items 1. and 2. Business and Properties.


All of our periodic reports filed with the United States (U.S.) Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, through our website, www.fcx.com, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. These reports and amendments are available through our website as soon as reasonably practicable after we electronically file or furnish such material to the SEC.


References to "we," "us" and "our" refer to Freeport-McMoRan Inc. (FCX) and its consolidated subsidiaries. References to "Notes" refer to the Notes to Consolidated Financial Statements included herein (refer to Item 8), and references to "MD&A" refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included herein (refer to Item 7).


GENERAL


We are a leading international mining company with headquarters in Phoenix, Arizona. Our company was incorporated under the laws of the state of Delaware on November 10, 1987. We operate large, long-lived geographically diverse assets with significant proven and probable reserves of copper, gold and molybdenum, and we are the world's largest publicly traded copper producer. Our portfolio of assets includes the Grasberg minerals district in Indonesia, one of the world's largest copper and gold deposits, and significant mining operations in the Americas, including the large-scale Morenci minerals district in North America and the Cerro Verde operation in South America.


During 2016, we took actions to restore our balance sheet strength through a combination of asset sale transactions, cash flow from operations and capital market transactions. During the year, we completed $6.6 billion in asset sale transactions, including the sale of our interest in TF Holdings Limited (TFHL), the sale of an additional 13 percent undivided interest in the Morenci minerals district and the sales of our Deepwater Gulf of Mexico (GOM), onshore California and Haynesville oil and gas properties (refer to Note 2 for further discussion of dispositions). In November 2016, we completed a registered at-the-market offering of our common stock that was announced in July 2016, which generated $1.5 billion in gross proceeds through the sale of 116.5 million shares of our common stock (refer to Note 10 for further discussion). During 2016, we also redeemed $369 million in senior notes for 27.7 million shares of our common stock in a series of privately negotiated transactions and purchased $38 million in senior notes in open-market transactions (refer to Note 8 for further discussion), and in second-quarter 2016, we terminated contracts for deepwater drillships, settling aggregate commitments totaling $1.1 billion for $755 million, of which $540 million was funded with shares of our common stock (refer to Note 10 for further discussion).


We continue to manage production, exploration and administrative costs and capital spending and, subject to commodity prices and operational results, expect to generate cash flows for further debt reduction during 2017.


We believe the underlying long-term fundamentals of the copper business remain positive and have retained a high-quality portfolio of long-lived copper assets positioned to generate long-term value. In addition to debt reduction plans, we are pursuing opportunities to enhance net present values, and we continue to advance studies for future development of our copper resources, the timing of which will be dependent on market conditions.




1

Table of Contents


Following are our ownership interests at December 31, 2016 , in operating mines through our subsidiaries, Freeport Minerals Corporation (FMC) and PT Freeport Indonesia (PT-FI):

a.

Effective May 31, 2016, FMC's undivided interest in Morenci via an unincorporated joint venture was prospectively reduced from 85 percent to 72 percent (refer to Note 2 for further discussion). Additionally, PT-FI has an unincorporated joint venture with Rio Tinto plc (Rio Tinto) related to our Indonesia operations. Refer to Note 3 for further discussion of our ownership in subsidiaries and joint ventures.


In November 2016, we completed the sale of our interest in TFHL (through which we held an effective 56 percent interest in the Tenke Fungurume (Tenke) mine in the Democratic Republic of Congo (DRC)) and in November 2014, we completed the sale of our 80 percent ownership interests in the Candelaria and Ojos del Salado copper mining operations in Chile.


During 2016, we also completed the sales of our Deepwater GOM, onshore California and Haynesville oil and gas properties, and during 2014, we completed the sale of our Eagle Ford shale assets.


Refer to Note 2 for further discussion of dispositions.


Mining

At December 31, 2016 , our estimated consolidated recoverable proven and probable mineral reserves totaled 86.8 billion pounds of copper, 26.1 million ounces of gold and 2.95 billion pounds of molybdenum. Following is a summary of our consolidated recoverable proven and probable mineral reserves at December 31, 2016 , by geographic location (refer to "Mining Operations" for further discussion):

Copper

Gold

Molybdenum

North America

35

%

1

%

78

%

South America

34


-


22


Indonesia

31


99


-


100

%

100

%

100

%


In North America, we operate seven copper mines - Morenci, Bagdad, Safford, Sierrita and Miami in Arizona, and Chino and Tyrone in New Mexico, and two molybdenum mines - Henderson and Climax in Colorado. In addition to copper, certain of our North America copper mines also produce molybdenum concentrate, gold and silver. In South America, we operate two copper mines - Cerro Verde in Peru and El Abra in Chile. In addition to copper, the Cerro Verde mine also produces molybdenum concentrate and silver. In Indonesia, our subsidiary PT-FI operates the


2

Table of Contents


mines in the Grasberg minerals district. In addition to copper, the Grasberg minerals district also produces gold and silver.


Following is a summary of the geographic location of our consolidated copper, gold and molybdenum production (excluding copper production from Tenke, which is reported as a discontinued operation) for the year 2016 (refer to "Mining Operations" for further information):

Copper

Gold

Molybdenum

North America

43

%

2

%

74

%

a

South America

32


-


26


Indonesia

25


98


-


100

%

100

%

100

%

a.

Our Henderson and Climax molybdenum mines produced 33 percent of consolidated molybdenum production, and our North America copper mines produced 41 percent .


The locations of our operating mines are shown on the world map below.

Oil and Gas

In December 2016, we completed the sales of our Deepwater GOM and onshore California oil and gas properties and in July 2016, we completed the sale of our Haynesville shale assets (refer to Note 2 for further discussion). In January 2017, we entered into an agreement to sell our property interests in the Madden area in central Wyoming. Following completion of the Madden transaction, our portfolio of oil and gas assets would include oil and natural gas production onshore in South Louisiana and on the GOM Shelf and oil production offshore California.


At December 31, 2016 , our estimated proved developed oil and natural gas reserves (all of which are located in the U.S.) totaled 18 million barrels of oil equivalents (MMBOE), comprised of 4 million barrels (MMBbls) of oil and natural gas liquids (NGLs) and 87 billion cubic feet (Bcf) of natural gas, and included 7 MMBOE associated with our property interests in the Madden area. We had no proved undeveloped reserves at December 31, 2016 . Refer to Note 21 for further discussion of our proved oil and gas reserves.




3

Table of Contents


COPPER, GOLD AND MOLYBDENUM


Following provides a brief discussion of our primary natural resources – copper, gold and molybdenum. For further discussion of historical and current market prices of these commodities refer to MD&A and Item 1A. "Risk Factors."


Copper

Copper is an internationally traded commodity, and its prices are determined by the major metals exchanges – the London Metal Exchange (LME), New York Mercantile Exchange (NYMEX) and Shanghai Futures Exchange. Prices on these exchanges generally reflect the worldwide balance of copper supply and demand, and can be volatile and cyclical. During 2016 , the LME spot copper price averaged $2.21 per pound, ranging from a low of $1.96 per pound to a high of $2.69 per pound, and was $2.50 per pound at December 31, 2016 .


In general, demand for copper reflects the rate of underlying world economic growth, particularly in industrial production and construction. According to Wood Mackenzie, a widely followed independent metals market consultant, copper's end-use markets (and their estimated shares of total consumption) are construction (31 percent), consumer products (24 percent), electrical applications (24 percent), transportation (11 percent) and industrial machinery (10 percent).


Gold

Gold is used for jewelry, coinage and bullion as well as various industrial and electronic applications. Gold can be readily sold on numerous markets throughout the world. Benchmark prices are generally based on London Bullion Market Association (London) PM quotations. During 2016 , the London PM gold price averaged $1,250 per ounce, ranging from a low of $1,077 per ounce to a high of $1,366 per ounce, and was $1,159 per ounce at December 31, 2016 .


Molybdenum

Molybdenum is a key alloying element in steel and the raw material for several chemical-grade products used in catalysts, lubrication, smoke suppression, corrosion inhibition and pigmentation. Molybdenum, as a high-purity metal, is also used in electronics such as flat-panel displays and in super alloys used in aerospace. Reference prices for molybdenum are available in several publications, including Metals Week, CRU Report and Metal Bulletin . During 2016 , the weekly average price of molybdenum quoted by Metals Week averaged $6.47 per pound, ranging from a low of $5.15 per pound to a high of $8.47 per pound, and was $6.74 per pound at December 31, 2016 .


PRODUCTS AND SALES


FCX's consolidated revenues for 2016 primarily included sales of copper ( 70 percent ), gold ( 10 percent ), oil ( 9 percent ) and molybdenum ( 4 percent ). Oil and gas sales to Phillips 66 Company represented 12 percent of our consolidated revenues in 2014 ; no other customer accounted for more than 10 percent of our consolidated revenues in any of the past three years. Refer to Note 16 for a summary of our consolidated revenues and operating income (loss) by business segment and geographic area.


Copper Products

We are one of the world's leading producers of copper concentrate, cathode and continuous cast copper rod. During 2016 , 58 percent of our mined copper was sold in concentrate, 21 percent as cathode and 21 percent as rod from North America operations.


The copper ore from our mines is generally processed either by smelting and refining or by solution extraction and electrowinning (SX/EW). Before being subject to the smelting and refining process, ore is crushed and treated to produce a copper concentrate with copper content of approximately 20 to 30 percent. Copper concentrate is then smelted ( i.e. , subjected to extreme heat) to produce copper anode, which weighs between 800 and 900 pounds and has an average copper content of 99.5 percent. The anode is further treated by electrolytic refining to produce copper cathode, which weighs between 100 and 350 pounds and has an average copper content of 99.99 percent. For ore subject to the SX/EW process, copper is extracted from the 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, on average, 99.99 percent copper. Our copper cathode is used as the raw material input for copper rod, brass mill products and for other uses.



4

Table of Contents


Copper Concentrate .  We produce copper concentrate at six of our mines. In North America, copper concentrate is produced at the Morenci, Bagdad, Sierrita and Chino mines, and a significant portion is shipped to our Miami smelter in Arizona. Copper concentrate is also produced at the Cerro Verde mine in Peru and the Grasberg minerals district in Indonesia.


Copper Cathode .  We produce copper cathode at our electrolytic refinery located in El Paso, Texas, and at nine of our mines. SX/EW cathode is produced from the Morenci, Bagdad, Safford, Sierrita, Miami, Chino and Tyrone mines in North America, and from the Cerro Verde and El Abra mines in South America . Copper cathode is also produced at Atlantic Copper (our wholly owned copper smelting and refining unit in Spain) and PT Smelting (PT-FI's 25-percent-owned copper smelter and refinery in Indonesia). Refer to "Mining Operations - Smelting Facilities and Other Mining Properties" for further discussion of Atlantic Copper and PT Smelting.


Continuous Cast Copper Rod .  We manufacture continuous cast copper rod at our facilities in El Paso, Texas; Norwich, Connecticut; and Miami, Arizona, primarily using copper cathode produced at our North America copper mines.


Copper Sales

North America .  The majority of the copper produced at our North America copper mines and refined in our El Paso, Texas, refinery is consumed at our rod plants. The remainder of our North America copper production is sold in the form of copper cathode or copper concentrate under U.S. dollar-denominated annual contracts. Cathode and rod contract prices are generally based on the prevailing Commodity Exchange Inc. (COMEX - a division of NYMEX) monthly average spot price for the month of shipment and include a premium. Generally, copper rod is sold to wire and cable manufacturers, while cathode is sold to rod, brass or tube fabricators. During 2016 , 12 percent of our North America mines' copper concentrate sales volumes were shipped to Atlantic Copper.


South America . Production from our South America mines is sold as copper concentrate or copper cathode under U.S. dollar-denominated, annual and multi-year contracts. During 2016 , our South America mines sold approximately 75 percent of their copper production in concentrate and 25 percent as cathode. During 2016, four percent of our South America mines' copper concentrate sales volumes were shipped to Atlantic Copper.


Substantially all of South America's copper concentrate and cathode sales contracts provide final copper pricing in a specified future month (generally one to four months from the shipment date) primarily based on quoted LME monthly average spot copper prices. Revenues from South America's concentrate sales are recorded net of royalties and treatment charges ( i.e., fees paid to smelters that are generally negotiated annually). In addition, because a portion of the metals contained in copper concentrate is unrecoverable from the smelting process, revenues from South America's concentrate sales are also recorded net of allowances for unrecoverable metals, which are a negotiated term of the contracts and vary by customer.


Indonesia . PT-FI sells its production in the form of copper concentrate, which contains significant quantities of gold and silver, under U.S. dollar-denominated, long-term contracts. PT-FI also sells a small amount of copper concentrate in the spot market. Following is a summary of PT-FI's aggregate percentage concentrate sales to third parties, PT Smelting and Atlantic Copper for the years ended December 31:

2016

2015

2014

Third parties

56

%

61

%

36

%

PT Smelting

42


37


58


Atlantic Copper

2


2


6


100

%

100

%

100

%


Substantially all of PT-FI's concentrate sales contracts provide final copper pricing in a specified future month (generally one to four months from the shipment date) primarily based on quoted LME monthly average spot copper prices. Revenues from PT-FI's concentrate sales are recorded net of royalties, export duties, treatment charges and allowances for unrecoverable metals.


Gold Products and Sales

We produce gold mostly from the Grasberg minerals district. Gold is primarily sold as a component of our copper concentrate or in slimes, which are a product of the smelting and refining process at Atlantic Copper. Gold generally is priced at the average London price for a specified month near the month of shipment. Revenues from gold sold


5

Table of Contents


as a component of our copper concentrate are recorded net of treatment and refining charges. Revenues from gold sold in slimes are recorded net of refining charges.


Molybdenum Products and Sales

We are the world's largest producer of molybdenum and molybdenum-based chemicals. In addition to production from the Henderson and Climax molybdenum mines, we produce molybdenum concentrate at certain of the North America copper mines and the Cerro Verde copper mine in Peru. The majority of our molybdenum concentrate is processed in our own conversion facilities. During 2016 , our molybdenum sales were generally priced based on the average published Metals Week price for the month prior to the month of shipment. We have incorporated changes in the commercial pricing structure for our molybdenum-based chemical products to enable continuation of chemical-grade production.


LABOR MATTERS


At December 31, 2016 , we employed approximately 30,000 people (12,200 in Indonesia, 11,000 in North America, 5,400 in South America and 1,400 in Europe and other locations). We also had contractors that employ personnel at many of our operations, including approximately 21,300 at the Grasberg minerals district in Indonesia, 3,700 at our South America mining operations, 3,700 in North America and 400 in Europe and other locations. Employees represented by unions at December 31, 2016 , are listed below, with the number of employees represented and the expiration date of the applicable union agreements:


Location

Number of Unions

Number of

Union-

Represented Employees

Expiration Date

PT-FI – Indonesia

2

9,456


September 2017

Cerro Verde – Peru

1

3,023


August 2018

El Abra – Chile

2

583


April 2020

Atlantic Copper – Spain

2

422


December 2015

a

Kokkola - Finland

3

409


November 2017

Rotterdam – The Netherlands

1

61


September 2018

Stowmarket – United Kingdom

1

39


May 2017

a.

The Collective Labor Agreement between Atlantic Copper and its workers' unions expired in December 2015, but has been extended through December 2017 by mutual agreement from both parties in accordance with Spanish law.


Refer to Item 1A. "Risk Factors" for further information on labor matters.


ENVIRONMENTAL AND RECLAMATION MATTERS


The cost of complying with environmental laws is fundamental to and a substantial cost of our business. For information about environmental regulation, litigation and related costs, refer to Item 1A. "Risk Factors" and Notes 1 and 12 .


COMPETITION


The top 10 producers of copper comprise approximately half of total worldwide mined copper production. We currently rank second among those producers, with approximately nine percent of estimated total worldwide mined copper production. Our competitive position is based on the size, quality and grade of our ore bodies and our ability to manage costs compared with other producers. We have a diverse portfolio of mining operations with varying ore grades and cost structures. Our costs are driven by the location, grade and nature of our ore bodies, and the level of input costs, including energy, labor and equipment. The metals markets are cyclical, and our ability to maintain our competitive position over the long term is based on our ability to acquire and develop quality deposits, hire and retain a skilled workforce, and to manage our costs.




6

Table of Contents


MINING OPERATIONS


Following are maps and descriptions of our mining operations in North America (including both copper and molybdenum operations), South America and Indonesia.


North America

In the U.S., most of the land occupied by our copper and molybdenum mines, concentrators, SX/EW facilities, smelter, refinery, rod mills, molybdenum roasters and processing facilities is generally owned by us or is located on unpatented mining claims owned by us. Certain portions of our Bagdad, Sierrita, Miami, Chino, Tyrone, Henderson and Climax operations are located on government-owned land and are operated under a Mine Plan of Operations or other use permit. Various federal and state permits or leases on government land are held for purposes incidental to mine operations.


In response to market conditions, beginning in the second half of 2015, we revised operating plans for our North America copper mines to reduce operating and capital costs and adjust production to reflect market conditions. In addition, we operated the Henderson molybdenum mine at reduced rates, resulting in an approximate 65 percent reduction in its annual production volumes. These operating plans will continue to be reviewed and additional adjustments may be made as market conditions warrant.

Morenci


We own a 72 percent undivided interest in Morenci, with the remaining 28 percent owned by Sumitomo Metal Mining Arizona, Inc. (15 percent) and SMM Morenci, Inc. (13 percent). Each partner takes in kind its share of Morenci's production.


Morenci is an open-pit copper mining complex that has been in continuous operation since 1939 and previously was mined through underground workings. Morenci is located in Greenlee County, Arizona, approximately 50 miles northeast of Safford on U.S. Highway 191. The site is accessible by a paved highway and a railway spur.


The Morenci mine is a porphyry copper deposit that has oxide, secondary sulfide and primary sulfide mineralization. The predominant oxide copper mineral is chrysocolla. Chalcocite is the most important secondary copper sulfide mineral, with chalcopyrite as the dominant primary copper sulfide.


The Morenci operation consists of two concentrators capable of milling 115,000 metric tons of ore per day, which produce copper and molybdenum concentrate; a 68,000 metric ton-per-day, crushed-ore leach pad and stacking system; a low-grade run-of-mine (ROM) leaching system; four SX plants; and three EW tank houses that produce copper cathode. Total EW tank house capacity is approximately 900 million pounds of copper per year. During second-quarter 2015, Morenci's concentrate leach, direct-electrowinning facility (which was placed on care-and-maintenance status in early 2009) resumed operation. Morenci's available mining fleet consists of one hundred and eleven 236-metric ton haul trucks loaded by 12 shovels with bucket sizes ranging from 47 to 57 cubic meters, which are capable of moving an average of 815,000 metric tons of material per day.


The Morenci mill expansion project, which achieved full rates in second-quarter 2015, expanded mill capacity from 50,000 metric tons of ore per day to approximately 115,000 metric tons of ore per day, which results in incremental annual production of approximately 225 million pounds of copper and an improvement in Morenci's cost structure.


7

Table of Contents


Over the next five years, Morenci's copper production, including our joint venture partner share, is expected to average approximately one billion pounds per year.


Morenci's production, including our joint venture partner's share, totaled 1.1 billion pounds of copper and 15 million pounds of molybdenum in 2016 , 1.1 billion pounds of copper and 7 million pounds of molybdenum in 2015 , and 812 million pounds of copper and less than 1 million pounds of molybdenum in 2014 .


Morenci is located in a desert environment with rainfall averaging 13 inches per year. The highest bench elevation is 2,000 meters above sea level, and the ultimate pit bottom is expected to have an elevation of 840 meters above sea level. The Morenci operation encompasses approximately 68,310 acres, comprising 51,170 acres of patented mining claims and other fee lands, 14,420 acres of unpatented mining claims and 2,720 acres of land held by state or federal permits, easements and rights-of-way.


The Morenci operation's electrical power is primarily sourced from Tucson Electric Power Company, Arizona Public Service Company and the Luna Energy facility in Deming, New Mexico. Although we believe the Morenci operation has sufficient water sources to support current operations, we are a party to litigation that may impact our water rights claims or rights to continued use of currently available water supplies, which could adversely affect our water supply for the Morenci operation. Refer to Item 1A. "Risk Factors" and Item 3. "Legal Proceedings" for further discussion.

Bagdad


Our wholly owned Bagdad mine is an open-pit copper and molybdenum mining complex located in Yavapai County in west-central Arizona. It is approximately 60 miles west of Prescott and 100 miles northwest of Phoenix. The property can be reached by Arizona Highway 96, which ends at the town of Bagdad. The closest railroad is at Hillside, Arizona, approximately 24 miles southeast on Arizona Highway 96. The open-pit mining operation has been ongoing since 1945, and prior mining was conducted through underground workings.


The Bagdad mine is a porphyry copper deposit containing both sulfide and oxide mineralization. Chalcopyrite and molybdenite are the dominant primary sulfides and are the primary economic minerals in the mine. Chalcocite is the most common secondary copper sulfide mineral, and the predominant oxide copper minerals are chrysocolla, malachite and azurite.


The Bagdad operation consists of a 75,000 metric ton-per-day concentrator that produces copper and molybdenum concentrate, an SX/EW plant that can produce up to 32 million pounds per year of copper cathode from solution generated by low-grade stockpile leaching, and a pressure-leach plant to process molybdenum concentrate. The available mining fleet consists of thirty 235-metric ton haul trucks loaded by six shovels with bucket sizes ranging from 30 to 48 cubic meters, which are capable of moving an average of 250,000 metric tons of material per day.


Bagdad's production totaled 177 million pounds of copper and 8 million pounds of molybdenum in 2016 , 210 million pounds of copper and 9 million pounds of molybdenum in 2015 , and 237 million pounds of copper and 9 million pounds of molybdenum in 2014 .


Bagdad is located in a desert environment with rainfall averaging 15 inches per year. The highest bench elevation is 1,200 meters above sea level, and the ultimate pit bottom is expected to be 310 meters above sea level. The


8

Table of Contents


Bagdad operation encompasses approximately 21,750 acres, comprising 21,150 acres of patented mining claims and other fee lands and 600 acres of unpatented mining claims.


Bagdad receives electrical power from Arizona Public Service Company. We believe the Bagdad operation has sufficient water sources to support current operations.


Safford


Our wholly owned Safford mine has been in operation since 2007 and is an open-pit copper mining complex located in Graham County, Arizona, approximately 8 miles north of the town of Safford and 170 miles east of Phoenix. The site is accessible by paved county road off U.S. Highway 70.


The Safford mine includes two copper deposits that have oxide mineralization overlaying primary copper sulfide mineralization. The predominant oxide copper minerals are chrysocolla and copper-bearing iron oxides with the predominant copper sulfide material being chalcopyrite.


The property is a mine-for-leach project and produces copper cathode. The operation consists of two open pits feeding a crushing facility with a capacity of 103,000 metric tons per day. The crushed ore is delivered to leach pads by a series of overland and portable conveyors. Leach solutions feed a SX/EW facility with a capacity of 240 million pounds of copper per year. A sulfur burner plant is also in operation at Safford, providing a cost-effective source of sulphuric acid used in SX/EW operations. The available mining fleet consists of sixteen 235-metric ton haul trucks loaded by four shovels with bucket sizes ranging from 31 to 34 cubic meters, which are capable of moving an average of 225,000 metric tons of material per day.


Safford's copper production totaled 230 million pounds in 2016 , 202 million pounds in 2015 and 139 million pounds in 2014 .


Safford is located in a desert environment with rainfall averaging 10 inches per year. The highest bench elevation is 1,250 meters above sea level, and the ultimate pit bottom is expected to have an elevation of 750 meters above sea level. The Safford operation encompasses approximately 25,000 acres, comprising 21,000 acres of patented lands, 3,950 acres of unpatented lands and 50 acres of land held by federal permit.


The Safford operation's electrical power is primarily sourced from Tucson Electric Power Company, Arizona Public Service Company and the Luna Energy facility. Although we believe the Safford operation has sufficient water sources to support current operations, we are a party to litigation that may impact our water right claims or rights to continued use of currently available water supplies, which could adversely affect our water supply for the Safford operation. Refer to Item 1A. "Risk Factors" and Item 3. "Legal Proceedings" for further discussion.



9

Table of Contents


Sierrita


Our wholly owned Sierrita mine has been in operation since 1959 and is an open-pit copper and molybdenum mining complex located in Pima County, Arizona, approximately 20 miles southwest of Tucson and 7 miles west of the town of Green Valley and Interstate Highway 19. The site is accessible by a paved highway and by rail.


The Sierrita mine is a porphyry copper deposit that has oxide, secondary sulfide and primary sulfide mineralization. The predominant oxide copper minerals are malachite, azurite and chrysocolla. Chalcocite is the most important secondary copper sulfide mineral, and chalcopyrite and molybdenite are the dominant primary sulfides.


The Sierrita operation includes a 102,000 metric ton-per-day concentrator that produces copper and molybdenum concentrate. Sierrita also produces copper from a ROM oxide-leaching system. Cathode copper is plated at the Twin Buttes EW facility, which has a design capacity of approximately 50 million pounds of copper per year. The Sierrita operation also has molybdenum facilities consisting of a leaching circuit, two molybdenum roasters and a packaging facility. The molybdenum facilities process molybdenum concentrate produced by Sierrita, from our other mines and from third-party sources. The available mining fleet consists of twenty-five 235-metric ton haul trucks loaded by three shovels with bucket sizes ranging from 34 to 56 cubic meters, which are capable of moving an average of 200,000 metric tons of material per day.


Sierrita's production totaled 162 million pounds of copper and 14 million pounds of molybdenum in 2016 , 189 million pounds of copper and 21 million pounds of molybdenum in 2015 , and 195 million pounds of copper and 24 million pounds of molybdenum in 2014 .


Sierrita is located in a desert environment with rainfall averaging 12 inches per year. The highest bench elevation is 1,160 meters above sea level, and the ultimate pit bottom is expected to be 440 meters above sea level. The Sierrita operation, including the adjacent Twin Buttes site (refer to "Smelting Facilities and Other Mining Properties" for further discussion), encompasses approximately 37,650 acres, comprising 13,300 acres of patented mining claims and 24,350 acres of split-estate lands.


Sierrita receives electrical power through long-term contracts with the Tucson Electric Power Company. Although we believe the Sierrita operation has sufficient water sources to support current operations, we are a party to litigation that may impact our water rights claims or rights to continued use of currently available water supplies, which could adversely affect our water supply for the Sierrita operation. Refer to Item 1A. "Risk Factors" and Item 3. "Legal Proceedings" for further discussion.



10

Table of Contents


Miami


Our wholly owned Miami mine is an open-pit copper mining complex located in Gila County, Arizona, approximately 90 miles east of Phoenix and 6 miles west of the city of Globe on U.S. Highway 60. The site is accessible by a paved highway and by rail.


The Miami mine is a porphyry copper deposit that has leachable oxide and secondary sulfide mineralization. The predominant oxide copper minerals are chrysocolla, copper-bearing clays, malachite and azurite. Chalcocite and covellite are the most important secondary copper sulfide minerals.


Since about 1915, the Miami mining operation had processed copper ore using both flotation and leaching technologies. The design capacity of the SX/EW plant is 200 million pounds of copper per year. During 2015, Miami's operating plans were revised to suspend mining operations and produce copper through leaching material already placed on stockpiles. Miami's copper production totaled 25 million pounds in 2016 , 43 million pounds in 2015 and 57 million pounds in 2014 .


Miami is located in a desert environment with rainfall averaging 18 inches per year. The highest bench elevation is 1,390 meters above sea level, and the pit bottom has an elevation of 810 meters above sea level. The Miami operation encompasses approximately 9,100 acres, comprising 8,750 acres of patented mining claims and other fee lands and 350 acres of unpatented mining claims.


Miami receives electrical power through long-term contracts with the Salt River Project and natural gas through long-term contracts with El Paso Natural Gas as the transporter. We believe the Miami operation has sufficient water sources to support current operations.


Chino and Tyrone


Chino

Our wholly owned Chino mine is an open-pit copper mining complex located in Grant County, New Mexico, approximately 15 miles east of the town of Silver City off of State Highway 180. The mine is accessible by paved roads and by rail. Chino has been in operation since 1910.


11

Table of Contents



The Chino mine is a porphyry copper deposit with adjacent copper skarn deposits. There is leachable oxide, secondary sulfide and millable primary sulfide mineralization. The predominant oxide copper mineral is chrysocolla. Chalcocite is the most important secondary copper sulfide mineral, and chalcopyrite and molybdenite the dominant primary sulfides.


The Chino operation consists of a 36,000 metric ton-per-day concentrator that produces copper and molybdenum concentrate, and a 150 million pound-per-year SX/EW plant that produces copper cathode from solution generated by ROM leaching. The available mining fleet consists of thirty-seven 240-metric ton haul trucks loaded by four shovels with bucket sizes ranging from 42 to 48 cubic meters, which are capable of moving an average of 235,000 metric tons of material per day.


Chino's copper production totaled 308 million pounds in 2016 , 314 million pounds in 2015 and 250 million pounds in 2014 .


Chino is located in a desert environment with rainfall averaging 16 inches per year. The highest bench elevation is 2,250 meters above sea level, and the ultimate pit bottom is expected to be 1,500 meters above sea level. The Chino operation encompasses approximately 118,600 acres, comprising 113,200 acres of patented mining claims and other fee lands and 5,400 acres of unpatented mining claims.


Chino receives power from the Luna Energy facility and from the open market. We believe Chino has sufficient water resources to support current operations.


Tyrone

Our wholly owned Tyrone mine is an open-pit copper mining complex which has been in operation since 1967. It is located in Grant County, New Mexico, approximately 10 miles south of Silver City, New Mexico, along State Highway 90. The site is accessible by paved road and by rail.


The Tyrone mine is a porphyry copper deposit. Mineralization is predominantly secondary sulfide consisting of chalcocite, with leachable oxide mineralization consisting of chrysocolla.


Copper processing facilities consist of a SX/EW operation with a maximum capacity of approximately 100 million pounds of copper cathode per year. The available mining fleet consists of seven 240-metric ton haul trucks loaded by one shovel with a bucket size of 47 cubic meters, which is capable of moving an average of 49,000 metric tons of material per day.


Tyrone's copper production totaled 76 million pounds in 2016 , 84 million pounds in 2015 and 94 million pounds in 2014 .


Tyrone is located in a desert environment with rainfall averaging 16 inches per year. The highest bench elevation is 2,000 meters above sea level, and the ultimate pit bottom is expected to have an elevation of 1,500 meters above sea level. The Tyrone operation encompasses approximately 35,200 acres, comprising 18,750 acres of patented mining claims and other fee lands and 16,450 acres of unpatented mining claims.


Tyrone receives electrical power from the Luna Energy facility and from the open market. We believe the Tyrone operation has sufficient water resources to support current operations.



12

Table of Contents


Henderson and Climax


Henderson

Our wholly owned Henderson molybdenum mine has been in operation since 1976 and is located approximately 42 miles west of Denver, Colorado, off U.S. Highway 40. Nearby communities include the towns of Empire, Georgetown and Idaho Springs. The Henderson mill site is located approximately 15 miles west of the mine and is accessible from Colorado State Highway 9. The Henderson mine and mill are connected by a 10-mile conveyor tunnel under the Continental Divide and an additional five-mile surface conveyor. The tunnel portal is located five miles east of the mill.


The Henderson mine is a porphyry molybdenum deposit, with molybdenite as the primary sulfide mineral.


The Henderson operation consists of a large block-cave underground mining complex feeding a concentrator with a current capacity of approximately 32,000 metric tons per day. Henderson has the capacity to produce approximately 35 million pounds of molybdenum per year. The majority of the molybdenum concentrate produced is shipped to our Fort Madison, Iowa, processing facility. The available underground mining equipment fleet consists of seventeen 9-metric ton load-haul-dump (LHD) units and seven 73-metric ton haul trucks, which deliver ore to a gyratory crusher feeding a series of three overland conveyors to the mill stockpiles.


In response to market conditions, the Henderson molybdenum mine operated at reduced rates during 2016. Henderson's molybdenum production totaled 10 million pounds in 2016 , 25 million pounds in 2015 and 30 million pounds in 2014 .


The Henderson mine is located in a mountainous region with the main access shaft at 3,180 meters above sea level. The main production levels are currently at elevations of 2,200 and 2,350 meters above sea level. This region experiences significant snowfall during the winter months.


The Henderson mine and mill operations encompass approximately 11,900 acres, comprising 11,850 acres of patented mining claims and other fee lands and a 50-acre easement with the U.S. Forest Service for the surface portion of the conveyor corridor.


Henderson operations receive electrical power through long-term contracts with Xcel Energy and natural gas through long-term contracts with BP Energy Company (with Xcel Energy as the transporter). We believe the Henderson operation has sufficient water resources to support current operations.


Climax

Our wholly owned Climax mine is located 13 miles northeast of Leadville, Colorado, off Colorado State Highway 91 at the top of Fremont Pass. The mine is accessible by paved roads .


The Climax ore body is a porphyry molybdenum deposit, with molybdenite as the primary sulfide mineral.


The Climax open-pit mine includes a 25,000 metric ton-per-day mill facility. Climax has the capacity to produce approximately 30 million pounds of molybdenum per year. The available mining fleet consists of nine 177-metric ton haul trucks loaded by two hydraulic shovels with bucket sizes of 34 cubic meters, which are capable of moving an average of 90,000 metric tons of material per day.



13

Table of Contents


Molybdenum production from Climax totaled 16 million pounds in 2016 , 23 million pounds in 2015 and 21 million pounds in 2014 .


The Climax mine is located in a mountainous region. The highest bench elevation is approximately 4,050 meters above sea level, and the ultimate pit bottom is expected to have an elevation of approximately 3,100 meters above sea level. This region experiences significant snowfall during the winter months.


The operations encompass approximately 14,350 acres, consisting primarily of patented mining claims and other fee lands.


Climax operations receive electrical power through long-term contracts with Xcel Energy and natural gas through long-term contracts with Andarko Energy and BP Energy Company (with Xcel Energy as the transporter). We believe the Climax operation has sufficient water resources to support current operations.


South America

At our operations in South America, mine properties and facilities are controlled through mining claims or concessions under the general mining laws of the relevant country. The claims or concessions are owned or controlled by the operating companies in which we or our subsidiaries have a controlling ownership interest. Roads, power lines and aqueducts are controlled by easements.


Cerro Verde


We have a 53.56 percent ownership interest in Cerro Verde, with the remaining 46.44 percent held by SMM Cerro Verde Netherlands B.V. (21.0 percent), Compañia de Minas Buenaventura S.A.A. (19.58 percent) and other stockholders whose shares are publicly traded on the Lima Stock Exchange (5.86 percent).


Cerro Verde is an open-pit copper and molybdenum mining complex that has been in operation since 1976 and is located 20 miles southwest of Arequipa, Peru. The site is accessible by paved highway. A majority of Cerro Verde's copper cathode production is sold locally, and the remaining copper cathode and concentrate production are transported approximately 70 miles by truck and by rail to the Port of Matarani for shipment to international markets.


The Cerro Verde mine is a porphyry copper deposit that has oxide, secondary sulfide and primary sulfide mineralization. The predominant oxide copper minerals are brochantite, chrysocolla, malachite and copper "pitch." Chalcocite and covellite are the most important secondary copper sulfide minerals. Chalcopyrite and molybdenite are the dominant primary sulfides.


Cerro Verde's operation consists of an open-pit copper mine, a 360,000 metric ton-per-day concentrator and SX/EW leaching facilities. Leach copper production is derived from a 39,000 metric ton-per-day crushed leach facility and a ROM leach system. This SX/EW leaching operation has a capacity of approximately 200 million pounds of copper per year.


The Cerro Verde expansion project, which commenced operations in September 2015, achieved capacity operating rates during first-quarter 2016. Cerro Verde's expanded operations benefit from its large-scale, long-lived reserves and cost efficiencies. The project expanded the concentrator facilities from 120,000 metric tons of ore per day to 360,000 metric tons of ore per day.



14

Table of Contents


The available fleet consists of eleven 290-metric ton haul trucks and ninety 230-metric ton haul trucks loaded by nine electric shovels with bucket sizes ranging in size from 33 to 57 cubic meters and two hydraulic shovels with a bucket size of 21 cubic meters. This fleet is capable of moving an average of approximately 735,000 metric tons of material per day.


Cerro Verde's production totaled 1.1 billion pounds of copper and 21 million pounds of molybdenum in 2016 , 545 million pounds of copper and 7 million pounds of molybdenum in 2015 , and 500 million pounds of copper and 11 million pounds of molybdenum in 2014 .


Cerro Verde is located in a desert environment with rainfall averaging 1.5 inches per year and is in an active seismic zone. The highest bench elevation is 2,750 meters above sea level, and the ultimate pit bottom is expected to be 1,570 meters above sea level. The Peruvian general mining law and Cerro Verde's mining stability agreement grant the surface rights of mining concessions located on government land. Additional government land if obtained prior to 1997, must be leased or purchased. Cerro Verde has a mining concession covering approximately 157,000 acres, including 14,500 acres rented from the Regional Government of Arequipa, plus 71 acres of owned property, and 80 acres of rights-of-way outside the mining concession area.


Cerro Verde receives electrical power under long-term contracts with Kallpa Generación SA, ElectroPeru and Engie Energia Peru S.A.


Water for our Cerro Verde processing operations comes from renewable sources through a series of storage reservoirs on the Rio Chili watershed that collect water primarily from seasonal precipitation. In 2015, Cerro Verde completed the construction of a wastewater treatment plant that intercepts raw sewage that would otherwise be discharged into the Rio Chili and processes it for both use at the Cerro Verde mine and for recharge of treated water into the Rio Chili. We believe the Cerro Verde operation has sufficient water resources to support current operations. For further discussion of risks associated with the availability of water, see Item 1A. "Risk Factors."


El Abra


We own a 51 percent interest in El Abra, and the remaining 49 percent interest is held by the state-owned copper enterprise Corporación Nacional del Cobre de Chile (CODELCO).


El Abra is an open-pit copper mining complex that has been in operation since 1996 and is located 47 miles north of Calama in Chile's El Loa province, Region II. The site is accessible by paved highway and by rail.


The El Abra mine is a porphyry copper deposit that has sulfide and oxide mineralization. The predominant primary sulfide copper minerals are bornite and chalcopyrite. There is a minor amount of secondary sulfide mineralization

as chalcocite. The oxide copper minerals are chrysocolla and pseudomalachite. There are lesser amounts of copper-bearing clays and tenorite.


The El Abra operation consists of an open-pit copper mine and a SX/EW facility with a capacity of 500 million pounds of copper cathode per year from a 125,000 metric ton-per-day crushed leach circuit and a similar-sized ROM leaching operation. The available fleet consists of thirty-six 220-metric ton haul trucks loaded by four shovels with buckets ranging in size from 34 to 63 cubic meters, which are capable of moving an average of 214,000 metric tons of material per day.



15

Table of Contents


In response to market conditions, in the second half of 2015, we adjusted operations at El Abra to reduce mining and stacking rates by approximately 50 percent to achieve lower operating and labor costs, defer capital expenditures and extend the life of the existing operations. El Abra's copper production totaled 220 million pounds in 2016 , 324 million pounds in 2015 and 367 million pounds in 2014 .


We continue to evaluate a potential large-scale milling operation at El Abra to process additional sulfide material and to achieve higher recoveries. Exploration results in recent years at El Abra indicate a significant sulfide resource, which could potentially support a major mill project. Future investments will be dependent on technical studies, economic factors and market conditions.


El Abra is located in a desert environment with rainfall averaging less than one inch per year and is in an active seismic zone. The highest bench elevation is 4,180 meters above sea level, and the ultimate pit bottom is expected to be 3,430 meters above sea level. El Abra controls a total of approximately 151,300 acres of mining claims covering the ore deposit, stockpiles, process plant, and water wellfield and pipeline. In addition, El Abra has land surface rights for the road between the processing plant and the mine, the water wellfield, power transmission lines and for the water pipeline from the Salar de Ascotán aquifer.


