FAIR VALUE MEASUREMENT

Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).


Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;


Level 2	Quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means; and


Level 3	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

FCX recognizes transfers between levels at the end of the reporting period. FCX did not have any significant transfers in or out of Level 1, 2 or 3 for 2013. A summary of the carrying amount and fair value of FCX’s financial instruments other than cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and dividends payable follows:



	At December 31, 2013
	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Assets
Investment securities (current and long-term):^a,b
U.S. core fixed income fund	$	21	$	21	$	—	$	21	$	—
Money market funds	18		18		18		—		—
Equity securities	5		5		5		—		—
Total	44		44		23		21		—

Legally restricted funds (long-term):^a,b,c
U.S. core fixed income fund	48		48		—		48		—
Government mortgage-backed securities	34		34		—		34		—
Corporate bonds	28		28		—		28		—
Government bonds and notes	28		28		—		28		—
Money market funds	28		28		28		—		—
Asset-backed securities	15		15		—		15		—
Municipal bonds	1		1		—		1		—
Total	182		182		28		154		—



Derivatives:^a,d
Embedded derivatives in provisional sales/purchase
contracts in a gross asset position	63		63		—		63		—
Copper futures and swap contracts	6		6		5		1		—
Total	69		69		5		64		—

Total assets			$	295	$	56	$	239	$	—

Liabilities
Derivatives:^a
Embedded derivatives in provisional sales/purchase
contracts in a gross liability position^d	$	16	$	16	$	—	$	16	$	—
Crude oil options^d	309		309		—		—		309
Natural gas swaps	4		4		—		4		—
Copper forward contracts^d	1		1		1		—		—
Plains Offshore warrants^e	2		2		—		—		2
Total	332		332		1		20		311

Long-term debt, including current portion^f	20,706		20,487		—		20,487		—

Total liabilities			$	20,819	$	1	$	20,507	$	311



	At December 31, 2012
	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Assets
Investment securities (current and long-term):
MMR investment^g	$	446	$	539	$	—	$	539	$	—
U.S. core fixed income fund^a,b	22		22		—		22		—
Money market funds^a,b	16		16		16		—		—
Equity securities^a,b	8		8		8		—		—
Total	492		585		24		561		—

Legally restricted funds (long-term):^a,b
U.S. core fixed income fund	50		50		—		50		—
Government mortgage-backed securities	36		36		—		36		—
Corporate bonds	30		30		—		30		—
Government bonds and notes	24		24		—		24		—
Asset-backed securities	15		15		—		15		—
Money market funds	7		7		7		—		—
Municipal bonds	1		1		—		1		—
Total	163		163		7		156		—

Derivatives:^a,d
Embedded derivatives in provisional sales/purchase
contracts in a gross asset position	36		36		—		36		—
Copper futures and swap contracts	5		5		5		—		—
Total	41		41		5		36		—

Total assets			$	789	$	36	$	753	$	—

Liabilities
Derivatives:^a,d
Embedded derivatives in provisional sales/purchase
contracts in a gross liability position	$	27	$	27	$	—	$	27	$	—
Copper futures and swap contracts	1		1		1		—		—
Total	28		28		1		27		—

Long-term debt, including current portion^f	3,527		3,589		—		3,589		—

Total liabilities			$	3,617	$	1	$	3,616	$	—


a.	Recorded at fair value.


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


c.	Legally restricted funds excluded $210 million of time deposits (which approximated fair value) at December 31, 2013, associated with the Cerro Verde royalty dispute (refer to Note 12 for further discussion).


d.	Refer to Note 14 for further discussion and balance sheet classifications. At December 31, 2013, crude oil options are net of $444 million for deferred premiums and accrued interest.


e.	Included in other liabilities. Refer to Note 2 for further discussion.


f.	Recorded at cost except for debt assumed in the PXP and FMC acquisitions, which were recorded at fair value at the respective acquisition dates.


g.	Recorded at cost and included in other assets.

Valuation Techniques

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

Fixed income securities (U.S. core fixed income funds, government securities, corporate bonds, asset-backed securities and municipal bonds) are valued using a bid evaluation price or a mid-evaluation price. A bid evaluation price is an estimated price at which a dealer would pay for a security. A mid-evaluation price is the average of the estimated price at which a dealer would sell a security and the estimated price at which a dealer would pay for a security. These evaluations are based on quoted prices, if available, or models that use observable inputs and, as such, are classified within Level 2 of the fair value hierarchy.

Equity securities are valued at the closing price reported on the active market on which the individual securities are traded and, as such, are classified within Level 1 of the fair value hierarchy.

FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales have critical observable inputs of quoted monthly LME or COMEX copper forward prices and the London gold forward price at each reporting date based on the month of maturity; however, FCX's contracts themselves are not traded on an exchange. As a result, these derivatives are classified within Level 2 of the fair value hierarchy.

FCX's derivative financial instruments for crude oil options are valued using an option pricing model, which uses various observable inputs including IntercontinentalExchange, Inc. (ICE) crude oil prices, volatilities, interest rates and contract terms. FCX's derivative financial instruments for natural gas swaps are valued using a pricing model that has various observable inputs including NYMEX price quotations, interest rates and contract terms. Valuations are adjusted for credit quality, using the counterparties' credit quality for asset balances and FCX's credit quality for liability balances. For asset balances, FCX uses the credit default swap value for counterparties when available or the spread between the risk-free interest rate and the yield rate on the counterparties' publicly traded debt for similar instruments (which considers the impact of netting agreements on counterparty credit risk, including whether the position with the counterparty is a net asset or net liability). The 2014 natural gas swaps are classified within Level 2 of the fair value hierarchy because the inputs used in the valuation models are directly or indirectly observable for substantially the full term of the instruments. The 2014 and 2015 crude oil options are classified within Level 3 of the fair value hierarchy because the inputs used in the valuation models are not observable for substantially the full term of the instruments. The significant unobservable inputs used in the fair value measurement of the crude oil options are implied volatilities and deferred premiums. Significant increases (decreases) in implied volatilities in isolation would result in a significantly higher (lower) fair value measurement. The implied volatilities ranged from 17 percent to 45 percent, with a weighted average of 23 percent. The deferred premiums ranged from $5.15 per barrel to $7.22 per barrel, with a weighted average of $6.33 per barrel. Refer to Note 14 for further discussion of these derivative financial instruments.

FCX’s derivative financial instruments for copper futures and swap contracts and copper forward contracts that are traded on the respective exchanges are classified within Level 1 of the fair value hierarchy because they are valued using quoted monthly COMEX or LME prices at each reporting date based on the month of maturity (refer to Note 14 for further discussion). Certain of these contracts are traded on the over-the-counter market and are classified within Level 2 of the fair value hierarchy based on COMEX and LME forward prices.

The fair value of warrants associated with the Plains Offshore Preferred Stock was determined with an option pricing model that used unobservable inputs. The inputs used in the valuation model are the estimated fair value of the underlying Plains Offshore common stock, expected exercise price, expected term, expected volatility and risk-free interest rate. The assumptions used in the valuation model are highly subjective because the common stock of Plains Offshore is not publicly traded. As a result, these warrants are classified within Level 3 of the fair value hierarchy. Refer to Note 2 for further discussion of the Plains Offshore warrants.

Long-term debt, including current portion, is not actively traded and is valued using prices obtained from a readily available pricing source and, as such, is classified within Level 2 of the fair value hierarchy.

At December 31, 2012, FCX's investment in MMR's 5.75% Convertible Perpetual Preferred Stock, Series 2 (MMR investment) was not actively traded; therefore, FCX valued it's MMR investment based on a pricing simulation model that used the quoted market prices of MMR's publicly traded common stock as the most significant observable input and other inputs, such as expected volatility, expected settlement date, and risk-free interest rate. Therefore, this investment was classified within Level 2 of the fair value hierarchy. FCX's shares of MMR's 5.75% Convertible Perpetual Preferred Stock, Series 2 were canceled in connection with the acquisition of MMR.

A summary of the changes in the fair value of FCX's Level 3 instruments follows:



	Crude Oil				Plains Offshore
	Options				Warrants
Fair value at December 31, 2012	$	—			$	—
Derivative financial instruments assumed in the PXP acquisition	(83		)		(10		)
Net realized losses	(38		)	^a	—
Net unrealized (losses) gains included in earnings related to assets and liabilities still held at the end of the period	(230		)	^b	8			^c
Settlement payments	42				—
Fair value at December 31, 2013	$	(309	)		$	(2	)


a.	Included net realized losses of $37 million recorded in revenues and $1 million of interest expense associated with the deferred premiums for the seven month period from June 1, 2013, to December 31, 2013.


b.	Included unrealized losses of $228 million recorded in revenues and $2 million of interest expense associated with the deferred premiums.


c.	Recorded in other (expense) income, net.

The techniques described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while FCX believes its valuation techniques are appropriate and consistent with other market participants, the use of different techniques or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the techniques used at December 31, 2013.

Refer to Note 2 for the levels within the fair value hierarchy associated with other assets acquired, liabilities assumed and redeemable noncontrolling interest related to second-quarter 2013 acquisitions.