FAIR VALUE MEASUREMENT

Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). FCX 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 third-quarter 2017.

FCX’s financial instruments are recorded on the consolidated balance sheets at fair value except for contingent consideration associated with the sale of the Deepwater Gulf of Mexico (GOM) oil and gas properties (which was recorded under the loss recovery approach) and debt. A summary of the carrying amount and fair value of FCX’s financial instruments, other than cash and cash equivalents, accounts receivable, restricted cash, and accounts payable and accrued liabilities (refer to Note 7) follows (in millions):



	At September 30, 2017
	Carrying		Fair Value
	Amount		Total		NAV		Level 1		Level 2		Level 3
Assets
Investment securities:^a,b
U.S. core fixed income fund	$	25	$	25	$	25	$	—	$	—	$	—
Money market funds	21		21		—		21		—		—
Equity securities	6		6		—		6		—		—
Total	52		52		25		27		—		—

Legally restricted funds:^a
U.S. core fixed income fund	55		55		55		—		—		—
Government bonds and notes	38		38		—		—		38		—
Corporate bonds	30		30		—		—		30		—
Government mortgage-backed securities	25		25		—		—		25		—
Money market funds	18		18		—		18		—		—
Asset-backed securities	14		14		—		—		14		—
Collateralized mortgage-backed securities	8		8		—		—		8		—
Municipal bonds	1		1		—		—		1		—
Total	189		189		55		18		116		—

Derivatives:
Embedded derivatives in provisional sales/
purchase contracts in a gross asset position^c	74		74		—		—		74		—
Copper futures and swap contracts^c	7		7		—		5		2		—
Contingent consideration for the sales of TFHL
and onshore California oil and gas properties^a	80		80		—		—		80		—
Total	161		161		—		5		156		—

Contingent consideration for the sale of the
Deepwater GOM oil and gas properties^a	150		138		—		—		—		138

Total assets			$	540	$	80	$	50	$	272	$	138

Liabilities
Derivatives:^c
Embedded derivatives in provisional sales/
purchase contracts in a gross liability position	46		$	46	$	—	$	—	$	46	$	—
Copper futures and swap contracts	2		2		—		1		1		—
Total	48		48		—		1		47		—

Long-term debt, including current portion^d	14,782		14,735		—		—		14,735		—

Total liabilities			$	14,783	$	—	$	1	$	14,782	$	—



	At December 31, 2016
	Carrying		Fair Value
	Amount		Total		NAV		Level 1		Level 2		Level 3
Assets
Investment securities:^a,b
U.S. core fixed income fund	$	23	$	23	$	23	$	—	$	—	$	—
Money market funds	22		22		—		22		—		—
Equity securities	5		5		—		5		—		—
Total	50		50		23		27		—		—

Legally restricted funds:^a
U.S. core fixed income fund	53		53		53		—		—		—
Government bonds and notes	36		36		—		—		36		—
Corporate bonds	32		32		—		—		32		—
Government mortgage-backed securities	25		25		—		—		25		—
Asset-backed securities	16		16		—		—		16		—
Money market funds	12		12		—		12		—		—
Collateralized mortgage-backed securities	8		8		—		—		8		—
Municipal bonds	1		1		—		—		1		—
Total	183		183		53		12		118		—

Derivatives:
Embedded derivatives in provisional sales/
purchase contracts in a gross asset position^c	137		137		—		—		137		—
Copper futures and swap contracts^c	9		9		—		8		1		—
Contingent consideration for the sales of TFHL
and onshore California oil and gas properties^a	46		46		—		—		46		—
Total	192		192		—		8		184		—

Contingent consideration for the sale of the
Deepwater GOM oil and gas properties^a	150		135		—		—		—		135

Total assets			$	560	$	76	$	47	$	302	$	135

Liabilities
Derivatives:^c
Embedded derivatives in provisional sales/
purchase contracts in a gross liability position	56		$	56	$	—	$	—	$	56	$	—
Copper futures and swap contracts	2		2		—		2		—		—
Total	58		58		—		2		56		—