El Abra currently receives electrical power under a long-term contract with Engie Energia Chile S.A. Water for our El Abra processing operations comes from the continued pumping of groundwater from the Salar de Ascotán aquifer pursuant to regulatory approval. We believe El Abra has sufficient water rights and regulatory approvals to support current operations. For a discussion of risks associated with the availability of water, refer to Item 1A. "Risk Factors."


Indonesia


Ownership . PT-FI is a limited liability company organized under the laws of the Republic of Indonesia. We directly own 81.28 percent of the outstanding common stock of PT-FI and indirectly own 9.36 percent through our wholly owned subsidiary, PT Indocopper Investama; the Indonesian government owns the remaining 9.36 percent.


PT-FI has an unincorporated joint venture with Rio Tinto, under which Rio Tinto has a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver through 2022 in Block A of PT-FI's Contract of Work (COW), and after 2022, a 40 percent interest in all production from Block A. The Block A area is where all of PT-FI's proven and probable mineral reserves and all of its current mining operations are located. Refer to Note 3 for further discussion of the joint venture agreement.



16

Table of Contents


Contract of Work . PT-FI conducts its current exploration and mining operations in Indonesia through a COW with the Indonesian government. The COW governs our rights and obligations relating to taxes, exchange controls, royalties, repatriation and other matters, and was concluded pursuant to the 1967 Foreign Capital Investment Law, which expresses Indonesia's foreign investment policy and provides basic guarantees of remittance rights and protection against nationalization, a framework for economic incentives and basic rules regarding other rights and obligations of foreign investors. Specifically, the COW provides that the Indonesian government will not nationalize or expropriate PT-FI's mining operations. Any disputes regarding the provisions of the COW are subject to international arbitration.


PT-FI's original COW was entered into in 1967 and was replaced by the current COW in 1991. The initial term of the current COW expires in 2021, but the COW explicitly provides that it can be extended for two 10-year periods subject to Indonesian government approval, which pursuant to the COW cannot be withheld or delayed unreasonably. The COW allows us to conduct exploration, mining and production activities in the 24,700-acre Block A area. Under the COW, PT-FI also conducts exploration activities in the Block B area currently covering 502,000 acres.


Under the COW, PT-FI pays royalties on copper, gold and silver in the concentrate it sells (refer to Note 13 for further discussion of the royalty rates). A large part of the mineral royalties under Indonesian government regulations is designated to the provinces from which the minerals are extracted. In connection with its fourth concentrator mill expansion completed in 1998, PT-FI agreed to pay the Indonesian government additional royalties, which were not required by the COW, to provide further support to the local governments and to the people of the Indonesian province of Papua. PT-FI's royalties totaled $131 million in 2016 , $114 million in 2015 and $115 million in 2014 .


Regulatory Matters . PT-FI continues to seek approval from Indonesian authorities for the export of its copper concentrate, consistent with its rights under the COW.


In January 2014, the Indonesian government published regulations that among other things imposed a progressive export duty on copper concentrate and restricts concentrate exports after January 12, 2017. Despite PT-FI's rights under its COW to export concentrate without the payment of duties, PT-FI was unable to obtain administrative approval for exports and operated at approximately half of its capacity from mid-January 2014 through July 2014.


In July 2014, PT-FI and the Indonesian government entered into a Memorandum of Understanding (MOU) in which, subject to concluding an agreement to extend PT-FI's operations beyond 2021 on acceptable terms, PT-FI agreed to construct new smelter capacity in Indonesia and to divest an additional 20.64 percent interest in PT-FI at fair market value. Under the MOU, PT-FI provided a $115 million assurance bond to support its commitment for smelter development, agreed to increase royalty rates and agreed to pay export duties until certain smelter development milestones were met. The MOU also anticipated an amendment of the COW within six months to address other matters; however, no terms of the COW other than those relating to the smelter bond, increased royalties and export duties were changed. In January 2015, the MOU was extended to July 25, 2015, and it expired on that date. The Indonesian government has continued to impose the increased royalty rates, export duties and smelter assurance bond. PT-FI paid export duties totaling $95 million in 2016 , $109 million in 2015 and $ 77 million in 2014 .


In October 2015, the Indonesian government provided a letter of assurance to PT-FI indicating that it would revise regulations allowing it to approve the extension of PT-FI's operations beyond 2021, and provide the same rights and the same level of legal and fiscal certainty provided under the current COW.


In January and February 2017, the Indonesian government issued new regulations to address exports of unrefined metals, including copper concentrate and anode slimes, and other matters related to the mining sector. The new regulations permit the continuation of copper concentrate exports for a five-year period through January 2022, subject to various conditions, including conversion from a contract of work to a special operating license (known as an IUPK, which provides virtually none of the protections of a contract of work), commitment to completion of smelter construction in five years and payment of export duties to be determined by the Ministry of Finance. In addition, the new regulations enable application for extension of operating rights five years before expiration of the IUPK and require foreign IUPK holders to divest 51 percent to Indonesian interests no later than the tenth year of production. Export licenses would be valid for one-year periods, subject to review every six months, depending on smelter construction progress.



17

Table of Contents


The January 2017 regulations permit the export of anode slimes, which is necessary for PT Smelting (PTFI's 25-percent-owned copper smelter and refinery located in Gresik, Indonesia) to continue operating. PT Smelting is seeking to renew its anode slimes export license; however, we cannot predict when PT Smelting's anode slimes export license may be renewed. In addition, a labor strike at PT Smelting has resulted in a shutdown of its operations since January 19, 2017. Although PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity, on February 10, 2017, PT-FI was forced to suspend production as a result of limited storage capacity at PT-FI and PT Smelting. PT Smelting has indicated that it expects to resume operations in March 2017. Delays in PT Smelting obtaining its anode slimes export license or restarting operations could further impact PT-FI's operations.


Following the issuance of the January and February 2017 regulations and discussions with the government, PT-FI advised the Indonesian government that it was prepared to convert its COW to an IUPK, subject to obtaining an investment stability agreement providing equivalent rights with the same level of legal and fiscal certainty enumerated under its COW, and provided that the COW would remain in effect until it is replaced by a mutually satisfactory alternative. PT-FI also committed to commence construction of a new smelter during a five-year timeframe after approval of the extension of its long-term operating rights.


Under its COW, PT-FI has specified rights to export copper concentrate without restriction or payment of export duties. PT-FI has requested that concentrate exports be permitted without the imposition of export duties while the new license and stability agreement are negotiated. The Indonesia government has indicated that in order to export its concentrate production, PT-FI would be required to immediately convert to an IUPK, forgo its current rights to fiscal and legal certainty and commit to a new smelter prior to completing a long-term investment stability agreement. PT-FI has advised the Indonesian government that attempts to enforce the new regulations on PT-FI violates its COW and that it is unwilling to terminate its COW unless replaced by a mutually acceptable form of agreement providing fiscal and legal assurances to support its long-term investment plans in Papua, Indonesia.


As of February 24, 2017 , PT-FI has not obtained approval to export concentrate and production remains suspended. PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity (assuming that PT Smelting's export license is approved and its operations are resumed in March 2017). PT-FI has begun to significantly adjust its cost structure, reduce its workforce and spending with local suppliers, and suspend investments in its underground development projects and new smelter.


On February 17, 2017, pursuant to the COW's dispute resolution provisions, PT-FI provided formal notice to the Indonesian government of an impending dispute listing the government's breaches and violations of the COW, which are described in Item 1A. "Risk Factors."


We cannot predict whether or when PT-FI will be able to resume exporting copper concentrate. For each month of delay in obtaining approval to export, PT-FI's share of production is projected to be reduced by approximately 70 million pounds of copper and 70 thousand ounces of gold.  The inability of either PT-FI to export copper concentrate, or PT Smelting to export anode slimes or restart operations, for any extended period of time would lead to the continued suspension of production in Indonesia. We also cannot predict whether PT-FI will be successful in reaching a satisfactory agreement on the terms of PT-FI's long-term mining rights. If PT-FI is unable to reach agreement with the Indonesian government on its long-term mining rights, we may be required to reduce or defer investments in underground development projects.


Refer to Item 1A. "Risk Factors" for further discussion of risks associated with operations in Indonesia.


Grasberg Minerals District .  PT-FI operates in the remote highlands of the Sudirman Mountain Range in the province of Papua, Indonesia, which is on the western half of the island of New Guinea. We and our predecessors have been the only operator of exploration and mining activities in Block A since 1967.


The Grasberg minerals district has three operating mines, the Grasberg open pit, the Deep Ore Zone (DOZ) underground mine and the Big Gossan underground mine where operations restarted in fourth-quarter 2016. In addition, in September 2015, PT-FI initiated pre-commercial production at the Deep Mill Level Zone (DMLZ) underground mine. PT-FI also has several projects in progress in the Grasberg minerals district related to the development of the large-scale, long-lived, high-grade underground ore bodies located beneath and nearby the Grasberg open pit, including the Grasberg Block Cave underground mine (refer to MD&A for further discussion). In aggregate, these underground ore bodies are expected to produce large-scale quantities of copper and gold


18

Table of Contents


following the transition from the Grasberg open pit. Our current plans and mineral reserves at PT-FI assume that the COW will be extended beyond 2021 (refer to "Regulatory Matters" above for discussion of matters that could impact PT-FI's development plans).


PT-FI's production, including our joint venture partner's share, totaled 1.1 billion pounds of copper and 1.1 million ounces of gold in 2016 , 752 million pounds of copper and 1.2 million ounces of gold in 2015 and 651 million pounds of copper and 1.1 million ounces of gold in 2014 .


Our principal source of power for all our Indonesian operations is a coal-fired power plant that we built in 1998. Diesel generators supply peaking and backup electrical power generating capacity. A combination of naturally occurring mountain streams and water derived from our underground operations provides water for our operations. Our Indonesian operations are in an active seismic zone and experience average annual rainfall of approximately 200 inches.


Grasberg Open Pit  

PT-FI began open-pit mining of the Grasberg ore body in 1990 and is currently mining the final phase of the Grasberg open pit, which contains high copper and gold ore grades. PT-FI expects to mine high-grade ore over the next several quarters prior to transitioning to the Grasberg Block Cave underground mine during 2018. Additionally, production from the ore stockpiles, which are located outside of the pit limits, is expected to continue until early 2019. Production in the open pit is currently at the 3,310- to 3,520-meter elevation level and totaled 44 million metric tons of ore in 2016 , which provided 72 percent of PT-FI's 2016 mill feed.


The current open-pit equipment fleet consists of over 500 units. The larger mining equipment directly associated with production includes an available fleet of 132 haul trucks with payloads ranging from 218 to 276 metric tons and 16 shovels with bucket sizes ranging from 17 to 42 cubic meters, which mined an average of 180,500 metric tons of material per day in 2016 , 250,400 metric tons per day in 2015 and 298,400 metric tons per day in 2014 .


Crushing and conveying systems are integral to the Grasberg mine and provide the capacity to transport more than 250,000 metric tons of ore per day. During 2016 , Grasberg's crushing and conveying systems delivered an average of 121,000 metric tons of ore per day to the mill. From January 2016 to May 2016, the Grasberg overburden handling system delivered 1.9 million metric tons of overburden to the overburden stockpiles. The remaining overburden moved by haul trucks averaged 16,100 metric tons per day during 2016. Ore milled from the Grasberg open pit averaged 119,700 metric tons per day in 2016 , 115,900 metric tons per day in 2015 and 69,100 metric tons per day in 2014 .


DOZ Underground Mine

The DOZ ore body lies vertically below the now depleted Intermediate Ore Zone. PT-FI began production from the DOZ ore body in 1989 using open-stope mining methods, but suspended production in 1991 in favor of production from the Grasberg open pit. Production resumed in September 2000 using the block-cave method and is at the 3,110-meter elevation level.


The DOZ is a mature block-cave mine that previously operated at 80,000 metric tons of ore per day. Current operating rates from the DOZ underground mine are driven by the value of the incremental DOZ ore grade compared to the ore from the Grasberg open pit and ore grade material from the development of the DMLZ and Grasberg Block Cave underground mines. Ore milled from the DOZ underground mine averaged 38,000 metric tons of ore per day in 2016, 43,700 metric tons of ore per day in 2015 and 50,500 metric tons of ore per day in 2014. Production at the DOZ underground mine is expected to continue through 2021 and to ramp up to 60,000 metric tons of ore per day in 2017.


The DOZ mine fleet consists of over 180 pieces of mobile equipment. The primary mining equipment directly associated with production and development includes an available fleet of 46 LHD units and 22 haul trucks. Each production LHD unit typically carries approximately 11 metric tons of ore. Using ore passes and chutes, the LHD units transfer ore into 55-metric ton capacity haul trucks. The trucks dump into two gyratory crushers, and the ore is then conveyed to the surface stockpiles for processing.


The success of the development of the DOZ mine, one of the world's largest underground mines, provides confidence in the future development of PT-FI's large-scale, underground ore bodies.



19

Table of Contents


DMLZ Underground Mine

The DMLZ ore body lies below the DOZ underground mine at the 2,590-meter elevation and represents the downward continuation of mineralization in the Ertsberg East Skarn system and neighboring Ertsberg porphyry. In September 2015, PT-FI initiated pre-commercial production at the DMLZ underground mine, which represents ore extracted during the development phase for the purpose of obtaining access to the ore body. Ore milled from the DMLZ underground mine averaged 4,400 metric tons of ore per day in 2016 and 2,900 metric tons per day in 2015. Targeted production rates once the DMLZ underground mine reaches full capacity are expected to approximate 80,000 metric tons of ore per day in 2022. Production at the DMLZ underground mine is expected to continue through 2041.


The DMLZ mine fleet consists of over 210 pieces of mobile equipment, which includes 24 LHD units and 16 haul trucks used in production and development activities.


Big Gossan Underground Mine

Production from the Big Gossan ore body, which restarted in fourth-quarter 2016, is expected to ramp up to 7,000 metric tons of ore per day in 2022. The Big Gossan mine lies underground and adjacent to the current mill site. It is a tabular, near vertical ore body with approximate dimensions of 1,200 meters along strike and 800 meters down dip with varying thicknesses from 20 meters to 120 meters. The mine utilizes a blasthole stoping method with delayed paste backfill. Stopes of varying sizes are mined and the ore dropped down passes to a truck haulage level. Trucks are chute loaded and transport the ore to a jaw crusher. The crushed ore is then hoisted vertically via a two-skip production shaft to a level where it is loaded onto a conveyor belt. The belt carries the ore to one of the main underground conveyors where the ore is transferred and conveyed to the surface stockpiles for processing.


The Big Gossan mine fleet consists of over 71 pieces of mobile equipment, which includes 8 LHD units and 9 haul trucks used in development and production activities.


Description of Ore Bodies . Our Indonesia ore bodies are located within and around two main igneous intrusions, the Grasberg monzodiorite and the Ertsberg diorite. The host rocks of these ore bodies include both carbonate and clastic rocks that form the ridge crests and upper flanks of the Sudirman Range, and the igneous rocks of monzonitic to dioritic composition that intrude them. The igneous-hosted ore bodies (the Grasberg open pit and block cave, and portions of the DOZ block cave) occur as vein stockworks and disseminations of copper sulfides, dominated by chalcopyrite and, to a lesser extent, bornite. The sedimentary-rock hosted ore bodies (portions of the DOZ and all of the Big Gossan) occur as "magnetite-rich, calcium/magnesian skarn" replacements, whose location and orientation are strongly influenced by major faults and by the chemistry of the carbonate rocks along the margins of the intrusions.


The copper mineralization in these skarn deposits is dominated by chalcopyrite, but higher bornite concentrations are common. Moreover, gold occurs in significant concentrations in all of the district's ore bodies, though rarely visible to the naked eye. These gold concentrations usually occur as inclusions within the copper sulfide minerals, though, in some deposits, these concentrations can also be strongly associated with pyrite.



20

Table of Contents


The following diagram indicates the relative elevations (in meters) of our reported Indonesia ore bodies. The following map, which encompasses an area of approximately 42 square kilometers (approximately 16 square miles), indicates the relative positions and sizes of our reported Indonesia ore bodies and their locations.



Smelting Facilities and Other Mining Properties

Atlantic Copper . Our wholly owned Atlantic Copper smelter and refinery is located on land concessions from the Huelva, Spain, port authorities, which are scheduled to expire in 2027.


The design capacity of the smelter is approximately 295,000 metric tons of copper per year, and the refinery has a capacity of 285,000 metric tons of copper per year. Atlantic Copper produced 296,900 metric tons of copper anode


21

Table of Contents


from its smelter and 285,800 metric tons of copper cathode from its refinery in 2016 ; 293,100 metric tons of copper anode from its smelter and 284,800 metric tons of copper cathode from its refinery in 2015; and 294,100 metric tons of copper anode from its smelter and 283,800 metric tons of copper cathode from its refinery in 2014.


Following is a summary of Atlantic Copper's concentrate purchases from third parties and our copper mining operations for the years ended December 31:

2016

2015

2014

Third parties

77

%

71

%

50

%

North America copper mines

13


23


21


South America mining

7


3


a

21


Indonesia mining

3


3


8


100

%

100

%

100

%

a.

Lower purchases from the South America mines primarily reflect the impact of the November 2014 sale of the Candelaria and Ojos del Salado mines.


Atlantic Copper's major maintenance turnarounds typically occur approximately every eight years, with shorter-term maintenance turnarounds in the interim. Atlantic Copper completed a 68-day major maintenance turnaround in 2013 and a 13-day shorter-term maintenance in 2015. The next 21-day maintenance turnaround is scheduled for second-quarter 2017.


PT Smelting . PT-FI's COW required us to construct, or cause to be constructed, a smelter in Indonesia if we and the Indonesian government determined that such a project would be economically viable. In 1995, following the completion of a feasibility study, we entered into agreements relating to the formation of PT Smelting, an Indonesian company, and the construction of the copper smelter and refinery in Gresik, Indonesia. PT Smelting owns and operates the smelter and refinery. PT-FI owns 25 percent of PT Smelting, with the remainder owned by Mitsubishi Materials Corporation (60.5 percent), Mitsubishi Corporation Unimetals Ltd. (9.5 percent) and JX Nippon Mining & Metals Corporation (5 percent).


PT-FI's contract with PT Smelting requires PT-FI to supply 100 percent of the copper concentrate requirements (at market rates subject to a minimum or maximum treatment charge rate) necessary for PT Smelting to produce 205,000 metric tons of copper annually on a priority basis. An extension of the minimum and maximum treatment charge rate, which expires in April 2017, is currently being negotiated. PT-FI may also sell copper concentrate to PT Smelting at market rates for quantities in excess of 205,000 metric tons of copper annually. PT-FI supplied 88 percent of PT Smelting's concentrate requirements in 2016 and approximately 80 percent in both 2015 and 2014.


PT Smelting produced 255,700 metric tons of copper anode from its smelter and 241,700 metric tons of copper cathode from its refinery in 2016 ; 199,700 metric tons of copper anode from its smelter and 198,400 metric tons of copper cathode from its refinery in 2015; and 236,900 metric tons of copper anode from its smelter and 231,800 metric tons of copper cathode from its refinery in 2014. Following a temporary suspension in July 2015, PT Smelting operated at approximately 80 percent capacity from September 2015 to November 2015 when required repairs of an acid plant cooling tower that was damaged during the suspension were completed.


PT Smelting's maintenance turnarounds (which range from two weeks to a month to complete) typically are expected to occur approximately every two years, with short-term maintenance turnarounds in the interim. PT Smelting completed a 25-day maintenance turnaround during 2016, and the next major maintenance turnaround is scheduled for 2018.


In January and February 2017, the Indonesian government issued new regulations to address exports of unrefined metals, including copper concentrate and anode slimes, and other matters related to the mining sector. These regulations permit the export of anode slimes, which is necessary for PT Smelting to continue operating. PT Smelting is seeking to renew its anode slimes export license; however, we cannot predict when PT Smelting's anode slimes export license may be renewed. In addition, a labor strike at PT Smelting has resulted in a shutdown of its operations since January 19, 2017. PT Smelting has indicated that it expects to resume operations in March 2017. Refer to Item 1A. "Risk Factors" for further discussion of Indonesia regulatory matters.



22

Table of Contents


Miami Smelter . We own and operate a smelter at our Miami mining operation in Arizona. The smelter has been operating for approximately 100 years and has been upgraded numerous times during that period to implement new technologies, to improve production and to comply with air quality requirements. The Miami smelter is installing emission control equipment that will allow it to operate in compliance with adopted air quality standards (refer to Item 1A. "Risk Factors" for further discussion).


The Miami smelter processes copper concentrate primarily from our North America copper mines. Concentrate processed through the smelter totaled 673,300 metric tons in 2016 , 686,700 metric tons in 2015 and 603,700 metric tons in 2014. In addition, because sulphuric acid is a by-product of smelting concentrate, the Miami smelter is also the most significant source of sulphuric acid for our North America leaching operations (refer to Item 1A. "Risk Factors" for further discussion).


Major maintenance turnarounds (which take approximately three weeks to complete) typically occur approximately every 14 months for the Miami smelter, with short-term maintenance turnarounds in the interim. The Miami smelter completed a major maintenance turnaround in third-quarter 2016, and the next major maintenance turnaround is scheduled for second-quarter 2017.


Rod & Refining Operations . Our Rod & Refining operations consist of conversion facilities located in North America, including a refinery in El Paso, Texas; rod mills in El Paso, Texas, Norwich, Connecticut, and Miami, Arizona; and a specialty copper products facility in Bayway, New Jersey. We refine our copper anode production from our Miami smelter at our El Paso refinery. The El Paso refinery has the potential to operate at an annual production capacity of about 900 million pounds of copper cathode, which is sufficient to refine all of the copper anode we produce at our Miami smelter. Our El Paso refinery also produces nickel carbonate, copper telluride and autoclaved slimes material containing gold, silver, platinum and palladium.


Molybdenum Conversion Facilities . We process molybdenum concentrate at our conversion plants in the U.S. and Europe into such products as technical-grade molybdic oxide, ferromolybdenum, pure molybdic oxide, ammonium molybdates and molybdenum disulfide. We operate molybdenum roasters in Sierrita, Arizona; Fort Madison, Iowa; and Rotterdam, the Netherlands, and we operate a molybdenum pressure-leach plant in Bagdad, Arizona. We also produce ferromolybdenum for customers worldwide at our conversion plant located in Stowmarket, United Kingdom.


Freeport Cobalt . In March 2013, we acquired a cobalt chemical refinery in Kokkola, Finland, and the related sales and marketing business which provided direct end-market access for the cobalt hydroxide production at the Tenke mine. The joint venture operates under the name Freeport Cobalt, and we are the operator with an effective 56 percent ownership interest. The remaining effective ownership interest is held by Lundin Mining Corporation (24 percent) and La Générale des Carrières et des Mines (20 percent). The Kokkola refinery has an annual refining capacity of approximately 15,000 metric tons of cobalt.


As further discussed in Note 2, we have agreed to negotiate exclusively with China Molybdenum Co., Ltd. until February 28, 2017, to enter into a definitive agreement to sell our interest in Freeport Cobalt for $100 million.


Other North America Copper Mines . We also have five non-operating copper mines in North America – Ajo, Bisbee, Twin Buttes and Tohono in Arizona, and Cobre in New Mexico – that have been on care-and-maintenance status for several years and would require new or updated environmental studies, new permits, and additional capital investment, which could be significant, to return them to operating status.


Mining Development Projects and Exploration

Capital expenditures for mining operations totaled $1.6 billion (including $1.2 billion for major projects) in 2016 , $3.3 billion (including $2.4 billion for major projects) in 2015 and $4.0 billion (including $2.9 billion for major projects) in 2014 . Capital expenditures for major projects during the three years ended December 31, 2016 , were primarily associated with expansion projects at Morenci and Cerro Verde, and underground development activities at Grasberg. Refer to MD&A for projected capital expenditures for the year 2017. PT-FI has begun suspending investments in its underground development projects, pending resolution of its long-term mining rights. If PT-FI is unable to reach agreement with the Indonesian government on its long-term mining rights, we may be required to further reduce or defer investments in underground development projects.

We have several projects and potential opportunities to expand production volumes, extend mine lives and develop large-scale underground ore bodies. As further discussed in MD&A, our near-term major development projects primarily include the underground development activities in the Grasberg minerals district. Considering the long-


23

Table of Contents


term nature and large size of our development projects, actual costs and timing could vary from estimates. Additionally, in response to market conditions and Indonesian regulatory uncertainty, the timing of our expenditures will continue to be reviewed. As further discussed in "Mining Operations - Indonesia," PT-FI also committed to commence construction of a new smelter during a five year timeframe after obtaining an investment stability agreement providing equivalent rights with the same level of legal and fiscal certainty enumerated under PT-FI's COW, which has not been received as of February 24, 2017 . As a result, PT-FI has begun suspending investments in its underground development projects and new smelter. Refer to Item 1A. "Risk Factors" for further discussion of Indonesia regulatory matters. We continue to review our mine development and processing plans to maximize the value of our mineral reserves.


We also have an additional long-term underground mine development project in the Grasberg minerals district for the Kucing Liar ore body, which lies on the southern flank of and underneath the southern portion of the Grasberg open pit at the 2,605-meter elevation level. We expect to mine the Kucing Liar ore body using the block-cave method; aggregate capital cost estimates for development of the Kucing Liar ore body are projected to approximate $2.6 billion (which are expected to be made between 2019 and 2031). Additionally, our current mine development plans include approximately $5.7 billion of capital expenditures at our processing facilities to optimize the handling of underground ore types once the Grasberg open-pit operations cease. We expect substantially all of these expenditures to be made between 2019 and 2034. If PT-FI is unable to reach agreement with the Indonesian government on its long-term mining rights, we may be required to reduce or defer investments in underground development projects.


Our mining exploration activities are generally associated with our existing mines focusing on opportunities to expand reserves and resources to support development of additional future production capacity. Exploration results continue to indicate opportunities for significant future potential reserve additions in North and South America. Exploration spending associated with mining operations totaled $44 million in 2016 , $96 million in 2015 and $182 million in 2014 . Exploration spending is expected to approximate $47 million for the year 2017 .


Sources and Availability of Energy, Natural Resources and Raw Materials

Our copper mining operations require significant energy, principally diesel, electricity, coal and natural gas, most of which is obtained from third parties under long-term contracts. Energy represented approximately 20 percent of our copper mine site operating costs in 2016 and included purchases of approximately 214 million gallons of diesel fuel; 8,400 gigawatt hours of electricity at our North and South America copper mining operations (we generate all of our power at our Indonesia mining operation); 780 thousand metric tons of coal for our coal power plant in Indonesia; and 1 million MMBtu (British thermal units) of natural gas at certain of our North America mines. Based on current cost projections, we estimate energy will approximate 20 percent of our copper mine site operating costs in 2017 .


Our mining operations also require significant quantities of water for mining, ore processing and related support facilities. The loss of water rights for any of our mines, in whole or in part, or shortages of water to which we have rights, could require us to curtail or shut down mining operations. For a further discussion of risks and legal proceedings associated with the availability of water, refer to Item 1A. "Risk Factors" and Item 3. "Legal Proceedings."


Sulphuric acid is used in the SX/EW process and is produced as a by-product of the smelting process at our smelters and from our sulfur burners at the Safford mine. Sulphuric acid needs in excess of the sulphuric acid produced by our operations are purchased from third parties. As further discussed in Item 1A. "Risk Factors," if production were to be curtailed at the Miami smelter, we would be required to export concentrate rather than process it ourselves and to purchase sulphuric acid from third parties, thereby increasing our operating costs.


Community and Human Rights

We have adopted policies that govern our working relationships with the communities where we operate and are designed to guide our practices and programs in a manner that respects human rights and the culture of the local people impacted by our operations. We continue to make significant expenditures on community development, education, training and cultural programs, which include:


comprehensive job training programs

basic education programs

public health programs, including malaria control and human immunodeficiency virus                                                                                           

agricultural assistance programs

small and medium enterprise development programs


24

Table of Contents


cultural promotion and preservation programs

clean water and sanitation projects

community infrastructure development

charitable donations


In December 2000, we endorsed the joint U.S. State Department-British Foreign Office Voluntary Principles on Human Rights and Security (Voluntary Principles). We participated in developing these Voluntary Principles with other major natural resource companies and international human rights organizations and they are incorporated into our human rights policy. The Voluntary Principles provide guidelines for our security programs, including interaction with host-government security personnel, private security contractors and our internal security employees.


We completed a corporate level human rights impact assessment in 2014, the results of which were used to evaluate our human rights program, including a review of our human rights policy. In February 2015, we updated our human rights policy to, among other things, reflect our commitment to integrating the United Nations Guiding Principles on Business and Human Rights into our human rights program. We have embarked on a program to plan and conduct site-level human rights impact assessments at operations with higher potential risks. We also participate in a multi-industry human rights working group to gain insight from peer companies and are integrating human rights due diligence into our business practices.


We believe that our social and economic development programs are responsive to the issues raised by the local communities near our areas of operation and help us maintain good relations with the surrounding communities and avoid disruptions of mining operations. As part of our ongoing commitment to sustainable community development, we make significant investments in social programs, including in-kind support and administration, across our global operations. Over the last five years, these investments have averaged $170 million per year. Nevertheless, social and political instability in the areas of our operations may adversely impact our mining operations. Refer to Item 1A. "Risk Factors" for further discussion.


South America . Cerro Verde has provided a variety of community support projects over the years. Following engagements with regional and local governments, civic leaders and development agencies, in 2006, Cerro Verde committed to support the costs for a new potable water treatment plant to serve Arequipa. In addition, an agreement was reached with the Peruvian government for development of a water storage network that was financed by Cerro Verde and a distribution network that was financed by the Cerro Verde Civil Association (the Association). The Association manages contributions made by Cerro Verde for projects that focus on education, training, health, cultural preservation and basic infrastructure.


Cerro Verde reached an agreement with the Regional Government of Arequipa, the National Government, SEDAPAR and other local institutions to allow it to finance, engineer and construct a wastewater treatment plant for the city of Arequipa, which was completed in 2015. The wastewater treatment plant supplements existing water supplies to support Cerro Verde's concentrator expansion and also improves the regional water quality, enhances agriculture products grown in the area and reduces waterborne illnesses. In addition to these projects, Cerro Verde annually makes significant community development investments in the Arequipa region.


Security Matters . Consistent with our operating permits in Peru and our commitment to protect our employees and property, we have taken steps to provide a safe and secure working environment. As part of its security program, Cerro Verde maintains its own internal security department. Both employees and contractors perform functions such as protecting company facilities, monitoring shipments of supplies and products, assisting in traffic control and aiding in emergency response operations. The security department receives human rights and Voluntary Principles training annually. Some contractors assigned to protection of expatriate personnel are armed. These contractors receive training in motivation and defensive driving weekly; human rights and Voluntary Principles monthly; and firearms quarterly. Cerro Verde's costs for its internal civilian security department totaled $6 million in both 2016 and 2015 and $7 million in 2014.


Cerro Verde, and all businesses and residents of Peru, rely on the Peruvian government for the maintenance of public order, upholding the rule of law and the protection of personnel and property. The Peruvian government is responsible for employing police and military personnel and directing their operations. Since 1997, the Peruvian government has relied on Cerro Verde to provide logistical and infrastructure support and assistance for these necessary services because of the limited resources of the Peruvian government. Cerro Verde's financial support for the Peruvian government security institutions assigned to the operations area represents a prudent response to its requirements to protect its workforce and property, better ensuring that personnel are properly fed and lodged,


25

Table of Contents


and have the logistical resources to secure Cerro Verde's operating area. In addition, providing such support reflects our philosophy of responsible corporate citizenship, and is in keeping with our commitment to pursue practices that promote human rights.


Cerro Verde's share of support costs for the government-provided security approximated $1 million in each of the years 2016, 2015 and 2014. This supplemental support consists of various infrastructure and other costs, such as food, housing, fuel, travel, vehicle repairs, allowances to cover incidental and administrative costs, and community assistance programs conducted by the military and police.


Indonesia . In 1996, PT-FI established the Freeport Partnership Fund for Community Development (the Partnership Fund) through which PT-FI has made available funding and technical assistance to support community development initiatives in the areas of health, education and economic development of the area. PT-FI has committed through 2018 to provide one percent of its annual revenue for the development of the local people in its area of operations through the Partnership Fund. PT-FI recognized $33 million in 2016 , $27 million in 2015 and $31 million in 2014 for this commitment.


The Amungme and Kamoro Community Development Organization ( Lembaga Pengembangan Masyarakat Amungme dan Kamoro or LPMAK) oversees disbursement of the program funds we contribute to the Partnership Fund. LPMAK is governed by a board of commissioners and a board of directors, which are comprised of representatives from the local Amungme and Kamoro tribal communities, government leaders, church leaders, and one representative of PT-FI on each board. The Amungme and Kamoro people are original inhabitants of the land in our area of operations. In addition to the Partnership Fund, PT-FI annually makes significant investments in public health, education, community infrastructure and economic development.


Security Matters . Consistent with our COW in Indonesia and our commitment to protect our employees and property, we have taken steps to provide a safe and secure working environment. As part of its security program, PT-FI maintains its own internal security department. Both employees and contractors are unarmed and perform functions such as protecting company facilities, monitoring shipments of supplies and products, assisting in traffic control and aiding in emergency response operations. The security department receives human rights training annually.


PT-FI's share of costs for its internal civilian security department totaled $58 million for both 2016 and 2015 and $57 million for 2014 .


PT-FI, and all businesses and residents of Indonesia, rely on the Indonesian government for the maintenance of public order, upholding the rule of law and the protection of personnel and property. The Grasberg minerals district has been designated by the Indonesian government as one of Indonesia's vital national assets. This designation results in the police, and to a lesser extent, the military, playing a significant role in protecting the area of our operations. The Indonesian government is responsible for employing police and military personnel and directing their operations.


From the outset of PT-FI's operations, the Indonesian government has looked to PT-FI to provide logistical and infrastructure support and assistance for these necessary services because of the limited resources of the Indonesian government and the remote location of and lack of development in Papua. PT-FI's financial support for the Indonesian government security institutions assigned to the operations area represents a prudent response to its requirements to protect its workforce and property, better ensuring that personnel are properly fed and lodged, and have the logistical resources to patrol PT-FI's roads and secure its operating area. In addition, the provision of such support is consistent with PT-FI's obligations under the COW, reflects our philosophy of responsible corporate citizenship, and is in keeping with our commitment to pursue practices that will promote human rights.


PT-FI's share of support costs for the government-provided security was $20 million in 2016 , $21 million in 2015 and $27 million in 2014 . This supplemental support consists of various infrastructure and other costs, such as food, housing, fuel, travel, vehicle repairs, allowances to cover incidental and administrative costs, and community assistance programs conducted by the military and police.


Refer to Item 1A. "Risk Factors" for further discussion of security risks in Indonesia.


26

Table of Contents


Mining Production and Sales Data

Years Ended December 31,

Production

Sales

COPPER  (millions of recoverable pounds)

2016

2015

2014

2016

2015

2014

(FCX's net interest in %)

North America

Morenci (72%) a

848


902


691


855


915


680


Bagdad (100%)

177


210


237


180


222


240


Safford (100%)

230


202


139


229


198


142


Sierrita (100%)

162


189


195


162


196


196


Miami (100%)

25


43


57


27


46


60


Chino (100%)

308


314


250


308


319


243


Tyrone (100%)

76


84


94


75


89


96


Other (100%)

5


3


7


5


3


7


Total North America

1,831


1,947


1,670


1,841


1,988


1,664


South America

Cerro Verde (53.56%)

1,108


545


500


1,105


544


501


El Abra (51%)

220


324


367


227


327


366


Candelaria/Ojos del Salado (80%) b

-


-


284


-


-


268


Total South America

1,328


869


1,151


1,332


871


1,135


Indonesia

Grasberg (90.64%) c

1,063


752


636


1,054


744


664


Consolidated - continuing operations

4,222


3,568


3,457


4,227


d

3,603


d

3,463


d

Discontinued operations e

425


449


447


424


467


425


Total

4,647


4,017


3,904


4,651


4,070


3,888


Less noncontrolling interests

909


680


725


910


688


715


Net

3,738


3,337


3,179


3,741


3,382


3,173


Average realized price per pound (continuing operations)

$

2.28


$

2.42


$

3.09


GOLD  (thousands of recoverable ounces)

North America (100%)

27


25


12


25


23


13


South America (80%) b

-


-


72


-


-


67


Indonesia (90.64%) c

1,061


1,232


1,130


1,054


1,224


1,168


Consolidated

1,088


1,257


1,214


1,079


1,247


1,248


Less noncontrolling interests

99


115


120


99


115


123


Net

989


1,142


1,094


980


1,132


1,125


Average realized price per ounce

$

1,238


$

1,129


$

1,231


MOLYBDENUM (millions of recoverable pounds)

Henderson (100%)

10


25


30


N/A


N/A


N/A


Climax (100%)

16


23


21


N/A


N/A


N/A


North America copper mines (100%) a

33


37


33


N/A


N/A


N/A


Cerro Verde (53.56%)

21


7


11


N/A


N/A


N/A


Consolidated

80


92


95


74


89


95


Less noncontrolling interest

9


3


5


6


4


5


Net

71


89


90


68


85


90


Average realized price per pound

$

8.33


$

8.70


$

12.74


a.

Amounts are net of Morenci's undivided joint venture partners' interest; effective May 31, 2016, FCX's undivided interest in Morenci was prospectively reduced from 85 percent to 72 percent.

b.

In November 2014, we completed the sale of our 80 percent interests in the Candelaria and Ojos del Salado mines.

c.

Amounts are net of Grasberg's joint venture partner interest, which varies in accordance with terms of the joint venture agreement (refer to Note 3). Under the joint venture agreement, PT-FI's share of copper production and sales was 100 percent in 2016 and 2015 and 98 percent in 2014 . PT-FI's share of gold production and sales was 100 percent in 2016, 2015 and 2014.

d.

Consolidated sales volumes exclude purchased copper of 188 million pounds for 2016, 121 million pounds for 2015 and 125 million pounds for 2014.

e.

In November 2016, we completed the sale of our interest in TFHL, through which we held an interest in the Tenke mine, which is reported as a discontinued operation for all periods presented (refer to Note 2 for further discussion).





27

Table of Contents


Mineral Reserves

Recoverable proven and probable reserves have been calculated in accordance with Industry Guide 7 as required by the Securities Exchange Act of 1934. Proven and probable reserves may not be comparable to similar information regarding mineral reserves disclosed in accordance with the guidance in other countries. Proven and probable reserves were determined by the use of mapping, drilling, sampling, assaying and evaluation methods generally applied in the mining industry, as more fully discussed below. The term "reserve," as used in the reserve data presented here, means that part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination. The term "proven reserves" means reserves for which (i) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; (ii) grade and/or quality are computed from the results of detailed sampling; and (iii) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is sufficiently defined that size, shape, depth and mineral content of reserves are well established. The term "probable reserves" means reserves for which quantity and grade are computed from information similar to that used for proven reserves but the sites for sampling are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.


Our mineral reserve estimates are based on the latest available geological and geotechnical studies. We conduct ongoing studies of our ore bodies to optimize economic values and to manage risk. We revise our mine plans and estimates of recoverable proven and probable mineral reserves as required in accordance with the latest available studies.


Estimated recoverable proven and probable reserves at December 31, 2016 , were determined using long-term average prices of $2.00 per pound for copper, $1,000 per ounce for gold and $10 per pound for molybdenum. For the three-year period ended December 31, 2016 , LME spot copper prices averaged $2.60 per pound, London PM gold prices averaged $1,226 per ounce and the weekly average price for molybdenum quoted by Metals Week averaged $8.18 per pound.


The recoverable proven and probable reserves presented in the table below represent the estimated metal quantities from which we expect to be paid after application of estimated metallurgical recovery rates and smelter recovery rates, where applicable. Recoverable reserves are that part of a mineral deposit that we estimate can be economically and legally extracted or produced at the time of the reserve determination.

Recoverable Proven and Probable Mineral Reserves

Estimated at December 31, 2016

Copper a

(billion pounds)

Gold

(million ounces)

Molybdenum

(billion pounds)

North America

30.4


0.3


2.31


South America

29.5


-


0.64


Indonesia b

26.9


25.8


-


Consolidated basis c

86.8


26.1


2.95


Net equity interest d

70.5


23.7


2.65


a.

