424B3
The
information in this prospectus supplement is not complete and
may be changed. This prospectus supplement and the accompanying
prospectus are not an offer to sell these securities and we are
not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
|
Filed Pursuant to Rule 424(b)(3).
Registration Statement
File No. 333-140997
Subject to Completion
Preliminary Prospectus
Supplement dated March 19, 2007
PROSPECTUS SUPPLEMENT
(To prospectus dated March 1, 2007)
10,000,000 Shares
Freeport-McMoRan
Copper & Gold Inc.
%
Mandatory Convertible Preferred Stock
We are offering 10,000,000 shares of
our % mandatory convertible
preferred stock.
We will pay annual dividends on each share of our mandatory
convertible preferred stock at a rate
of % per share on the
liquidation preference thereof of $100 per share. Dividends will
accrue and cumulate from the date of issuance and, to the extent
that we are legally permitted to pay dividends and our board of
directors declares a dividend payable, we will pay dividends in
cash, common stock or a combination thereof, on February 1,
May 1, August 1 and November 1 of each year prior
to May 1, 2010, and on May 1, 2010. The first dividend
payment will be made on August 1, 2007, in the expected
amount of $ per share
of our mandatory convertible preferred stock, which reflects the
time period from the date of issuance to August 1, 2007.
Each share of our mandatory convertible preferred stock has a
liquidation preference of $100.00, plus accrued, cumulated and
unpaid dividends. Each share of our mandatory convertible
preferred stock will automatically convert on May 1, 2010,
into between
and shares of our
common stock, subject to anti-dilution adjustments, depending on
the average daily closing price per share of our common stock
over the 20 trading day period ending on the third trading day
prior to such date. At any time prior to May 1, 2010,
holders may elect to convert each share of our mandatory
convertible preferred stock
into shares of
common stock, subject to anti-dilution adjustments.
Prior to this offering, there has been no public market for our
mandatory convertible preferred stock. We intend to apply to
list our mandatory convertible preferred stock on the New York
Stock Exchange, subject to satisfaction of its minimum listing
standards. Our common stock is listed on the New York Stock
Exchange under the symbol FCX. On March 16,
2007, the last reported sale price of our common stock was
$60.71 per share.
Concurrently with this offering of mandatory convertible stock,
we are offering 35,000,000 shares of our common stock
(40,250,000 shares if the underwriters exercise their
overallotment option in full). The common stock will be offered
pursuant to a separate prospectus supplement. This prospectus
supplement shall not be deemed an offer to sell or a
solicitation of an offer to buy any of our common stock. This
offering is not conditioned upon the successful completion of
the common stock offering.
Investing in our mandatory convertible preferred stock
involves risks. See Risk Factors beginning on
page S-19
of this prospectus supplement for more information.
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
Total
|
|
Public offering price
|
|
$
|
|
|
|
$
|
|
|
Underwriting discount
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to
Freeport-McMoRan Copper & Gold Inc.
|
|
$
|
|
|
|
$
|
|
|
We have granted the underwriters an option for a period of
30 days to purchase up to 1,500,000 additional shares
of our mandatory convertible preferred stock at the public
offering price less the underwriting discount to cover
overallotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The mandatory convertible preferred stock will be ready for
delivery on or about ,
2007.
Joint Book-Running Managers
|
|
Merrill
Lynch & Co. |
JPMorgan |
The date of this prospectus supplement
is , 2007.
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
Prospectus Supplement
|
|
|
|
S-1
|
|
|
|
|
S-19
|
|
|
|
|
S-37
|
|
|
|
|
S-39
|
|
|
|
|
S-40
|
|
|
|
|
S-41
|
|
|
|
|
S-42
|
|
|
|
|
S-43
|
|
|
|
|
S-52
|
|
|
|
|
S-55
|
|
|
|
|
S-58
|
|
|
|
|
S-59
|
|
|
|
|
S-62
|
|
|
|
|
S-64
|
|
|
|
|
S-78
|
|
|
|
|
S-84
|
|
|
|
|
S-88
|
|
|
|
|
S-88
|
|
|
|
|
S-88
|
|
|
|
|
S-88
|
|
|
Prospectus
|
|
|
|
|
|
About this Prospectus
|
|
|
1
|
|
Freeport-McMoRan Copper &
Gold Inc.
