FAIR VALUE MEASUREMENT (Notes)

12 Months Ended

Dec. 31, 2019

FAIR VALUE MEASUREMENT

Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). FCX did not have any significant transfers in or out of Level 3 for 2019.

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 GOM oil and gas properties (which was recorded under the loss recovery approach) and debt. A summary of the carrying amount and fair value of FCX’s financial instruments (including those measured at NAV as a practical expedient), other than cash and cash equivalents, restricted cash, restricted cash equivalents, accounts receivable, accounts payable and accrued liabilities, and dividends payable (refer to Note 14) follows:



	At December 31, 2019
	Carrying		Fair Value
	Amount		Total		NAV		Level 1		Level 2		Level 3
Assets
Investment securities:^a,b
U.S. core fixed income fund	$	27	$	27	$	27	$	—	$	—	$	—
Equity securities	4		4		—		4		—		—
Total	31		31		27		4		—		—

Legally restricted funds:^a
U.S. core fixed income fund	59		59		59		—		—		—
Government mortgage-backed securities	43		43		—		—		43		—
Government bonds and notes	36		36		—		—		36		—
Corporate bonds	33		33		—		—		33		—
Asset-backed securities	14		14		—		—		14		—
Collateralized mortgage-backed securities	7		7		—		—		7		—
Money market funds	3		3		—		3		—		—
Municipal bonds	1		1		—		—		1		—
Total	196		196		59		3		134		—

Derivatives:
Embedded derivatives in provisional copper,
gold and cobalt sales/purchase contracts
in a gross asset position^c	68		68		—		—		68		—
Copper futures and swap contracts^c	6		6		—		5		1		—
Contingent consideration for the sale of onshore
California oil and gas properties^a	11		11		—		—		11		—
Total	85		85		—		5		80		—

Contingent consideration for the sale of the
Deepwater GOM oil and gas properties^a	122		108		—		—		—		108



Liabilities
Derivatives:^c
Embedded derivatives in provisional copper,
gold and cobalt sales/purchase contracts
in a gross liability position	20	20	—	—	20	—
Copper forward contracts	1	1	—	—	1	—
Total	21	21	—	—	21	—

Long-term debt, including current portion^d	9,826	10,239	—	—	10,239	—



	At December 31, 2018
	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	$	—	$	—	$	—
Equity securities	4		4		—		4		—		—
Total	29		29		25		4		—		—

Legally restricted funds:^a
U.S. core fixed income fund	55		55		55		—		—		—
Government mortgage-backed securities	38		38		—		—		38		—
Government bonds and notes	36		36		—		—		36		—
Corporate bonds	28		28		—		—		28		—
Asset-backed securities	11		11		—		—		11		—
Collateralized mortgage-backed securities	7		7		—		—		7		—
Money market funds	5		5		—		5		—		—
Municipal bonds	1		1		—		—		1		—
Total	181		181		55		5		121		—

Derivatives:
Embedded derivatives in provisional copper,
gold and cobalt sales/purchase contracts
in a gross asset position^c	23		23		—		—		23		—
Contingent consideration for the sales of TFHL
and onshore California oil and gas properties^a	73		73		—		—		73		—
Total	96		96		—		—		96		—

Contingent consideration for the sale of the
Deepwater GOM oil and gas properties^a	143		127		—		—		—		127

Liabilities
Derivatives:^c
Embedded derivatives in provisional copper,
gold and cobalt sales/purchase contracts
in a gross liability position	39		39		—		—		39		—
Copper futures and swap contracts	9		9		—		7		2		—
Total	48		48		—		7		41		—


Long-term debt, including current portion^d	11,141		10,238		—		—		10,238		—


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

Excludes time deposits (which approximated fair value) included in (i) other current assets of $100 million at December 31, 2019, and $109 million at December 31, 2018, and (ii) other assets of $157 million at December 31, 2019, and $126 million at December 31, 2018, primarily associated with an assurance bond to support PT-FI’s commitment for the development of a new smelter in Indonesia (refer to Note 13 for further discussion) and PT-FI’s closure and reclamation guarantees (refer to Note 12 for further discussion).


c.	Refer to Note 14 for further discussion and balance sheet classifications.


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

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

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

Fixed income securities (government securities, corporate bonds, asset-backed securities, collateralized mortgage-backed securities and municipal bonds) are valued using a bid-evaluation price or a mid-evaluation price. These evaluations are based on quoted prices, if available, or models that use observable inputs and, as such, are classified within Level 2 of the fair value hierarchy.

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

FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales are valued using only quoted monthly LME or COMEX copper forward prices and the adjusted LBMA gold prices at each reporting date based on the month of maturity (refer to Note 14 for further discussion); however, FCX’s contracts themselves are not traded on an exchange. FCX’s embedded derivatives on provisional cobalt purchases are valued using quoted monthly LME cobalt forward prices or average published Metals Bulletin cobalt prices, subject to certain adjustments as specified by the terms of the contracts, at each reporting date based on the month of maturity. 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 copper 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 copper forward prices.

In 2016, FCX completed the sale of its onshore California oil and gas properties, which included contingent consideration of up to $150 million, consisting of $50 million per year for 2018, 2019 and 2020 if the price of Brent crude oil averages over $70 per barrel in each of these calendar years. The fair value of the contingent consideration derivative (included in other assets in the consolidated balance sheets) was $11 million at December 31, 2019, and $16 million at December 31, 2018. Future changes in the fair value of this contingent consideration derivative will continue to be recorded in operating income. Also, contingent consideration of $50 million (included in other current assets in the consolidated balance sheet at December 31, 2018) was realized in 2018 and collected in first-quarter 2019 (included in proceeds from sales of oil and gas properties in the consolidated statements of cash flows) because the average Brent crude oil price exceeded $70 per barrel for 2018. Contingent consideration of $50 million was not realized in 2019 because the average Brent crude oil price did not exceeded $70 per barrel for 2019. The fair values, including the contingent consideration derivative associated with the 2016 TFHL sale (refer to Note 2 for further discussion), are 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.

In 2016, FCX completed the sale of its Deepwater GOM oil and gas properties, which included up to $150 million in contingent consideration that was recorded at the total amount under the loss recovery approach. The contingent consideration will be received over time as future cash flows are realized in connection with a third-party production handling agreement for an offshore platform. The first collection occurred in 2018. The balance included in (i) other current assets totaled $18 million at December 31, 2019, and $27 million at December 31, 2018, and (ii) other assets totaled $104 million at December 31, 2019, and $116 million at December 31, 2018. The fair value of this contingent consideration was calculated based on a discounted cash flow model using inputs that include third-party estimates for reserves, production rates and production timing, and discount rates. Because significant inputs are not observable in the market, the contingent consideration is classified within Level 3 of the fair value hierarchy.

Long-term debt, including current portion, is 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 NRV or reflective of future fair values. Furthermore, while FCX believes its valuation techniques are appropriate and consistent with those used by 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, 2019.

A summary of the changes in the fair value of FCX’s Level 3 instrument, contingent consideration for the sale of the Deepwater GOM oil and gas properties, for the years ended December 31 follows:



	2019			2018			2017
Balance at beginning of year	$	127		$	134		$	135
Net unrealized gains (losses) related to assets still held at the end of the year	2			—			(1		)
Settlements	(21		)	(7		)	—
Balance at end of year	$	108		$	127		$	134

Refer to Notes 1 and 2 for a discussion of the fair value estimates associated with other assets acquired and liabilities assumed related to the PT-FI divestment, which were determined based on inputs not observable in the market and thus represent Level 3 measurements.

- Definition

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

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