Consolidated recoverable copper reserves include 2.2 billion pounds in leach stockpiles and 1.0 billion pounds in mill stockpiles (refer to "Mill and Leach Stockpiles" for further discussion).

b.

Recoverable proven and probable reserves from Indonesia reflect estimates of minerals that can be recovered through the end of 2041. Refer to Note 13 and to Item 1A. "Risk Factors" for discussion of PT-FI's COW and Indonesian regulatory matters.

c.

Consolidated reserves represent estimated metal quantities after reduction for joint venture partner interests at the Morenci mine in North America and the Grasberg minerals district in Indonesia (refer to Note 3 for further discussion of our joint ventures). Excluded from the table above were our estimated recoverable proven and probable reserves of 281.8 million ounces of silver in North America, South America and Indonesia, which were determined using a long term average price of $15 per ounce.

d.

Net equity interest reserves represent estimated consolidated metal quantities further reduced for noncontrolling interest ownership (refer to Note 3 for further discussion of our ownership in subsidiaries). Excluded from the table above were our estimated recoverable proven and probable reserves of 226.0 million ounces of silver in North America, South America and Indonesia.


28

Table of Contents


Recoverable Proven and Probable Mineral Reserves

Estimated at December 31, 2016

Proven Reserves

Probable Reserves

Average Ore Grade

Average Ore Grade

Processing

Million

Copper

Gold

Moly

Silver

Million

Copper

Gold

Moly

Silver

Method

metric tons

%

g/t

%

g/t

metric tons

%

g/t

%

g/t

North America

Morenci

Mill

591


0.43


-


0.02


-


93


0.40


-


0.02


-


Crushed leach

290


0.52


-


-


-


66


0.46


-


-


-


ROM leach

1,711


0.18


-


-


-


523


0.16


-


-


-


Bagdad

Mill

969


0.35


-


a

0.02


1.46


136


0.32


-


a

0.02


1.36


ROM leach

88


0.17


-


-


-


51


0.14


-


-


-


Safford

Crushed leach

50


0.31


-


-


-


25


0.31


-


-


-


Sierrita

Mill

2,220


0.23


-


a

0.03


1.39


214


0.19


-


a

0.02


1.10


Chino

Mill

87


0.61


0.04


0.01


0.51


48


0.56


0.04


-


a

0.49


ROM leach

73


0.28


-


-


-


18


0.29


-


-


-


Tyrone

ROM leach

6


0.51


-


-


-


-


a

1.23


-


-


-


Henderson

Mill

63


-


-


0.18


-


14


-


-


0.14


-


Climax

Mill

146


-


-


0.16


-


24


-


-


0.09


-


Cobre b

Mill

13


0.57


-


-


-


-


a

0.49


-


-


-


ROM leach

72


0.30


-


-


-


1


0.22


-


-


-


6,379


1,213


South America

Cerro Verde

Mill

854


0.38


-


0.01


1.92


2,698


0.37


-


0.01


1.88


Crushed leach

32


0.50


-


-


-


40


0.34


-


-


-


ROM leach

11


0.21


-


-


-


38


0.20


-


-


-


El Abra

Crushed leach

333


0.46


-


-


-


86


0.43


-


-


-


ROM leach

9


0.19


-


-


-


3


0.21


-


-


-


1,239


2,865


Indonesia

DMLZ

Mill

73


1.00


0.83


-


4.75


366


0.88


0.74


-


4.27


Grasberg open pit

Mill

20


1.81


3.65


-


5.14


36


0.95


1.25


-


2.76


DOZ

Mill

30


0.54


0.71


-


2.25


70


0.50


0.69


-


2.04


Big Gossan

Mill

18


2.33


1.00


-


14.62


42


2.13


0.96


-


12.69


Grasberg Block Cave b

Mill

374


1.14


0.89


-


4.12


590


0.96


0.70


-


3.26


Kucing Liar b

Mill

152


1.34


1.16


-


7.09


256


1.22


1.06


-


5.94


667


1,360


Total FCX - 100% Basis

8,285


5,438


a.

Grade not shown because of rounding.

b.

Would require additional capital investment, which could be significant, to bring into production.


The reserve table above and the tables on the following pages utilize the abbreviations described below:

g/t – grams per metric ton

Moly – Molybdenum

ROM – Run of Mine


29

Table of Contents


Recoverable Proven and Probable Mineral Reserves

Estimated at December 31, 2016

(continued)

Proven and

Probable

Average Ore Grade

Recoveries a

Processing

Million

Copper

Gold

Moly

Silver

Copper

Gold

Moly

Silver

Method

metric tons

%

g/t

%

g/t

%

%

%

%

North America

Morenci

Mill

684


0.42


-


0.02


-


81.4


-


49.3


-


Crushed leach

356


0.51


-


-


-


78.5


-


-


-


ROM leach

2,234


0.18


-


-


-


43.0


-


-


-


Bagdad

Mill

1,105


0.34


-


b

0.02


1.45


86.3


59.1


70.8


49.3


ROM leach

139


0.16


-


-


-


27.3


-


-


-


Safford

Crushed leach

75


0.31


-


-


-


70.4


-


-


-


Sierrita

Mill

2,434


0.23


-


b

0.02


1.36


83.1


59.3


79.5


49.3


Chino

Mill

135


0.59


0.04


0.01


0.50


82.1


86.6


40.7


87.3


ROM leach

91


0.28


-


-


-


29.2


-


-


-


Tyrone

ROM leach

6


0.51


-


-


-


67.8


-


-


-


Henderson

Mill

77


-


-


0.17


-


-


-


86.3


-


Climax

Mill

170


-


-


0.15


-


-


-


89.6


-


Cobre c

Mill

13


0.57


-


-


-


81.7


-


-


-


ROM leach

73


0.30


-


-


-


47.7


-


-


-


7,592


South America

Cerro Verde

Mill

3,552


0.37


-


0.01


1.89


86.3


-


54.3


44.8


Crushed leach

72


0.41


-


-


-


79.9


-


-


-


ROM leach

49


0.20


-


-


-


52.5


-


-


-


El Abra

Crushed leach

419


0.46


-


-


-


59.0


-


-


-


ROM leach

12


0.20


-


-


-


42.6


-


-


-


4,104


Indonesia

DMLZ

Mill

439


0.90


0.75


-


4.35


86.9


79.3


-


64.3


Grasberg open pit

Mill

56


1.26


2.11


-


3.62


89.0


86.5


-


45.2


DOZ

Mill

100


0.51


0.70


-


2.10


90.2


81.9


-


67.1


Big Gossan

Mill

60


2.19


0.97


-


13.29


91.5


67.2


-


63.7


Grasberg Block Cave c

Mill

964


1.03


0.78


-


3.60


84.4


65.3


-


56.9


Kucing Liar c

Mill

408


1.26


1.10


-


6.37


85.3


46.5


-


39.5


2,027


Total FCX - 100% Basis

13,723


a.

Recoveries are net of estimated mill and smelter losses.

b.

Grade not shown because of rounding.

c.

Would require additional capital investment, which could be significant, to bring into production.


30

Table of Contents


Recoverable Proven and Probable Mineral Reserves

Estimated at December 31, 2016

(continued)

Recoverable Reserves

Copper

Gold

Moly

Silver

FCX's

Processing

billion

million

billion

million

Interest

Method

lbs.

ozs.

lbs.

ozs.

North America

Morenci

72%

Mill

5.2


-


0.15


-


Crushed leach

3.1


-


-


-


ROM leach

3.8


-


-


-


Bagdad

100%

Mill

7.2


0.1


0.36


25.4


ROM leach

0.2


-


-


-


Safford

100%

Crushed leach

0.3


-


-


-


Sierrita

100%

Mill

10.2


0.1


1.04


52.5


Chino

100%

Mill

1.4


0.1


0.01


1.9


ROM leach

0.2


-


-


-


Tyrone

100%

ROM leach

0.1


-


-


-


Henderson

100%

Mill

-


-


0.25


-


Climax

100%

Mill

-


-


0.52


-


Cobre

100%

Mill

0.1


-


-


-


ROM leach

0.3


-


-


-


32.1


0.3


2.33


79.8


Recoverable metal in stockpiles a

1.9


-


0.02


-


100% operations

34.0


0.3


2.35


79.8


Consolidated b

30.4


0.3


2.31


79.8


Net equity interest c

30.4


0.3


2.31


79.8


South America

Cerro Verde

53.56%

Mill

25.0


-


0.62


96.7


Crushed leach

0.5


-


-


-


ROM leach

0.2


-


-


-


El Abra

51%

Crushed leach

2.5


-


-


-


ROM leach

-


d

-


-


-


28.2


-


0.62


96.7


Recoverable metal in stockpiles a

1.3


-


0.02


2.9


100% operations

29.5


-


0.64


99.6


Consolidated b

29.5


-


0.64


99.6


Net equity interest c

15.7


-


0.34


53.4


Indonesia

DMLZ

e

Mill

7.6


8.4


-


39.5


Grasberg open pit

e

Mill

1.4


3.3


-


2.9


DOZ

e

Mill

1.0


1.8


-


4.5


Big Gossan

e

Mill

2.6


1.3


-


16.3


Grasberg Block Cave

e

Mill

18.5


15.7


-


63.5


Kucing Liar

e

Mill

9.7


6.7


-


33.0


40.8


37.2


-


159.7


Recoverable metal in stockpiles a

0.3


0.1


-


0.6


100% operations

41.1


37.3


-


160.3


Consolidated b

26.9


25.8


-


102.4


Net equity interest c

24.4


23.4


-


92.8


Total FCX –  100% basis

104.6


37.6


2.99


339.7


Total FCX –  Consolidated basis b

86.8


26.1


2.95


281.8


Total FCX –  Net equity interest c

70.5


23.7


2.65


226.0


a.

Refer to "Mill and Leach Stockpiles" for additional information.

b.

Consolidated reserves represent estimated metal quantities after reduction for joint venture partner interests at the Morenci mine in North America and the Grasberg minerals district in Indonesia. Refer to Note 3 for further discussion of our joint ventures.

c.

Net equity interest represents estimated consolidated metal quantities further reduced for noncontrolling interest ownership. Refer to Note 3 for further discussion of our ownership in subsidiaries.

d.

Amount not shown because of rounding.

e.

Our joint venture agreement with Rio Tinto provides that PT-FI will receive cash flow from specified annual amounts of copper, gold and silver through 2022, calculated by reference to its proven and probable reserves as of December 31,1994, and 60 percent of all remaining cash flow.


31

Table of Contents


In defining our open-pit reserves, we apply a "variable cutoff grade" strategy. The objective of this strategy is to maximize the net present value of our operations. We use a "break-even cutoff grade" to define the in-situ reserves for our underground ore bodies. The break-even cutoff grade is defined for a metric ton of ore as that equivalent copper grade, once produced and sold, that generates sufficient revenue to cover all operating and administrative costs associated with our production.


Our copper mines may contain other commercially recoverable metals, such as gold, molybdenum and silver. We value all commercially recoverable metals in terms of a copper equivalent percentage to determine a single cutoff grade. Copper equivalent percentage is used to express the relative value of multi-metal ores in terms of one metal. The calculation expresses the relative value of the ore using estimates of contained metal quantities, metals prices as used for reserve determination, recovery rates, treatment charges and royalties. Our molybdenum properties use a molybdenum cutoff grade.


The table below shows the minimum cutoff grade by process for each of our existing ore bodies as of December 31, 2016 :        

Copper Equivalent Cutoff Grade (Percent)

Molybdenum

Cutoff Grade

(Percent)

Mill

Crushed or

Agitation Leach

ROM

Leach

Mill

North America

Morenci

0.27

0.17

0.03

-

Bagdad

0.20

-

0.06

-

Safford

-

0.12

-

-

Sierrita

0.17

-

-

-

Chino

0.23

-

0.08

-

Tyrone

-

-

0.11

-

Henderson

-

-

-

0.12

Climax

-

-

-

0.05

Cobre

0.28

-

0.10

-

South America

Cerro Verde

0.17

0.14

0.14

-

El Abra

-

0.10

0.08

-

Indonesia

DMLZ

0.85

-

-

-

Grasberg open pit

0.25

-

-

-

DOZ

0.92

-

-

-

Big Gossan

1.52

-

-

-

Grasberg Block Cave

0.78

-

-

-

Kucing Liar

1.01

-

-

-


32

Table of Contents


Drill hole spacing data is used by mining professionals, such as geologists and geological engineers, in determining the suitability of data coverage (on a relative basis) in a given deposit type and mining method scenario so as to achieve a given level of confidence in the resource estimate. Drill hole spacing is only one of several criteria necessary to establish resource classification. Drilling programs are typically designed to achieve an optimum sample spacing to support the level of confidence in results that apply to a particular stage of development of a mineral deposit.


The following table sets forth the average drill hole spacing based on average sample distance or drill pattern spacing for proven and probable ore reserves by process type:

Average Drill Hole Spacing (in Meters)

Proven

Probable

Mining Unit

Mill

Leach

Mill

Leach

North America

Morenci

Open Pit

86

86

122

122

Bagdad

Open Pit

86

86

122

122

Safford

Open Pit

-

86

-

122

Sierrita

Open Pit

73

-

104

-

Miami

Open Pit

-

61

-

91

Chino

Open Pit

43

86

86

122

Tyrone

Open Pit

-

86

-

86

Henderson

Block Cave

47

-

96

-

Climax

Open Pit

61

-

91

-

Cobre

Open Pit

61

61

91

91

South America

Cerro Verde

Open Pit

55

55

100

100

El Abra

Open Pit

-

75

-

120

Indonesia

DMLZ

Block Cave

21

-

65

-

Grasberg open pit

Open Pit

34

-

68

-

DOZ

Block Cave

23

-

58

-

Big Gossan

Open Stope

12

-

35

-

Grasberg Block Cave

Block Cave

34

-

79

-

Kucing Liar

Block Cave

33

-

88

-



33

Table of Contents


Production Sequencing

The following chart illustrates our current plans for sequencing and producing our proven and probable reserves at each of our ore bodies and the years in which we currently expect production from each ore body and from related stockpiles. The chart also shows the term of PT-FI's COW. Production volumes are typically lower in the first few years for each ore body as development activities are ongoing and as the mine ramps up to full production and production volumes may also be lower as the mine reaches the end of its life. The sequencing dates shown in the chart below include development activity that results in metal production. The ultimate timing of the start of production from our undeveloped mines is dependent upon a number of factors, including the results of our exploration and development efforts, and may vary from the dates shown below. In addition, we develop our mine plans based on maximizing the net present value from the ore bodies. Significant additional capital expenditures will be required at many of these mines in order to achieve the life-of-mine plans reflected below.

Mill and Leach Stockpiles

Mill and leach stockpiles generally contain lower grade ores that have been extracted from an ore body and are available for copper recovery. Mill stockpiles contain sulfide ores and recovery of metal is through milling, concentrating, smelting and refining or, alternatively, by concentrate leaching. Leach stockpiles contain oxide ores and certain secondary sulfide ores and recovery of metal is through exposure to acidic solutions that dissolve contained copper and deliver it in solution to extraction processing facilities.


Because it is generally impracticable to determine copper contained in mill and leach stockpiles by physical count, reasonable estimation methods are employed. The quantity of material delivered to mill and leach stockpiles is based on surveyed volumes of mined material and daily production records. Sampling and assaying of blasthole cuttings determine the estimated copper grades of material delivered to mill and leach stockpiles.


Expected copper recovery rates for mill stockpiles are determined by metallurgical testing. The recoverable copper in mill stockpiles, once entered into the production process, can be produced into copper concentrate almost immediately.


Expected copper recovery rates for leach stockpiles are determined using small-scale laboratory tests, small- to large-scale column testing (which simulates the production process), historical trends and other factors, including mineralogy of the ore and rock type. Total copper recovery in leach stockpiles can vary significantly from a low


34

Table of Contents


percentage to more than 90 percent depending on several variables, including processing methodology, processing variables, mineralogy and particle size of the rock. For newly placed material on active stockpiles, as much as 80 percent of total copper recovery may be extracted during the first year, and the remaining copper may be recovered over many years. Processes and recovery rates are monitored regularly, and recovery rate estimates are adjusted periodically as additional information becomes available and as related technology changes.


Following are our stockpiles and the estimated recoverable copper contained within those stockpiles as of December 31, 2016 :

Recoverable

Million

Average

Recovery

Copper

Metric Tons

Ore Grade (%)

Rate (%)

(billion pounds)

Mill stockpiles

Cerro Verde

151


0.32


73.1


0.8


Grasberg minerals district

33


0.53


65.8


0.3


184


1.1


Leach stockpiles

Morenci

6,204


0.24


2.2


0.7


Bagdad

499


0.24


0.9


-


a

Safford

237


0.47


10.9


0.3


Sierrita

650


0.15


10.7


0.2


Miami

498


0.39


2.3


0.1


Chino

1,722


0.25


4.9


0.5


Tyrone

1,130


0.28


1.9


0.1


Cerro Verde

436


0.50


4.8


0.2


El Abra

670


0.44


4.9


0.3


12,046


2.4


Total FCX - 100% basis

3.5


Total FCX - Consolidated basis b

3.2


Total FCX - Net equity interest c

2.6


a.

Amounts not shown because of rounding.

b.

Consolidated stockpiles represent estimated metal quantities after reduction for joint venture partner interests at the Morenci mine in North America and the Grasberg minerals district in Indonesia. Refer to Note 3 for further discussion of our joint ventures.

c.

Net equity interest represents estimated consolidated metal quantities further reduced for noncontrolling interest ownership. Refer to Note 3 for further discussion of our ownership in subsidiaries.


Mineralized Material

We hold various properties containing mineralized material that we believe could be brought into production should market conditions warrant. However, permitting and significant capital expenditures would be required before operations could commence at these properties. Mineralized material is a mineralized body that has been delineated by appropriately spaced drilling and/or underground sampling to support the reported tonnage and average metal grades. Such a deposit cannot qualify as recoverable proven and probable reserves until legal and economic feasibility are confirmed based upon a comprehensive evaluation of development costs, unit costs, grades, recoveries and other material factors. Estimated mineralized materials as presented on the following page were assessed using prices of $2.20 per pound for copper, $1,000 per ounce for gold, $12 per pound for molybdenum and $20 per ounce for silver.


35

Table of Contents


Mineralized Material

Estimated at December 31, 2016

Milling Material

Leaching Material

Total Mineralized Material

Million

Million

Million

FCX's

metric

Copper

Gold

Moly

SIlver

metric

Copper

metric

Interest

tons

%

g/t

%

g/t

tons

%

tons

North America

Morenci

72%

551


0.30


-


0.02


-


905


0.22


1,456


Bagdad

100%

839


0.27


-


a

0.02


1.2


4


0.19


843


Safford

100%

226


0.63


0.12


-


2.4


116


0.26


342


Sierrita

100%

1,768


0.18


-


a

0.02


1.1


-


-


1,768


Chino

100%

146


0.48


0.03


0.01


0.4


11


0.26


157


Tyrone

100%

-


-


-


-


-


18


0.38


18


Henderson

100%

77


-


-


0.14


-


-


-


77


Climax

100%

414


-


-


0.15


-


-


-


414


Cobre

100%

30


0.46


0.07


-


1.1


4


0.29


34


Ajo

100%

438


0.40


0.06


0.01


0.9


-


-


438


Cochise/Bisbee

100%

-


-


-


-


-


255


0.46


255


Lone Star

100%

-


-


-


-


-


642


0.47


642


Sanchez

100%

-


-


-


-


-


153


0.29


153


Tohono

100%

230


0.71


-


-


-


271


0.67


501


Twin Buttes

100%

76


0.61


-


0.04


6.3


42


0.23


118


Christmas

100%

203


0.40


0.05


-


a

1.0


-


-


203


South America

Cerro Verde

53.56%

972


0.36


-


0.02


1.8


8


0.34


980


El Abra

51%

1,999


0.45


0.02


0.01


1.4


188


0.28


2,187


Indonesia

Grasberg minerals district

54.38% b

2,004


0.72


0.64


-


3.7


-


-


2,004


Total FCX - 100% basis

9,973


2,617


12,590


c

Total FCX - Consolidated basis d

9,017


2,363


11,380


Total FCX - Net equity interest e

7,474


2,267


9,741


a.

Amounts not shown because of rounding.

b.

FCX's interest in the Grasberg minerals district reflects our 60 percent joint venture ownership further reduced by noncontrolling interest ownership.

c.

Excludes mineralized material of 89 million metric tons associated with Kisanfu, which in accordance with accounting guidelines is included in assets held for sale.

d.

Consolidated basis represents estimated mineralized materials after reduction for joint venture partner interests in the Morenci mine in North America and the Grasberg minerals district in Indonesia. Refer to Note 3 for further discussion of our joint ventures.

e.

Net equity interest represents estimated consolidated mineralized material further reduced for noncontrolling interest ownership. Refer to Note 3 for further discussion of our ownership in subsidiaries.


36

Table of Contents


OIL AND GAS OPERATIONS


As further discussed in Note 2, during 2016, we completed the sales of our Deepwater GOM, onshore California and Haynesville oil and gas properties, which represented 90 percent of our total proved reserves as of December 31, 2015, and 83 percent of our total oil and natural gas production for the year ended December 31, 2016. In January 2017, we entered into an agreement to sell our property interests in the Madden area in central Wyoming. Following the completion of the Madden transaction, our portfolio of oil and gas assets would include oil and natural gas production onshore in South Louisiana and on the GOM Shelf and oil production offshore California, which had total oil and gas sales volumes of 6.4 MMBOE in 2016.


Acreage

At December 31, 2016 , we owned interests in oil and gas leases covering 411 thousand gross acres ( 218 thousand acres net to our interest), consisting of 325 thousand gross ( 160 thousand net) of developed acres and 86 thousand gross ( 58 thousand net) of undeveloped acres. Developed acres are acres spaced or assigned to productive wells and do not include undrilled acreage held by production under the terms of the lease. Undeveloped acres are acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or gas, regardless of whether such acreage contains proved reserves.


Exploration and Development Activities

Capital expenditures for our oil and gas operations totaled $1.2 billion in 2016 (including $0.6 billion incurred for GOM and $0.5 billion for changes in capital expenditure accruals), $3.0 billion in 2015 (including $ 2.6 billion incurred for GOM) and $3.2 billion in 2014 (including $2.6 billion incurred for GOM). During second-quarter 2016, we terminated contracts for deepwater drillships and settled aggregate commitments totaling $1.1 billion for $755 million, of which $540 million was funded with shares of our common stock. We currently have no plans to incur oil and gas exploration expenditures in future periods.


Production and Sales Data

The following table presents summary oil and gas production and sales data for the years ended December 31:

2016

2015

2014

GOM a

Oil (MMBbls)

22.9


22.2


19.7


Natural gas (Bcf)

39.0


b

35.9


b

28.7


NGLs (MMBbls)

1.7


2.2


2.0


MMBOE

31.1


30.3


26.5


California c

Oil (MMBbls)

11.4


12.9


13.7


Natural gas (Bcf)

1.8


b

2.2


b

2.4


b

NGLs (MMBbls)

0.1


0.2


0.2


MMBOE

11.8


13.5


14.3


Haynesville/Madden/Other d

Oil (MMBbls)

0.1


0.2


0.2


Natural gas (Bcf)

24.3


51.6


42.4


MMBOE

4.2


8.8


7.3


Eagle Ford e

Oil (MMBbls)

-


-


6.5


Natural gas (Bcf)

-


-


7.4


NGLs (MMBbls)

-


-


1.0


MMBOE

-


-


8.7


Total U.S. oil and gas operations

Oil (MMBbls)

34.4


35.3


40.1


Natural gas (Bcf)

65.1


89.7


80.9


NGLs (MMBbls)

1.8


2.4


3.2


MMBOE

47.1


52.6


56.8


Average cost per BOE:

Production costs f

$

14.51


$

17.14


$

18.00


Production and ad valorem taxes

0.68


1.45


2.08


Cash production costs g

$

15.19


$

18.59


$

20.08



37

Table of Contents


a.

Includes properties in the Deepwater GOM and on the Shelf. In December 2016, we completed the sale of the Deepwater GOM properties, which had sales volumes of 26.4 MMBOE in 2016.

b.

Natural gas sales from GOM are net of fuel used in operations totaling 3.8 Bcf in 2016 and 1.1 Bcf in 2015. Natural gas sales from California are net of fuel used in operations totaling 0.1 Bcf in 2016, 0.6 Bcf in 2015 and 1.2 Bcf in 2014.

c.

Includes properties onshore and offshore California. In December 2016, we completed the sale of the onshore California properties, which had sales volumes of 10.2 MMBOE in 2016.

d.

In July 2016, we completed the sale of the Haynesville shale assets, which had sales volumes of 2.7 MMBOE in 2016. In January 2017, we entered into an agreement to sell our property interests in the Madden area, which had sales volumes of 1.2 MMBOE in 2016.

e.

In June 2014, we completed the sale of Eagle Ford shale assets.

f.

Reflects costs incurred to operate and maintain wells and related equipment and facilities.

g.

Refer to MD&A for further discussion of cash production costs per BOE and for a reconciliation to production costs reported in our consolidated financial statements.


Oil and Gas Reserves

At December 31, 2016 , our estimated proved developed oil and gas reserves (all of which are located in the U.S.) totaled 18 MMBOE, comprised of 4 MMBbls of oil and NGLs and 87 Bcf of natural gas, and included 7 MMBOE associated with our property interests in the Madden area. We had no proved undeveloped reserves at December 31, 2016. Refer to Note 21 for further discussion of our proved oil and gas reserves.


Drilling Activities

The following table provides the total number of wells that we drilled during the years ended December 31:

2016

2015

2014

Gross

Net

Gross

Net

Gross

Net

Exploratory

Productive:

Oil

2


2


2


1


25


21


Gas

1


-


31


5


21


2


Dry

-


-


4


3


10


7


3


2


37


9


56


30


Development

Productive:

Oil

8


5


7


3


184


174


Gas

1


-


17


2


75


10


Dry

-


-


2


2


2


-


9


5


26


7


261


184


12


7


63


16


317


214



In addition to the wells drilled, there was one gross exploratory and one gross development well (zero net exploratory and zero net development wells) in progress at December 31, 2016 .


Productive Wells

We had working interests in 120 gross (94 net) active producing oil wells and 640 gross (100 net) active producing natural gas wells at December 31, 2016 (of which 293 gross (40 net) active producing natural gas wells were in the Madden area); 3,060 gross (2,976 net) active producing oil wells and 1,759 gross (213 net) active producing natural gas wells at December 31, 2015 ; and 3,069 gross (2,991 net) active producing oil wells and 1,710 gross (211 net) active producing natural gas wells at December 31, 2014 . One or more completions in the same well bore are considered one well. If any well in which one of the multiple completions is an oil completion, such well is classified as an oil well. At December 31, 2016 , we owned interests in two gross wells containing multiple completions.



38

Table of Contents


Item 1A. Risk Factors.


This report contains "forward-looking statements" within the meaning of United States (U.S.) federal securities laws. Forward-looking statements are all statements other than statements of historical facts, such as projections or expectations relating to ore grades and milling rates; production and sales volumes; unit net cash costs; operating cash flows; capital expenditures; exploration efforts and results; development and production activities and costs; liquidity; tax rates; the impact of copper, gold and molybdenum price changes; the impact of deferred intercompany profits on earnings; reserve estimates; future dividend payments; and share purchases and sales.


We undertake no obligation to update any forward-looking statements. We caution readers that forward-looking statements are not guarantees of future performance and our actual results may differ materially from those anticipated, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include the following:


Financial risks


Declines in the market prices of copper and molybdenum have adversely affected our earnings, cash flows and asset values and, if sustained, may adversely affect our ability to repay debt. Fluctuations in the market prices of copper, gold and molybdenum have caused and may continue to cause significant volatility in our financial performance and in the trading prices of our debt and common stock.


Our financial results will vary with fluctuations in the market prices of the commodities we produce, primarily copper and gold, and to a lesser extent molybdenum. As described below, beginning in 2015, copper prices declined significantly, before recovering in fourth-quarter 2016. If prices decline in the future, they may have a material adverse effect on our financial results, the value of our assets and/or our ability to repay our debt and meet our other fixed obligations; and may depress the trading prices of our common stock and of our publicly traded debt securities.


In response to market-conditions, beginning in the second half of 2015, we made adjustments to operating plans for our mining operations, including reducing operating and capital costs and adjusting production at our North America copper mines; reducing mining and stacking rates at our El Abra mine in Chile by approximately 50 percent to achieve lower operating and labor costs, defer capital expenditures and extend the life of the operation; and operating the Henderson molybdenum mine in Colorado at reduced rates. If market prices for our primary commodities decline or persist at low levels, we may have to further revise our operating plans, including curtailing production, reducing operating costs and capital expenditures and discontinuing certain exploration and development programs. We may be unable to decrease our costs in an amount sufficient to offset reductions in revenues, in which case we may incur additional losses, and those losses may be material.


Fluctuations in commodities prices are caused by varied and complex factors beyond our control, including global supply and demand balances and inventory levels; global economic and political conditions; international regulatory, trade and tax policies; commodities investment activity and speculation; the price and availability of substitute products; and changes in technology.


Copper prices may be affected by demand from China, which has become the largest consumer of refined copper in the world, and by changes in demand for industrial, commercial and residential products containing copper. Copper prices declined significantly during 2015 and remained low throughout most of 2016, with London Metal Exchange (LME) spot copper prices averaging $2.21 per pound in 2016, $2.49 per pound in 2015 and $3.11 per pound in 2014. During fourth-quarter 2016, copper prices improved, with the LME spot price averaging $2.39 per pound. The LME spot copper price was $2.50 per pound on December 31, 2016 , and $2.73 per pound on February 15, 2017 .


Factors affecting gold prices may include the relative strength of the U.S. dollar to other currencies, inflation and interest rate expectations, purchases and sales of gold by governments and central banks, demand from China and India, two of the world ' s largest consumers of gold, and global demand for jewelry containing gold. The London PM gold price averaged $1,250 per ounce in 2016, $1,160 per ounce in 2015 and $1,266 per ounce in 2014. The London PM gold price was $1,224 per ounce on February 15, 2017 .



39

Table of Contents


Molybdenum prices also declined significantly during 2015 and have remained low throughout 2016, with the Metals Week Molybdenum Dealer Oxide weekly average price averaging $6.47 per pound in 2016, $6.66 per pound in 2015 and $11.41 per pound in 2014. The Metals Week Molybdenum Dealer Oxide weekly average price was $7.59 per pound on February 15, 2017 .


Lower copper and molybdenum prices during 2016 and 2015 resulted in non-cash charges for inventory adjustments ( $36 million for the year 2016 and $338 million for the year 2015) and long-lived mining asset impairments ( $37 million for the year 2015). Refer to Notes 4 and 5 for additional information. Declines in copper and/or molybdenum prices could result in additional metals inventory adjustments and impairment charges for our long-lived assets. Other events that could result in impairment of our long-lived assets include, but are not limited to, decreases in estimated proven and probable mineral reserves and any event that might have a material adverse effect on mine production costs.


Our debt and other financial commitments may limit our financial and operating flexibility.


At December 31, 2016 , our total consolidated debt was $ 16.0 billion (see Note 8) and our total consolidated cash was $4.2 billion . We also have various other financial commitments, including reclamation and environmental obligations, take-or-pay contracts and leases. Our level of indebtedness and other financial commitments could have important consequences to our business, including the following:


Limiting our flexibility in planning for, or reacting to, changes in the industries in which we operate;


Increasing our vulnerability to general adverse economic and industry conditions;


Limiting our ability to fund future working capital, capital expenditures and/or material contingencies, to engage in future development activities, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flows from operations to payments on our debt;


Requiring us to sell assets to reduce debt; or


Placing us at a competitive disadvantage compared to our competitors that have less debt and/or fewer financial commitments.


Any failure to comply with the financial and other covenants in our debt agreements may result in an event of default that would allow the creditors to accelerate maturities of the related debt, which in turn may trigger cross-acceleration or cross-default provisions in other debt agreements. Our available cash and liquidity would not be sufficient to fully repay borrowings under our debt instruments that are accelerated upon an event of default.


From August 2015 through November 2016, we sold 326.5 million shares of our common stock under registered at-the-market equity programs, which generated $3.5 billion in gross proceeds (refer to Note 10). In addition, during 2016, we issued 48.1 million shares of our common stock in connection with the settlement of two drilling rig contracts (refer to Note 13) and 27.7 million shares of our common stock in exchange for $369 million of FCX senior notes (refer to Note 10). Any additional issuance of equity capital to fund operations, reduce debt, improve our financial position or for other purposes, may have a negative impact on our stock price.


As of February 15, 2017 , our senior unsecured debt was rated "BB-" with a stable outlook by Standard & Poor's (S&P), "BBB-" with a negative outlook by Fitch Ratings (Fitch), and "B1" with a positive outlook by Moody's Investors Service (Moody's). There is no assurance that our credit ratings will not be downgraded in the future. For more information, refer to the risk factor below relating to mine closure and reclamation regulations and plugging and abandonment obligations related to our remaining oil and gas operations.


40

Table of Contents



Mine closure and reclamation regulations impose substantial costs on our operations and include requirements that we provide financial assurance supporting those obligations. We also have plugging and abandonment obligations related to our remaining oil and gas properties, and are required to provide bonds or other forms of financial assurance in connection with those operations. Changes in or the failure to comply with these requirements could have a material adverse effect on us.


We are required by U.S. federal and state laws and regulations to provide financial assurance sufficient to allow a third party to implement approved closure and reclamation plans for our mining properties if we are unable to do so. The U.S. Environmental Protection Agency (EPA) and state agencies may also require financial assurance for investigation and remediation actions that are required under settlements of enforcement actions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) or similar state laws. Refer to Note 12 for additional information regarding our financial assurance obligations.


With respect to our mining operations, most of our financial assurance obligations are imposed by state laws that vary significantly by jurisdiction, depending on how each state regulates land use and groundwater quality. Although Section 108(b) of CERCLA has required EPA to identify classes of facilities that must establish evidence of financial responsibility since it was adopted in 1980, currently there are no financial assurance requirements for active mining operations under CERCLA. In August 2014, several environmental organizations initiated litigation against EPA to require it to set a schedule for adopting financial assurance regulations under CERCLA governing the hard rock mining industry. EPA and the environmental organizations reached a joint agreement and submitted it to the U.S. Court of Appeals for the District of Columbia Circuit for approval. Notwithstanding industry objections, the court approved the agreement on January 29, 2016, thereby requiring the EPA to propose financial assurance regulations for the hard rock mining industry by December 1, 2016, and to provide notice of its final action by December 1, 2017. The proposed regulations were published on January 11, 2017, subject to a 60-day comment period. The proposed rules, if promulgated without material modification, would result in onerous financial responsibility obligations for our U.S. hard rock mining operations, and the form, cost and availability of financial mechanisms necessary to meet such obligations is uncertain (if they could be met at all). In addition, complying with these obligations could be very costly, harm the international competitiveness of our U.S. hard rock mining operations and could have a material adverse effect on our cash flows, results of operations and financial condition.


We are also subject to financial assurance requirements in connection with our remaining oil and gas operations under both state and federal laws, including financial responsibility required under the Oil Pollution Act of 1990 to cover containment and cleanup costs resulting from an oil spill. In 2016, the U.S. Bureau of Ocean Energy Management issued revised requirements for lessees operating in federal waters to secure the cost of plugging, abandoning, decommissioning and/or removing wells, platforms and pipelines at the end of production. The revised requirements eliminate previously provided waivers from requirements to post security. The new requirements to post significant amounts of security in the form of bonds or similar assurances could have a material adverse effect on our cash flows, results of operations and financial condition. The cost for bonds or assurances can be substantial, and there is no assurance that they can be obtained in all cases.


As of December 31, 2016 , our financial assurance obligations totaled $1.1 billion for closure and reclamation/restoration costs of U.S. mining sites, and $0.7 billion for plugging and abandonment obligations of our remaining oil and gas operations (refer to Note 12). A substantial portion of our financial assurance obligations are satisfied by FCX guarantees and financial capability demonstrations. As a result of the downgrade of our credit ratings on our debt to below investment grade by S&P and Moody's, we may be required to provide additional or alternative forms of financial assurance, such as letters of credit, surety bonds or collateral. These other forms of assurance are costly to provide and, depending on our financial condition and market conditions, may be difficult or impossible to obtain. Failure to provide the required financial assurance could result in the closure of the affected properties.


Refer to Notes 1 and 12 , for further discussion of our environmental and asset retirement obligations.


Unanticipated litigation or negative developments in pending litigation or with respect to other contingencies could have a material adverse effect on our cash flows, results of operations and financial condition.


We are involved in numerous legal proceedings and subject to other contingencies that have arisen or may arise in the ordinary course of our business or are associated with environmental issues arising from legacy operations conducted over the years by Freeport Minerals Corporation (FMC) and its affiliates, including those described in


41

Table of Contents


Note 12 and in Item 3. "Legal Proceedings" involving matters such as remediation, restoration and reclamation of environmental contamination, claims of personal injury or property damage arising from such contamination or from exposure to substances such as lead, arsenic, asbestos, talc and other allegedly toxic substances, disputes over water rights, and disputes with foreign governments or regulatory authorities over royalties, taxes, rights and obligations under concession or other agreements, or other matters. We are also involved periodically in other reviews, inquiries, investigations and other proceedings initiated by or involving government agencies, some of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In addition, from time to time we are involved in disputes over the allocation of environmental remediation obligations at Superfund and other sites. The outcome of litigation is inherently uncertain and adverse developments or outcomes can result in significant monetary damages, penalties, other sanctions or injunctive relief against us, limitations on our property rights, or regulatory interpretations that increase our operating costs. Management does not believe, based on currently available information, that the outcome of any individual legal proceeding will have a material adverse effect on our financial condition, although individual or cumulative outcomes could be material to our operating results for a particular period, depending on the nature and magnitude of the outcome and the operating results for the period.


With respect to the asbestos exposure cases described in Note 12, there has been an increase in the number of cases against FMC and its affiliates alleging exposure to talc contaminated with asbestos and to talc that is not alleged to be contaminated with asbestos. Recently, there have been a limited number of large jury awards in single plaintiff cases primarily brought by consumers against makers of common consumer products containing talc and alleging serious health risks, including ovarian cancer associated with long-term use of such products. Prior affiliates were involved in talc mining, and some of those affiliates have been named as defendants in some of those cases. We have indemnification rights against a successor to those businesses, and the successor has acknowledged those indemnification obligations and has taken responsibility for all cases we have tendered to it. However, the indemnitor may have limited financial resources and limited amounts of insurance available to meet those obligations.


International risks


Our international operations are subject to political, social and geographic risks of doing business in countries outside the U.S.


We are a U.S.-based mining company with substantial assets located outside of the U.S. We conduct international mining operations in Indonesia, Peru and Chile. Accordingly, in addition to the usual risks associated with conducting business in countries outside the U.S., our business may be adversely affected by political, economic and social uncertainties in each of these countries. Risks of conducting business in countries outside of the U.S. include:


Renegotiation, cancellation or forced modification of existing contracts;


Expropriation or nationalization of property;


Changes in the host country's laws, regulations and policies, including those relating to labor, taxation, royalties, divestment, imports, exports, trade regulations, currency and environmental matters, which because of rising "resource nationalism" in countries around the world, may impose increasingly onerous requirements on foreign operations and investment;


Political instability, bribery, extortion, corruption, civil strife, acts of war, guerrilla activities, insurrection and terrorism;


Changes in the aspirations and expectations of local communities in which we operate with respect to our contributions to employee health and safety, infrastructure and community development and other factors that may affect our social license to operate, all of which lead to increased costs;


Changes in U.S. trade, tax, immigration or other policies that may harm relations with foreign countries or result in retaliatory policies;


Foreign exchange controls and movements in foreign currency exchange rates; and



42

Table of Contents


The risk of having to submit to the jurisdiction of an international court or arbitration panel or having to enforce the judgment of an international court or arbitration panel against a sovereign nation within its own territory.