|
|
|
1
|
|
Use of Proceeds
|
|
|
1
|
|
Ratio of Earnings to Fixed Charges
|
|
|
2
|
|
Description of Securities
|
|
|
2
|
|
Description of Freeport-McMoRan
Capital Stock
|
|
|
2
|
|
Description of Debt Securities
|
|
|
6
|
|
Description of Warrants
|
|
|
6
|
|
Description of Purchase Contracts
|
|
|
6
|
|
Description of Units
|
|
|
7
|
|
Forms of Securities
|
|
|
7
|
|
Plan of Distribution
|
|
|
9
|
|
Where You Can Find More Information
|
|
|
10
|
|
Information Concerning
Forward-Looking Statements
|
|
|
11
|
|
Legal Opinions
|
|
|
12
|
|
Experts
|
|
|
12
|
|
Reserves
|
|
|
13
|
|
S-DO NOT DELETE
THIS TEXT
so as to maintain
the auto numbering scheme for the page numbers. This text is
hidden and will not print.
S-i
You should rely only on the information contained or
incorporated by reference in this prospectus supplement and the
accompanying prospectus. We have not, and the underwriters have
not, authorized any other person to provide you with different
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information contained or
incorporated by reference in this prospectus supplement is
accurate only as of the date on the front cover of this
prospectus supplement and that the information contained or
incorporated by reference in the accompanying prospectus is
accurate only as of the date on the front cover of the
accompanying prospectus. Our business, financial condition,
results of operations and prospects may have changed since that
date.
ABOUT
THIS PROSPECTUS SUPPLEMENT
This document contains two parts. The first part consists of
this prospectus supplement, which describes the specific terms
of this offering and the securities offered. The second part,
the accompanying prospectus, provides more general information,
some of which may not apply to this offering. If the description
of the offering varies between this prospectus supplement and
the accompanying prospectus, you should rely on the information
in this prospectus supplement.
Before purchasing any securities, you should carefully read both
this prospectus supplement and the accompanying prospectus,
together with the additional information described under the
heading Where You Can Find More Information.
Unless otherwise noted, the information in this prospectus
supplement assumes that the underwriters overallotment
option to purchase up to an additional 1,500,000 shares of
mandatory convertible preferred stock will not be exercised.
INDUSTRY
AND OTHER INFORMATION
Unless we indicate otherwise, we base the information concerning
the mining industry contained or incorporated by reference in
this prospectus supplement and the accompanying prospectus on
our general knowledge of and expectations concerning the
industry. Our market positions and market shares are based on
our estimates using data from various industry sources and
assumptions that we believe to be reasonable based on our
knowledge of the mining industry. We have not independently
verified data from industry sources and cannot guarantee its
accuracy or completeness. In addition, we believe that data
regarding the mining industry and our market positions and
market shares within such industry provide general guidance but
are inherently imprecise. Further, our estimates involve risks
and uncertainties and are subject to change based on various
factors, including those discussed in the Risk
Factors section of this prospectus supplement. The
information regarding Freeport-McMoRans reserves as of
December 31, 2006, that is contained in this prospectus
supplement or the accompanying prospectus, including the
documents incorporated by reference herein or therein, has been
verified by Independent Mining Consultants, Inc. as experts in
mining, geology and reserve determination.
S-ii
PROSPECTUS
SUPPLEMENT SUMMARY
This summary highlights certain information contained
elsewhere or incorporated by reference in this prospectus
supplement. Because this is only a summary, it does not contain
all the information that may be important to you. For a more
complete understanding of our business and this offering, you
should read the entire prospectus supplement and the
accompanying prospectus and the documents incorporated herein
and therein by reference, including the annual financial
statements included elsewhere or incorporated by reference in
this prospectus supplement and the accompanying prospectus. You
should also carefully consider the matters discussed under
Risk Factors.