Contingent payments for the settlements of
drilling rig contracts^e	23		23		—		—		23		—

Long-term debt, including current portion^d	16,027		15,196		—		—		15,196		—

Total liabilities			$	15,277	$	—	$	2	$	15,275	$	—


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


b.	Excludes time deposits (which approximated fair value) included in (i) other current assets of $41 million at September 30, 2017, and $28 million at December 31, 2016, and (ii) other assets of $122 million at both September 30, 2017, and December 31, 2016, primarily associated with an assurance bond to support PT-FI’s commitment for smelter development in Indonesia.


c.	Refer to Note 7 for further discussion and balance sheet classifications.


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


e.	Included in accounts payable and accrued liabilities.

Valuation Techniques. The U.S. core fixed income fund is valued at net asset value (NAV). The fund strategy seeks total return consisting of income and capital appreciation primarily by investing in a broad range of investment-grade debt securities, including U.S. government obligations, corporate bonds, mortgage-backed securities, asset-backed securities and money market instruments. There are no restrictions on redemptions (which are usually within one business day of notice).

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

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

Fixed income securities (government securities, corporate bonds, asset-backed securities, collateralized mortgage-backed securities and municipal bonds) are valued using a bid-evaluation price or a mid-evaluation price. 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.

FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales are valued using only quoted monthly LME or COMEX copper forward prices and the London gold forward price at each reporting date based on the month of maturity (refer to Note 7 for further discussion); however, FCX’s contracts themselves are not traded on an exchange. As a result, these derivatives are classified within Level 2 of the fair value hierarchy.

FCX’s derivative financial instruments for copper futures and swap contracts and copper forward contracts that are traded on the respective exchanges are classified within Level 1 of the fair value hierarchy because they are valued using quoted monthly COMEX or LME prices at each reporting date based on the month of maturity (refer to Note 7 for further discussion). Certain of these contracts are traded on the over-the-counter market and are classified within Level 2 of the fair value hierarchy based on COMEX and LME forward prices.

The fair value of contingent consideration for the sales of TFHL and onshore California oil and gas properties is calculated based on average commodity price forecasts through applicable maturity dates using a Monte Carlo simulation model. The models use various observable inputs, including Brent crude oil forward prices, historical copper and cobalt prices, volatilities, discount rates and settlement terms. As a result, these contingent consideration assets are classified within Level 2 of the fair value hierarchy.

The fair value of contingent consideration for the sale of Deepwater GOM oil and gas properties is calculated based on a discounted cash flow model using inputs that include third-party reserve estimates, production rates, production timing and discount rates. Because significant inputs are not observable in the market, the contingent consideration is classified within Level 3 of the fair value hierarchy.

The December 31, 2016, fair value of contingent payments for the settlements of drilling rig contracts was calculated based on the average price forecasts of West Texas Intermediate (WTI) crude oil over the 12-month period ending June 30, 2017, using a mean-reverting model. The model used various observable inputs, including WTI crude oil forward prices, volatilities, discount rate and settlement terms. As a result, these contingent payments were classified within Level 2 of the fair value hierarchy. The contingency period for FM O&G’s drilling rig contract settlements ended June 30, 2017, and no additional amounts were paid.

Long-term debt, including current portion, is valued using available market quotes and, as such, is classified within Level 2 of the fair value hierarchy.

The techniques described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while FCX believes its valuation techniques are appropriate and consistent with other market participants, the use of different techniques or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the techniques used at September 30, 2017, as compared to those techniques used at December 31, 2016.

A summary of the changes in the fair value of FCX’s Level 3 instrument, contingent consideration for the sale of the Deepwater GOM oil and gas properties, during the first nine months of 2017 follows (in millions):



Fair value at January 1, 2017	$	135
Net unrealized gain related to assets still held at the end of the period	3
Fair value at September 30, 2017	$	138