Our insurance does not cover most losses caused by the above described risks. Accordingly, our exploration, development and production activities outside of the U.S. may be substantially affected by many unpredictable factors beyond our control, some of which could have a material adverse effect on our cash flows, results of operations and financial condition.


Our international operations must comply with the U.S. Foreign Corrupt Practices Act and similar anti-corruption and anti-bribery laws of the other jurisdictions in which we operate. There has been a substantial increase in the global enforcement of these laws in recent years, and a steadily increasing focus on enforcement of those laws continues. Any violation of those laws could result in significant criminal or civil fines and penalties, litigation, and loss of operating licenses or permits, and may damage our reputation, which could have a material adverse effect on our cash flows, results of operations and financial condition.


We are involved in several significant tax proceedings and other tax disputes with the Indonesian and Peruvian tax authorities (refer to Note 12 for further discussion of these matters). Other risks specific to certain countries in which we operate are discussed in more detail below.


Because our Grasberg mining operation in Indonesia is a significant operating asset, our business may continue to be adversely affected by political, economic and social uncertainties in Indonesia.


Our mining operations in Indonesia are conducted by our subsidiary PT Freeport Indonesia (PT-FI) pursuant to a Contract of Work (COW) with the Indonesian government. Maintaining a good working relationship with the Indonesian government is important to us because of the significance of our Indonesia operations to our business, and because our mining operations there are among Indonesia's most significant business enterprises. Partially because of their significance to Indonesia's economy, the environmentally sensitive area in which they are located, and the number of people employed, our Indonesia operations have been the subject of political debates and of criticism in the Indonesian press, and have been the target of protests and occasional violence. For further discussion of the history of PT-FI's COW, refer to Note 13 .


The initial term of PT-FI's COW expires in 2021, but the COW explicitly provides that it can be extended for two 10-year periods subject to Indonesian government approval, which cannot be withheld or delayed unreasonably. PT-FI has been engaged in discussions with officials of the Indonesian government since 2012 regarding various provisions of its COW, including extending its term. Notwithstanding provisions in the COW prohibiting it from doing so, the Indonesian government has sought to modify existing mining contracts, including PT-FI's COW, to address provisions contained in the mining law enacted in 2009; and mining regulations adopted thereunder, including provisions that conflict with the COW, such as the size of contract concessions, government revenues, domestic processing of minerals, divestment, provision of local goods and services, conversion from a COW to a licensing framework for extension periods, and a requirement that extensions may be applied for only within two years prior to a COW's expiration.

Regulations published in January 2014 imposed, among other things, a progressive export duty on copper concentrate and restricted exports of copper concentrate and anode slimes (a by-product of the copper refining process containing metals, including gold) after January 12, 2017. Despite PT-FI's rights under its COW to export concentrate without the payment of duties, PT-FI was unable to obtain administrative approval for exports and operated at approximately half of its capacity from mid-January 2014 through July 2014.


In July 2014, PT-FI entered into a Memorandum of Understanding (MOU) with the Indonesian government, in which, subject to concluding an agreement to extend PT-FI's operations beyond 2021 on acceptable terms, PT-FI agreed to construct new smelter capacity in Indonesia and to divest an additional 20.64 percent interest at fair value. Under the MOU, PT-FI provided a $115 million assurance bond to support its commitment for smelter development, agreed to pay higher royalty rates and agreed to pay export duties until certain smelter development milestones were met. The MOU also anticipated an amendment of the COW within six months to address other matters; however, no terms of the COW other than those relating to the smelter bond, increased royalties and export duties were changed. In January 2015, the MOU was extended to July 25, 2015, and it expired on that date. The Indonesian government has continued to impose the increased royalty rates, export duties and smelter assurance bond.


43

Table of Contents



In October 2015, the Indonesian government provided a letter of assurance to PT-FI indicating that it would revise regulations allowing it to approve the extension of PT-FI's operations beyond 2021, and provide the same rights and the same level of legal and fiscal certainty provided under the current COW.


In January and February 2017, the Indonesian government issued new regulations to address exports of unrefined metals, including copper concentrate and anode slimes, and other matters related to the mining sector. The new regulations permit the continuation of copper concentrate exports for a five-year period through January 2022, subject to various conditions, including conversion from a contract of work to a special operating license (known as an IUPK, which provides virtually none of the protections of a contract of work), commitment to completion of smelter construction in five years and payment of export duties to be determined by the Ministry of Finance. In addition, the new regulations enable application for extension of operating rights five years before expiration of the IUPK and require foreign IUPK holders to divest 51 percent to Indonesian interests no later than the tenth year of production. Export licenses would be valid for one-year periods, subject to review every six months, depending on smelter construction progress.


The January 2017 regulations permit the export of anode slimes, which is necessary for PT Smelting (PTFI's 25-percent-owned copper smelter and refinery located in Gresik, Indonesia) to continue operating. PT Smelting is seeking to renew its anode slimes export license; however, we cannot predict when PT Smelting's anode slimes export license may be renewed. In addition, a labor strike at PT Smelting has resulted in a shutdown of its operations since January 19, 2017. Although PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity, on February 10, 2017, PT-FI was forced to suspend production as a result of limited storage capacity at PT-FI and PT Smelting. PT Smelting has indicated that it expects to resume operations in March 2017. Delays in PT Smelting obtaining its anode slimes export license or restarting operations could further impact PT-FI's operations.


Following the issuance of the January and February 2017 regulations and discussions with the government, PT-FI advised the Indonesian government that it was prepared to convert its COW to an IUPK, subject to obtaining an investment stability agreement providing equivalent rights with the same level of legal and fiscal certainty enumerated under its COW, and provided that the COW would remain in effect until it is replaced by a mutually satisfactory alternative. PT-FI also committed to commence construction of a new smelter during a five-year timeframe after approval of the extension of its long-term operating rights.


Under its COW, PT-FI has specified rights to export copper concentrate without restriction or payment of export duties. PT-FI has requested that concentrate exports be permitted without the imposition of export duties while the new license and stability agreement are negotiated. The Indonesia government has indicated that in order to export its concentrate production, PT-FI would be required to immediately convert to an IUPK, forgo its current rights to fiscal and legal certainty and commit to a new smelter prior to completing a long-term investment stability agreement. PT-FI has advised the Indonesian government that attempts to enforce the new regulations on PT-FI violates its COW and that it is unwilling to terminate its COW unless replaced by a mutually acceptable form of agreement providing fiscal and legal assurances to support its long-term investment plans in Papua, Indonesia.


As of February 24, 2017 , PT-FI has not obtained approval to export concentrate and production remains suspended. PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity (assuming that PT Smelting's export license is approved and its operations are resumed in March 2017). PT-FI has begun to significantly adjust its cost structure, reduce its workforce and spending with local suppliers, and suspend investments in its underground development projects and new smelter.

On February 17, 2017, pursuant to the COW's dispute resolution provisions, PT-FI provided formal notice to the Indonesian government of an impending dispute listing the government's breaches and violations of the COW as described in the risk factor below "PT-FI's COW may be subject to termination if we do not comply with our contractual obligations, and if a dispute arises, we may have to submit to the jurisdiction of an international arbitration panel."


We cannot predict whether or when PT-FI will be able to resume exporting copper concentrate. For each month of delay in obtaining approval to export, PT-FI's share of production is projected to be reduced by approximately 70 million pounds of copper and 70 thousand ounces of gold. The inability of either PT-FI to export copper concentrate, or PT Smelting to export anode slimes or restart operations, for any extended period of time would lead to the


44

Table of Contents


continued suspension of production in Indonesia, which would have a material adverse effect on our cash flow, results of operations and financial position, and could result in asset impairments, inventory write downs, difficulty in meeting covenants under our credit facilities, and a significant reduction in our reported mineral reserves.


We also cannot predict whether PT-FI will be successful in reaching a satisfactory agreement on the terms of its long-term mining rights. If PT-FI is unable to reach agreement with the Indonesian government on its long-term rights, we may be required to reduce or defer investments in underground development projects, which would have a material adverse effect on our future production, cash flow, results of operations and financial position, and could result in asset impairments, inventory write downs, difficulty in meeting covenants under our credit facilities, and a significant reduction in our reported mineral reserves.

In October 2016, a new Minister of Energy and Mineral Resources was appointed, and is the fourth person to hold the office since July 2016. We cannot predict what impact the transition will have on the progress or outcome of PT-FI's license and stability agreement negotiations.

PT-FI's COW may be subject to termination if we do not comply with our contractual obligations, and if a dispute arises, we may have to submit to the jurisdiction of an international arbitration panel.


PT-FI's COW was entered into under Indonesia's 1967 Foreign Capital Investment Law, which provides guarantees of remittance rights and protection against nationalization. The COW may be subject to termination by the Indonesian government if we do not satisfy our contractual obligations, which include the payment of royalties and taxes to the government and the satisfaction of certain mining, environmental, safety and health requirements.


Recently adopted Indonesian laws and regulations conflict with the mining rights established under the COW. Although the COW grants to PT-FI the unencumbered right to operate in accordance with the COW, government agencies have sought and continue to seek to impose additional restrictions on PT-FI that could affect exploration and operating requirements. For further discussion, refer to the above risk factor "Because our Grasberg mining operation in Indonesia is a significant operating asset, our business may continue to be adversely affected by political, economic and social uncertainties in Indonesia."


PT-FI's COW requires that disputes with the Indonesian government be submitted to international arbitration. On February 17, 2017, pursuant to the COW's formal dispute resolution provisions, PT-FI provided formal notice to the Indonesian government of an impending dispute listing the government's breaches and violations of the COW, including, but not limited to, the following:


Restrictions on PT-FI's basic right to export mining products in violation of the COW;


Imposition of export duties other than those taxes and other charges expressly provided for in the COW;


Imposition of surface water taxes in excess of the restrictions imposed by the COW (refer to Note 12 for further discussion of these assessments);


Requirement for PT-FI to build a smelter, while such requirements are not contained in the COW;


Unreasonable withholding and delay in granting approval of two successive ten-year extensions of the term of the COW; and


Imposition of divestment requirements that are not provided for in the COW.


If the dispute is not resolved by June 17, 2017, PT-FI may commence arbitration under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules to enforce all provisions of the COW and seek damages, specifically in respect of the issuance of the January 11, 2017, regulations which are not in accordance with honoring the contractual commitments of the Indonesian government and PT-FI under the COW. The arbitration proceedings would take place in Jakarta, Indonesia, and for limited purposes, would be overseen by the Indonesian courts under the Indonesian Arbitration Act. The international arbitration process is complex and could take considerable time to complete and there is no assurance that we will prevail. If we prevail, we will face the additional risk of having to enforce the judgment of an international arbitration panel against Indonesia within its own territory. Additionally, our operations may be materially and adversely affected while resolution of a dispute is pending.


45

Table of Contents



At times, certain government officials and others in Indonesia have questioned the validity of contracts entered into by the Indonesian government prior to May 1998 ( i.e., during the Suharto regime, which lasted over 30 years), including PT-FI's COW, which was signed in December 1991. We cannot provide assurance that the validity of, or our compliance with, the COW will not be challenged for political or other reasons.


We will not mine all of our ore reserves in Indonesia before the initial term of our COW expires.


Our proven and probable ore reserves in Indonesia reflect estimates of minerals that can be recovered through the end of 2041, and our current mine plan and planned operations are based on the assumption that we will receive the two 10-year extensions. As a result, we will not mine all of these ore reserves during the initial term of the current COW. Prior to the end of 2021, we expect to mine 17 percent of aggregate proven and probable recoverable ore at December 31, 2016 , representing 22 percent of PT-FI's share of recoverable copper reserves and 33 percent of its share of recoverable gold reserves. There can be no assurance that the Indonesian government will approve our COW extensions. For further discussion, refer to the above risk factors "Because our Grasberg mining operation in Indonesia is a significant operating asset, our business may continue to be adversely affected by political, economic and social uncertainties in Indonesia" and "PT-FI's COW may be subject to termination if we do not comply with our contractual obligations, and if a dispute arises, we may have to submit to the jurisdiction of an international arbitration panel."


Operational risks


Our mining operations are subject to operational risks that could adversely affect our business.


Our mines are very large in scale and, by their nature are subject to significant operational risks, some of which are outside of our control, and many of which are not covered fully, or in some cases even partially, by insurance. These operational risks, which could materially and adversely affect our business, operating results and cash flow, include earthquakes, rainstorms, floods, and other natural disasters; equipment failures; accidents; wall failures and rock slides in our open-pit mines, and structural collapses of our underground mines or tailings impoundments; and lower than expected ore grades or recovery rates.


The waste rock (including overburden) and tailings produced in our mining operations represent our largest volume of waste. Managing the volume of waste rock and tailings presents significant environmental, safety and engineering challenges and risks. We maintain large leach pads and tailings impoundments containing viscous material, which are effectively large dams that must be engineered, constructed and monitored to assure structural stability and avoid leakages or structural collapse. Our tailings impoundments in arid areas must have effective programs to suppress fugitive dust emissions, and we must effectively monitor and treat acid rock drainage at all of our operations. In Indonesia, we use a river transport system for tailings management, which presents other risks, as discussed below.


The failure of tailings and other impoundments at any of our mining operations could cause severe property and environmental damage and loss of life, and we apply significant financial resources and both internal and external technical resources to the effective, safe management of all those facilities. The importance of careful design, management and monitoring of large impoundments was emphasized in recent years by large scale tailings dam failures at unaffiliated mines, which caused extensive property and environmental damage and resulted in the loss of life. As a member company of the International Council on Mining and Metals (ICMM), we intend to augment our existing practices to be consistent with the ICMM's Tailings Governance Framework adopted in December 2016 in an effort to reduce the risk of catastrophic failure of tailings storage facilities.


Labor unrest, activism and civil and religious strife could disrupt our operations and may adversely affect our business, financial condition, results of operations and prospects.


As of December 31, 2016 , approximately half of our global labor force was covered by collective bargaining agreements and approximately one third of our global labor force was covered by agreements that have expired and are currently being negotiated or will expire during 2017, including the agreement covering employees at our PT-FI operations in Indonesia.


Labor agreements are negotiated on a periodic basis, and may not be renewed on reasonably satisfactory terms to us or at all. If we do not successfully negotiate new collective bargaining agreements with our union workers, we


46

Table of Contents


may incur prolonged strikes and other work stoppages at our mining operations, which could adversely affect our financial condition and results of operations. Additionally, if we enter into a new labor agreement with any union that significantly increases our labor costs relative to our competitors, our ability to compete may be materially and adversely affected. Refer to Items 1. and 2., "Business and Properties," for additional information regarding labor matters, and expiration dates of such agreements.


We could also experience labor disruptions such as work stoppages, work slowdowns, union organizing campaigns, strikes, or lockouts that could adversely affect our operations. For example, in October 2014, a large percentage of Grasberg open-pit operators did not report to their scheduled shifts and during third-quarter 2016, PT-FI experienced labor productivity issues and a 10-day work stoppage that began in late September 2016. These labor productivity issues have continued during fourth-quarter 2016 and early 2017, and could be heightened by the workforce reductions that began in February 2017. Significant reductions in productivity or protracted work stoppages at one or more of our operations could significantly reduce our production and sales volumes, which could adversely affect our cash flow, results of operations and financial condition.


Indonesia has long faced separatist movements and civil and religious strife in a number of provinces. Several separatist groups have sought increased political independence for the province of Papua, where our Grasberg minerals district is located. In Papua, there have been sporadic attacks on civilians by separatists and sporadic but highly publicized conflicts between separatists and the Indonesian military. In addition, illegal miners have periodically clashed with police who have attempted for years to move them away from our facilities. Social, economic and political instability in Papua could materially and adversely affect us if it results in damage to our property or interruption of our Indonesia operations.


In 2009, a series of shooting incidents occurred within the PT-FI project area, including along the road leading to our mining and milling operations. The shooting incidents have continued on a sporadic basis with the last incident occurring on January 1, 2015. During this time, there were 20 fatalities and 59 injuries to our employees, contractor employees, government security personnel and civilians. To date, no one person or group has claimed responsibility for the shootings. The safety of our workforce is a critical concern, and PT-FI continues to work with the Indonesian government to address security issues. The investigation of these incidents is ongoing. We also continue to limit the use of the road leading to our mining and milling operations to secured convoys.


We cannot predict whether additional incidents will occur that could disrupt or suspend our Indonesian operations. If other disruptive incidents occur, they could adversely affect our results of operations and financial condition in ways that we cannot predict at this time.


Our mining operations depend on the availability of secure water supplies.


Our mining operations require physical availability and secure legal rights to significant quantities of water for mining and ore processing activities, and related support facilities. Most of our North and South America mining operations are in areas where competition for water supplies is significant. Continuous production at our mines is dependent on many factors, including our ability to maintain our water rights and claims, and the continuing physical availability of the water supplies.


In Arizona, where our operations use both surface and ground water, we are a participant in an active general stream adjudication in which the Arizona courts have been attempting, for over 40 years, to quantify and prioritize surface water claims for the Gila River, one of the state's largest river systems, which primarily affects our Morenci, Safford and Sierrita mines. The adjudication is addressing the state law claims of thousands of competing users, including us, as well as significant federal water claims that are potentially adverse to the state law claims of both surface water and groundwater users. Groundwater is treated differently from surface water under Arizona law, which historically allowed land owners to pump unlimited quantities of subsurface water, subject only to the requirement of putting it to "reasonable use." However, court decisions in the adjudication have concluded that underground water is often hydrologically connected to surface water so that it actually is surface water and is therefore subject to the Arizona doctrine of prior appropriation, as a result of which it would be subject to the adjudication and potentially unavailable to groundwater pumpers in the absence of valid surface water claims, which historic groundwater pumpers typically do not have. Any re-characterization of groundwater as surface water could affect the ability of consumers, farmers, ranchers, municipalities, and industrial users like us to continue to access water supplies that have been relied on for decades. Because we are a user of both groundwater and surface water in Arizona, we are an active participant in the adjudication proceeding.



47

Table of Contents


Water for our Cerro Verde operation in Peru comes from renewable sources through a series of storage reservoirs on the Rio Chili watershed that collects water primarily from seasonal precipitation. As a result of occasional drought conditions, temporary supply shortages are possible that could affect our Cerro Verde operations. In January 2016, the Peruvian government declared a temporary state of emergency with respect to the water supply in the Rio Chili Basin because of drought conditions. As a result, the Cerro Verde water rights from the Rio Chili were temporarily decreased during February 2016.


Water for our El Abra mining operation in Chile comes from the continued pumping of groundwater from the Salar de Ascotán aquifer. In 2010, El Abra obtained regulatory approval for the continued pumping of groundwater from the Salar de Ascotán aquifer for its sulfide processing plant, which began operations in 2011. The agreement to pump from this aquifer is subject to continued monitoring of the aquifer level to ensure that environmentally sensitive areas are not impacted by our pumping. If impact occurs, we would have to reduce pumping to restore water levels, which could have an adverse effect on production from El Abra.


Although we typically have sufficient water for our Indonesian operations, lower rainfall resulting from El Niño weather conditions affected operations in the second half of 2015 and may do so again in the future.


Although each of our mining operations currently has access to sufficient water supplies to support current operational demands, as discussed above some supplies are subject to adjudication proceedings, the outcome of which we cannot predict, and the availability of additional supplies that may be required for potential future expansions is uncertain. While we are taking actions to acquire additional back-up water supples, such supplies may not be available at acceptable cost, or at all, so that the loss of a water right or currently available water supply could force us to curtail operations or force premature closures, thereby increasing and/or accelerating costs or foregoing profitable operations.


In addition to the usual risks encountered in the mining industry, our Indonesia mining operations involve additional risks because they are located in very remote areas and on unusually difficult terrain.


The Grasberg minerals district is located in steep mountainous terrain in a remote area of Indonesia. These conditions have required us to overcome special engineering difficulties and develop extensive infrastructure facilities. In addition, the area receives considerable rainfall, which has led to periodic floods and mudslides. The mine site is also in an active seismic area and has experienced earth tremors from time to time. Our insurance may not sufficiently cover an unexpected natural or operating disaster.


Underground mining operations can be particularly dangerous, and in May 2013, a tragic accident, which resulted in 28 fatalities and 10 injuries, occurred at PT-FI when the rock structure above the underground ceiling of a training facility collapsed. PT-FI temporarily suspended mining and processing activities at the Grasberg complex to conduct inspections and resumed open-pit mining and concentrating activities on June 24, 2013, and underground operations on July 9, 2013. No assurance can be given that similar events will not occur in the future.


We must continually replace reserves depleted by production, but our exploration activities may not result in additional discoveries.


Our existing mineral reserves will be depleted over time by production from our operations. Because our profits are primarily derived from our mining operations, our ability to replenish our mineral reserves is essential to our long-term success. Our exploration projects involve many risks, require substantial expenditures and may not result in the discovery of additional deposits that can be produced profitably. We may not be able to discover, enhance, develop or acquire reserves in sufficient quantities to maintain or grow our current reserve levels, which could negatively affect our cash flow, results of operations and financial condition.


Development projects are inherently risky and may require more capital than anticipated, which could adversely affect our business.


Consolidated capital expenditures are expected to approximate $1.8 billion for 2017, including $1.1 billion for major projects primarily associated with underground development activities at Grasberg and $0.7 billion for sustaining capital. Refer to the risk factor "Because our Grasberg mining operation in Indonesia is a significant operating asset, our business may continue to be adversely affected by political, economic and social uncertainties in Indonesia" for further discussion of regulatory matters in Indonesia that may impact future investments in PT-FI's underground development projects.


48

Table of Contents



There are many risks and uncertainties inherent in all development projects. The economic feasibility of development projects is based on many factors, including the accuracy of estimated reserves, estimated capital and operating costs, and estimated future prices of the relevant commodity. The capital expenditures and time required to develop new mines or other projects are considerable, and changes in costs or timing can adversely affect project economics.


New development projects have no operating history upon which to base estimates of future cash flow. The actual costs, production rates and economic returns of our development projects may differ materially from our estimates, which may have a material adverse impact on our cash flows, results of operations and financial condition.


Our operations are subject to extensive regulations, some of which require permits and other approvals. These regulations increase our costs and in some circumstances may delay or suspend our operations.


Our operations are subject to extensive and complex laws and regulations that are subject to change and to changing interpretation by governmental agencies and other bodies vested with broad supervisory authority. As a natural resource company, compliance with environmental legal requirements is an integral and costly part of our business. For additional information, see "Environmental risks" below. We are also subject to extensive regulation of worker health and safety, including the requirements of the U.S. Occupational Safety and Health Act and similar laws of other jurisdictions. In the U.S., the operation of our mines is subject to regulation by the U.S. Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977. MSHA inspects our mines on a regular basis and issues citations and orders when it believes a violation has occurred. If such inspections result in an alleged violation, we may be subject to fines and penalties and, in instances of alleged significant violations, our mining operations could be subject to temporary or extended closures.


Many other governmental bodies regulate other aspects of our operations, and our failure to comply with these legal requirements can result in substantial penalties. In addition, new laws and regulations or changes to existing laws and regulations and new interpretations of existing laws and regulations by courts or regulatory authorities occur regularly, but are difficult to predict. Any such variations could have a material adverse effect on our cash flow, results of operations and financial condition.


Our business may be adversely affected by information technology disruptions.


Cybersecurity incidents are increasing in frequency, evolving in nature and include, but are not limited to, installation of malicious software, unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. We have experienced cybersecurity incidents in the past and may experience them in the future. We believe we have implemented appropriate measures to mitigate potential risks. However, given the unpredictability of the timing, nature and scope of information technology disruptions, we could be subject to manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our cash flow, results of operations and financial condition.


Environmental risks


Our operations are subject to complex, evolving and increasingly stringent environmental laws and regulations. Compliance with environmental regulatory requirements involves significant costs and may constrain existing operations or expansion opportunities.


Our operations, both in the U.S. and internationally, are subject to extensive environmental laws and regulations governing the generation, storage, treatment, transportation and disposal of hazardous substances; solid waste disposal; air emissions; wastewater discharges; remediation, restoration and reclamation of environmental contamination, including mine closures and reclamation; well plug and abandonment requirements; protection of endangered and protected species and designation of critical habitats; and other related matters. In addition, we must obtain regulatory permits and approvals to start, continue and expand operations.


Our Miami, Arizona smelter processes approximately half of the aggregate copper concentrate produced by our North America copper mines. EPA regulations require us to invest in new pollution control equipment to reduce sulfur dioxide (SO 2 ) to meet both regional haze requirements and to allow the state of Arizona to demonstrate compliance with EPA's SO 2 ambient air quality standards. The deadline for the smelter to install the SO 2 pollution


49

Table of Contents


control equipment to comply with the regional haze rules is January 1, 2018. Arizona regulators have promulgated rules for complying with the national ambient air quality standards, which must be approved by the EPA to become effective, but it is possible that they will be effective prior to January 1, 2018. In order to meet both regulatory requirements, we expect capital expenditures to approximate $250 million, and we expect those expenditures to be made through 2018. If these expenditures are delayed or deferred for technical, financial or any other reasons, we may be forced to curtail production at the Miami smelter, which would require us to export concentrate rather than process it ourselves and to purchase sulphuric acid that would otherwise be generated during the smelting process, which would result in increased production costs.


Laws such as CERCLA and similar state laws may expose us to joint and several liability for environmental damages caused by our operations, or by previous owners or operators of properties we acquired or are currently operating or at sites where we sent materials for processing, recycling or disposal. As discussed in more detail in the next risk factor, we have substantial obligations for environmental remediation on mining properties previously owned or operated by FMC and certain of its affiliates. Noncompliance with these laws and regulations could result in material penalties or other liabilities. In addition, compliance with these laws may from time to time result in delays in or changes to our development or expansion plans. Compliance with these laws and regulations imposes substantial costs, which we expect will continue to increase over time because of increased regulatory oversight, adoption of increasingly stringent environmental standards, as well as other factors.


New or revised environmental regulatory requirements are frequently proposed, many of which result in substantially increased costs for our business, including those regarding financial assurance in the financial risk factor above. In addition, in 2015, the EPA promulgated rules that could reclassify certain mineral processing materials as "hazardous waste" under the federal Resource Conservation and Recovery Act and subject the industry to significant new and costly waste management requirements. These rules are currently being challenged by multiple parties in court; however, if the legal challenges are unsuccessful, and the regulatory agencies reclassify certain mineral processing materials as "hazardous waste," costs at our U.S. copper and molybdenum processing facilities could materially increase.


The EPA has also adopted rules that bring remote "tributaries" into the regulatory definition of "waters of the United States" that are protected by the Clean Water Act, thereby imposing significant additional restrictions on waterway discharges and land uses, and is in many ways aggressively attempting to expand its regulatory authority over air quality, water quality and solid wastes, among other things. These rules are being litigated by multiple parties. Regulations are also being considered at various governmental levels to increase federal financial responsibility requirements both for mine closure and reclamation and for oil and gas decommissioning, and to increase regulation of or prohibit hydraulic fracturing. Adoption of these or similar new environmental regulations or more stringent application of existing regulations may materially increase our costs, threaten certain operating activities and constrain our expansion opportunities.


In February 2016, the Department of the Interior's Fish & Wildlife Service (FWS) adopted final rules that broaden the regulatory definitions of "critical habitat" and "destruction or adverse modification," both of which are integral to the FWS's implementation of the Endangered Species Act, which protects federally-listed endangered and threatened species. The new rules increase FWS's discretion to limit uses of land and water courses that may become suitable habitat for listed species in the future, or that are occasionally used by protected species. The new rules may limit the ability of landowners, including us, to obtain federal permits or authorizations needed for expansion of our operations, and may also affect our ability to obtain, retain or deliver water to some operations.


We incurred environmental capital expenditures and other environmental costs (including our joint venture partners' shares) to comply with applicable environmental laws and regulations that affect our operations totaling $0.4 billion in each of 2016, 2015 and 2014. For 2017 , we expect to incur approximately $0.6 billion of aggregate environmental capital expenditures and other environmental costs, which includes expenditures for the Miami smelter pollution control equipment discussed above. The timing and amounts of estimated payments could change as a result of changes in regulatory requirements, changes in scope and costs of reclamation and plug and abandonment activities, the settlement of environmental matters and the rate at which actual spending occurs on continuing matters.



50

Table of Contents


We incur significant costs for remediating environmental conditions on properties that have not been operated in many years.


FMC and its subsidiaries, and many of their affiliates and predecessor companies, have been involved in exploration, mining, milling, smelting and manufacturing in the U.S. for more than a century. Activities that occurred in the late 19th century and the 20th century prior to the advent of modern environmental laws were not subject to environmental regulation and were conducted before American industrial companies fully understood the long-term effects of their operations on the surrounding environment.


With the passage of CERCLA in 1980, companies like FMC became legally responsible for remediating hazardous substances released into the environment from properties owned or operated by them as well as properties where they arranged for disposal of such substances, irrespective of when the release to the environment occurred or who caused it. That liability is often asserted on a joint and several basis with other prior and subsequent owners, operators and arrangers, meaning that each owner or operator of the property is, and each arranger may be, held fully responsible for the remediation, although in many cases some or all of the other responsible parties no longer exist, do not have the financial ability to respond or cannot be found. As a result, because of our acquisition of FMC in 2007, many of the subsidiary companies we now own are potentially responsible for a wide variety of environmental remediation projects throughout the U.S., and we expect to spend substantial sums annually for many years to address those remediation issues. We are also subject to claims where the release of hazardous substances is alleged to have damaged natural resources. At December 31, 2016 , we had more than 100 active remediation projects in 26 U.S. states. In addition, FMC and certain affiliates and predecessor companies were parties to agreements relating to the transfer of businesses or properties that contained indemnification provisions relating to environmental matters, and from time to time these provisions become the source of claims against us.


At December 31, 2016 , we had $1.2 billion recorded in our consolidated balance sheet for environmental obligations attributable to CERCLA or analogous state programs and for estimated future costs associated with environmental matters at closed facilities or closed portions of operating facilities. Our environmental obligation estimates are primarily based upon:


Our knowledge and beliefs about complex scientific and historical facts and circumstances that in many cases occurred many decades ago;


Our beliefs and assumptions regarding the nature, extent and duration of remediation activities that we will be required to undertake and the estimated costs of those remediation activities, which are subject to varying interpretations; and


Our beliefs regarding the requirements that are imposed on us by existing laws and regulations and, in some cases, the clarification of uncertain regulatory requirements that could materially affect our environmental obligation estimates.


Significant adjustments to these estimates are likely to occur in the future as additional information becomes available. The actual environmental costs may exceed our current and future accruals for these costs, and any such changes could be material.


In addition, remediation standards imposed by the EPA and state environmental agencies have generally become more stringent over time and may become even more stringent in the future. Imposition of more stringent remediation standards, particularly for arsenic and lead in soils, poses a risk that additional remediation work could be required at our active remediation sites and at sites that we have already remediated to the satisfaction of the responsible governmental agencies, and may increase the risk of toxic tort litigation.


Refer to Note 12 for further discussion of our environmental obligations.


Our Indonesia mining operations create difficult and costly environmental challenges, and future changes in environmental laws, or unanticipated environmental impacts from those operations, could require us to incur increased costs.


Mining operations on the scale of our Indonesia operations involve significant environmental risks and challenges. Our primary challenge is to dispose of the large amount of crushed and ground rock material, called tailings, that results from the process by which we physically separate the copper-, gold- and silver-bearing materials from the


51

Table of Contents


ore that we mine. Our tailings management plan, which has been approved by the Indonesian government, uses the unnavigable river system in the highlands near our mine to transport the tailings to an engineered area in the lowlands where the tailings and natural sediments are managed in a deposition area. Lateral levees have been constructed to help contain the footprint of the tailings and to limit their impact in the lowlands.


Another major environmental challenge is managing overburden, which is the rock that must be moved aside in the mining process to reach the ore. In the presence of air, water and naturally occurring bacteria, some overburden can generate acid rock drainage, or acidic water containing dissolved metals that, if not properly managed, can adversely affect the environment. In addition, overburden stockpiles are subject to erosion caused by the large amounts of rainfall, with the eroded stockpile material eventually being deposited in the lowlands tailings management area; this additional material, while predicted in our environmental studies, influences the deposition of finer tailings material in the estuary.


From time to time, certain Indonesian government officials have raised questions with respect to our tailings and overburden management plans, including a suggestion that we implement a pipeline system rather than the river transport system for tailings management and disposition. Because our Indonesia mining operations are remotely located in steep mountainous terrain and in an active seismic area, a pipeline system would be costly, difficult to construct and maintain, and more prone to catastrophic failure, and could therefore involve significant potentially adverse environmental issues. Based on our own studies and others conducted by third parties, we do not believe that a pipeline system is necessary or practical.


Regulation of greenhouse gas emissions and climate change issues may increase our costs and adversely affect our operations.


Carbon-based energy is a significant input in our operations, and our revenues include sales of oil, natural gas liquids and natural gas, and other carbon-based energy products. The potential physical impacts of climate change on our operations are highly uncertain, and would vary by operation based on particular geographic circumstances. As a result of the Paris Agreement reached during the 21 st Conference of the Parties to the United Nations Framework Convention on Climate Change in 2015, a number of governments have pledged "Nationally Determined Contributions" to control and reduce greenhouse gas emissions. In the U.S., EPA has finalized regulations governing greenhouse gas emissions from new, modified, and existing power plants. While these rules are being challenged in court, increased regulation of greenhouse gas emissions may increase our costs.


Other risks


Our holding company structure may impact our ability to service debt and our stockholders ' ability to receive dividends .


We are a holding company with no material assets other than the capital stock and intercompany receivables of our subsidiaries. As a result, our ability to repay our indebtedness and pay dividends is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, loan, debt repayment or otherwise. Our subsidiaries do not have any obligation to make funds available to us to repay our indebtedness or pay dividends. Dividends from subsidiaries that are not wholly owned are shared with other equity owners. Cash at our international operations is also typically subject to foreign withholding taxes upon repatriation into the U.S.


In addition, our subsidiaries may not be able to, or be permitted to, make distributions to us or repay loans to us, to enable us to repay our indebtedness or pay dividends. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal restrictions, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. Certain of our subsidiaries are parties to credit agreements that restrict their ability to make distributions or loan repayments to us if such subsidiary is in default under such agreements, to repay any subordinated loan we may make to such subsidiary unless specified conditions are met, or to transfer substantially all of the assets of such subsidiary without the consent of the lenders.

Our rights to participate in any distribution of our subsidiaries' assets upon their liquidation, reorganization or insolvency would generally be subject to the prior claims of the subsidiaries' creditors, including any trade creditors.



52

Table of Contents


Anti-takeover provisions in our charter documents and Delaware law may make an acquisition of us more difficult.


Anti-takeover provisions in our charter documents and Delaware law may make an acquisition of us more difficult. These provisions:


Authorize the Board to issue preferred stock without stockholder approval and to designate the rights, preferences and privileges of each class; if issued, such preferred stock would increase the number of outstanding shares of our capital stock and could include terms that may deter an acquisition of us;


Establish advance notice requirements for nominations to the Board or for proposals that can be presented at stockholder meetings;


Limit who may call stockholder meetings; and


Require the approval of the holders of two thirds of our outstanding common stock to enter into certain business combination transactions, subject to certain exceptions, including if the consideration to be received by our common stockholders in the transaction is deemed to be a fair price.


These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors other than the candidates nominated by the Board.


In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders from consummating a merger with, or acquisition of, us.


These provisions may deter an acquisition of us that might otherwise be attractive to stockholders.


Item 1B.  Unresolved Staff Comments.


Not applicable.


Item 3. Legal Proceedings.


We are involved in numerous legal proceedings that arise in the ordinary course of our business or are associated with environmental issues arising from legacy operations conducted over the years by Freeport Minerals Corporation (FMC) and its affiliates. We are also involved periodically in reviews, inquiries, investigations and other proceedings initiated by or involving government agencies, some of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Management does not believe, based on currently available information, that the outcome of any legal proceeding will have a material adverse effect on our financial condition; although individual outcomes could be material to our operating results for a particular period, depending on the nature and magnitude of the outcome and the operating results for the period. Below is a discussion of our material water rights legal proceedings. Refer to Note 12 for discussion of our other material legal proceedings.


Water Rights Legal Proceedings


Our operations in the western United States (U.S.) require significant secure quantities of water for mining, ore processing and related support facilities. Continuous operation of our mines is dependent on, among other things, our ability to maintain our water rights and claims and the continuing physical availability of the water supplies. In the arid western U.S., where certain of our mines are located, water rights are often contested, and disputes over water rights are generally time-consuming, expensive and not necessarily dispositive unless they resolve both actual and potential claims. The loss of a water right, or a currently available water supply could force us to curtail operations, or force premature closures, thereby increasing and/or accelerating costs or foregoing profitable operations.


At our North America operations, certain of our water supplies are supported by surface water rights, which give us the right to use public waters for a statutorily defined beneficial use at a designated location. In Arizona, where our


53

Table of Contents


operations use both surface and groundwater, we are a participant in an active general stream adjudication in which the Arizona courts have been attempting, for over 40 years, to quantify and prioritize surface water claims for the Gila River, one of the state's largest river systems, which primarily affect our Morenci, Safford, and Sierrita mines. The adjudication is addressing the state law claims of thousands of competing users, including us, as well as significant federal water claims that are potentially adverse to the state law claims of both surface water and groundwater users. Groundwater is treated differently from surface water under Arizona law, which historically allowed land owners to pump unlimited quantities of subsurface water, subject only to the requirement of putting it to "reasonable use." However, court decisions in the adjudication have concluded that underground water is often hydrologically connected to surface water so that it actually is surface water and is therefore subject to the Arizona doctrine of prior appropriation, as a result of which it would be subject to the adjudication and potentially unavailable to groundwater pumpers in the absence of valid surface water claims, which historic groundwater pumpers typically do not have. Any re-characterization of groundwater as surface water could affect the ability of consumers, farmers, ranchers, municipalities, and industrial users like us to continue to access water supplies that have been relied on for decades. Because we are a user of both groundwater and surface water in Arizona, we are an active participant in the adjudication proceeding.


In Re The General Adjudication of All Rights to Use Water in the Gila River System and Sources , Maricopa County, Superior Court, Cause Nos. W-1 (Salt), W-2 (Verde), W-3 (Upper Gila), and W-4 (San Pedro). This case was originally initiated in 1974 with the filing of a petition with the Arizona State Land Department and was consolidated and transferred to the Maricopa County Superior Court in 1981. The principal parties, in addition to us, include: the state of Arizona; the Gila Valley Irrigation District; the Franklin Irrigation District; the San Carlos Irrigation and Drainage District; the Salt River Project; the San Carlos Apache Tribe; the Gila River Indian Community (GRIC); and the U.S. on behalf of those tribes, on its own behalf, and on behalf of the White Mountain Apache Tribe, the Fort McDowell Mohave-Apache Indian Community, the Salt River Pima-Maricopa Indian Community, and the Payson Community of Yavapai Apache Indians.


Prior to January 1, 1983, various Indian tribes filed suits in the U.S. District Court in Arizona claiming superior rights to water being used by many other water users, including us, and claiming damages for prior use in derogation of their allegedly superior rights. These federal proceedings have either been stayed pending the Arizona Superior Court adjudications or have been settled.


The Maricopa County Superior Court issued a decision in 2005 in the Gila River adjudication that directed the Arizona Department of Water Resources (ADWR) to prepare detailed recommendations regarding the delineation of the "sub-flow" zone of the San Pedro River Basin, a tributary of the Gila River. According to the court, the sub-flow zone is the subsurface area adjacent to the river where the court may find that groundwater is connected to the surface water such that groundwater pumping may reduce surface flows in violation of rights of holders of surface water rights. Although we have minimal interests in the San Pedro River Basin, a decision that re-characterizes groundwater in that basin as surface water may set a precedent for other river systems in Arizona that could have material implications for many commercial, industrial, municipal and agricultural users of groundwater, including our Arizona operations.