On March 19, 2007, Freeport-McMoRan Copper &
Gold Inc. acquired Phelps Dodge Corporation (the
acquisition). In this prospectus supplement, we
refer to the issuance of the 8.25% senior notes due 2015,
the 8.375% senior notes due 2017 and the senior floating
rate notes due 2015 (the notes) and the borrowings
under the new senior credit facilities as the
financing and the acquisition and the related
transactions, including the financing, as the
transactions.
Except as otherwise described herein or the context otherwise
requires, all references to (i) the combined
company, we, us, our
and ours in this prospectus supplement mean
Freeport-McMoRan Copper & Gold Inc. and all entities
owned or controlled by Freeport-McMoRan Copper & Gold
Inc. (including Phelps Dodge Corporation and its subsidiaries on
a pro forma basis after giving effect to the acquisition of
Phelps Dodge by Freeport-McMoRan and the other transactions
described herein), (ii) Freeport-McMoRan refer
to Freeport-McMoRan Copper & Gold Inc. and its
subsidiaries prior to the acquisition and
(iii) Phelps Dodge refer to Phelps Dodge
Corporation and its subsidiaries.
Overview
Freeport-McMoRan Copper & Gold Inc. is one of the
worlds largest producers of copper and gold.
Freeport-McMoRans Grasberg minerals district in Papua,
Indonesia contains the worlds single largest copper
reserve and the worlds single largest gold reserve. Phelps
Dodge Corporation is one of the worlds leading producers
of copper and molybdenum. Phelps Dodge has mines in operation or
under development in North and South America, and Africa,
including the Tenke Fungurume development project in the
Democratic Republic of Congo.
On March 19, 2007, Freeport-McMoRan acquired Phelps Dodge
for approximately $26 billion in cash and stock, based on
Freeport-McMoRans closing stock price on November 17,
2006, creating one of the worlds largest publicly-traded
copper companies and one of North Americas largest mining
companies. Freeport-McMoRan will use the proceeds from this
offering to repay outstanding indebtedness incurred in
connection with the acquisition.
Acquisition
Rationale
The combination of Freeport-McMoRan and Phelps Dodge will
dramatically expand Freeport-McMoRans operations, reserves
and project pipeline, while diversifying both its geographic and
commodity portfolio. The significant benefits of the acquisition
include:
|
|
|
|
|
our increased scale of operations, management depth and
strengthened cash flows will provide an improved platform from
which to capitalize on growth opportunities in the global market;
|
|
|
|
we will be well-positioned to benefit from the positive copper
market at a time when there is a scarcity of large-scale copper
development projects combined with strong global demand for
copper;
|
|
|
|
|
|
we will have long-lived, geographically diverse ore reserves
totaling 77.2 billion pounds of copper, 38.3 million
ounces of gold and 1.8 billion pounds of molybdenum, net of
minority interests of all joint venture partners and minority
owners;
|
|
|
|
we expect to generate strong cash flows, which will strengthen
our financial profile;
|
S-1
|
|
|
|
|
our future growth will be supported by a project pipeline with
the potential to add nearly one billion pounds of copper
production capacity on a consolidated basis by the end of
2009; and
|
|
|
|
we will have exploration rights with significant potential in
copper regions around the world, including
Freeport-McMoRans prospective acreage in Papua, Indonesia,
and Phelps Dodges opportunities at its Tenke Fungurume
concessions in the Democratic Republic of Congo.
|
Our
Business
The combined company will be a new industry leader with large,
long-lived, geographically diverse assets and significant proven
and probable reserves of copper, gold and molybdenum. For the
year ended December 31, 2006, on a pro forma basis giving
effect to the transactions, the combined companys revenues
totaled $17.7 billion.