ADWR produced its recommendations in June 2009 which were objected to by numerous parties. Following this and other court rulings in 2012 and 2013, ADWR submitted a revised report in 2014. The court held hearings in 2015 to address the parties' comments and objections, and the issue is currently under advisement with the court. Also in 2014, ADWR submitted a proposal for the next projects that it believes should be undertaken in the case, including the development of procedures for "cone of depression" analyses to determine whether a well located outside of the subflow zone creates a cone of depression that intersects the subflow zone and causes a drawdown in the subflow of the river. Based on the cone of depression analyses, wells outside of the subflow zone could be subject to the jurisdiction of the adjudication court, which might then require the owners of those wells to either demonstrate a valid surface water claim to support the pumping, refrain from pumping or pay damages. On January 27, 2017, ADWR issued a report containing its recommendations on cone of depression methodologies, and on January 31, 2017, the Special Master issued an order initiating proceedings on the Cone of Depression Test Methodology developed by ADWR. Parties have until March 6, 2017, to file objections to the proposed methodology contained in ADWR's report. A status conference has been set for March 15, 2017, to schedule any proceedings necessary to resolve any objections filed to the ADWR report.

As part of the Gila River adjudication, the U.S. has asserted numerous claims for express and implied "reserved" surface water and groundwater rights on non-Indian federal lands throughout Arizona. These claims are related to reservations of federal land for specific purposes ( e.g. , national parks, military bases and wilderness areas). Unlike


54

Table of Contents


state law-based water rights, federal reserved water rights are given priority in the prior appropriation system based on the date the land was reserved, not the date that water was first used on the land. In addition, federal reserved water rights, if recognized by the court, may enjoy greater protection from groundwater pumping than is accorded to state law-based water rights.


Because federal reserved water rights have not yet been quantified, the task of determining how much water each federal reservation may use has been left to the Gila River adjudication court. Several "contested cases" to quantify reserved water rights for particular federal reservations in Arizona are currently pending in the adjudication. For instance, In re Aravaipa Canyon Wilderness Area is a contested case to resolve the U.S.'s claims to water for the Aravaipa Canyon Wilderness Area. These claims went to trial in 2015 and the parties are awaiting a decision. In Re Fort Huachuca concerns the U.S.'s claims to water for an Army base. Trial began in October 2016 and has been continued into February 2017. In Re Redfield Canyon Wilderness Area and In Re San Pedro Riparian National Conservation Area concern the U.S.'s claims to two other federal reservations, and these cases are expected to go to trial in 2017.


In multiple instances, the U.S. asserts a right to all water in a particular watershed that was not effectively appropriated under state law prior to the establishment of the federal reservation. This creates risks for both surface water users and groundwater users because such expansive claims may severely impede current and future uses of water within the same watershed. Federal reserved rights present additional risks to water users aside from the significant quantities of water claimed by the U.S. Of particular significance, federal reserved rights enjoy greater protection from groundwater pumping than is accorded to state law-based water rights.


Because there are numerous federal reservations in watersheds across Arizona, the reserved water right claims of the U.S. pose a significant risk to multiple operations, including Morenci and Safford in the Upper Gila River watershed, and Sierrita in the Santa Cruz watershed. Because federal reserved water rights may adversely affect water uses at each of these operations, we have been actively involved in litigation over these claims.


Given the legal and technical complexity of these adjudications, their long history, and their long-term legal, economic and political implications, it is difficult to predict the timing or the outcome of these proceedings. If we are unable to satisfactorily resolve the issues being addressed in the adjudications, our ability to pump groundwater could be diminished or curtailed, and our operations at Morenci, Safford and Sierrita mines could be adversely affected unless we are able to acquire alternative resources.

Item 4. Mine Safety Disclosures.


The safety and health of all employees is our highest priority. Management believes that safety and health considerations are integral to, and compatible with, all other functions in the organization and that proper safety and health management will enhance production and reduce costs. Our approach towards the health and safety of our workforce is to continuously improve performance through implementing robust management systems and providing adequate training, safety incentive and occupational health programs.


Our objective is zero work place injuries and occupational illnesses. We measure progress toward achieving our objective against regularly established benchmarks, including measuring company-wide Total Recordable Incident Rates (TRIR). Our TRIR (including contractors) was 0.64 per 200,000 man-hours worked in 2016 and 0.56 per 200,000 man-hours worked in both 2015 and 2014 . The metal mining sector industry average reported by the U.S. Mine Safety and Health Administration (MSHA) was 2.02 per 200,000 man-hours worked in 2015 and 2.23 per 200,000 man-hours worked in 2014 . The metal mining sector industry average for 2016 was not available at the time of this filing.


Refer to Exhibit 95.1 for mine safety disclosures required in accordance with Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K.



55

Table of Contents


Executive Officers of the Registrant.


Certain information as of February 15, 2017 , about our executive officers is set forth in the following table and accompanying text:

Name

Age

Position or Office

Richard C. Adkerson

70

Vice Chairman of the Board, President and Chief Executive Officer

Kathleen L. Quirk

53

Executive Vice President, Chief Financial Officer and Treasurer

Harry M. "Red" Conger, IV

61

President and Chief Operating Officer - Americas

Michael J. Arnold

64

Executive Vice President and Chief Administrative Officer


Richard C. Adkerson has served as Vice Chairman of the Board since June 2013, President since January 2008 and also from April 1997 to March 2007, Chief Executive Officer since December 2003 and a director since October 2006. Mr. Adkerson previously served as Chief Financial Officer from October 2000 to December 2003. Mr. Adkerson served as Co-Chairman of the Board of McMoRan Exploration Co. (MMR) from September 1998 until FCX's acquisition of MMR in 2013.


Kathleen L. Quirk has served as Executive Vice President since March 2007, Chief Financial Officer since December 2003 and Treasurer since February 2000. Ms. Quirk previously served as Senior Vice President from December 2003 to March 2007. Ms. Quirk served as Senior Vice President of MMR from April 2002 and as Treasurer from January 2000 until FCX's acquisition of MMR in 2013.


Harry M. "Red" Conger, IV has served as Chief Operating Officer - Americas since July 2015, and as President - Americas since 2007. Mr. Conger has also served as President and Chief Operating Officer - Rod and Refining since 2014. He served as Chief Operating Officer - Africa Mining from July 2015 to December 2016. Prior to 2007, he served in a number of senior operations positions at Phelps Dodge Corporation.


Michael J. Arnold has served as Executive Vice President since March 2007 and Chief Administrative Officer since December 2003.


PART II


Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.


Unregistered Sales of Equity Securities


None.


Common Stock


Our common shares trade on the New York Stock Exchange (NYSE) under the symbol "FCX." The FCX share price is reported daily in the financial press under "FMCG" in most listings of NYSE securities. The table below shows the NYSE composite tape common share price ranges during 2016 and 2015 :

2016

2015

High

Low

High

Low

First Quarter

$11.45

$3.52

$23.72

$16.43

Second Quarter

$14.06

$8.76

$23.97

$18.11

Third Quarter

$13.59

$9.43

$18.84

$7.76

Fourth Quarter

$16.42

$9.24

$14.20

$6.08


At February 15, 2017 , there were 14,665 holders of record of our common stock.



56

Table of Contents


Common Stock Dividends


In February 2012, the FCX Board of Directors (the Board) authorized an increase in the cash dividend on our common stock to an annual rate of $1.25 per share ($0.3125 per share quarterly). The Board declared a one-time special cash dividend of $0.1105 per share related to the settlement of the shareholder derivative litigation, which was paid in August 2015. In March 2015, the Board reduced the annual common stock dividend to $0.20 per share ($0.05 per share quarterly), and in December 2015, the Board suspended the annual common stock dividend. Accordingly, there were no common stock dividends paid in 2016.


Below is a summary of FCX common stock dividends declared and paid during 2015 :

Per Share

Amount

Record Date

Payment Date

First Quarter

$0.3125

01/15/2015

02/02/2015

Second Quarter

$0.0500

04/15/2015

05/01/2015

Special Dividend

$0.1105

07/15/2015

08/03/2015

Third Quarter

$0.0500

07/15/2015

08/03/2015

Fourth Quarter

$0.0500

10/15/2015

11/02/2015


The declaration of dividends is at the discretion of our Board and will depend upon our financial results, cash requirements, future prospects and other factors deemed relevant by our Board. Additionally, in connection with the February 2016 amendment to the revolving credit facility, we are not permitted to pay dividends on our common stock on or prior to March 31, 2017. The Board reviews its financial policy on an ongoing basis.


Issuer Purchases of Equity Securities


The following table sets forth information with respect to shares of FCX common stock purchased by us during the three months ended December 31, 2016 :

Period

(a) Total

Number of

Shares Purchased

(b) Average

Price Paid Per Share

(c) Total Number of

Shares Purchased as Part of Publicly Announced Plans or Programs a

(d) Maximum Number of Shares That May

Yet Be Purchased Under the Plans or Programs a

October 1-31, 2016

-


$

-


-


23,685,500


November 1-30, 2016

-


-


-


23,685,500


December 1-31, 2016

-


-


-


23,685,500


Total

-


-


-


23,685,500


a.

On July 21, 2008, the Board approved an increase in our open-market share purchase program for up to 30 million shares. The program does not have an expiration date.



57

Table of Contents


Item 6. Selected Financial Data.


FREEPORT-McMoRan INC.

SELECTED FINANCIAL AND OPERATING DATA

Years Ended December 31,

2016

2015

2014

2013 a

2012

CONSOLIDATED FINANCIAL DATA

(In millions, except per share amounts)

Revenues

$

14,830


b

$

14,607


b

$

20,001


b

$

19,331


b

$

16,661


Operating (loss) income c

$

(2,792

)

d

$

(13,512

)

e

$

(298

)

f

$

4,820


g

$

5,299


h

Net (loss) income from continuing operations

$

(3,832

)

i,j

$

(12,180

)

k

$

(1,022

)

i,j

$

3,053


i,j,l

$

3,578


i,j

Net (loss) income from discontinued operations m

$

(193

)

$

91


$

277


$

388


$

402


Net (loss) income attributable to common stock

$

(4,154

)

n

$

(12,236

)


$

(1,308

)


$

2,658



$

3,041



Basic net (loss) income per share attributable to common stock:

    Continuing operations

$

(2.96

)

$

(11.32

)

$

(1.37

)

$

2.45


$

2.96


    Discontinued operations

(0.20

)

0.01


0.11


0.20


0.24


$

(3.16

)

$

(11.31

)

$

(1.26

)

$

2.65


$

3.20


Basic weighted-average common shares outstanding

1,318


1,082


1,039


1,002


949


Diluted net (loss) income per share attributable to common stock:

    Continuing operations

$

(2.96

)

$

(11.32

)

$

(1.37

)

$

2.44


$

2.94


    Discontinued operations

(0.20

)

0.01


0.11


0.20


0.25


$

(3.16

)

$

(11.31

)

$

(1.26

)

$

2.64


$

3.19


Diluted weighted-average common shares outstanding

1,318


1,082


1,039


1,006


954


Dividends declared per share of common stock

$

-


$

0.2605


$

1.25


$

2.25


$

1.25


Operating cash flows

$

3,729


$

3,220


$

5,631


$

6,139


$

3,774


Capital expenditures

$

2,813


$

6,353


$

7,215


$

5,286


$

3,494


At December 31:

Cash and cash equivalents

$

4,245


$

177


$

298


$

1,864


$

3,567


Property, plant, equipment and mine development costs, net

$

23,219


$

23,986


$

22,649


$

20,401


$

17,499


Oil and gas properties, net

$

74


$

7,093


$

19,274


$

23,359


$

-


Assets held for sale, including current portion o

$

344


$

5,306


$

5,339


$

5,128


$

4,717


Total assets

$

37,317


$

46,577


$

58,674


$

63,385


$

35,421


Total debt, including current portion

$

16,027


$

20,324


$

18,741


$

20,476


$

3,340


Redeemable noncontrolling interest

$

-


$

764


$

751


$

716


$

-


Total stockholders' equity

$

6,051


$

7,828


$

18,287


$

20,934


$

17,543


The selected consolidated financial data shown above is derived from our audited consolidated financial statements. These historical results are not necessarily indicative of results that you can expect for any future period. You should read this data in conjunction with Items 7. and 7A. Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risks (MD&A) and Item 8. Financial Statements and Supplementary Data thereto contained in our annual report on Form 10-K for the year ended December 31, 2016. All references to income or losses per share are on a diluted basis, unless otherwise noted. Additionally, in accordance with accounting guidelines, TF Holdings Limited (TFHL), through which we held an interest in the Tenke Fungurume (Tenke) mine until it was sold on November 16, 2016, is reported as discontinued operations for all periods presented.

a.

Includes the results of oil and gas operations beginning June 1, 2013.

b.

Includes net noncash mark-to-market (losses) gains associated with crude oil and natural gas derivative contracts totaling $(41) million ( $(41) million to net loss attributable to common stock or $(0.03) per share) in 2016 , $(319) million ( $(198) million to net loss attributable to common stock or $(0.18) per share) in 2015 , $627 million ( $389 million to net loss attributable to common stock or $0.37 per share) in 2014 and $(312) million ($(194) million to net income attributable to common stock or $(0.19) per share) for the seven-month period from June 1, 2013, to December 31, 2013 .

c.

Includes net (credits) charges for adjustments to environmental obligations and related litigation reserves of $(16) million ( $(16) million to net loss attributable to common stock or $(0.01) per share) in 2016 , $43 million ( $28 million to net loss attributable to common stock or $0.03 per share) in 2015 , $76 million ( $50 million to net loss attributable to common stock or $0.05 per share) in 2014 , $19 million ($17 million to net income attributable to common stock or $0.02 per share) in 2013 and $(62) million ($(40) million to net income attributable to common stock or $(0.04) per share) in 2012.

d.

The year 2016 includes net charges totaling $4.9 billion to operating loss ($4.8 billion to net loss attributable to common stock or $3.67 per share) consisting of (i) $4.3 billion for impairment of oil and gas properties, (ii) $926 million for drillship settlements/idle


58

Table of Contents


rig and contract termination costs, (iii) $196 million for other charges at oil and gas operations primarily associated with inventory adjustments, asset impairment and other restructuring charges and (iv) $69 million for charges at mining operations for metals inventory adjustments, PT Freeport Indonesia (PT-FI) asset retirement and Cerro Verde social commitments, partly offset by (v) net gains on sales of assets totaling $649 million mostly associated with the Morenci and Timok transactions, partly offset by estimated losses associated with assets held for sale.

e.

The year 2015 includes net charges totaling $13.8 billion to operating loss ($12.0 billion to net loss attributable to common stock or $11.10 per share) consisting of (i) $13.1 billion for impairment of oil and gas properties, (ii) $338 million for metals inventory adjustments, (iii) $188 million for charges at oil and gas operations primarily associated with other asset impairment and inventory adjustments, idle/terminated rig costs and prior year mineral tax assessments related to the California properties, (iv) $145 million for charges at mining operations primarily associated with asset impairment, restructuring and other net charges and (v) $18 million for executive retirement benefits, partly offset by (vi) a net gain of $39 million for the sale of our interest in the Luna Energy power facility.

f.

The year 2014 includes net charges totaling $4.8 billion to operating loss ($3.6 billion to net loss attributable to common stock or $3.46 per share) consisting of (i) $3.7 billion for impairment of oil and gas properties, (ii) $1.7 billion to impair the full carrying value of goodwill, (ii) $46 million for charges at oil and gas operations primarily associated with idle/terminated rig costs and inventory adjustments and (iv) $6 million for adjustments to molybdenum inventories, partly offset by (v) net gains on sales of assets of $717 million primarily from the sale of our 80 percent interests in the Candelaria and Ojos del Salado mining operations.

g.

The year 2013 includes net charges totaling $232 million to operating income ($137 million to net income attributable to common stock or $0.14 per share) consisting of (i) $80 million for transaction and related costs principally associated with oil and gas acquisitions, (ii) $76 million associated with updated mine plans at Morenci that resulted in a loss in recoverable leach stockpiles, (iii) $37 million for restructuring an executive employment arrangement, (iv) $36 million associated with a labor agreement at Cerro Verde and (v) $3 million for adjustments to molybdenum inventories.

h.

The year 2012 includes net charges totaling $16 million to operating income ($8 million to net income attributable to common stockholders or $0.01 per share) associated with a labor agreement at Candelaria.

i.

Includes after-tax net gains (losses) on exchanges and early extinguishment of debt totaling $26 million ( $0.02 per share) in 2016 , $3 million (less than $0.01 per share) in 2014 , $(28) million ($(0.03) per share) in 2013 and $(149) million ( $(0.16) per share) in 2012.

j.

As further discussed in "Consolidated Results - Income Taxes" contained in MD&A, amounts include net tax credits (charges) of $370 million ($374 million net of noncontrolling interests or $0.28 per share) in 2016 and $(121) million ($(103) million net of noncontrolling interests or $(0.10) per share) in 2014. In addition, the year 2013 includes a net tax benefit of $199 million ( $0.20 per share) for reductions in our valuation allowances resulting from the oil and gas acquisitions and the year 2012 includes a net tax benefit of $205 million ($98 million net of noncontrolling interests or $0.11 per share) primarily for adjustments to Cerro Verde's deferred income taxes.

k.

The year 2015 includes a gain of $92 million ($92 million to net loss attributable to common stock or $0.09 per share) related to net proceeds received from insurance carriers and other third parties related to the shareholder derivative litigation settlement.

l.

The year 2013 includes a gain of $128 million ($0.13 per share) related to our preferred stock investments in and the subsequent acquisition of McMoRan Exploration Co.

m.

Reflects the results of TFHL through November 16, 2016, and includes charges for allocated interest expense associated with the portion of the term loan that was required to be repaid as a result of the sale of our interest in TFHL. The year 2016 also includes a net charge of $198 million for the loss on disposal.

n.

The year 2016 includes a gain on redemption of a redeemable noncontrolling interest of $199 million ($0.15 per share) associated with the settlement of a preferred stock obligation at our Plains Offshore Operations Inc. subsidiary.

o.

In accordance with accounting guidelines, the assets and liabilities of TFHL, Freeport Cobalt and the Kisanfu exploration project have been presented as held for sale in the consolidated balance sheets for all periods presented.


59

Table of Contents


FREEPORT-McMoRan INC.

SELECTED FINANCIAL AND OPERATING DATA (Continued)

Years Ended December 31,

2016

2015

2014

2013

2012

CONSOLIDATED MINING (CONTINUING OPERATIONS) a,b

Copper (millions of recoverable pounds)

Production

4,222


3,568


3,457


3,669


3,315


Sales, excluding purchases

4,227


3,603


3,463


3,632


3,312


Average realized price per pound

$

2.28


$

2.42


$

3.09


$

3.32


$

3.61


Gold (thousands of recoverable ounces)

Production

1,088


1,257


1,214


1,250


958


Sales, excluding purchases

1,079


1,247


1,248


1,204


1,010


Average realized price per ounce

$

1,238


$

1,129


$

1,231


$

1,315


$

1,665


Molybdenum (millions of recoverable pounds)

Production

80


92


95


94


85


Sales, excluding purchases

74


89


95


93


83


Average realized price per pound

$

8.33


$

8.70


$

12.74


$

11.85


$

14.26


NORTH AMERICA COPPER MINES

Operating Data, Net of Joint Venture Interest

Copper (millions of recoverable pounds)

Production

1,831


1,947


1,670


1,431


1,363


Sales, excluding purchases

1,841


1,988


1,664


1,422


1,351


Average realized price per pound

$

2.24


$

2.47


$

3.13


$

3.36


$

3.64


Molybdenum (millions of recoverable pounds)

Production

33


37


33


32


36


100% Operating Data

Solution extraction/electrowinning (SX/EW) operations

Leach ore placed in stockpiles (metric tons per day)

739,200


909,900


1,005,300


1,003,500


998,600


Average copper ore grade (percent)

0.31


0.26


0.25


0.22


0.22


Copper production (millions of recoverable pounds)

1,224


1,134


963


889


866


Mill operations

Ore milled (metric tons per day)

300,500


312,100


273,800


246,500


239,600


Average ore grade (percent):

Copper

0.47


0.49


0.45


0.39


0.37


Molybdenum

0.03


0.03


0.03


0.03


0.03


Copper recovery rate (percent)

85.5


85.4


85.8


85.3


83.9


Copper production (millions of recoverable pounds)

854


972


828


642


592


SOUTH AMERICA MINING b

Copper (millions of recoverable pounds)

Production

1,328


869


1,151


1,323


1,257


Sales

1,332


871


1,135


1,325


1,245


Average realized price per pound

$

2.31


$

2.38


$

3.08


$

3.30


$

3.58


Molybdenum (millions of recoverable pounds)

Production

21


7


11


13


8


SX/EW operations

Leach ore placed in stockpiles (metric tons per day)

151,600


193,900


275,200


274,600


229,300


Average copper ore grade (percent)

0.41


0.44


0.48


0.50


0.55


Copper production (millions of recoverable pounds)

328


430


491


448


457


Mill operations

Ore milled (metric tons per day)

353,400


152,100


180,500


192,600


191,400


Average ore grade:

Copper (percent)

0.43


0.46


0.54


0.65


0.60


Molybdenum (percent)

0.02


0.02


0.02


0.02


0.02


Copper recovery rate (percent)

85.8


81.5


88.1


90.9


90.1


Copper production (millions of recoverable pounds)

1,000


439


660


875


800




60

Table of Contents


FREEPORT-McMoRan INC.

SELECTED FINANCIAL AND OPERATING DATA (Continued)

Years Ended December 31,

2016

2015

2014

2013

2012

INDONESIA MINING

Operating Data, Net of Joint Venture Interest

Copper (millions of recoverable pounds)

Production

1,063


752


636


915


695


Sales

1,054


744


664


885


716


Average realized price per pound

$

2.32


$

2.33


$

3.01


$

3.28


$

3.58


Gold (thousands of recoverable ounces)

Production

1,061


1,232


1,130


1,142


862


Sales

1,054


1,224


1,168


1,096


915


Average realized price per ounce

$

1,237


$

1,129


$

1,229


$

1,312


$

1,664


100% Operating Data

Ore milled (metric tons per day)

165,700


162,500


120,500


179,200


165,000


Average ore grade:

Copper (percent)

0.91


0.67


0.79


0.76


0.62


Gold (grams per metric ton)

0.68


0.79


0.99


0.69


0.59


Recovery rates (percent):

Copper

91.0


90.4


90.3


90.0


88.7


Gold

82.2


83.4


83.2


80.0


75.7


Production:

Copper (millions of recoverable pounds)

1,063


752


651


928


695


Gold (thousands of recoverable ounces)

1,061


1,232


1,132


1,142


862


MOLYBDENUM MINES c

Molybdenum production (millions of recoverable pounds)

26


48


51


49


41


Ore milled (metric tons per day)

18,300


34,800


39,400


35,700


20,800


Average molybdenum ore grade (percent)

0.21


0.20


0.19


0.19


0.23


OIL AND GAS OPERATIONS d

Sales Volumes:

Oil (million barrels)

34.4


35.3


40.1


26.6


Natural gas (billion cubic feet)

65.1


89.7


80.8


54.2


-


Natural gas liquids (NGLs) (million barrels)

1.8


2.4


3.2


2.4


-


Million barrels of oil equivalents

47.1


52.6


56.8


38.1


-


Average Realizations:

Oil (per barrel)

$

39.13


$

57.11


$

90.00


$

98.32


-


Natural gas (per million British thermal units)

$

2.38


$

2.59


$

4.23


$

3.99


-


NGLs (per barrel)

$

18.11


$

18.90


$

39.73


$

38.20


-


AFRICA MINING (DISCONTINUED OPERATIONS) e

Copper (millions of recoverable pounds)

Production

425


449


447


462


348


Sales

424


467


425


454


336


Average realized price per pound

$

2.10


$

2.42


$

3.06


$

3.21


$

3.51


Cobalt (millions of contained pounds)

Production

32


35


29


28


26


Sales

33


35


30


25


25


Average realized price per pound

$

7.45


$

8.21


$

9.66


$

8.02


$

7.83


Ore milled (metric tons per day)

15,200


14,900


14,700


14,900


13,000


Average ore grade (percent):

Copper

4.18


4.00


4.06


4.22


3.62


Cobalt

0.44


0.43


0.34


0.37


0.37


Copper recovery rate (percent)

93.6


94.0


92.6


91.4


92.4


a.

Excludes the results from Africa mining, which is reported as discontinued operations.

b.

Includes the results of the Candelaria and Ojos del Salado mines prior to their sale in November 2014.

c.

Includes production from the Climax molybdenum mine beginning in May 2012.

d.

Represents the results of FM O&G beginning June 1, 2013. In June 2014, we completed the sale of the Eagle Ford shale assets, in July 2016, we completed the sale of the Haynesville shale assets and in December 2016, we completed the sales of the Deepwater Gulf of Mexico and onshore California oil and gas properties.

e.

On November 16, 2016, we completed the sale of our interest in TFHL, through which we held an interest in the Tenke mine.


61

Table of Contents


Ratio of Earnings to Fixed Charges

For the ratio of earnings to fixed charges calculation, earnings consist of (loss) income from continuing operations before income taxes, noncontrolling interests in consolidated subsidiaries, equity in affiliated companies' net (losses) earnings, cumulative effect of accounting changes and fixed charges. Fixed charges include interest and that portion of rent deemed representative of interest. The ratio of earnings to fixed charges and preferred stock dividends is the same as the ratio of earnings to fixed charges for the years presented because no shares of FCX preferred stock were outstanding during these years. Our ratio of earnings to fixed charges was as follows for the years presented:

Years Ended December 31,

2016

2015

2014

2013

2012

Ratio of earnings to fixed charges

-

a

-

a

-

a

6.8x

18.3x


a.

As a result of the losses recorded in 2016, 2015 and 2014, the ratio coverage was less than 1:1. To achieve coverage of 1:1, FCX would have needed to generate additional earnings of $3.5 billion in 2016, $14.3 billion in 2015 and $1.0 billion in 2014.


Items 7. and 7A.  Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk.


In Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk, "we," "us" and "our" refer to Freeport-McMoRan Inc. (FCX) and its consolidated subsidiaries. The results of operations reported and summarized below are not necessarily indicative of future operating results (refer to "Cautionary Statement" for further discussion). References to "Notes" are Notes included in our Notes to Consolidated Financial Statements. Throughout Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk, all references to earnings or losses per share are on a diluted basis, unless otherwise noted. Additionally, in accordance with accounting guidelines, TF Holdings Limited (TFHL), through which we held an interest in the Tenke

Fungurume (Tenke) mine until it was sold on November 16, 2016, is reported as a discontinued operation for all periods presented.


OVERVIEW


We are a leading international mining company with headquarters in Phoenix, Arizona. We operate large, long-lived, geographically diverse assets with significant proven and probable reserves of copper, gold and molybdenum. We are the world's largest publicly traded copper producer. Our portfolio of assets includes the Grasberg minerals district in Indonesia, one of the world's largest copper and gold deposits; and significant mining operations in the Americas, including the large-scale Morenci minerals district in North America and the Cerro Verde operation in South America.


Net loss attributable to common stock totaled $4.2 billion in 2016, $12.2 billion in 2015 and $1.3 billion in 2014, which included charges for the impairment of oil and gas properties totaling $4.3 billion in 2016, $11.6 billion in 2015 and $2.3 billion in 2014. In addition to lower charges for the impairment of oil and gas properties, our results for 2016, compared to 2015, reflected higher net gains on the sales of assets, and a gain on redemption of a redeemable noncontrolling interest, net tax credits, higher copper sales volumes and lower metals inventory adjustments, partly offset by charges at our oil and gas operations for the termination and settlements of drillship and other contracts, a loss on discontinued operations and lower copper prices. Refer to "Consolidated Results" for discussion of items impacting our consolidated results for the three years ended December 31, 2016 .


During 2016, we took actions to restore our balance sheet strength through a combination of asset sale transactions, cash flow from operations and capital market transactions. During the year, we completed $6.6 billion in asset sale transactions and generated gross proceeds of $1.5 billion from a registered at-the-market offering of common stock. Refer to Notes 2 and 10 for further discussion.


At December 31, 2016, we had $4.2 billion in consolidated cash and cash equivalents and $16.0 billion in total debt, compared with consolidated cash and cash equivalents of $177 million and total debt of $20.3 billion at December 31, 2015 . We had no borrowings and $3.5 billion available under our $3.5 billion revolving credit facility at year-end 2016. 




62

Table of Contents


During 2016, we also terminated contracts for deepwater drillships and settled aggregate commitments totaling $1.1 billion for $755 million (excluding contingent consideration), of which $540 million was funded with shares of our common stock (refer to Notes 10 and 13 for further discussion).


We continue to manage production, exploration and administrative costs and capital spending and, subject to commodity prices and operational results, expect to generate cash flows for further debt reduction during 2017.


We have retained a high-quality portfolio of long-lived copper assets positioned to generate long-term value. In addition to debt reduction plans, we are pursuing opportunities to enhance net present values, and we continue to advance studies for future development of our copper resources, the timing of which is dependent on market conditions.


We have significant mineral reserves, resources and future development opportunities within our portfolio of mining assets. At December 31, 2016 , our estimated consolidated recoverable proven and probable mineral reserves totaled 86.8 billion pounds of copper, 26.1 million ounces of gold and 2.95 billion pounds of molybdenum, which were determined using long-term average prices of $2.00 per pound for copper, $1,000 per ounce for gold and $10 per pound for molybdenum. Refer to "Critical Accounting Estimates – Mineral Reserves" for further discussion.


A summary of the sources of our consolidated copper, gold and molybdenum production (excluding copper production from Tenke) for the year 2016 by geographic location follows:

Copper

Gold

Molybdenum

North America

43

%

2

%

74

%

a

South America

32


-


26


Indonesia

25


98


-


100

%

100

%

100

%

a.

Our Henderson and Climax molybdenum mines produced 33 percent of consolidated molybdenum production, and our North America copper mines produced 41 percent .


Copper production from the Grasberg mine in Indonesia, Morenci mine in North America and Cerro Verde mine in Peru together totaled 72 percent of our consolidated copper production in 2016 .


As further discussed in "Operations - Indonesia Mining," in January and February 2017, the Indonesian government issued new regulations to address exports of unrefined metals, including copper concentrate and anode slimes, and other matters related to the mining sector. Following the issuance of the January and February 2017 regulations and discussions with the government, PT Freeport Indonesia (PT-FI) advised the Indonesian government that it was prepared to convert its Contract of Work (COW) to a special operating license (known as an IUPK), subject to obtaining an investment stability agreement providing equivalent rights with the same level of legal and fiscal certainty enumerated under its COW, and provided that the COW would remain in effect until it is replaced by a mutually satisfactory alternative. PT-FI has requested that concentrate exports be permitted without the imposition of export duties while the new license and stability agreement are negotiated. The Indonesia government has indicated that in order to export its concentrate production, PT-FI would be required to immediately convert to an IUPK, forgo its current rights to fiscal and legal certainty and commit to a new smelter prior to completing a long-term investment stability agreement. PT-FI has advised the Indonesian government attempts to enforce the new regulations on PT-FI violates its COW and that it is unwilling to terminate its COW unless replaced by a mutually acceptable form of agreement providing fiscal and legal assurances to support its long-term investment plans in Papua, Indonesia.


As of February 24, 2017 , PT-FI has not obtained approval to export concentrate. Although PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity, on February 10, 2017, PT-FI was forced to suspend production as a result of limited storage capacity at PT-FI and PT Smelting (PT-FI's 25-percent-owned copper smelter and refinery located in Gresik, Indonesia). PT-FI has also begun to significantly adjust its cost structure, reduce its workforce and spending with local suppliers, and suspend investments in its underground development projects and new smelter.


On February 17, 2017, pursuant to the COW's dispute resolution provisions, PT-FI provided formal notice to the Indonesian government of an impending dispute listing the government's breaches and violations of the COW.


63

Table of Contents


Refer to "Risk Factors" contained in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2016, for further discussion.


OUTLOOK


We view the long-term outlook for our business positively, supported by limitations on supplies of copper and by the requirements for copper in the world's economy. Our financial results vary as a result of fluctuations in market prices primarily for copper, gold and molybdenum, as well as other factors. World market prices for these commodities have fluctuated historically and are affected by numerous factors beyond our control. Because we cannot control the price of our products, the key measures that management focuses on in operating our business are sales volumes, unit net cash costs, operating cash flow and capital expenditures.


The below projections for 2017 were prepared in January 2017 and assumed the resumption of concentrate exports by PT-FI in February 2017 and the renewal of PT Smelting's anode slimes export license, neither of which has occurred as of February 24, 2017 . As a result of regulations passed by the Indonesian government in January and February 2017, PT-FI has been unable to export concentrate and is proceeding with its plan to suspend investments in Papua, Indonesia, reduce its production by approximately 60 percent from normal levels and implement cost savings plans involving significant reductions in its workforce and spending levels with local suppliers, which are not reflected in our projections for 2017.


Sales Volumes  

Following are projected consolidated sales volumes for 2017 , as prepared in January 2017 based on the assumptions described above, and actual consolidated sales volumes from continuing operations for 2016 :

2017

2016

(Projected)

(Actual)

Copper  (millions of recoverable pounds):

North America copper mines

1,465


1,841


South America mining

1,315


1,332


Indonesia mining

1,325


1,054


4,105


4,227


Gold  (thousands of recoverable ounces)

2,170


1,079


Molybdenum  (millions of recoverable pounds)

92


a

74


a.

Projected molybdenum sales include 36 million pounds produced by our Molybdenum mines and 56 million pounds produced by our North and South America copper mines.


Consolidated sales for first-quarter 2017 were expected to approximate 1.0 billion pounds of copper, 460 thousand ounces of gold and 23 million pounds of molybdenum. First-quarter 2017 production has been adversely impacted by the suspension of concentrate exports from PT-FI and a labor strike at PT Smelting, which resulted in a shutdown of its operations since January 19, 2017. PT Smelting has advised PT-FI that it expects to resume operations in March 2017. Assuming resumption of PT Smelting's operations in March 2017 and a continuation of the ban on PT-FI's copper concentrate exports, we estimate our first-quarter 2017 sales will be reduced, resulting in deferrals of approximately 170 million pounds of copper and 270 thousand ounces of gold, representing a 17 percent reduction in first-quarter 2017 consolidated copper sales and a 59 percent reduction in first-quarter 2017 consolidated gold sales. For each month of delay in obtaining approval to export, PT-FI's share of production is projected to be reduced by approximately 70 million pounds of copper and 70 thousand ounces of gold.


Projected sales volumes are dependent on operational performance and other factors. For other important factors that could cause results to differ materially from projections, refer to "Cautionary Statement."


Unit Net Cash Costs

Assuming average prices of $1,200 per ounce of gold and $7.00 per pound of molybdenum, and achievement of the volume and cost estimates included in our January 2017 projections (including the resumption of concentrate exports by PT-FI in February 2017, which has not occurred as of February 24, 2017 ), consolidated unit net cash costs (net of by-product credits) for our copper mines were expected to average $1.06 per pound in 2017 . The impact of price changes in 2017 on consolidated unit net cash costs would approximate $0.025 per pound for each


64

Table of Contents


$50 per ounce change in the average price of gold and $0.025 per pound for each $2 per pound change in the average price of molybdenum. Quarterly unit net cash costs vary with fluctuations in volumes and average realized prices, primarily for gold and molybdenum. Refer to "Consolidated Results – Production and Delivery Costs" for further discussion of consolidated production costs for our mining operations.


Consolidated Operating Cash Flow

Our consolidated operating cash flows vary with volumes, prices realized from copper, gold and molybdenum, production costs, income taxes, other working capital changes and other factors. Based on the sales volume and cost estimates included in our January 2017 projections (including the resumption of concentrate exports by PT-FI in February 2017, which has not occurred as of February 24, 2017 ), and assuming average prices of $2.50 per pound of copper, $1,200 per ounce of gold and $7.00 per pound of molybdenum, we estimated consolidated operating cash flows for 2017 of $4.3 billion (including $1.0 billion for working capital sources and changes in other tax payments). Projected consolidated operating cash flows for  2017  also reflected an estimated income tax provision of $1.4 billion primarily associated with income from our international mining operations (refer to "Consolidated Results - Income Taxes" for further discussion of projected income taxes). The impact of price changes in 2017 on consolidated operating cash flows would approximate $385 million for each $0.10 per pound change in the average price of copper, $95 million for each $50 per ounce change in the average price of gold and $100 million for each $2 per pound change in the average price of molybdenum.


Consolidated Capital Expenditures

Consolidated capital expenditures were expected to approximate $1.8 billion for 2017 , including $1.1 billion for major mining projects primarily for underground development activities at Grasberg. PT-FI has begun suspending investments in its underground development projects, pending resolution of its long-term mining rights. If PT-FI is unable to reach agreement with the Indonesian government on its long-term mining rights, we may be required to further reduce or defer investments in underground development projects. For further discussion of regulatory matters in Indonesia, which may impact future investment in PT-FI's underground development projects, refer to "Operations - Indonesia Mining."




65

Table of Contents


MARKETS


Metals

World prices for copper, gold and molybdenum can fluctuate significantly. During the period from January 2007 through December 2016, the London Metal Exchange (LME) spot copper price varied from a low of $1.26 per pound in 2008 to a record high of $4.60 per pound in 2011; the London Bullion Market Association (London) PM gold price fluctuated from a low of $608 per ounce in 2007 to a record high of $1,895 per ounce in 2011, and the Metals Week Molybdenum Dealer Oxide weekly average price ranged from a low of $4.46 per pound in 2015 to a high of $33.88 per pound in 2008. Copper, gold and molybdenum prices are affected by numerous factors beyond our control as described further in our "Risk Factors" contained in Part I, Item 1A. of our annual report on Form 10-K for the year ended December 31, 2016 .



This graph presents LME spot copper prices and combined reported stocks of copper at the LME, Commodity Exchange Inc. (COMEX), a division of the New York Mercantile Exchange (NYMEX), and the Shanghai Futures Exchange from January 2007 through December 2016 . Since mid-2014, copper prices have declined because of concerns about slowing growth rates in China, a stronger U.S. dollar and a broad-based decline in commodity prices. During fourth-quarter 2016, copper prices improved with the LME spot copper prices averaging $2.39 per pound and closing at $2.50 per pound on December 31, 2016 . For the year 2016 , LME spot copper prices ranged from a low of $1.96 per pound to a high of $2.69 per pound and averaged $2.21 per pound. The LME spot copper price closed at $2.73 per pound on February 15, 2017 .


We believe the underlying long-term fundamentals of the copper business remain positive, supported by the significant role of copper in the global economy and a challenging long-term supply environment attributable to difficulty in replacing existing large mines' output with new production sources. Future copper prices are expected to be volatile and are likely to be influenced by demand from China and emerging markets, as well as economic activity in the U.S. and other industrialized countries, the timing of the development of new supplies of copper and production levels of mines and copper smelters.


66

Table of Contents



This graph presents London PM gold prices from January 2007 through December 2016 . An improving economic outlook, stronger U.S. dollar and positive equity performance contributed to lower demand for gold since 2014. During 2016 , London PM gold prices ranged from a low of $1,077 per ounce to a high of $1,366 per ounce, averaged $1,250 per ounce and closed at $1,159 per ounce on December 31, 2016 . Gold prices closed at $1,224 per ounce on February 15, 2017 .



This graph presents the Metals Week Molybdenum Dealer Oxide weekly average price from January 2007 through December 2016 . Molybdenum prices have declined since mid-2014 because of weaker demand from global steel and stainless steel producers. During 2016 , the weekly average price for molybdenum ranged from a low of $5.15 per pound to a high of $8.47 per pound, averaged $6.47 per pound and was $6.74 per pound on December 31, 2016 . The Metals Week Molybdenum Dealer Oxide weekly average price was $7.59 per pound on February 15, 2017 .


67

Table of Contents



Oil and Gas

Our results for the three years ended December 31, 2016 , were impacted by market prices for crude oil, and to a lesser extent natural gas, which can fluctuate significantly. Crude oil prices reached a record high of $146.08 per barrel in 2008 as economic growth in emerging economies and the U.S. created high global demand for oil and lower inventories. Beginning mid-2014, oil prices significantly declined because of concerns of global oversupply and reached a low of $27.88 per barrel in January 2016. During 2016 , the Brent crude oil price ranged from a low of $27.88 per barrel to a high of $56.82 per barrel, averaged $45.13 per barrel and was $56.82 per barrel on December 31, 2016 .


CRITICAL ACCOUNTING ESTIMATES


Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles (GAAP) in the U.S. The preparation of these statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on historical experience and on assumptions that we consider reasonable under the circumstances; however, reported results could differ from those based on the current estimates under different assumptions or conditions. The areas requiring the use of management's estimates are also discussed in Note 1 under the subheading "Use of Estimates." Management has reviewed the following discussion of its development and selection of critical accounting estimates with the Audit Committee of our Board of Directors (Board).


Mineral Reserves

Recoverable proven and probable reserves are the part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination. The determination of reserves involves numerous uncertainties with respect to the ultimate geology of the ore bodies, including quantities, grades and recovery rates. Estimating the quantity and grade of mineral reserves requires us to determine the size, shape and depth of our ore bodies by analyzing geological data, such as samplings of drill holes, tunnels and other underground workings. In addition to the geology of our mines, assumptions are required to determine the economic feasibility of mining these reserves, including estimates of future commodity prices and demand, the mining methods we use and the related costs incurred to develop and mine our reserves. Our estimates of recoverable proven and probable mineral reserves are prepared by and are the responsibility of our employees. A majority of these estimates are reviewed annually and verified by independent experts in mining, geology and reserve determination.


At December 31, 2016 , our consolidated estimated recoverable proven and probable reserves were determined using long-term average prices of $2.00 per pound for copper, $1,000 per ounce for gold and $10 per pound for molybdenum. The following table summarizes changes in our estimated consolidated recoverable proven and probable copper, gold and molybdenum reserves during 2016 and 2015 :

Copper a

(billion

pounds)

Gold

(million

ounces)

Molybdenum

(billion

pounds)

Consolidated reserves at December 31, 2014

103.5


28.5

3.11

Net additions/revisions

-


(0.1)

0.03

Production

(4.0

)

(1.3)

(0.09)

Consolidated reserves at December 31, 2015

99.5


27.1

3.05

Net additions

0.5


0.1

-

Production

(4.6

)

b

(1.1)

(0.08)

Sale of interest in Tenke

(6.8

)

-

-

Sale of 13 percent interest in Morenci

(1.8

)

-

(0.02)

Consolidated reserves at December 31, 2016

86.8


26.1

2.95

a.

Includes estimated recoverable metals contained in stockpiles. See below for additional discussion of recoverable copper in stockpiles.

b.

Includes copper production of 0.4 billion pounds from the Tenke mine.


Refer to Note 20 for further information regarding estimated recoverable proven and probable mineral reserves.


As discussed in Note 1 , we depreciate our life-of-mine mining and milling assets and values assigned to proven and probable mineral reserves using the unit-of-production (UOP) method based on our estimated recoverable proven


68

Table of Contents


and probable mineral reserves. Because the economic assumptions used to estimate mineral reserves may change from period to period and additional geological data is generated during the course of operations, estimates of reserves may change, which could have a significant impact on our results of operations, including changes to prospective depreciation rates and impairments of long-lived asset carrying values. Excluding impacts associated with changes in the levels of finished goods inventories and based on projected copper sales volumes, if estimated copper reserves at our mines were 10 percent higher at December 31, 2016 , we estimate that our annual depreciation, depletion and amortization (DD&A) expense for 2017 would decrease by $53 million ($29 million to net income attributable to common stockholders), and a 10 percent decrease in copper reserves would increase DD&A expense by $64 million ($36 million to net income attributable to common stockholders). We perform annual assessments of our existing assets in connection with the review of mine operating and development plans. If it is determined that assigned asset lives do not reflect the expected remaining period of benefit, any change could affect prospective depreciation rates.


As discussed below and in Note 1 , we review and evaluate our long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount of such assets may not be recoverable, and changes to our estimates of recoverable proven and probable mineral reserves could have an impact on our assessment of asset recoverability. Refer to "Risk Factors" contained in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2016, for further discussion of Indonesian regulatory matters that could have a material adverse affect on our cash flow, results of operations and financial position, and could result in asset impairments at PT-FI.


Recoverable Copper in Stockpiles

We record, as inventory, applicable costs for copper contained in mill and leach stockpiles that are expected to be processed in the future based on proven processing technologies. Mill and leach stockpiles are evaluated periodically to ensure that they are stated at the lower of weighted-average cost or net realizable value (refer to Note 4 and "Consolidated Results" for further discussion of inventory adjustments recorded for the three years ended December 31, 2016 ). Accounting for recoverable copper from mill and leach stockpiles represents a critical accounting estimate because (i) it is generally impracticable to determine copper contained in mill and leach stockpiles by physical count, thus requiring management to employ reasonable estimation methods and (ii) recovery rates from leach stockpiles can vary significantly. Refer to Note 1 for further discussion of our accounting policy for recoverable copper in stockpiles.


At December 31, 2016 , estimated consolidated recoverable copper was 2.2 billion pounds in leach stockpiles (with a carrying value of $2.2 billion ) and 1.0 billion pounds in mill stockpiles (with a carrying value of $746 million ), compared with 2.6 billion pounds in leach stockpiles (with a carrying value of $2.6 billion) and 1.0 billion pounds in mill stockpiles (with a carrying value of $617 million) at December 31, 2015.


Impairment of Long-Lived Assets

Mining. As discussed in Note 1 , we assess the carrying values of our long-lived mining assets when events or changes in circumstances indicate that the related carrying amounts of such assets may not be recoverable. In evaluating our long-lived mining assets for recoverability, we use estimates of pre-tax undiscounted future cash flows of our individual mines. Estimates of future cash flows are derived from current business plans, which are developed using near-term metal price forecasts reflective of the current price environment and management's projections for long-term average metal prices. In addition to near- and long-term metal price assumptions, other key assumptions include estimates of commodity-based and other input costs; proven and probable mineral reserves estimates, including the timing and cost to develop and produce the reserves; value beyond proven and probable mineral reserve estimates (refer to Note 1); and the use of appropriate discount rates in the measurement of fair value. We believe our estimates and models used to determine fair value are similar to what a market participant would use. As quoted market prices are unavailable for our individual mining operations, fair value is determined through the use of after-tax discounted estimated future cash flows.


As a result of declining copper and molybdenum prices, during 2015, we evaluated our long-lived mining assets for impairment, which resulted in charges of $37 million at our Tyrone mine, net of a revision to asset retirement obligations (AROs). The December 31, 2015, evaluations of the recoverability of our copper mines were based on near-term price assumptions reflecting prevailing copper futures prices, ranging from $2.15 per pound to $2.17 per pound for COMEX and from $2.13 per pound to $2.16 per pound for LME, and a long-term average price of $3.00 per pound. The December 31, 2015, evaluations of the recoverability of our molybdenum mines used near-term price assumptions that were consistent with then-current market prices for molybdenum and a long-term average of $10 per pound.


69

Table of Contents



During the year 2016, we concluded there were no events or changes in circumstances that would indicate that the carrying amount of our long-lived mining assets might not be recoverable. Additionally, copper and molybdenum prices have improved. The LME copper spot price of $2.50 per pound at December 31, 2016, was 17 percent higher than the LME spot price of $2.13 per pound at December 31, 2015, and the weekly average price for molybdenum of $6.74 per pound on December 31, 2016, was 29 percent higher than the weekly average price of $5.23 per pound at December 31, 2015.


In addition to decreases in future metal price assumptions, other events that could result in future impairment of our long-lived mining assets include, but are not limited to, decreases in estimated recoverable proven and probable mineral reserves and any event that might otherwise have a material adverse effect on mine site production levels or costs. Refer to "Risk Factors" contained in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2016, for further discussion of Indonesian regulatory matters that could have a material adverse affect on our cash flow, results of operations and financial position, and could result in asset impairments at PT-FI.


Oil and Gas Properties. As discussed in Note 1 , we follow the full cost method of accounting for our oil and gas operations, whereby all costs associated with oil and gas property acquisition, exploration and development activities are capitalized and amortized to expense under the UOP method on a country-by-country basis using estimates of proved oil and natural gas reserves relating to each country where such activities are conducted. The costs of unproved oil and gas properties are excluded from amortization until the properties are evaluated.


Under full cost accounting rules, a "ceiling test" is conducted each quarter to review the carrying value of our oil and gas properties for impairment (refer to Note 1 for further discussion). The U.S. Securities and Exchange Commission (SEC) requires that the twelve-month average of the first-day-of-the-month historical reference prices be used to determine the ceiling test limitation. The reference pricing in ceiling test impairment calculations may cause results that do not reflect current market conditions that exist at the end of an accounting period. For example, in periods of increasing oil and gas prices, the use of a twelve-month historical average price in the ceiling test calculation may result in an impairment. Conversely, in times of declining prices, ceiling test calculations may not result in an impairment.


Using West Texas Intermediate (WTI) as the reference oil price, the average price was $42.75 per barrel at December 31, 2016 , compared with $50.28 per barrel at December 31, 2015, and $94.99 per barrel at December 31, 2014. The combined impact of the reduction in twelve-month historical prices and reserve revisions caused net capitalized costs with respect to our proved U.S. oil and gas properties to exceed the ceiling test limitation specified by the SEC's full cost accounting rules, which resulted in the recognition of impairment charges totaling $4.3 billion in 2016 , $13.0 billion in 2015 and $3.7 billion in 2014. Impairment charges were also recognized for our international oil and gas properties, primarily related to Morocco, totaling $18 million in 2016 and $164 million in 2015.


Following the completion of the sales of our Deepwater Gulf of Mexico (GOM) and onshore California oil and gas properties, at December 31, 2016, we had $ 74 million remaining in our consolidated balance sheet for proved oil and gas properties, and no amounts recorded for unproved oil and gas properties.


Environmental Obligations

Our current and historical operating activities are subject to various national, state and local environmental laws and regulations that govern the protection of the environment, and compliance with those laws requires significant expenditures. Environmental expenditures are charged to expense or capitalized, depending upon their future economic benefits. The guidance provided by U.S. GAAP requires that liabilities for contingencies be recorded when it is probable that obligations have been incurred, and the cost can be reasonably estimated. At December 31, 2016 , environmental obligations recorded in our consolidated balance sheet totaled $1.2 billion , which reflect obligations for environmental liabilities attributed to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) or analogous state programs and for estimated future costs associated with environmental matters. Refer to Notes 1 and 12 for further discussion of environmental obligations, including a summary of changes in our estimated environmental obligations for the three years ended December 31, 2016 .


Accounting for environmental obligations represents a critical accounting estimate because changes to environmental laws and regulations and/or circumstances affecting our operations could result in significant changes to our estimates, which could have a significant impact on our results of operations. We perform a


70

Table of Contents


comprehensive annual review of our environmental obligations and also review changes in facts and circumstances associated with these obligations at least quarterly. Judgments and estimates are based upon currently available facts, existing technology, presently enacted laws and regulations, remediation experience, whether or not we are a potentially responsible party (PRP), the ability of other PRPs to pay their allocated portions and take into consideration reasonably possible outcomes. Our cost estimates can change substantially as additional information becomes available regarding the nature or extent of site contamination, updated cost assumptions (including increases and decreases to cost estimates), changes in the anticipated scope and timing of remediation activities, the settlement of environmental matters, required remediation methods and actions by or against governmental agencies or private parties.


Asset Retirement Obligations

We record the fair value of our estimated AROs associated with tangible long-lived assets in the period incurred. Fair value is measured as the present value of cash flow estimates after considering inflation and a market risk premium. Our cost estimates are reflected on a third-party cost basis and comply with our legal obligation to retire tangible long-lived assets in the period incurred. These cost estimates may differ from financial assurance cost estimates for reclamation activities because of a variety of factors, including obtaining updated cost estimates for reclamation activities, the timing of reclamation activities, changes in scope and the exclusion of certain costs not considered reclamation and closure costs. At the end of 2016, PT-FI revised its estimates for the overburden stockpile to address ongoing erosion that occurred during 2016, a design change that increased the volume and updated cost estimates reflecting more recent productivity and costs at the stockpile, which resulted in an increase in the ARO of $372 million. At December 31, 2016 , AROs recorded in our consolidated balance sheet totaled $2.6 billion , including $0.6 billion associated with our remaining oil and gas operations. Refer to Notes 1 and 12 for further discussion of reclamation and closure costs, including a summary of changes in our AROs for the three years ended December 31, 2016 .


Generally, ARO activities are specified by regulations or in permits issued by the relevant governing authority, and management judgment is required to estimate the extent and timing of expenditures. Accounting for AROs represents a critical accounting estimate because (i) we will not incur most of these costs for a number of years, requiring us to make estimates over a long period, (ii) reclamation and closure laws and regulations could change in the future and/or circumstances affecting our operations could change, either of which could result in significant changes to our current plans, (iii) the methods used or required to plug and abandon non-producing oil and gas wellbores, remove platforms, tanks, production equipment and flow lines, and restore the wellsite could change, (iv) calculating the fair value of our AROs requires management to estimate projected cash flows, make long-term assumptions about inflation rates, determine our credit-adjusted, risk-free interest rates and determine market risk premiums that are appropriate for our operations and (v) given the magnitude of our estimated reclamation, mine closure and wellsite abandonment and restoration costs, changes in any or all of these estimates could have a significant impact on our results of operations.


Taxes

In preparing our annual consolidated financial statements, we estimate the actual amount of income taxes currently payable or receivable as well as deferred income tax assets and liabilities attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized in income in the period in which such changes are enacted.


Our operations are in multiple jurisdictions where uncertainties arise in the application of complex tax regulations. Some of these tax regimes are defined by contractual agreements with the local government, while others are defined by general tax laws and regulations. We and our subsidiaries are subject to reviews of our income tax filings and other tax payments, and disputes can arise with the taxing authorities over the interpretation of our contracts or laws. Final taxes paid may be dependent upon many factors, including negotiations with taxing authorities. In certain jurisdictions, we must pay a portion of the disputed amount to the local government in order to formally appeal an assessment. Such payment is recorded as a receivable if we believe the amount is collectible.


A valuation allowance is provided for those deferred income tax assets for which the weight of available evidence suggests that the related benefits will not be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income or loss as well as feasible tax planning strategies in each jurisdiction. If we determine that we will not realize all or a portion of our deferred income tax assets, we will increase our


71

Table of Contents


valuation allowance. Conversely, if we determine that we will ultimately be able to realize all or a portion of the related benefits for which a valuation allowance has been provided, all or a portion of the related valuation allowance will be reduced.


Our valuation allowances totaled $6.1 billion at December 31, 2016 , which covered U.S. federal and state deferred tax assets, including all of our U.S. foreign tax credit carryforwards, U.S. federal net operating loss carryforwards, U.S. federal capital loss carryforwards, foreign net operating loss carryforwards, and substantially all of our U.S. minimum tax credit carryforwards and U.S. state net operating loss carryforwards. Refer to Note 11 for further discussion.


CONSOLIDATED RESULTS

Years Ended December 31,

2016

2015

2014 a

SUMMARY FINANCIAL DATA

(in millions, except per share amounts)

Revenues b,c,d

$

14,830


$

14,607


$

20,001


Operating loss b,e,f,g,h,i

$

(2,792

)

j

$

(13,512

)

j

$

(298

)

k

Net loss from continuing operations l

$

(3,832

)

m,n

$

(12,180

)

o

$

(1,022

)

m,n

Net (loss) income from discontinued operations p

$

(193

)

$

91


$

277


Net loss attributable to common stock

$

(4,154

)

q

$

(12,236

)

$

(1,308

)

Diluted net (loss) income per share attributable to common stock:

Continuing operations

$

(2.96

)

$

(11.32

)

$

(1.37

)

Discontinued operations

(0.20

)

0.01


0.11


$

(3.16

)

$

(11.31

)

$

(1.26

)

Diluted weighted-average common shares outstanding

1,318


1,082


1,039


Operating cash flows r

$

3,729


$

3,220


$

5,631


Capital expenditures

$

2,813


$

6,353


$

7,215


At December 31:

Cash and cash equivalents

$

4,245


$

177


$

298


Total debt, including current portion

$

16,027


$

20,324


$

18,741


a.

Includes the results of the Candelaria and Ojos del Salado mines prior to their sale in November 2014, and the results of the Eagle Ford shale assets prior to their sale in June 2014.

b.

As further detailed in Note 16, following is a summary of revenues and operating income (loss) by operating division (in millions):

Years Ended December 31,

Revenues

2016

2015

2014

North America copper mines

$

4,374


$

5,126


$

5,616


South America mining

2,938


1,934


3,532


Indonesia mining

3,295


2,653


3,071


Molybdenum mines

186


348


587


Rod & Refining

3,862


4,154


4,655


Atlantic Copper Smelting & Refining

1,830


1,970


2,412


U.S. Oil & Gas operations

1,513


1,994


4,710


Other mining, corporate, other & eliminations

(3,168

)

(3,572

)

(4,582

)

Total revenues

$

14,830


$

14,607


$

20,001


Operating income (loss)

North America copper mines

$

1,479


$

648


$

1,698


South America mining

618


67


1,220


Indonesia mining

1,027


449


719


Molybdenum mines

(96

)

(72

)

167


Rod & Refining

16


16


12


Atlantic Copper Smelting & Refining

72


67


(2

)

U.S. Oil & Gas operations

(5,711

)

(14,189

)

(4,479

)

Other mining, corporate, other & eliminations

(197

)

(498

)

367


Total operating loss

$

(2,792

)

$

(13,512

)

$

(298

)


72

Table of Contents


c.

Includes favorable (unfavorable) adjustments to provisionally priced concentrate and cathode copper sales recognized in prior periods totaling $5 million ( $2 million to net loss attributable to common stock or less than $0.01 per share) in 2016 , $(100) million ( $(50) million to net loss attributable to common stock or $(0.05) per share) in 2015 and $(117) million ( $(65) million to net loss attributable to common stock or $(0.06) per share) in 2014 . Refer to "Revenues" for further discussion. 

d.

Includes net noncash mark-to-market (losses) gains associated with crude oil and natural gas derivative contracts totaling $(41) million ( $(41) million to net loss attributable to common stock or $(0.03) per share) in 2016 , $(319) million ( $(198) million to net loss attributable to common stock or $(0.18) per share) in 2015 and $627 million ( $389 million to net loss attributable to common stock or $0.37 per share) in 2014 . Refer to "Revenues" for further discussion.

e.

Includes the following charges to reduce the carrying value of oil and gas properties pursuant to full cost accounting rules (in millions except per share amounts):

Years Ended December 31,

2016

2015

2014

Operating loss

$

4,317


$

13,144


$

3,737


Net loss attributable to common stock

4,317


11,598


2,324


Net loss per share of common stock

3.28


10.72


2.24


As a result of the impairment to U.S. oil and gas properties, we recorded tax charges totaling $1.6 billion in 2016 and $3.3 billion in 2015 to establish valuation allowances against U.S. federal and state deferred tax assets that are not expected to generate a future benefit, which have been reflected in the above after-tax impacts for the impairment of oil and gas properties.

f.

Includes net charges at oil and gas operations totaling $1.1 billion ($1.1 billion to net loss attributable to common stock or $0.84 per share) in 2016 , primarily for drillship settlements/idle rig costs, the termination of contracts for support vessels and equipment, inventory adjustments, asset impairment and restructuring charges, $188 million ( $117 million to net loss attributable to common stock or $0.11 per share) in 2015 , primarily for asset impairments, inventory adjustments and idle rig costs, and $46 million ( $29 million to net loss attributable to common stock or $0.03 per share) in 2014 , primarily for idle rig costs and inventory adjustments.

g.

Includes charges for metals inventory adjustments totaling $36 million ( $36 million to net loss attributable to common stock or $0.03 per share) in 2016 , $338 million ( $217 million to net loss attributable to common stock or $0.20 per share) in 2015 and $6 million ( $4 million to net loss attributable to common stock or less than $0.01 per share) in 2014 .

h.

Includes net (credits) charges for adjustments to environmental obligations and related litigation reserves of $(16) million ( $(16) million to net loss attributable to common stock or $(0.01) per share) in 2016 , $43 million ( $28 million to net loss attributable to common stock or $0.03 per share) in 2015 and $76 million ( $50 million to net loss attributable to common stock or $0.05 per share) in 2014 .

i.

Includes net gains on sales of assets of $649 million ( $649 million to net loss attributable to common stock or $0.49 per share) in 2016, $39 million ( $25 million to net loss attributable to common stock or $0.02 per share) in 2015 and $717 million ( $481 million to net loss attributable to common stockholders or $0.46 per share) in 2014. Refer to Note 2 and "Net Gain on Sales of Assets" below for further discussion.

j.

Includes net charges at mining operations totaling $33 million ( $14 million to net loss attributable to common stock or $0.01 per share) in 2016 for an asset retirement at PT-FI and social commitments at Cerro Verde and $145 million ( $90 million to net loss attributable to common stock or $0.08 per share) in 2015 for asset impairment, restructuring and other net charges. The year 2015 also includes $18 million ( $12 million to net loss attributable to common stock or $0.01 per share) for executive retirement benefits.

k.

Includes an impairment charge of $1.7 billion ( $1.7 billion to net loss attributable to common stockholders or $1.65 per share) for the full carrying value of goodwill associated with our 2013 oil and gas acquisitions.

l.

We defer recognizing profits on intercompany sales until final sales to third parties occur. Refer to "Operations - Smelting & Refining" for a summary of net impacts from changes in these deferrals.

m.

Includes net gains on exchanges and early extinguishment of debt totaling $26 million ( $26 million to net loss attributable to common stock or $0.02 per share) in 2016 and $73 million ( $3 million to net loss attributable to common stock or less than $0.01 per share) in 2014. Refer to Note 8 for further discussion.

n.

Includes net tax credits (charges) of $374 million ( $0.28 per share) in 2016 and $(103) million ( $(0.10) per share) in 2014. Refer to "Income Taxes" below for further discussion.

o.

The year 2015 includes a gain of $92 million ($92 million to net loss attributable to common stock or $0.09 per share) related to net proceeds received from insurance carriers and other third parties related to the shareholder derivative litigation settlement.

p.

Reflects the results of TFHL through November 16, 2016, and includes charges for allocated interest expense associated with the portion of our term loan that was required to be repaid as a result of the sale of our interest in TFHL. The year


73

Table of Contents


2016 also includes $198 million for the loss on disposal. Refer to Note 2 and "Net (Loss) Income from Discontinued Operations" below for further discussion.

q.

Includes a gain on redemption of noncontrolling interest of $199 million for the settlement of our preferred stock obligation at our Plains Offshore Operations Inc. (Plains Offshore) subsidiary.

r.

Includes net working capital sources (uses) and changes in other tax payments of $57 million in 2016 , $373 million in 2015 and $(632) million in 2014 .

Years Ended December 31,

2016

2015

2014 a,b

SUMMARY OPERATING DATA

Copper (millions of recoverable pounds) c

Production

4,222


3,568


3,457


Sales, excluding purchases

4,227


3,603


3,463


Average realized price per pound

$

2.28


$

2.42


$

3.09


Site production and delivery costs per pound d

$

1.42


$

1.81


$

1.95


Unit net cash costs per pound d

$

1.26


$

1.57


$

1.55


Gold (thousands of recoverable ounces)

Production

1,088


1,257


1,214


Sales, excluding purchases

1,079


1,247


1,248


Average realized price per ounce

$

1,238


$

1,129


$

1,231


Molybdenum (millions of recoverable pounds)

Production

80


92


95


Sales, excluding purchases

74


89


95


Average realized price per pound

$

8.33


$

8.70


$

12.74


Oil Equivalents

Sales volumes:

Million barrels of oil equivalent (MMBOE)

47.1


52.6


56.8


Thousand BOE (MBOE) per day

128


144


156


Cash operating margin per BOE: e

Realized revenues f

$

32.59


$

43.54


$

71.83


Cash production costs

(15.19

)

(18.59

)

(20.08

)

Cash operating margin

$

17.40


$

24.95


$

51.75


a.

Includes the results of the Candelaria and Ojos del Salado mines prior to their sale in November 2014. Sales volumes from the Candelaria and Ojos del Salado mines totaled 268 million pounds of copper and 67 thousand ounces of gold in 2014.

b.

Includes the results of the Eagle Ford shale assets prior to their sale in June 2014. Sales volumes from Eagle Ford totaled 8.7 MMBOE ( 24 MBOE per day) in 2014; excluding Eagle Ford, oil and gas cash production costs were $21.36 per BOE for the year 2014.

c.

Excludes results from the Tenke mine, which is reported as a discontinued operation. Refer to "Discontinued Operations" for further discussion of Tenke's operating results.

d.

Reflects per pound weighted-average production and delivery costs and unit net cash costs (net of by-product credits) for all copper mines, before net noncash and other costs. For reconciliations of the per pound unit costs by operating division to production and delivery costs applicable to sales reported in our consolidated financial statements, refer to "Product Revenues and Production Costs."

e.

Cash operating margin for oil and gas operations reflects realized revenues less cash production costs. Realized revenues exclude noncash mark-to-market adjustments on derivative contracts, and cash production costs exclude accretion and other costs. For reconciliations of realized revenues and cash production costs per BOE to revenues and production and delivery costs reported in our consolidated financial statements, refer to "Product Revenues and Production Costs."

f.

Includes realized cash gains (losses) on crude oil and natural gas derivative contracts of $0.13 per BOE in 2016, $7.72 per BOE in 2015 and $(2.15) per BOE in 2014. We do not have any oil and gas derivative contracts in place for future periods.



74

Table of Contents


Revenues

Consolidated revenues totaled $14.8 billion in 2016 , $14.6 billion in 2015 and $20.0 billion in 2014 . Revenues from our mining operations primarily include the sale of copper concentrate, copper cathode, copper rod, gold and molybdenum. Revenue from our oil and gas operations include the sale of oil, natural gas and natural gas liquids (NGLs). Following is a summary of changes in our consolidated revenues between periods (in millions):

2016

2015

Consolidated revenues - prior year

$

14,607


$

20,001


Mining operations:

Higher (lower) sales volumes:

Copper

1,508


433


Gold

(190

)

(1

)

Molybdenum

(128

)

(72

)

(Lower) higher averaged realized prices:

Copper

(592

)

(2,414

)

Gold

117


(127

)

Molybdenum

(27

)

(360

)

Net adjustments for prior year provisionally priced copper sales

105


17


Higher (lower) revenues from purchased copper

117


(95

)

Lower Atlantic Copper revenues

(140

)

(442

)

Oil and gas operations:

Lower oil sales volumes

(40

)

(451

)

Lower oil average realized prices, excluding derivative contracts

(228

)

(1,663

)

Net mark-to-market adjustments on derivative contracts

(122

)

(418

)

Other, including intercompany eliminations

(157

)

199


Consolidated revenues - current year

$

14,830


$

14,607



Mining Operations

Sales Volumes. Consolidated copper sales volumes totaled 4.2 billion pounds in 2016 , 3.6 billion pounds in 2015 and 3.5 billion pounds in 2014. Higher copper sales volumes in 2016, compared to 2015 , primarily reflect higher volumes from Cerro Verde and PT-FI, partly offset by lower sales volumes in North America primarily reflecting reduced mining rates and the impact of the May 2016 sale of an additional 13 percent undivided interest in Morenci. Higher copper sales volumes in 2015, compared to 2014, primarily reflect higher volumes from North America associated with increased production from the Morenci mill expansion project and higher ore grades at the Chino mine, and higher volumes from Indonesia associated with higher mill throughput because of export restrictions in 2014, partly offset by lower volumes from South America as a result of the sale of the Candelaria and Ojos del Salado mines in November 2014.


Consolidated gold sales volumes totaled 1.1 million ounces in 2016 and 1.25 million ounces in both 2015 and 2014. Lower gold sales volumes in 2016, compared with 2015, primarily reflect lower ore grades at PT-FI.


Consolidated molybdenum sales volumes totaled 74 million pounds in 2016 , 89 million pounds in 2015 and 95 million pounds in 2015. Lower molybdenum sales volumes in 2016, compared with 2015, primarily reflect reduced operating rates in response to weak demand.


Refer to "Operations" for further discussion of sales volumes at our operating divisions.


Metals Realized Prices. Our consolidated revenues can vary significantly as a result of fluctuations in the market prices of copper, gold and molybdenum. Our average realized prices were 6 percent lower for copper, 10 percent higher for gold and 4 percent lower for molybdenum in 2016 , compared with 2015 . In 2015 , our average realized prices were 22 percent lower for copper, 8 percent lower for gold and 32 percent lower for molybdenum, compared with 2014.



75

Table of Contents


Provisionally Priced Copper Sales. Impacts of net adjustments for prior year provisionally priced sales primarily relate to copper sales. Substantially all of our copper concentrate and cathode sales contracts provide final copper pricing in a specified future month (generally one to four months from the shipment date) based primarily on quoted LME monthly average spot copper prices (refer to "Disclosures About Market Risks-Commodity Price Risk" for further discussion). Revenues include favorable (unfavorable) net adjustments to prior years' provisionally priced copper sales totaling $5 million in 2016 , $(100) million in 2015 and $(117) million in 2014 .


Purchased Copper. We purchased copper cathode primarily for processing by our Rod & Refining operations. Purchased copper volumes totaled 188 million pounds in 2016, 121 million pounds in 2015 and 125 million pounds in 2014.


Atlantic Copper Revenues. Atlantic Copper revenues totaled $1.8 billion in 2016, $2.0 billion in 2015 and $2.4 billion in 2014. Lower Atlantic Copper revenues in 2016, compared with 2015, and in 2015, compared with 2014, primarily reflect lower copper prices.


Oil & Gas Operations

Oil Sales Volumes. Oil sales volumes totaled 34.4 million barrels (MMBbls) in 2016 , 35.3 MMBbls in 2015 and 40.1 MMBbls in 2014. Lower oil sales volumes in 2016, compared with 2015, primarily reflect lower volumes from California. Lower oil sales volumes in 2015, compared with 2014, primarily reflect the sale of the Eagle Ford shale assets in June 2014, partly offset by higher volumes in the GOM. Refer to "Operations" for further discussion of sales volumes at our oil and gas operations.


Realized Oil Prices Excluding Derivative Contracts. Our average realized price for oil (excluding the impact of derivative contracts) of $38.96 per barrel in 2016 was 15 percent lower than our average realized price of $45.58 per barrel in 2015 . Our average realized price for oil (excluding the impact of derivative contracts) in 2015 was 51 percent lower than our average realized price of $92.76 per barrel for 2014.


Oil and Gas Derivative Contracts. During 2016 , 2015 and 2014, we had derivative contracts that were not designated as hedging instruments; accordingly, they were recorded at fair value with the mark-to-market gains and losses recorded in revenues each period (refer to Note 14 for further discussion of oil and gas derivative contracts). Net mark-to-market (losses) gains on oil and gas derivative contracts totaled $(35) million in 2016 , compared with $87 million in 2015 and $505 million in 2014. We currently have no derivative contracts in place for future periods.


Production and Delivery Costs

Consolidated production and delivery costs totaled $10.7 billion in both 2016 and 2015 and $11.1 billion in 2014 . Production and delivery costs for mining operations were $640 million lower in 2016, compared to 2015, primarily reflecting the impact of cost reduction initiatives. Production and delivery costs for our U.S. oil and gas operations were $590 million higher in 2016, compared to 2015, primarily reflecting higher charges for drillship settlements/idle rig and contract termination costs (which totaled $926 million in 2016, compared to $26 million in 2015), partly offset by the impact of cost reduction efforts.


Production and delivery costs from mining operations were $394 million lower in 2015 , compared with 2014, primarily reflecting lower costs at our South America mines as a result of the sale of the Candelaria and Ojos del Salado mines in November 2014 and lower diesel costs in Indonesia, partly offset by higher costs at our North America mines associated with higher volumes. Production and delivery costs for our U.S. oil and gas operations were $26 million lower in 2015, compared with 2014, primarily reflecting the sale of the Eagle Ford shale assets in June 2014 and lower well workover expense and steam gas costs in California.


Mining Unit Site Production and Delivery Costs

Site production and delivery costs for our copper mining operations primarily include labor, energy and commodity-based inputs, such as sulphuric acid, reagents, liners, tires and explosives. Consolidated unit site production and delivery costs (before net noncash and other costs) for our copper mines averaged $1.42 per pound of copper in 2016 , $1.81 per pound in 2015 and $1.95 per pound in 2014. Lower consolidated unit site production and delivery costs in 2016 , compared with 2015, primarily reflect higher sales volumes and the impact of cost reduction initiatives. Lower consolidated unit site production and delivery costs in 2015, compared with 2014, primarily reflect higher copper sales volumes in North America and Indonesia. Refer to "Operations – Unit Net Cash Costs" for further discussion of unit net cash costs associated with our operating divisions, and to "Product Revenues and


76

Table of Contents


Production Costs" for reconciliations of per pound costs by operating division to production and delivery costs applicable to sales reported in our consolidated financial statements.


Our copper mining operations require significant energy, principally diesel, electricity, coal and natural gas, most of which is obtained from third parties under long-term contracts. Energy represented approximately 20 percent of our copper mine site operating costs in 2016 , including purchases of approximately 214 million gallons of diesel fuel; 8,400 gigawatt hours of electricity at our North America and South America copper mining operations (we generate all of our power at our Indonesia mining operation); 780 thousand metric tons of coal for our coal power plant in Indonesia; and 1 million MMBtu (million British thermal units) of natural gas at certain of our North America mines. Based on current cost estimates, energy will approximate 20 percent of our copper mine site operating costs for 2017 .


Oil and Gas Production Costs per BOE

Production costs for our oil and gas operations primarily include costs incurred to operate and maintain wells and related equipment and facilities, such as lease operating expenses, steam gas costs, electricity, production and ad valorem taxes, and gathering and transportation expenses. Cash production costs for our oil and gas operations averaged $15.19 per BOE in 2016 , $18.59 per BOE in 2015 and $20.08 per BOE in 2014 . Lower cash production costs in 2016 , compared with 2015, primarily resulted from cost reduction efforts. Lower cash production costs in 2015, compared with 2014, primarily reflect lower well workover expense and steam gas costs in California. Refer to "Operations" for further discussion of cash production costs at our oil and gas operations.


Depreciation, Depletion and Amortization

Depreciation will vary under the UOP method as a result of changes in sales volumes and the related UOP rates at our mining and oil and gas operations. Consolidated DD&A totaled $2.5 billion in 2016 , $3.2 billion in 2015 and $3.6 billion in 2014 .


DD&A from our mining operations was $225 million higher in 2016 , compared with 2015 , primarily associated with higher sales volumes at Cerro Verde. DD&A from U.S. oil and gas operations was $935 million lower in 2016 , compared with 2015 , primarily reflecting lower DD&A rates as a result of impairment of our oil and gas properties.


DD&A from our mining operations was $92 million higher in 2015, compared with 2014, primarily associated with higher sales volumes in North America and Indonesia. DD&A from U.S. oil and gas operations was $487 million lower in 2015 , compared with 2014 , primarily reflecting lower DD&A rates as a result of impairment of our oil and gas properties.


Impairment of Oil and Gas Properties

Under the full cost accounting rules, a "ceiling test" is conducted each quarter to review the carrying value of our U.S. oil and gas properties for impairment, which resulted in the recognition of impairment charges totaling $4.3 billion in 2016 , $13.0 billion in 2015 and $3.7 billion in 2014. We also recognized impairment charges of $18 million in 2016 and $164 million in 2015 for international oil and gas properties, primarily related to Morocco. Refer to Note 1 and "Critical Accounting Estimates" for further discussion.


Metals Inventory Adjustments

Lower copper and molybdenum prices resulted in adjustments to related inventory carrying values totaling $36 million in 2016 , $338 million in 2015 and $6 million in 2014 . Refer to Notes 1 and 4 for further discussion.


Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses totaled $607 million in 2016 , $558 million in 2015 and $580 million in 2014 . Selling, general and administrative expenses included net restructuring charges of $85 million in 2016 associated with oil and gas operations and $18 million in 2015 for executive retirement benefits.


Consolidated selling, general and administrative expenses were net of capitalized general and administrative expenses at our oil and gas operations totaling $78 million in 2016 , $124 million in 2015 and $143 million in 2014.


Mining Exploration and Research Expenses

Consolidated exploration and research expenses for our mining operations totaled $64 million in 2016 , $107 million in 2015 and $106 million in 2014 . Our mining exploration activities are generally associated with our existing mines focusing on opportunities to expand reserves and resources to support development of additional future production capacity. Exploration results continue to indicate opportunities for significant future potential reserve additions in


77

Table of Contents


North and South America. Exploration spending continues to be constrained by market conditions and is expected to approximate $47 million in 2017 .


Environmental Obligations and Shutdown Costs

Environmental obligation costs reflect net revisions to our long-term environmental obligations, which vary from period to period because of changes to environmental laws and regulations, the settlement of environmental matters and/or circumstances affecting our operations that could result in significant changes in our estimates (refer to "Critical Accounting Estimates - Environmental Obligations" for further discussion). Shutdown costs include care-and-maintenance costs and any litigation, remediation or related expenditures associated with closed facilities or operations. Net charges for environmental obligations and shutdown costs totaled $20 million in 2016 , $78 million in 2015 and $119 million in 2014 . Refer to Note 12 for further discussion of environmental obligations and litigation matters.


Goodwill Impairment

As further discussed in Note 1, the fourth-quarter 2014 goodwill assessment resulted in an impairment charge of $1.7 billion for the full carrying value of goodwill associated with the 2013 oil and gas acquisitions.


Net Gain on Sales of Assets

Net gain on sales of assets totaled $649 million in 2016 , primarily related to the gains recognized for the Morenci and Timok transactions, partly offset by estimated losses on assets held for sale related to the potential Freeport Cobalt and Kisanfu transactions. Net gain on sales of assets for the year 2016 also reflects $183 million for contingent consideration, including $150 million associated with the sale of the Deepwater GOM oil and gas properties, which is payable to us as the buyer realizes future cash flows in connection with a third-party production handling agreement and $33 million for the fair value of the potential $150 million in contingent consideration from the sale of the onshore California oil and gas properties, which in accordance with accounting guidelines will continue to be adjusted to fair value through December 31, 2020.


Net gain on sales of assets totaled $39 million in 2015 related to the sale of our one-third interest in the Luna Energy power facility in New Mexico and $717 million in 2014 primarily related to the sale of our 80 percent interests in the Candelaria and Ojos del Salado mines.


Refer to Note 2 for further discussion of dispositions.


Interest Expense, Net

Consolidated interest expense (excluding capitalized interest and interest expense allocated to discontinued operations) totaled $854 million in 2016 , $832 million in 2015 and $842 million in 2014 . Refer to Note 2 for a summary of interest allocated to discontinued operations.


Capitalized interest varies with the level of expenditures for our development projects and average interest rates on our borrowings, and totaled $99 million in 2016 , $215 million in 2015 and $236 million in 2014 . Refer to "Operations" and "Capital Resources and Liquidity - Investing Activities" for further discussion of current development projects.


Net Gain on Exchanges and Early Extinguishment of Debt

Net gains on exchanges and early extinguishment of debt totaled $26 million in 2016, primarily related to the redemption of certain senior notes in exchange for common stock, partly offset by losses associated with prepayments of the term loan and fees associated with the exchange of Freeport-McMoRan Oil & Gas LLC senior notes for new FCX senior notes. Net gains on exchanges and early extinguishment of debt totaled $73 million in 2014, primarily related to senior note redemptions and tender offers. Refer to Note 8 for further discussion.


Other Income, Net

Other income, net, primarily includes foreign currency translation adjustments and interest income, and totaled $49 million in 2016 , $1 million in 2015 and $31 million in 2014 . The year 2015 also includes a gain of $92 million associated with net proceeds received from insurance carriers and other third parties related to the shareholder derivative litigation.