The combined company will have significant, geographically
diverse ore reserves. At December 31, 2006, on a pro forma
basis after giving effect to the transactions, the combined
companys ore reserves on a consolidated basis totaled
93.6 billion pounds of copper, 42.4 million ounces of
gold and 2.0 billion pounds of molybdenum, and the combined
companys equity share of those ore reserves, net of the
interests of all joint venture partners and minority owners,
totaled 77.2 billion pounds of copper, 38.3 million
ounces of gold and 1.8 billion pounds of molybdenum. The
combined companys mines will have lives ranging from
6 years to 37 years based on current ore reserves and
mine plans. The combined companys consolidated implied
reserve lives, calculated by dividing ore reserves by estimated
production rates, will be 21 years for copper,
22 years for gold and 25 years for molybdenum. The
charts below illustrate the composition and diversity of the
combined companys portfolio by geography and commodity:
|
|
|
|
|
|
|
|
Freeport-McMoRan conducts its operations primarily through its
principal operating subsidiaries, PT Freeport Indonesia and
Atlantic Copper, S.A., which operates a copper smelter and
refinery in Huelva, Spain. In addition, Freeport-McMoRan holds
exploration rights covering approximately 2.2 million acres
in Papua, Indonesia. PT Freeport Indonesias operations in
Papua, Indonesia, involve mineral exploration and development,
mining and milling of ore containing copper, gold and silver and
the worldwide marketing of concentrates containing those metals.
PT Freeport Indonesias principal asset is the
world-class Grasberg mine discovered in 1988. The Grasberg
minerals district contains the worlds largest single
copper reserve and worlds largest single gold reserve. PT
Freeport Indonesia is also a 25 percent owner of PT
Smelting, which operates a copper smelter and refinery in
Gresik, Indonesia.
Phelps Dodge conducts its operations primarily through its two
divisions, Phelps Dodge Mining Company (PDMC) and
Phelps Dodge Industries (PDI). PDMC is a fully
integrated producer of copper and molybdenum, with mines and
processing facilities in North America, South America and Europe
and processing capabilities for other minerals as by-products,
such as gold, silver and rhenium. PDI consists of Phelps Dodge
Wire and Cable, which manufactures engineered products
principally for the global energy sector.
S-2
Competitive
Strengths
Geographically diverse asset base. The
combined company will have a geographically diverse portfolio of
assets across four continents, which produce copper, gold and
molybdenum for global sale and consumption. The combined company
will have 15 mines in operation located in Chile, Indonesia,
Peru and the United States and scheduled development projects in
North and South America, Asia and Africa. On a pro forma basis
after giving effect to the transactions, 38 percent of
total 2006 mining revenues of $12.9 billion were generated
from Indonesia, 35 percent from North America,
22 percent from Chile and 5 percent from Peru. While
the combined company will derive the majority of its revenues
from copper (78 percent of 2006 mining revenues on a pro
forma basis after giving effect to the transactions), gold and
molybdenum each represent important pieces of the production
profile, representing 10 percent and 12 percent of
2006 mining revenues, respectively, on a pro forma basis after
giving effect to the transactions. We believe the scope of
operations and diversification should enable the combined
company to perform well throughout periods of volatile commodity
prices and demand fluctuations.
Strong production and long-lived ore
reserves. We believe that the combined
companys geographically diverse asset base is
characterized by large scale production, long reserve lives and
strong future growth opportunities. The table below reflects our
consolidated and net reserves and production.
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Net
Interest(a)
|
|
|
Production for year ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
Copper (billion pounds)
|
|
|
3.6
|
|
|
|
3.1
|
|
Gold (million ounces)
|
|
|
1.8
|
|
|
|
1.7
|
|
Molybdenum (million pounds)
|
|
|
68.2
|
|
|
|
68.2
|
|
Ore reserves as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
Copper (billion pounds)
|
|
|
93.6
|
|
|
|
77.2
|
|
Gold (million ounces)
|
|
|
42.4
|
|
|
|
38.3
|
|
Molybdenum (billion pounds)
|
|
|
2.0
|
|
|
|
1.8
|
|
Copper reserves as of
December 31, 2006 by geographical region (billion
pounds):
|
|
|
|
|
|
|
|
|
Indonesia
|
|
|
38.8
|
|
|
|
35.2
|
|
United States
|
|
|
24.8
|
|
|
|
24.8
|
|
Chile
|
|
|
10.0
|
|
|
|
6.4
|
|
Peru
|
|
|
15.5
|
|
|
|
8.3
|
|
Democratic Republic of Congo
|
|
|
4.5
|
|
|
|
2.6
|
|
Implied ore reserve life
(years)(b):
|
|
|
|
|
|
|
|
|
Copper
|
|
|
21
|
|
|
|
21
|
|
Gold
|
|
|
22
|
|
|
|
22
|
|
Molybdenum
|
|
|
25
|
|
|
|
25
|
|
|
|
|
(a)
|
|
Reflects the combined
companys equity share, net of the interests of all joint
venture partners and minority owners.