78

Table of Contents


Income Taxes

Following is a summary of the approximate amounts used in the calculation of our consolidated income tax (provision) benefit from continuing operations for the years ended December 31 (in millions, except percentages):

2016

2015

Income (Loss) a

Effective

Tax Rate

Income Tax
(Provision)
Benefit

Income (Loss) a

Effective
Tax Rate

Income Tax
(Provision)
Benefit

U.S.

$

(865

)

41%

$

357


b

$

(1,626

)

c

44%

$

720


South America

501


43%

(216

)

d

(40

)

(10)%

(4

)

Indonesia

1,058


42%

(442

)

430


45%

(195

)

Impairment of oil and gas properties

(4,317

)

38%

1,632


(13,144

)

37%

4,884


Valuation allowance, net e

-


N/A

(1,632

)

-


N/A

(3,338

)

Eliminations and other

151


N/A

(70

)

252


N/A

(116

)

Consolidated FCX

$

(3,472

)

(11)%

$

(371

)

$

(14,128

)

14%

$

1,951


2014

Income (Loss) a

Effective
Tax Rate

Income Tax
(Provision)
Benefit

U.S.

$

1,881


28%

$

(527

)

f

South America

1,221


43%

(531

)

g

Indonesia

709


41%

(293

)

Impairment of oil and gas properties

(3,737

)

38%

1,413


Gain on sale of Candelaria and Ojos del Salado mines

671


33%

(221

)

Eliminations and other

172


N/A

(66

)

917


25%

(225

)

Adjustments

(1,717

)

h

N/A

-


Consolidated FCX

$

(800

)

(28)%

$

(225

)

a.

Represents income (loss) by geographic location before income taxes and equity in affiliated companies' net earnings(losses).

b.

Includes net tax credits of $357 million associated with alternative minimum tax credits, changes to valuation allowances and net operating loss carryback claims.

c.

Includes a gain of $92 million related to net proceeds received from insurance carriers and other third parties related to the shareholder derivative litigation settlement for which there was no related tax provision.

d.

Includes a net tax credit of $13 million ( $17 million net of noncontrolling interests) related to changes in Peruvian tax rules.

e.

As a result of the impairment to U.S. oil and gas properties, we recorded tax charges to establish valuation allowances against U.S. federal and state deferred tax assets that will not generate a future benefit.

f.

Includes a charge of $84 million for deferred taxes recorded in connection with the allocation of goodwill to the sale of Eagle Ford shale assets; partly offset by a net benefit of $41 million (comprised of $57 million related to changes in U.S. state income tax filing positions and a charge of $16 million for a change in U.S. federal income tax law regulations).

g.

Includes charges of $78 million ( $60 million net of noncontrolling interests) related to changes in Chilean and Peruvian tax rules.

h.

Reflects goodwill impairment charges, which were non-deductible for tax purposes.

Our consolidated effective income tax rate is a function of the combined effective tax rates for the jurisdictions in which we operate. Accordingly, variations in the relative proportions of jurisdictional income result in fluctuations to our consolidated effective income tax rate. Assuming achievement of current sales volume and cost estimates and average prices of $2.50 per pound for copper, $1,200 per ounce for gold and $7.00 per pound for molybdenum for 2017 , we estimate our consolidated effective tax rate for the year 2017 will approximate 46 percent and would decrease with higher prices.


Refer to Note 11 for further discussion of income taxes.



79

Table of Contents


Net (Loss) Income from Discontinued Operations

As further discussed in Note 2, in November 2016, we completed the sale of our interest in TFHL, through which we had an effective 56 percent interest in the Tenke copper and cobalt concessions in the Southeast region of the Democratic Republic of Congo (DRC). In accordance with accounting guidelines, the results of TFHL through November 16, 2016, have been reported as discontinued operations for all periods presented.


Net (loss) income from discontinued operations totaled $ (193) million in 2016, $91 million in 2015 and $277 million in 2014, and included allocated interest expense of $ 39 million in 2016, $28 million in 2015 and $24 million in 2014 associated with the portion of the term loan that was required to be repaid as a result of the sale of our interest in TFHL. The year 2016 also included $198 million for the loss on disposal, which includes (i) a charge of $33 million for our share of the settlement agreement entered into with La Générale des Carrières et des Mines (Gécamines), which is wholly owned by the DRC government, resulting in the resolution of all claims brought by Gécamines against us (refer to Note 2 for further discussion) and (ii) a gain of $13 million recognized for the fair value of contingent consideration, which in accordance with accounting guidelines will continue to be adjusted through December 31, 2019.


Gain on Redemption and Preferred Dividends Attributable to Redeemable Noncontrolling Interest

In connection with the December 2016 sale of the Deepwater GOM oil and gas properties, we settled a preferred stock obligation at our Plains Offshore subsidiary, which resulted in the recognition of a $199 million gain on redemption. Refer to Note 2 for further discussion.


OPERATIONS


North America Copper Mines

We operate seven open-pit copper mines in North America – Morenci, Bagdad, Safford, Sierrita and Miami in Arizona, and Chino and Tyrone in New Mexico. All of the North America mining operations are wholly owned, except for Morenci.


We record our undivided joint venture interest in Morenci using the proportionate consolidation method. On May 31,

2016, we completed the sale of an additional 13 percent undivided interest in Morenci. As a result of the transaction, our undivided interest in Morenci was prospectively reduced from 85 percent to 72 percent. Refer to Note 2 for further discussion.


The North America copper mines include open-pit mining, sulfide ore concentrating, leaching and solution extraction/electrowinning (SX/EW) operations. A majority of the copper produced at our North America copper mines is cast into copper rod by our Rod & Refining segment. The remainder of our North America copper sales is in the form of copper cathode or copper concentrate, a portion of which is shipped to Atlantic Copper (our wholly owned smelter). Molybdenum concentrate, gold and silver are also produced by certain of our North America copper mines .


Operating and Development Activities. We have significant undeveloped reserves and resources in North America

and a portfolio of long-term development projects. Future investments will be undertaken based on the results of economic and technical feasibility studies, and market conditions.


In response to market conditions, beginning in the second half of 2015, we took actions to reduce operating and capital costs and adjusted production to reflect market conditions. These operating plans will continue to be reviewed and additional adjustments may be made as market conditions warrant.









80

Table of Contents


Operating Data. Following is summary operating data for the North America copper mines for the years ended December 31:

2016

2015

2014

Operating Data, Net of Joint Venture Interest

Copper  (millions of recoverable pounds)

Production

1,831


1,947


1,670


Sales, excluding purchases

1,841


1,988


1,664


Average realized price per pound

$

2.24


$

2.47


$

3.13


Molybdenum  (millions of recoverable pounds)

Production a

33


37


33


100% Operating Data

SX/EW operations

Leach ore placed in stockpiles (metric tons per day)

739,200


909,900


1,005,300


Average copper ore grade (percent)

0.31


0.26


0.25


Copper production (millions of recoverable pounds)

1,224


1,134


963


Mill operations

Ore milled (metric tons per day)

300,500


312,100


273,800


Average ore grade (percent):

Copper

0.47


0.49


0.45


Molybdenum

0.03


0.03


0.03


Copper recovery rate (percent)

85.5


85.4


85.8


Copper production (millions of recoverable pounds)

854


972


828


a.

Refer to "Consolidated Results" for our consolidated molybdenum sales volumes, which includes sales of molybdenum produced at the North America copper mines.


Copper sales volumes from our North America copper mines decreased to 1.8 billion pounds in 2016 , compared with 2.0 billion pounds in 2015 , primarily reflecting the impact of the May 2016 sale of an additional 13 percent undivided interest in Morenci and reduced mining rates.


Copper sales volumes from our North America copper mines increased to 2.0 billion pounds in 2015 , compared with 1.7 billion pounds in 2014 , primarily because of higher mining and milling rates at Morenci and higher ore grades at Morenci, Chino and Safford.


Copper sales from North America are expected to approximate 1.5 billion pounds in 2017 . Refer to "Outlook" for projected molybdenum sales volumes.


Unit Net Cash Costs. Unit net cash costs per pound of copper is a measure intended to provide investors with information about the cash-generating capacity of our mining operations expressed on a basis relating to the primary metal product for our respective operations. We use this measure for the same purpose and for monitoring operating performance by our mining operations. This information differs from measures of performance determined in accordance with U.S. GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance with U.S. GAAP. This measure is presented by other metals mining companies, although our measure may not be comparable to similarly titled measures reported by other companies.


Gross Profit per Pound of Copper and Molybdenum

The following tables summarize unit net cash costs and gross profit per pound of copper at our North America copper mines for the years ended December 31. Refer to "Product Revenues and Production Costs" for an explanation of the "by-product" and "co-product" methods and a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in our consolidated financial statements.

2016

2015

By-

Co-Product Method

By-

Co-Product Method

Product

Method

Copper

Molyb-

denum a

Product

Method

Copper

Molyb-

denum a

Revenues, excluding adjustments

$

2.24


$

2.24


$

6.34


$

2.47


$

2.47


$

7.02


Site production and delivery, before net noncash

and other costs shown below

1.42


1.35


4.93


1.68


1.59


5.61


By-product credits

(0.12

)

-


-


(0.13

)

-


-


Treatment charges

0.11


0.10


-


0.12


0.12


-


Unit net cash costs

1.41


1.45


4.93


1.67


1.71


5.61


DD&A

0.29


0.27


0.60


0.28


0.27


0.53


Metals inventory adjustments

-


-


-


0.07


0.07


0.07


Noncash and other costs, net

0.05


0.05


0.06


0.12


b

0.11


0.16


Total unit costs

1.75


1.77


5.59


2.14


2.16


6.37


Revenue adjustments, primarily for pricing on prior period open sales

-


-


-


(0.01

)

(0.01

)

-


Gross profit per pound

$

0.49


$

0.47


$

0.75


$

0.32


$

0.30


$

0.65


Copper sales (millions of recoverable pounds)

1,836


1,836


1,985


1,985


Molybdenum sales (millions of recoverable pounds) a

33


37


a.

Reflects sales of molybdenum produced by certain of the North America copper mines to our molybdenum sales company at market-based pricing.

b.

Includes $99 million ( $0.05 per pound) in 2015 for asset impairment, restructuring and other net charges.


Our North America copper mines have varying cost structures because of differences in ore grades and characteristics, processing costs, by-product credits and other factors. During 2016 , average unit net cash costs (net of by-product credits) for the North America copper mines ranged from $1.28 per pound to $2.01 per pound at the individual mines and averaged $1.41 per pound. Lower average unit net cash costs (net of by-product credits) in 2016 , compared with $1.67 per pound in 2015 , reflects cost reduction initiatives.


Because certain assets are depreciated on a straight-line basis, North America's average unit depreciation rate may vary with asset additions and the level of copper production and sales.


Average unit net cash costs (net of by-product credits) for our North America copper mines are expected to

approximate $1.55 per pound of copper for the year 2017 , based on achievement of current sales volume and cost

estimates, and assuming an average molybdenum price of $7.00 per pound. North America's average unit net cash costs for the year 2017 would change by approximately $0.04 per pound for each $2 per pound change in the average price of molybdenum.

2015

2014

By-

Co-Product Method

By-

Co-Product Method

Product

Method

Copper

Molyb-

denum a

Product

Method

Copper

Molyb-

denum a

Revenues, excluding adjustments

$

2.47


$

2.47


$

7.02


$

3.13


$

3.13


$

11.74


Site production and delivery, before net noncash

and other costs shown below

1.68


1.59


5.61


1.85


1.73


6.85


By-product credits

(0.13

)

-


-


(0.24

)

-


-


Treatment charges

0.12


0.12


-


0.12


0.12


-


Unit net cash costs

1.67


1.71


5.61


1.73


1.85


6.85


DD&A

0.28


0.27


0.53


0.29


0.27


0.60


Metals inventory adjustments

0.07


0.07


0.07


-


-


-


Noncash and other costs, net

0.12


b

0.11


0.16


0.09


0.09


0.07


Total unit costs

2.14


2.16


6.37


2.11


2.21


7.52


Revenue adjustments, primarily for pricing on prior period open sales

(0.01

)

(0.01

)

-


-


-


-


Gross profit per pound

$

0.32


$

0.30


$

0.65


$

1.02


$

0.92


$

4.22


Copper sales (millions of recoverable pounds)

1,985


1,985


1,657


1,657


Molybdenum sales (millions of recoverable pounds) a

37


33


a.

Reflects sales of molybdenum produced by certain of the North America copper mines to our molybdenum sales company at market-based pricing.

b.

Includes $99 million ( $0.05 per pound) in 2015 for asset impairment, restructuring and other net charges.


Unit net cash costs (net of by-product credits) for our North America copper mines decreased to $1.67 per pound of copper in 2015 , compared with $1.73 per pound in 2014 , primarily reflecting favorable impacts from higher copper sales volumes, partly offset by lower by-product credits.


South America Mining

We operate two copper mines in South America – Cerro Verde in Peru (in which we own a 53.56 percent interest) and El Abra in Chile (in which we own a 51 percent interest), which are consolidated in our financial statements.


South America mining includes open-pit mining, sulfide ore concentrating, leaching and SX/EW operations. Production from our South America mines is sold as copper concentrate or cathode under long-term contracts. Our South America mines also ship a portion of their copper concentrate and cathode to Atlantic Copper. In addition to copper, the Cerro Verde mine produces molybdenum concentrate and silver.


As further discussed in Note 2, in November 2014, we completed the sale of our 80 percent ownership interests in the Candelaria and Ojos del Salado mines.


Operating and Development Activities. The Cerro Verde expansion project commenced operations in September 2015 and achieved capacity operating rates during first-quarter 2016. Cerro Verde's expanded operations benefit from its large-scale, long-lived reserves and cost efficiencies. The project expanded the concentrator facilities from 120,000 metric tons of ore per day to 360,000 metric tons of ore per day and is expected to provide incremental annual production of approximately 600 million pounds of copper and 15 million pounds of molybdenum. Cerro Verde's copper production totaled 1.1 billion pounds in 2016, compared with 545 million pounds in 2015.


In response to market conditions, in the second half of 2015, we adjusted operations at our El Abra mine to

reduce mining and stacking rates by approximately 50 percent to achieve lower operating and labor costs, defer

capital expenditures and extend the life of the existing operations.


We continue to evaluate a potential large-scale milling operation at El Abra to process additional sulfide material

and to achieve higher recoveries. Exploration results in recent years at El Abra indicate a significant sulfide

resource, which could potentially support a major mill project. Future investments will depend on technical studies,

economic factors and market conditions.




Operating Data. Following is summary operating data for our South America mining operations for the years ended December 31.

2016

2015

2014 a

Copper  (millions of recoverable pounds)

Production

1,328


869


1,151


Sales

1,332


871


1,135


Average realized price per pound

$

2.31


$

2.38


$

3.08


Molybdenum  (millions of recoverable pounds)

Production b

21


7


11


SX/EW operations

Leach ore placed in stockpiles (metric tons per day)

151,600


193,900


275,200


Average copper ore grade (percent)

0.41


0.44


0.48


Copper production (millions of recoverable pounds)

328


430


491


Mill operations

Ore milled (metric tons per day)

353,400


152,100


180,500


Average ore grade:

Copper (percent)

0.43


0.46


0.54


Molybdenum (percent)

0.02


0.02


0.02


Copper recovery rate (percent)

85.8


81.5


88.1


Copper production (millions of recoverable pounds)

1,000


439


660


a.

Includes the results of the Candelaria and Ojos del Salado mines prior to their sale in November 2014; sales volumes from the Candelaria and Ojos del Salado mines totaled 268 million pounds of copper in 2014.

b.

Refer to "Consolidated Results" for our consolidated molybdenum sales volumes, which includes sales of molybdenum produced at Cerro Verde.


Higher consolidated copper sales volumes from South America of 1.3 billion pounds in 2016 , compared with 871 million in 2015 , primarily reflect Cerro Verde's expanded operations.


Copper sales volumes from our South America mining operations totaled 871 million pounds in 2015 , and were lower compared with 1.1 billion pounds in 2014 , primarily reflecting the November 2014 sale of the Candelaria and Ojos del Salado mines and lower ore grades at El Abra, partly offset by higher mining and milling rates at Cerro Verde.


For the year 2017 , consolidated sales volumes from South America mines are expected to approximate 1.3 billion pounds of copper. Refer to "Outlook" for projected molybdenum sales volumes.


Unit Net Cash Costs. Unit net cash costs per pound of copper is a measure intended to provide investors with information about the cash-generating capacity of our mining operations expressed on a basis relating to the primary metal product for our respective operations. We use this measure for the same purpose and for monitoring operating performance by our mining operations. This information differs from measures of performance determined in accordance with U.S. GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance with U.S. GAAP. This measure is presented by other metals mining companies, although our measure may not be comparable to similarly titled measures reported by other companies.

Gross Profit per Pound of Copper

The following tables summarize unit net cash costs and gross profit per pound of copper at our South America mining operations for the years ended December 31. Unit net cash costs per pound of copper are reflected under the by-product and co-product methods as the South America mining operations also had sales of molybdenum, gold and silver. Refer to "Product Revenues and Production Costs" for an explanation of the "by-product" and "co-product" methods and a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in our consolidated financial statements.

2016

2015

2014

By-Product

Method

Co-Product

Method

By-Product

Method

Co-Product

Method

By-Product

Method

Co-Product

Method

Revenues, excluding adjustments

$

2.31


$

2.31


$

2.38


$

2.38


$

3.08


$

3.08


Site production and delivery, before net noncash

and other costs shown below

1.26


1.20


1.60


1.56


1.62


1.51


By-product credits

(0.10

)

-


(0.05

)

-


(0.22

)

-


Treatment charges

0.24


0.24


0.19


0.19


0.17


0.17


Royalty on metals

0.01


-


-


-


0.01


-


Unit net cash costs

1.41


1.44


1.74


1.75


1.58


a

1.68


DD&A

0.41


0.39


0.40


0.39


0.32


0.31


Metals inventory adjustments

-


-


0.08


0.08


-


-


Noncash and other costs, net

0.03


0.03


0.05


0.05


0.06


0.06


Total unit costs

1.85


1.86


2.27


2.27


1.96


2.05


Revenue adjustments, primarily for pricing on

prior period open sales

0.01


0.01


(0.03

)

(0.03

)

(0.05

)

(0.05

)

Gross profit per pound

$

0.47


$

0.46


$

0.08


$

0.08


$

1.07


$

0.98


Copper sales (millions of recoverable pounds)

1,332


1,332


871


871


1,135


1,135



a.

Excluding the results of Candelaria and Ojos del Salado mines, South America mining's unit net cash costs averaged $1.57 per pound of copper in 2014.


During 2016 , unit net cash costs (net of by-product credits) for the South America mines were $1.33 per pound of copper for the Cerro Verde mine and $1.77 per pound for the El Abra mine and averaged $1.41 per pound. Lower average unit net cash costs (net of by-product credits) for our South America mining operations in 2016 , compared with $1.74 per pound in 2015 , primarily reflect higher copper sales volumes and efficiencies associated with the Cerro Verde expansion.


Unit net cash costs (net of by-product credits) for our South America mining operations increased to $1.74 per pound of copper in 2015 , compared with $1.58 per pound in 2014 , primarily reflecting lower by-product credits.


Revenues from Cerro Verde's concentrate sales are recorded net of treatment charges. Accordingly, treatment charges will vary with Cerro Verde's sales volumes and the price of copper.


Because certain assets are depreciated on a straight-line basis, South America's unit depreciation rate may vary with asset additions and the level of copper production and sales.


Revenue adjustments primarily result from changes in prices on provisionally priced copper sales recognized in prior periods. Refer to "Consolidated Results - Revenues" for further discussion of adjustments to prior period provisionally priced copper sales.


Average unit net cash costs (net of by-product credits) for our South America mining operations are expected to

approximate $1.61 per pound of copper for the year 2017 , based on current sales volume and cost estimates, and

assuming average prices of $7.00 per pound of molybdenum in 2017 .


Indonesia Mining

Indonesia mining includes PT-FI's Grasberg minerals district, one of the world's largest copper and gold deposits, in Papua, Indonesia. We own 90.64 percent of PT-FI, including 9.36 percent owned through our wholly owned subsidiary, PT Indocopper Investama.


PT-FI proportionately consolidates an unincorporated joint venture with Rio Tinto plc (Rio Tinto), under which Rio Tinto has a 40 percent interest in certain assets and a 40 percent interest through 2022 (previously 2021 before recent adjustments caused by production shortfalls) in production exceeding specified annual amounts of copper, gold and silver. After 2022, all production and related revenues and costs are shared 60 percent PT-FI and 40 percent Rio Tinto. Refer to Note 3 for further discussion of our joint venture with Rio Tinto. Under the joint venture arrangements, PT-FI was allocated nearly 100 percent of copper, gold and silver production and sales for each of the three years ended December 31, 2016 . At December 31, 2016 , the amounts allocated 100 percent to PT-FI remaining to be produced totaled 5.7 billion pounds of copper, 8.6 million ounces of gold and 15.7 million ounces of silver. Based on the current mine plans, PT-FI anticipates that it will be allocated most of the production and related revenues and costs through 2022.


PT-FI produces copper concentrate that contains significant quantities of gold and silver. Substantially all of PT-FI's copper concentrate is sold under long-term contracts, and in 2016 , approximately 42 percent of PT-FI's copper concentrate was sold to PT Smelting.


Regulatory Matters . PT-FI continues to seek approval from Indonesian authorities for the export of its copper concentrate, consistent with its rights under the COW.


In January 2014, the Indonesian government published regulations that among other things imposed a progressive export duty on copper concentrate and restricts concentrate exports after January 12, 2017. Despite PT-FI's rights under its COW to export concentrate without the payment of duties, PT-FI was unable to obtain administrative approval for exports and operated at approximately half of its capacity from mid-January 2014 through July 2014.

In July 2014, PT-FI and the Indonesian government entered into a Memorandum of Understanding (MOU) in which, subject to concluding an agreement to extend PT-FI's operations beyond 2021 on acceptable terms, PT-FI agreed to construct new smelter capacity in Indonesia and to divest an additional 20.64 percent interest in PT-FI at fair market value. Under the MOU, PT-FI provided a $115 million assurance bond to support its commitment for smelter development, agreed to increase royalty rates and agreed to pay export duties until certain smelter development milestones were met. The MOU also anticipated an amendment of the COW within six months to address other matters; however, no terms of the COW other than those relating to the smelter bond, increased royalties and export duties were changed. In January 2015, the MOU was extended to July 25, 2015, and it expired on that date. The Indonesian government has continued to impose the increased royalty rates, export duties and smelter assurance bond.


In October 2015, the Indonesian government provided a letter of assurance to PT-FI indicating that it would revise regulations allowing it to approve the extension of PT-FI's operations beyond 2021, and provide the same rights and the same level of legal and fiscal certainty provided under the current COW.


In January and February 2017, the Indonesian government issued new regulations to address exports of unrefined metals, including copper concentrate and anode slimes, and other matters related to the mining sector. The new regulations permit the continuation of copper concentrate exports for a five-year period through January 2022, subject to various conditions, including conversion from a contract of work to a special operating license (known as an IUPK, which provides virtually none of the protections of a contract of work), commitment to completion of smelter construction in five years and payment of export duties to be determined by the Ministry of Finance. In addition, the new regulations enable application for extension of operating rights five years before expiration of the IUPK and require foreign IUPK holders to divest 51 percent to Indonesian interests no later than the tenth year of production. Export licenses would be valid for one-year periods, subject to review every six months, depending on smelter construction progress.


The January 2017 regulations permit the export of anode slimes, which is necessary for PT Smelting to continue operating. PT Smelting is seeking to renew its anode slimes export license; however, we cannot predict when PT Smelting's anode slimes export license may be renewed. In addition, a labor strike at PT Smelting has resulted in a shutdown of its operations since January 19, 2017. Although PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity, on February 10, 2017, PT-FI was forced to suspend production as a result of limited storage capacity at PT-FI and PT Smelting. PT Smelting has indicated that it expects to resume operations in March 2017. Delays in PT Smelting obtaining its anode slimes export license or restarting operations could further impact PT-FI's operations.


Following the issuance of the January and February 2017 regulations and discussions with the government, PT-FI advised the Indonesian government that it was prepared to convert its COW to an IUPK, subject to obtaining an investment stability agreement providing equivalent rights with the same level of legal and fiscal certainty enumerated under its COW, and provided that the COW would remain in effect until it is replaced by a mutually satisfactory alternative. PT-FI also committed to commence construction of a new smelter during a five-year timeframe after approval of the extension of its long-term operating rights.


Under its COW, PT-FI has specified rights to export copper concentrate without restriction or payment of export duties. PT-FI has requested that concentrate exports be permitted without the imposition of export duties while the new license and stability agreement are negotiated. The Indonesia government has indicated that in order to export its concentrate production, PT-FI would be required to immediately convert to an IUPK, forgo its current rights to fiscal and legal certainty and commit to a new smelter prior to completing a long-term investment stability agreement. PT-FI has advised the Indonesian government that attempts to enforce the new regulations on PT-FI violates its COW and that it is unwilling to terminate its COW unless replaced by a mutually acceptable form of agreement providing fiscal and legal assurances to support its long-term investment plans in Papua, Indonesia.


As of February 24, 2017 , PT-FI has not obtained approval to export concentrate and production remains suspended. PT-FI is taking near-term actions to reduce production to match available processing capacity at PT Smelting, or approximately 40 percent of PT-FI's concentrate production capacity (assuming that PT Smelting's export license is approved and its operations are resumed in March 2017). PT-FI has begun to significantly adjust its cost structure, reduce its workforce and spending with local suppliers, and suspend investments in its underground development projects and new smelter.


On February 17, 2017, pursuant to the COW's dispute resolution provisions, PT-FI provided formal notice to the Indonesian government of an impending dispute listing the government's breaches and violations of the COW, which are described in "Risk Factors" contained in Part 1, Item 1A. of our annual report on Form 10-K for the year ended December 31, 2016.


In January 2017, the Indonesia Tax Court issued a ruling against PT-FI with respect to assessments from the local regional tax authority in Papua, Indonesia, for additional taxes and penalties related to surface water taxes for the period from January 2011 through July 2015 in the amount of $376 million (based on the exchange rate as of December 31, 2016, and including $227 million in penalties). The aggregate amount of assessments received from August 2015 through December 2016 was an additional $93 million, including penalties (based on the exchange rate as of December 31, 2016). PT-FI continues to believe that its COW exempts it from these payments, and that PT-FI has the right to contest these assessments by appeal to the Indonesia Supreme Court and/or by instituting dispute resolution proceedings under the COW. In addition, on February 17, 2017, PT-FI provided formal notice to the Indonesian government of an impending dispute listing the government's breaches and violations of the COW, including the imposition of surface water taxes in excess of the restrictions imposed by the COW. As of February 24, 2017 , PT-FI has not paid and does not intend to pay amounts to the local regional tax authority related to these assessments for additional taxes and penalties. Refer to Note 12 for further discussion.


Refer to "Risk Factors" contained in Part I, Item 1A. of our annual report on Form 10-K for the year ended December 31, 2016 , for discussion of risks associated with our operations in Indonesia.


Operating and Development Activities . PT-FI is currently mining the final phase of the Grasberg open pit, which

contains high copper and gold ore grades. PT-FI expects to mine high-grade ore over the next several quarters

prior to transitioning to the Grasberg Block Cave underground mine during 2018.


PT-FI has several projects in progress in the Grasberg minerals district related to the development of its large-scale,

long-lived, high-grade underground ore bodies. In aggregate, these underground ore bodies are expected to

produce large-scale quantities of copper and gold following the transition from the Grasberg open pit. From 2017 to

2021, estimated aggregate capital spending on these projects was expected to average $1.0 billion per year ($0.8 billion per year net to PT-FI). Considering the long-term nature and size of these projects, actual costs could vary from these estimates. Additionally, in response to market conditions and Indonesian regulatory uncertainty, the timing of these expenditures continues to be reviewed. PT-FI has begun suspending investments in its underground development projects, pending resolution of its long-term mining rights. If PT-FI is unable to reach agreement with the Indonesian government on its long-term mining rights, we may be required to further reduce or defer investments in underground development projects.


The following provides additional information on the continued development of the Common Infrastructure project, the Grasberg Block Cave underground mine and the Deep Mill Level Zone (DMLZ) ore body that lies below the Deep Ore Zone (DOZ) underground mine. Our current plans and mineral reserves in Indonesia assume that PT-FI's COW will be extended beyond 2021.


Common Infrastructure and Grasberg Block Cave Mine. In 2004, PT-FI commenced its Common Infrastructure project to provide access to its large undeveloped underground ore bodies located in the Grasberg minerals district through a tunnel system located approximately 400 meters deeper than its existing underground tunnel system. In addition to providing access to our underground ore bodies, the tunnel system will enable PT-FI to conduct future exploration in prospective areas associated with currently identified ore bodies. The tunnel system was completed to the Big Gossan terminal, and the Big Gossan mine was brought into production in 2010. Production from the Big Gossan mine restarted in fourth-quarter 2016 and is expected to ramp up to 7,000 metric tons of ore per day in 2022. Development of the DMLZ and Grasberg Block Cave underground mines is advancing using the Common Infrastructure project tunnels as access.


The Grasberg Block Cave underground mine accounts for approximately half of our recoverable proven and probable reserves in Indonesia. Production from the Grasberg Block Cave mine is expected to commence in 2018, following the end of mining of the Grasberg open pit. Targeted production rates once the Grasberg Block Cave mining operation reaches full capacity are expected to approximate 160,000 metric tons of ore per day. As a result of current market conditions, PT-FI is reviewing its operating plans to determine the optimum mine plan for the Grasberg Block Cave.


Previous estimates for aggregate mine development capital for the Grasberg Block Cave mine and associated Common Infrastructure approximated $6.3 billion (incurred between 2008 to 2022), with PT-FI's share totaling approximately $5.8 billion. Aggregate project costs totaling $2.8 billion have been incurred through December 31, 2016 ($0.6 billion during 2016 ). PT-FI has begun suspending investments in its underground development projects, pending resolution of its long-term mining rights. If PT-FI is unable to reach agreement with the Indonesian government on its long-term mining rights, we may be required to further reduce or defer investments in underground development projects.


DMLZ. The DMLZ ore body lies below the DOZ mine at the 2,590-meter elevation and represents the downward continuation of mineralization in the Ertsberg East Skarn system and neighboring Ertsberg porphyry. In September 2015, PT-FI initiated pre-commercial production that represents ore extracted during the development phase for the purpose of obtaining access to the ore body. Targeted production rates once the DMLZ underground mine reaches full capacity are expected to approximate 80,000 metric tons of ore per day in 2022.


Drilling efforts continue to determine the extent of the ore body. Aggregate mine development capital costs for the DMLZ underground mine are expected to approximate $3.2 billion (incurred between 2009 and 2021), with PT-FI's share totaling approximately $1.9 billion. Aggregate project costs totaling $1.8 billion have been incurred through December 31, 2016 ($0.3 billion during 2016 ). PT-FI has begun suspending investments in its underground development projects, pending resolution of its long-term mining rights. If PT-FI is unable to reach agreement with the Indonesian government on its long-term mining rights, we may be required to further reduce or defer investments in underground development projects.


Operating Data. Following is summary operating data for our Indonesia mining operations for the years ended December 31.

2016

2015

2014

Operating Data, Net of Joint Venture Interest

Copper (millions of recoverable pounds)

Production

1,063


752


636


Sales

1,054


744


664


Average realized price per pound

$

2.32


$

2.33


$

3.01


Gold  (thousands of recoverable ounces)

Production

1,061


1,232


1,130


Sales

1,054


1,224


1,168


Average realized price per ounce

$

1,237


$

1,129


$

1,229


100% Operating Data

Ore milled (metric tons per day): a

Grasberg open pit

119,700


115,900


69,100


DOZ underground mine b

38,000


43,700


50,500


DMLZ underground mine

4,400


2,900


-


Grasberg Block Cave underground mine

2,700


-


-


Big Gossan underground mine

900


-


900


Total

165,700


162,500


120,500


Average ore grade:

Copper (percent)

0.91


0.67


0.79


Gold (grams per metric ton)

0.68


0.79


0.99


Recovery rates (percent):

Copper

91.0


90.4


90.3


Gold

82.2


83.4


83.2


Production (recoverable):

Copper (millions of pounds)

1,063


752


651


Gold (thousands of ounces)

1,061


1,232


1,132


a.

Amounts represent the approximate average daily throughput processed at PT-FI's mill facilities from each producing mine and from development activities that result in metal production.

b.

Ore milled from the DOZ underground mine is expected to ramp up to over 60,000 metric tons of ore per day in 2017.


Sales volumes from our Indonesia mining operations totaled 1.1 billion pounds of copper and 1.1 million ounces of gold in 2016 , compared with 744 million pounds of copper and 1.2 million ounces of gold in 2015 . Higher copper sales volumes in 2016 primarily reflect higher copper ore grades. Lower gold sales volumes in 2016 primarily reflect lower gold ore grades.


Sales volumes from our Indonesia mining operations totaled 744 million pounds of copper and 1.2 million ounces of gold in 2015 , compared with 664 million pounds of copper and 1.2 million ounces of gold in 2014 , reflecting higher mill rates because of the 2014 export restrictions, partly offset by lower ore grades.


At the Grasberg mine, the sequencing of mining areas with varying ore grades causes fluctuations in quarterly and annual production of copper and gold. Consolidated sales volumes from Indonesia mining operations included in our January 2017 projections (assuming the resumption of concentrate exports in February 2017, which has not occurred as of February 24, 2017 ) were expected to approximate 1.3 billion pounds of copper and 2.2 million ounces of gold for 2017. PT-FI's first-quarter 2017 production has been adversely impacted by the suspension of its concentrate exports and a labor strike at PT Smelting, which resulted in a shutdown of its operations since January 19, 2017. PT Smelting has advised PT-FI that it expects to resume operations in March 2017. Assuming resumption of PT Smelting's operations in March 2017 and a continuation of the ban on PT-FI's copper concentrate exports, we estimate our first-quarter 2017 sales will be reduced, resulting in deferrals of approximately 170 million pounds of copper and 270 thousand ounces of gold. For each month of delay in obtaining approval to export, PT-FI's share of production is projected to be reduced by approximately 70 million pounds of copper and 70 thousand ounces of gold.

Unit Net Cash Costs. Unit net cash costs per pound of copper is a measure intended to provide investors with information about the cash-generating capacity of our mining operations expressed on a basis relating to the primary metal product for our respective operations. We use this measure for the same purpose and for monitoring operating performance by our mining operations. This information differs from measures of performance determined in accordance with U.S. GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance with U.S. GAAP. This measure is presented by other metal mining companies, although our measure may not be comparable to similarly titled measures reported by other companies.


Gross Profit per Pound of Copper and per Ounce of Gold

The following tables summarize the unit net cash costs and gross profit per pound of copper and per ounce of gold at our Indonesia mining operations for the years ended December 31. Refer to "Product Revenues and Production Costs" for an explanation of "by-product" and "co-product" methods and a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in our consolidated financial statements.

2016

2015

By-

Product

Co-Product Method

By-
Product

Co-Product Method

Method

Copper

Gold

Method

Copper

Gold

Revenues, excluding adjustments

$

2.32


$

2.32


$

1,237


$

2.33


$

2.33


$

1,129


Site production and delivery, before net noncash

and other costs shown below

1.63


1.05


559


2.39


1.32


638


Gold and silver credits

(1.30

)

-


-


(1.91

)

-


-


Treatment charges

0.28


0.18


97


0.31


0.17


83


Export duties

0.09


0.06


31


0.15


0.08


39


Royalty on metals

0.13


0.07


47


0.15


0.09


41


Unit net cash costs

0.83


1.36


734


1.09


1.66


801


DD&A

0.36


0.24


125


0.39


0.22


105


Noncash and other costs, net

0.05


0.03


17


0.05


0.03


14


Total unit costs

1.24


1.63


876


1.53


1.91


920


Revenue adjustments, primarily for pricing on

prior period open sales

-


-


16


(0.07

)

(0.06

)

7


PT Smelting intercompany (loss) profit

(0.02

)

(0.02

)

(8

)

0.01


0.01


4


Gross profit per pound/ounce

$

1.06


$

0.67


$

369


$

0.74


$

0.37


$

220


Copper sales (millions of recoverable pounds)

1,054


1,054


744


744


Gold sales (thousands of recoverable ounces)

1,054


1,224



A significant portion of PT-FI's costs are fixed and unit costs vary depending on volumes and other factors. Indonesia's unit net cash costs (including gold and silver credits) of $0.83 per pound of copper in 2016 were lower than unit net cash costs of $1.09 per pound in 2015 , primarily reflecting higher copper sales volumes, partly offset by lower gold and silver credits.


Treatment charges vary with the volume of metals sold and the price of copper, and royalties vary with the volume

of metals sold and the prices of copper and gold.


Export duties were initially set at 7.5 percent in July 2014 and were reduced to 5.0 percent in July 2015 as a result

of smelter development progress. Export duties totaled $95 million in 2016 , $109 million in 2015 and $77 million in 2014 .


PT-FI's royalties totaled $131 million in 2016 , $114 million in 2015 and $115 million in 2014 . Refer to Note 13 for further discussion of PT-FI's royalties.


Because certain assets are depreciated on a straight-line basis, PT-FI's unit depreciation rate varies with the level of copper production and sales.


Revenue adjustments primarily result from changes in prices on provisionally priced copper sales recognized in prior periods. Refer to "Consolidated Results - Revenues" for further discussion of adjustments to prior period provisionally priced copper sales.


PT Smelting intercompany (loss) profit represents the change in the deferral of 25 percent of PT-FI's profit on sales to PT Smelting. Refer to "Operations - Smelting & Refining" for further discussion.


Anticipated higher ore grades from the Grasberg mine are expected to result in lower unit net cash costs in 2017. Assuming an average gold price of $1,200 per ounce for 2017 and achievement of the sales volume and

cost estimates included in our January 2017 projections (including the resumption of concentrate exports by PT-FI in February 2017, which has not occurred as of February 24, 2017 ), unit net cash credits (net of gold and silver credits) for Indonesia mining were expected to approximate $0.03 per pound of copper for the year 2017 . Indonesia mining's unit net cash credits would change by approximately $0.075 per pound for each $50 per ounce change in the average price of gold during 2017 . Because of the fixed nature of a large portion of Indonesia's costs, unit costs vary from quarter to quarter depending on copper and gold volumes.

2015

2014

By-
Product

Co-Product Method

By-
Product

Co-Product Method

Method

Copper

Gold

Method

Copper

Gold

Revenues, excluding adjustments

$

2.33


$

2.33


$

1,129


$

3.01


$

3.01


$

1,229


Site production and delivery, before net noncash

and other costs shown below

2.39


1.32


638


2.76


a

1.59


648


Gold and silver credits

(1.91

)

-


-


(2.25

)

-


-


Treatment charges

0.31


0.17


83


0.26


0.15


61


Export duties

0.15


0.08


39


0.12


0.06


27


Royalty on metals

0.15


0.09


41


0.17


0.10


41


Unit net cash costs

1.09


1.66


801


1.06


1.90


777


DD&A

0.39


0.22


105


0.40


0.23


94


Noncash and other costs, net

0.05


0.03


14


0.29


a

0.17


68


Total unit costs

1.53


1.91


920


1.75


2.30


939


Revenue adjustments, primarily for pricing on

prior period open sales

(0.07

)

(0.06

)

7


(0.08

)

(0.08

)

15


PT Smelting intercompany profit

0.01


0.01


4


0.05


0.03


12


Gross profit per pound/ounce

$

0.74


$

0.37


$

220


$

1.23


$

0.66


$

317


Copper sales (millions of recoverable pounds)

744


744


664


664


Gold sales (thousands of recoverable ounces)

1,224


1,168


a.

Fixed costs totaling $0.22 per pound of copper charged directly to cost of sales as a result of the impact of export restrictions on PT-FI's operating rates are excluded from site production and delivery and included in net noncash and other costs in 2014 .


Unit net cash costs (net of gold and silver credits) for our Indonesia mining operations of $1.09 per pound of copper in 2015 were higher than unit net cash costs of $1.06 per pound in 2014 , primarily reflecting lower gold and silver credits, partly offset by lower site production and delivery mostly associated with lower diesel costs and foreign exchange impacts.


Molybdenum Mines

We have two wholly owned molybdenum mines in North America – the Henderson underground mine and the Climax open-pit mine, both in Colorado. The Henderson and Climax mines produce high-purity, chemical-grade molybdenum concentrate, which is typically further processed into value-added molybdenum chemical products. The majority of the molybdenum concentrate produced at the Henderson and Climax mines, as well as from our North and South America copper mines, is processed at our own conversion facilities.


Operating and Development Activities. In response to market conditions, the Henderson molybdenum mine operated at reduced rates during 2016, resulting in an approximate 65 percent reduction in its annual production volumes. During 2016, we incorporated changes in the commercial pricing structure for our molybdenum-based chemical products to enable continuation of chemical-grade production.


Production from the Molybdenum mines totaled 26 million pounds of molybdenum in 2016 , 48 million pounds in 2015 and 51 million pounds in 2014 . Refer to "Consolidated Results" for our consolidated molybdenum operating data, which includes sales of molybdenum produced at our Molybdenum mines, and from our North and South America copper mines, and refer to "Outlook" for projected consolidated molybdenum sales volumes.


Unit Net Cash Costs Per Pound of Molybdenum. Unit net cash costs per pound of molybdenum is a measure intended to provide investors with information about the cash-generating capacity of our mining operations expressed on a basis relating to the primary metal product for our respective operations. We use this measure for the same purpose and for monitoring operating performance by our mining operations. This information differs from measures of performance determined in accordance with U.S. GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance with U.S. GAAP. This measure is presented by other metals mining companies, although our measure may not be comparable to similarly titled measures reported by other companies.


Average unit net cash costs for our molybdenum mines totaled $8.36 per pound of molybdenum in 2016 , $7.11 per pound in 2015 and $7.08 per pound in 2014 . The increase in the average unit net cash costs for molybdenum in 2016, compared to 2015 and 2014, primarily reflects lower volumes. Assuming achievement of current sales volume and cost estimates, we estimate unit net cash costs for the Molybdenum mines to average $7.75 per pound of molybdenum for the year 2017 . Refer to "Product Revenues and Production Costs" for a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in our consolidated financial statements.


Smelting & Refining

We wholly own and operate a smelter in Arizona (Miami smelter) and a smelter and refinery in Spain (Atlantic

Copper). Additionally, PT-FI owns 25 percent of a smelter and refinery in Gresik, Indonesia (PT Smelting).

Treatment charges for smelting and refining copper concentrate consist of a base rate per pound of copper and per

ounce of gold and are generally fixed. Treatment charges represent a cost to our mining operations and income to

Atlantic Copper and PT Smelting. Thus, higher treatment charges benefit our smelter operations and adversely

affect our mining operations. Our North America copper mines are less significantly affected by changes in

treatment charges because these operations are largely integrated with our Miami smelter. Through this form of

downstream integration, we are assured placement of a significant portion of our concentrate production.


Atlantic Copper smelts and refines copper concentrate and markets refined copper and precious metals in slimes. Following is a summary of Atlantic Copper's concentrate purchases from our copper mining operations and third parties for the years ended December 31:

2016

2015

2014

North America copper mines

13

%

23

%

21

%

South America mining

7


3


a

21


Indonesia mining

3


3


8


Third parties

77


71


50


100

%

100

%

100

%

a.

The decrease in purchases from the South America mines, compared to 2014, primarily reflects the impact of the November 2014 sale of the Candelaria and Ojos del Salado mines.


PT-FI's contract with PT Smelting provides for PT-FI to supply 100 percent of the copper concentrate requirements

(subject to a minimum or maximum treatment charge rate) necessary for PT Smelting to produce 205,000 metric tons of copper annually on a priority basis. An extension of the minimum and maximum treatment charge rate, which expires in April 2017, is currently being negotiated. PT-FI may also sell copper concentrate to PT Smelting at market rates for quantities in excess of 205,000 metric tons of copper annually. PT-FI supplied 88 percent of PT Smelting's concentrate requirements in 2016 and approximately 80 percent in both 2015 and 2014. PT Smelting processed 42 percent in 2016 , 37 percent in 2015 and 58 percent in 2014 of PT-FI's concentrate production.


Refer to "Operations - Indonesia Mining" and "Risk Factors" contained in Part I, Item IA. of our annual report on Form 10-K for the year ended December 31, 2016 , for information regarding Indonesia regulatory matters that impact the export of anode slimes by PT Smelting.


We defer recognizing profits on sales from our mining operations to Atlantic Copper and on 25 percent of PT-FI's sales to PT Smelting until final sales to third parties occur. Changes in these deferrals attributable to variability in intercompany volumes resulted in net (reductions) additions to net income attributable to common stock of $(8) million ( $(0.01) per share) in 2016 , $42 million ( $0.04 per share) in 2015 and $43 million ( $0.04 per share) in 2014 . Our net deferred profits on our inventories at Atlantic Copper and PT Smelting to be recognized in future periods' net income attributable to common stock totaled $43 million at December 31, 2016 . Quarterly variations in ore grades, the timing of intercompany shipments and changes in product prices will result in variability in our net deferred profits and quarterly earnings.


Oil and Gas Operations

In December 2016, we completed the sales of the Deepwater GOM and onshore California oil and gas properties and, in July 2016, completed the sale of the Haynesville shale assets (refer to Note 2 for further discussion). In January 2017, we entered into an agreement to sell our property interests in the Madden area. Following the completion of the Madden transaction, our portfolio of oil and gas assets would include oil and natural gas production onshore in South Louisiana and on the GOM Shelf and oil production offshore California, which had total oil and gas sales volumes of 6.4 MMBOE during 2016.


Impairment of Oil and Gas Properties. Under the SEC's full cost accounting rules, a "ceiling test" is conducted each quarter to review the carrying value of the oil and gas properties for impairment. Refer to Note 1 and "Critical Accounting Estimates" for further discussion. The combined impact of the reduction in twelve-month historical prices and reserve revisions caused net capitalized costs with respect to FM O&G's proved U.S. oil and gas properties to exceed the ceiling test limitation specified by full cost accounting rules, which resulted in the recognition of impairment charges totaling $4.3 billion in 2016 , $13.0 billion in 2015 and $3.7 billion in 2014 . We also recognized impairment charges of $18 million in 2016 and $164 million in 2015 for international oil and gas properties, primarily related to unsuccessful exploration activities in Morocco.


Following completion of the sales of our Deepwater GOM and onshore California oil and gas properties, at December 31, 2016 , we had $74 million remaining in our consolidated balance sheet for proved oil and gas properties, and no amounts recorded for unproved oil and gas properties.


U.S. Oil and Gas Operations. Following is summary operating results for the U.S. oil and gas operations for the years ended December 31:

2016

2015

2014 a

Sales Volumes

  Oil (MMBbls)

34.4


35.3


40.1


  Natural gas (Bcf)

65.1


89.7


80.8


NGLs (MMBbls)

1.8


2.4


3.2


MMBOE

47.1


52.6


56.8


Average Realizations b

Oil (per barrel)

$

39.13


$

57.11


$

90.00


Natural gas (per MMBtu)

$

2.38


$

2.59


$

4.23


NGLs (per barrel)

$

18.11


$

18.90


$

39.73


Gross Loss per BOE

Realized revenues b

$

32.59


$

43.54


$

71.83


Cash production costs b

(15.19

)

(18.59

)

(20.08

)

Cash operating margin b

17.40


24.95


51.75


DD&A

(18.47

)

(34.28

)

(40.34

)

Impairment of oil and gas properties

(91.35

)

(246.67

)

(65.80

)

Accretion and other costs

(23.10

)

c

(4.41

)

c

(1.69

)

Net noncash mark-to-market (losses) gains on derivative contracts

(0.87

)

(6.07

)

11.03


Other revenues

0.44


0.43


0.06


Gross loss

$

(115.95

)

$

(266.05

)

$

(44.99

)

a.

Includes results of the Eagle Ford shale assets prior to their sale in June 2014.

b.

Cash operating margin for oil and gas operations reflects realized revenues less cash production costs. Realized revenues exclude noncash mark-to-market adjustments on derivative contracts, and cash production costs exclude accretion and other costs. For reconciliations of realized revenues (including average realizations for oil, natural gas and NGLs) and cash production costs to revenues and production and delivery costs reported in our consolidated financial statements, refer to the supplemental schedule, "Product Revenues and Production Costs."

c.

Includes $21.63 per BOE in 2016 and $3.58 per BOE in 2015 primarily for drillship settlements/idle rig and contract termination costs, inventory adjustments and other asset impairments.


Excluding the impact of realized cash gains (losses) on derivative contracts of $0.17 per barrel in 2016 , $11.53 per barrel in 2015 and $(2.76) per barrel in 2014, the average realized price for crude oil was $38.96 per barrel in 2016 ( 86 percent of the average Brent crude oil price of $45.13 per barrel), $45.58 per barrel in 2015 (85 percent of the average Brent crude oil price of $53.64 per barrel) and $92.76 per barrel in 2014 (93 percent of the average Brent crude oil price of $99.45 per barrel).


The average realized price for natural gas was $2.38 per MMBtu in 2016 , $2.59 per MMBtu in 2015 and $4.23 per MMBtu in 2014 ($4.37 per MMBtu excluding the impact of derivative contracts), compared to the NYMEX natural gas price average of $2.46 per MMBtu for the year 2016 contracts, $2.26 per MMBtu for the year 2015 contracts, and $4.41 per MMBtu for the year 2014 contracts.


Realized revenues for oil and gas operations of $32.59 per BOE for 2016 were lower than realized revenues of $43.54 per BOE for 2015 , primarily reflecting lower oil prices and the impact of realized cash gains on derivative contracts in 2015 (cash gains of $0.13 per BOE in 2016 , compared with $7.72 per BOE in 2015 ). Realized revenues for oil and gas operations of $43.54 per BOE for 2015 were lower than realized revenues of $71.83 per BOE for 2014, primarily reflecting lower oil prices and higher cash gains on derivative contracts (cash gains of $7.72 per BOE in 2015, compared with cash losses of $2.15 per BOE in 2014).


Cash production costs for oil and gas operations of $15.19 per BOE for 2016 were lower than cash production costs of $18.59 for 2015 , primarily reflecting the impact of cost reduction efforts. Cash production costs of $18.59 per BOE for 2015 were lower than cash production costs of $20.08 per BOE for 2014, primarily reflecting lower well workover expense and steam gas costs in California.


Daily Sales Volumes . Following is a summary of average sales volumes per day by region for oil and gas operations for the years ended December 31:

2016

2015

2014

Sales Volumes (MBOE per day):

GOM a

85


83


73


California a

32


37


39


Haynesville/Madden/Other b

11


24


20


Eagle Ford c

-


-


24


Total oil and gas operations

128


144


156


a.

In December 2016, we completed the sales of the Deepwater GOM and onshore California oil and gas properties, which had average sales volumes of 100 MBOE per day in 2016.

b.

In July 2016, we completed the sale of the Haynesville shale assets, which contributed 7 MBOE per day to the 2016 average daily sales volumes.

c.

In June 2014, we completed the sale of the Eagle Ford shale assets.


Daily sales volumes averaged 128 MBOE for 2016 , including 94 MBbls of crude oil, 178 MMcf of natural gas and 5 MBbls of NGLs; 144 MBOE for 2015, including 96 MBbls of crude oil, 246 MMcf of natural gas and 7 MBbls of NGLs; and 156 MBOE for 2014, including 110 MBbls of crude oil, 221 MMcf of natural gas and 9 MBbls of NGLs.


DISCONTINUED OPERATIONS


Africa Mining

In November 2016, we completed the sale of our interest in TFHL, through which we held an effective 56 percent interest in the Tenke copper and cobalt mining concessions in the Southeast region of the DRC. In accordance with accounting guidelines, the operating results of Africa mining have been separately reported as discontinued operations in the consolidated statements of operations for all periods presented.


Operating Data. Following is summary operating data for our Africa mining operations for the years ended December 31:

2016 a

2015

2014

Copper  (millions of recoverable pounds)

Production

425


449


447


Sales

424


467


425


Average realized price per pound b

$

2.10


$

2.42


$

3.06


Cobalt  (millions of contained pounds)

Production

32


35


29


Sales

33


35


30


Average realized price per pound

$

7.45


$

8.21


$

9.66


Ore milled (metric tons per day)

15,200


14,900


14,700


Average ore grade (percent):

Copper

4.18


4.00


4.06


Cobalt

0.44


0.43


0.34


Copper recovery rate (percent)

93.6


94.0


92.6


a.

Includes the results of Tenke through November 16, 2016.

b.

Includes point-of-sale transportation costs as negotiated in customer contracts.


Sales volumes from TFM decreased to 424 million pounds of copper and 33 million pounds of cobalt in 2016, compared with 467 million pounds of copper and 35 million pounds of cobalt in 2015 , primarily reflecting the November 2016 sale of our interest in TFHL.


Sales volumes from TFM increased to 467 million pounds of copper and 35 million pounds of cobalt in 2015 , compared with 425 million pounds of copper and 30 million pounds of cobalt in 2014 . Higher copper sales volumes primarily reflect timing of shipments and higher cobalt sales volumes primarily reflect higher ore grades.


Unit Net Cash Costs. Unit net cash costs per pound of copper is a measure intended to provide investors with information about the cash-generating capacity of our mining operations expressed on a basis relating to the primary metal product for our respective operations. We use this measure for the same purpose and for monitoring operating performance by our mining operations. This information differs from measures of performance determined in accordance with U.S. GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance with U.S. GAAP. This measure is presented by other metals mining companies, although our measure may not be comparable to similarly titled measures reported by other companies.


Gross Profit per Pound of Copper and Cobalt. The following tables summarize the unit net cash costs and gross profit per pound of copper and cobalt at our Africa mining operations for the period from January 1, 2016, through November 16, 2016, and for the years ended December 31, 2015 and 2014. Refer to "Product Revenues and Production Costs" for an explanation of "by-product" and "co-product" methods and a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in our consolidated financial statements.

2016

2015

By-Product

Co-Product Method

By-Product

Co-Product Method

Method

Copper

Cobalt

Method

Copper

Cobalt

Revenues, excluding adjustments a

$

2.10


$

2.10


$

7.45


$

2.42


$

2.42


$

8.21


Site production and delivery, before net noncash

and other costs shown below

1.58


1.37


5.25


1.58


1.37


5.40


Cobalt credits b

(0.39

)

-


-


(0.42

)

-


-


Royalty on metals

0.05


0.04


0.12


0.05


0.04


0.14


Unit net cash costs

1.24


1.41


5.37


1.21


1.41


5.54


DD&A

0.50


0.41


1.16


0.55


0.46


1.26


Noncash and other costs, net

0.05


0.04


0.12


0.07


0.06


0.16


Total unit costs

1.79


1.86


6.65


1.83


1.93


6.96


Revenue adjustments, primarily for pricing on

prior period open sales

(0.01

)

(0.01

)

0.12


(0.01

)

(0.01

)

(0.02

)

Gross profit per pound

$

0.30


$

0.23


$

0.92


$

0.58


$

0.48


$

1.23


Copper sales (millions of recoverable pounds)

424


424


467


467


Cobalt sales (millions of contained pounds)

33


35


a.

Includes point-of-sale transportation costs as negotiated in customer contracts.

b.

Net of cobalt downstream processing and freight costs.


Higher unit net cash costs (net of cobalt credits) for Africa mining of $1.24 per pound of copper in 2016 , compared with $1.21 per pound of copper in 2015 , primarily reflects lower cobalt credits.

2015

2014

By-Product

Co-Product Method

By-Product

Co-Product Method

Method

Copper

Cobalt

Method

Copper

Cobalt

Revenues, excluding adjustments a

$

2.42


$

2.42


$

8.21


$

3.06


$

3.06


$

9.66


Site production and delivery, before net noncash

and other costs shown below

1.58


1.37


5.40


1.56


1.39


5.30


Cobalt credits b

(0.42

)

-


-


(0.48

)

-


-


Royalty on metals

0.05


0.04


0.14


0.07


0.06


0.16


Unit net cash costs

1.21


1.41


5.54


1.15


1.45


5.46


DD&A

0.55


0.46


1.26


0.54


0.46


1.13


Noncash and other costs, net

0.07


0.06


0.16


0.05


0.04


0.11


Total unit costs

1.83


1.93


6.96


1.74


1.95


6.70


Revenue adjustments, primarily for pricing on

prior period open sales

(0.01

)

(0.01

)

(0.02

)

-


-


0.07


Gross profit per pound

$

0.58


$

0.48


$

1.23


$

1.32


$

1.11


$

3.03


Copper sales (millions of recoverable pounds)

467


467


425


425


Cobalt sales (millions of contained pounds)

35


30


a.

Includes point-of-sale transportation costs as negotiated in customer contracts.

b.

Net of cobalt downstream processing and freight costs.


Higher unit net cash costs (net of cobalt credits) for Africa mining of $1.21 per pound of copper in 2015 , compared with $1.15 per pound of copper in 2014 , primarily reflects lower cobalt credits.




81

Table of Contents


CAPITAL RESOURCES AND LIQUIDITY


Our consolidated operating cash flows vary with prices realized from copper, gold and molybdenum, our sales volumes, production costs, income taxes, other working capital changes and other factors. During 2016, we took actions to restore our balance sheet strength through a combination of asset sale transactions, cash flow from operations and capital market transactions. During the year, we completed $6.6 billion in asset sale transactions and generated gross proceeds of $1.5 billion from a registered at-the-market offering of common stock. Refer to Notes 2 and 10 for further discussion. During 2016, we reduced total debt by $4.3 billion, which included the repayment of the $3.0 billion balance of the our term loan.


We have retained a high-quality portfolio of long-lived copper assets positioned to generate long-term value. In addition to debt reduction plans, we are pursuing opportunities to enhance our mines' net present values, and we continue to advance studies for future development of our copper resources, the timing of which will be dependent on market conditions.


Cash

Following is a summary of the U.S. and international components of consolidated cash and cash equivalents available to the parent company (excluding cash and cash equivalents in assets held for sale of $16 million at December 31, 2016), net of noncontrolling interests' share, taxes and other costs at December 31, 2016 (in millions):

Cash at domestic companies

$

3,908


Cash at international operations

337


Total consolidated cash and cash equivalents

4,245


Noncontrolling interests' share

(95

)

Cash, net of noncontrolling interests' share

4,150


Withholding taxes and other

(22

)

Net cash available

$

4,128



Cash held at our international operations is generally used to support our foreign operations' capital expenditures, operating expenses, working capital and other tax payments or other cash needs. Management believes that sufficient liquidity is available in the U.S. from cash balances and availability from our revolving credit facility and uncommitted lines of credit. We have not elected to permanently reinvest earnings from our foreign subsidiaries, and we have recorded deferred tax liabilities for foreign earnings that are available to be repatriated to the U.S. From time to time, our foreign subsidiaries distribute earnings to the U.S. through dividends that are subject to applicable withholding taxes and noncontrolling interests' share.


Debt

Following is a summary of our total debt and related weighted-average interest rates at December 31, 2016 (in billions, except percentages):

Weighted-

Average

Interest Rate

Senior Notes

$

14.4


4.4%

Cerro Verde Credit Facility

1.4


2.7%

Other FCX debt

0.2


3.1%

Total debt

$

16.0


4.2%


At December 31, 2016 , we had no borrowings, $43 million in letters of credit issued and availability of $3.5 billion under our revolving credit facility.


During 2016, we repaid the $3.0 billion balance of our term loan with proceeds from asset sale transactions, purchased $38 million of our senior notes in open-market transactions and exchanged $369 million in senior notes for 27.7 million shares of our common stock in a series of privately negotiated transactions. Additionally, in December 2016, we completed an exchange offer and consent solicitations associated with the Freeport-McMoRan Oil & Gas LLC senior notes. Refer to Note 8 for further discussion of debt.


82

Table of Contents


Operating Activities

We generated consolidated operating cash flows totaling $3.7 billion in 2016 (including $57 million in working capital sources and changes in other tax payments), $3.2 billion in 2015 (including $0.4 billion in working capital sources and changes in other tax payments) and $5.6 billion in 2014 (net of $0.6 billion in working capital uses and changes in other tax payments).


Higher consolidated operating cash flows for 2016 , compared with 2015 , primarily reflects the impact of cost reduction efforts, partly offset by a decrease in working capital sources mostly resulting from higher trade receivables, partly offset by lower tax payments by our international mining operations.


Lower consolidated operating cash flows for 2015 , compared with 2014 , primarily reflects the impact of lower commodity price realizations, partly offset by an increase in working capital sources mostly associated with accounts receivable associated with settlements of oil and gas derivative contracts and inventories reflecting a decrease in volumes and lower average costs.


Subject to future commodity prices for copper, gold and molybdenum, we expect estimated consolidated operating cash flows for the year 2017 , plus available cash and availability under our credit facility and uncommitted lines of credit, to be sufficient to fund our budgeted capital expenditures, scheduled debt maturities, noncontrolling interest distributions and other cash requirements for the year. Refer to "Outlook" for further discussion of projected operating cash flows for the year 2017 , and to "Operations - Indonesia Mining" and "Risk Factors" contained in Part I, Item 1A. of our annual report on Form 10-K for the year ended December 31, 2016, for discussion of regulatory matters in Indonesia, which may have a significant impact on future results.


Investing Activities

Capital Expenditures. Capital expenditures, including capitalized interest, totaled $2.8 billion in 2016 , consisting of $1.6 billion for mining operations (including $1.2 billion for major projects) and $1.2 billion for oil and gas operations; $6.4 billion in 2015 , consisting of $3.3 billion for mining operations (including $2.4 billion for major projects) and $3.0 billion for oil and gas operations; and $7.2 billion in 2014 , consisting of $4.0 billion for mining operations (including $2.9 billion for major projects) and $3.2 billion for oil and gas operations.


Lower capital expenditures in 2016, compared with 2015, primarily reflect a decrease in oil and gas exploration and development activities in Deepwater GOM and lower spending for major mining projects, mostly resulting from the completion of the Cerro Verde expansion.


Lower capital expenditures in 2015, compared with 2014, primarily reflected decreased spending for major projects at mining operations, mostly resulting from the completion of the Morenci mill expansion, which was substantially completed in May 2014.


Refer to "Outlook" for further discussion of projected capital expenditures for the year 2017.


Dispositions and Acquisitions. Proceeds, net of closing adjustments, from asset sales totaled $6.4 billion in 2016, primarily associated with the sales of our interest in TFHL, the Deepwater GOM, onshore California and Haynesville oil and gas properties, an additional 13 percent undivided interest in Morenci, and an interest in the Timok exploration project in Serbia.


Proceeds, net of closing adjustments, from asset sales in 2014 totaled $4.6 billion , associated with the sales of our 80 percent ownership interest in the Candelaria and Ojos del Salado mines and the Eagle Ford shale assets. In 2014, we also acquired additional Deepwater GOM interests for $1.4 billion.


Refer to Note 2 for further discussion of these dispositions and acquisitions.


Financing Activities

Debt Transactions. Net repayments of debt in 2016 totaled $3.9 billion primarily for the repayment of the term loan and payments on the Cerro Verde credit facility.


Net proceeds from debt in 2015 totaled $1.6 billion primarily reflecting borrowings of $1.4 billion under Cerro Verde's credit facility to fund its expansion project.



83

Table of Contents


During 2014, we completed the sale of $3.0 billion of senior notes. The proceeds from these senior notes were used to fund our December 2014 tender offers for $1.14 billion aggregate principal of senior notes, essentially all of our 2015 scheduled debt maturities, $300 million of 7.625% Senior Notes, and to repay borrowings under our revolving credit facility.


Refer to Note 8 for further discussion of debt.


Equity Transactions. Net proceeds from the sale of common stock of $1.5 billion in 2016 and $1.9 billion in 2015 reflect sales of our common stock under registered at-the-market equity offerings. Refer to Note 10 for further discussion.


Dividends. The Board reduced our annual common stock dividend from $1.25 per share to $0.20 per share in

March 2015, and subsequently suspended the annual common stock dividend in December 2015. The declaration of dividends is at the discretion of our Board and will depend upon our financial results, cash requirements, future prospects and other factors deemed relevant by our Board. Additionally, in connection with the February 2016 amendment to the revolving credit facility, we are not permitted to pay dividends on our common stock on or prior to March 31, 2017.


We paid dividends on our common stock totaling $6 million in 2016 (all of which is related to accumulated dividends paid for vested stock-based compensation), $605 million in 2015 (including $115 million for a special dividend paid in accordance with the settlement terms of the shareholder derivative litigation) and $1.3 billion in 2014 .


Cash dividends and other distributions paid to noncontrolling interests totaled $693 million (including $582 million for the redemption of a redeemable noncontrolling interest) in 2016 , $120 million in 2015 and $424 million in 2014 . These payments will vary based on the operating results and cash requirements of our consolidated subsidiaries.


CONTRACTUAL OBLIGATIONS


We have contractual and other long-term obligations, including debt maturities based on the principal amounts, which we expect to fund with available cash, projected operating cash flows, availability under our revolving credit facility or future financing transactions, if necessary. Following is a summary of these various obligations at December 31, 2016 (in millions):

Total

2017

2018 to

2019

2020 to

2021

Thereafter

Debt maturities

$

15,948


$

1,234


$

3,381


$

2,479


$

8,854


Scheduled interest payment obligations a

6,134


654


1,174


995


3,311


ARO and environmental obligations b

7,285


500


783


482


5,520


Take-or-pay contracts c

3,435


1,753


1,032


308


342


Operating lease obligations

251


45


58


39


109


Total d

$

33,053


$

4,186


$

6,428


$

4,303


$

18,136


a.

Scheduled interest payment obligations were calculated using stated coupon rates for fixed-rate debt and interest rates applicable at December 31, 2016 , for variable-rate debt.

b.

Represents estimated cash payments, on an undiscounted and unescalated basis, associated with ARO and environmental activities (including $714 million for our oil and gas operations). The timing and the amount of these payments could change as a result of changes in regulatory requirements, changes in scope and timing of ARO activities, the settlement of environmental matters and as actual spending occurs. Refer to Note 12 for additional discussion of environmental and ARO matters.

c.

Represents contractual obligations for purchases of goods or services agreements enforceable and legally binding and that specify all significant terms, and primarily include the procurement of copper concentrate ( $1.4 billion ), cobalt ($0.8 billion), electricity ( $0.5 billion ) and transportation services ( $0.4 billion ). Some of our take-or-pay contracts are settled based on the prevailing market rate for the service or commodity purchased, and in some cases, the amount of the actual obligation may change over time because of market conditions. Obligations for copper concentrate provide for deliveries of specified volumes to Atlantic Copper at market-based prices. Obligations for cobalt provide for deliveries of specified volumes to Freeport Cobalt at market-based prices. Electricity obligations are primarily for long-term power purchase agreements in North America and contractual minimum demand at the South America mines. Transportation obligations are primarily for South America contracted ocean freight.

As part of the termination and settlement of the drillship contracts, we agreed to provide contingent payments of up to $105 million, depending on the average price of crude oil over the 12-month period ending June 30, 2017. At December 31, 2016,


84

Table of Contents


we had recorded $23 million for the fair value of contingent payments related to drillship settlements, which is included within the above amounts. Also included in the above amounts are oil and gas obligations related to the termination of contracts for support vessels and equipment.

d.

This table excludes certain other obligations in our consolidated balance sheets, such as estimated funding for pension, postretirement and other employee benefit obligations as the funding may vary from year to year based on changes in the fair value of plan assets and actuarial assumptions, commitments and contingencies totaling $102 million and unrecognized tax benefits totaling $167 million where the timing of settlement is not determinable, and other less significant amounts. This table also excludes purchase orders for inventory and other goods and services, as purchase orders typically represent authorizations to purchase rather than binding agreements.


In addition to our debt maturities and other contractual obligations discussed above, we have other commitments, which we expect to fund with available cash, projected operating cash flows, available credit facilities or future financing transactions, if necessary. These include (i) PT-FI's commitment to provide one percent of its annual revenue for the development of the local people in its area of operations through the Freeport Partnership Fund for Community Development, (ii) Cerro Verde's scheduled installment payments for disputed mining royalty assessments and (iii) other commercial commitments, including standby letters of credit, surety bonds and guarantees. Refer to Notes 12 and 13 for further discussion.


CONTINGENCIES


Environmental

The cost of complying with environmental laws is a fundamental and substantial cost of our business. At December 31, 2016 , we had $1.2 billion recorded in our consolidated balance sheet for environmental obligations attributed to CERCLA or analogous state programs and for estimated future costs associated with environmental obligations that are considered probable based on specific facts and circumstances.


We incurred environmental capital expenditures and other environmental costs (including our joint venture partners' shares) to comply with applicable environmental laws and regulations that affect our operations totaling $0.4 billion in each of 2016, 2015 and 2014. For 2017 , we expect to incur approximately $0.6 billion of aggregate environmental capital expenditures and other environmental costs, which includes expenditures for Miami smelter pollution control equipment. The timing and amount of estimated payments could change as a result of changes in regulatory requirements, changes in scope and timing of reclamation and plug and abandonment activities, the settlement of environmental matters and the rate at which actual spending occurs on continuing matters.


Refer to Note 12 and "Risk Factors" contained in Part I, Item 1A. of our annual report on Form 10-K for the year ended December 31, 2016 , for further information about environmental regulation, including significant environmental matters.


Asset Retirement Obligations

We recognize AROs as liabilities when incurred, with the initial measurement at fair value. These obligations, which are initially estimated based on discounted cash flow estimates, are accreted to full value over time through charges to cost of sales. Mine reclamation costs for disturbances are recorded as an ARO and as a related asset retirement cost (ARC) (included in property, plant, equipment and mine development costs) in the period of disturbance. Oil and gas plugging and abandonment costs are recognized as an ARO and as a related ARC (included in oil and gas properties) in the period in which the well is drilled or acquired. Our cost estimates are reflected on a third-party cost basis and comply with our legal obligation to retire tangible, long-lived assets. At December 31, 2016 , we had $2.6 billion recorded in our consolidated balance sheet for AROs, including $0.6 billion related to our oil and gas properties. Spending on AROs totaled $188 million in 2016 , $132 million in 2015 and $101 million in 2014 (including $133 million in 2016, $92 million in 2015 and $74 million in 2014 for our oil and gas operations). For 2017 , we expect to incur approximately $240 million in aggregate ARO payments. Refer to Note 12 for further discussion.


Litigation and Other Contingencies

Refer to Notes 2 and 12 and "Legal Proceedings" contained in Part I, Item 3. of our annual report on Form 10-K for the year ended December 31, 2016 , for further discussion of contingencies associated with legal proceedings and other matters.




85

Table of Contents


DISCLOSURES ABOUT MARKET RISKS


Commodity Price Risk

Our consolidated revenues from our mining operations include the sale of copper concentrate, copper cathode, copper rod, gold, molybdenum and other metals by our North and South America mines, the sale of copper concentrate (which also contains significant quantities of gold and silver) by our Indonesia mining operations, the sale of molybdenum in various forms by our molybdenum operations, and the sale of copper cathode, copper anode and gold in anode and slimes by Atlantic Copper. Our financial results will vary with fluctuations in the market prices of the commodities we produce, primarily copper and gold, and to a lesser extent molybdenum and silver. For projected sensitivities of our operating cash flow to changes in commodity prices, refer to "Outlook." World market prices for these commodities have fluctuated historically and are affected by numerous factors beyond our control. Refer to "Risk Factors" contained in Part I, Item 1A. of our annual report on Form 10-K for the year ended December 31, 2016 , for further discussion of financial risks associated with fluctuations in the market prices of the commodities we sell.


During 2016 , our mined copper (excluding volumes from Tenke) was sold 58 percent in concentrate, 21 percent as cathode and 21 percent as rod from North America operations. Substantially all of our copper concentrate and cathode sales contracts provide final copper pricing in a specified future month (generally one to four months from the shipment date) based primarily on quoted LME monthly average spot copper prices. We receive market prices based on prices in the specified future period, which results in price fluctuations recorded through revenues until the date of settlement. We record revenues and invoice customers at the time of shipment based on then-current LME prices, which results in an embedded derivative on our provisionally priced concentrate and cathode sales that is adjusted to fair value through earnings each period, using the period-end forward prices, until final pricing on the date of settlement. To the extent final prices are higher or lower than what was recorded on a provisional basis, an increase or decrease to revenues is recorded each reporting period until the date of final pricing. Accordingly, in times of rising copper prices, our revenues benefit from adjustments to the final pricing of provisionally priced sales pursuant to contracts entered into in prior periods; in times of falling copper prices, the opposite occurs.


Following are the favorable (unfavorable) impacts of net adjustments to the prior years' provisionally priced copper sales for the years ended December 31 (in millions, except per share amounts):

2016

2015

2014

Revenues

$

5


$

(100

)

$

(117

)

Net income attributable to common stock

$

2


$

(50

)

$

(65

)

Net income per share attributable to common stock

$

-


$

(0.05

)

$

(0.06

)


At December 31, 2016 , we had provisionally priced copper sales at our copper mining operations totaling 466 million pounds of copper (net of intercompany sales and noncontrolling interests) recorded at an average price of $2.51 per pound, subject to final pricing over the next several months. We estimate that each $0.05 change in the price realized from the December 31, 2016 , provisional price recorded would have an approximate $15 million effect on 2017 net income attributable to common stock. The LME spot copper price closed at $2.73 per pound on February 15, 2017 .


Foreign Currency Exchange Risk

The functional currency for most of our operations is the U.S. dollar. Substantially all of our revenues and a significant portion of our costs are denominated in U.S. dollars; however, some costs and certain asset and liability accounts are denominated in local currencies, including the Indonesian rupiah, Australian dollar, Peruvian sol, Chilean peso and euro. We recognized foreign currency translation gains (losses) on balances denominated in foreign currencies totaling $32 million in 2016, $(90) million in 2015 and $(2) million in 2014, primarily at our Indonesia and South America mines. Generally, our operating results are positively affected when the U.S. dollar strengthens in relation to those foreign currencies and adversely affected when the U.S. dollar weakens in relation to those foreign currencies.



86

Table of Contents


Following is a summary of estimated annual payments and the impact of changes in foreign currency rates on our annual operating costs:

Exchange Rate per $1

at December 31,

Estimated Annual Payments

10% Change in

Exchange Rate

(in millions) a

2016

2015

2014

(in local currency)

(in millions) b

Increase

Decrease

Indonesia

Rupiah

13,369


13,726


12,378


7.7 trillion

$

576


$

(52

)

$

64


Australian dollar

1.39


1.37


1.22


230 million

$

166


$

(15

)

$

18


South America

Peruvian sol

3.36


3.41


2.99


1.08 billion

$

321


$

(29

)

$

36


Chilean peso

670


710


607


104 billion

$

155


$

(14

)

$

17


Atlantic Copper

Euro

0.95


0.92


0.82


140 million

$

147


$

(13

)

$

16


a.

Reflects the estimated impact on annual operating costs assuming a 10 percent increase or decrease in the exchange rate reported at December 31, 2016 .

b.

Based on exchange rates at December 31, 2016 .


Interest Rate Risk

At December 31, 2016 , we had total debt maturities based on the principal amounts of $15.9 billion , of which approximately 10 percent was variable-rate debt with interest rates based on the London Interbank Offered Rate. The table below presents average interest rates for our scheduled maturities of principal for our outstanding debt (excluding fair value adjustments) and the related fair values at December 31, 2016 (in millions, except percentages):

2017

2018

2019

2020

2021

Thereafter

Fair Value

Fixed-rate debt

$

1,234


$

1,483


$

237


$

1,617


$

862


$

8,854


$

13,590


Average interest rate

2.2

%

2.4

%

6.1

%

4.4

%

4.8

%

4.9

%

4.4

%

Variable-rate debt

-


$

770


$

891


-


-


-


$

1,606


Average interest rate

-


2.7

%

2.8

%

-


-


-


2.7

%


NEW ACCOUNTING STANDARDS


Refer to Note 1 for discussion of recently issued accounting standards and their projected impact on our future financial statements and disclosures.

OFF-BALANCE SHEET ARRANGEMENTS


Refer to Note 13 for discussion of off-balance sheet arrangements.




87

Table of Contents


PRODUCT REVENUES AND PRODUCTION COSTS


Mining Product Revenues and Unit Net Cash Costs

Unit net cash costs per pound of copper and molybdenum are measures intended to provide investors with information about the cash-generating capacity of our mining operations expressed on a basis relating to the primary metal product for the respective operations. We use this measure for the same purpose and for monitoring operating performance by our mining operations. This information differs from measures of performance determined in accordance with U.S. GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance with U.S. GAAP. This measure is presented by other metals mining companies, although our measures may not be comparable to similarly titled measures reported by other companies.


We present gross profit per pound of copper in the following tables using both a "by-product" method and a "co-product" method. We use the by-product method in our presentation of gross profit per pound of copper because (i) the majority of our revenues are copper revenues, (ii) we mine ore, which contains copper, gold, molybdenum and other metals, (iii) it is not possible to specifically assign all of our costs to revenues from the copper, gold, molybdenum and other metals we produce, (iv) it is the method used to compare mining operations in certain industry publications and (v) it is the method used by our management and the Board to monitor operations. In the co-product method presentation below, shared costs are allocated to the different products based on their relative revenue values, which will vary to the extent our metals sales volumes and realized prices change.


We show revenue adjustments for prior period open sales as separate line items. Because these adjustments do not result from current period sales, we have reflected these separately from revenues on current period sales. Noncash and other costs, which are removed from site production and delivery costs in the calculation of unit net cash costs, consist of items such as stock-based compensation costs, start-up costs, inventory adjustments, long-lived asset impairments, restructuring and/or unusual charges. As discussed above, gold, molybdenum and other metal revenues at copper mines are reflected as credits against site production and delivery costs in the by-product method. The following schedules for our mining operations are presentations under both the by-product and co-product methods together with reconciliations to amounts reported in our consolidated financial statements.


Oil and Gas Product Revenues and Cash Production Costs per Unit

Realized revenues and cash production costs per unit are measures intended to provide investors with information about the cash operating margin of our oil and gas operations expressed on a BOE basis. We use this measure for the same purpose and for monitoring operating performance by our oil and gas operations. This information differs from measures of performance determined in accordance with U.S. GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance with U.S. GAAP. Our measures may not be comparable to similarly titled measures reported by other companies.


We show adjustments from derivative contracts as separate line items. Because these adjustments do not result from oil and gas sales, these gains and losses have been reflected separately from revenues on current period sales. Additionally, accretion, charges for asset retirement obligations and other costs, such as idle/terminated rig costs, inventory and/or unusual charges, are removed from production and delivery costs in the calculation of cash production costs per BOE. The following schedules include calculations of oil and gas product revenues and cash production costs together with a reconciliation to amounts reported in our consolidated financial statements.




88

Table of Contents


North America Copper Mines Product Revenues and Production Costs

Year Ended December 31, 2016

(In millions)

By-Product

Co-Product Method

Method

Copper

Molybdenum a

Other b

Total

Revenues, excluding adjustments

$

4,113


$

4,113


$

213


$

94


$

4,420


Site production and delivery, before net noncash

and other costs shown below

2,613


2,474


166


58


2,698


By-product credits

(222

)

-


-


-


-


Treatment charges

193


185


-


8


193


Net cash costs

2,584


2,659


166


66


2,891


DD&A

527


496


20


11


527


Metals inventory adjustments

1


1


-


-


1


Noncash and other costs, net

87


84


2


1


87


Total costs

3,199


3,240


188


78


3,506


Revenue adjustments, primarily for pricing

on prior period open sales

(1

)

(1

)

-


-


(1

)

Gross profit

$

913


$

872


$

25


$

16


$

913


Copper sales (millions of recoverable pounds)

1,836


1,836


Molybdenum sales (millions of recoverable pounds) a

33


Gross profit per pound of copper/molybdenum:

Revenues, excluding adjustments

$

2.24


$

2.24


$

6.34


Site production and delivery, before net noncash

and other costs shown below

1.42


1.35


4.93


By-product credits

(0.12

)

-


-