|
|
(b)
|
|
Calculated by dividing ore reserves
by estimated production rates.
|
Attractive project pipeline. We believe that
the combined company will have significant potential for growth
through the development of its existing asset base, including
replacing production at existing mines that would otherwise be
depleted. The combined company has a number of projects that we
believe will add nearly one billion pounds of copper production
capacity on a consolidated basis by the end of 2009.
The Tenke Fungurume development project is considered to be one
of the largest, highest grade, undeveloped copper/cobalt
concessions in the world today, which we expect will commence
production by early 2009. Initial production rates are expected
to be approximately 250 million pounds of copper and
18 million pounds of cobalt on a consolidated basis. The
Safford, Arizona project is currently under
S-3
construction and is expected to be in production during the
first half of 2008 and to initially produce approximately
240 million pounds of copper per year on a consolidated
basis.
In South America, the combined company will have two mines with
significant development potential: Cerro Verde and El Abra.
Cerro Verde, in Peru, has recently been expanded and has the
capacity to initially produce approximately 430 million
pounds of additional copper per year on a consolidated basis.
El Abra, in Chile, has completed a feasibility study for
developing its sulfide ore reserves to produce approximately
325 million pounds of copper per year on a consolidated
basis for approximately 10 years beginning as early as 2010.
Significant exploration potential. The
combined company will have exploration rights with significant
potential in copper regions around the world. Two of the key
exploration areas are Freeport-McMoRans 2.2 million
acres in Papua, Indonesia, and Phelps Dodges opportunities
at its Tenke Fungurume development project in the Democratic
Republic of Congo. The Papua acreage is located in highly
prospective areas that we believe have the potential for major
mine developments in the future. In recent years, exploration in
Papua was suspended, but Freeport-McMoRan plans to resume
exploration activities in certain prospective areas during 2007.
See Risk Factors Risks Related to
Freeport-McMoRans Business Any suspension of
required activities under Freeport-McMoRans Contracts of
Work requires the consent of the Indonesian government.
The Tenke Fungurume copper/cobalt deposits are located within
four concessions totaling approximately 394,000 acres of mining
claims. Substantial portions of these concessions have had only
limited historical exploration and a major target definition and
drilling program is now under way in this high potential
copper/cobalt region.
Experienced management team. The combined
company will have a highly experienced management team with a
successful track record for finding and developing reserves and
effectively managing large-scale operations. The team will
include a combination of Freeport-McMoRan and Phelps Dodge
management and will be complemented by a strong operating team
with extensive mining experience.
Strategy
Continue to maximize free cash
flows. Freeport-McMoRan and Phelps Dodge have
proven track records for generating significant cash flows. We
will continue to maintain active programs to improve
efficiencies throughout the combined companys mining
operations in order to optimize production.
Actively pursue project pipeline and
exploration. We manage our business to maximize
the long-term value of our mineral deposits. We have been
disciplined in managing and evaluating potentially attractive
capital investments. The combined company will have significant
potential for growth through the development of its existing
asset base and exploration, which we plan to actively develop to
grow our production and ore reserves.
Strengthen our financial profile. Strong cash
flows have allowed both Freeport-McMoRan and Phelps Dodge to
significantly reduce indebtedness over the past several years.
We plan to continue to use available cash flows to reduce
indebtedness of the combined company. In addition, we will
consider possible opportunities to reduce debt of the combined
company through potential asset sales. While copper, gold and
molybdenum prices will play a significant role in determining
the extent of the combined companys free cash flows, we
will continue to strengthen our financial profile as well as
maximize the cash flows from our ore bodies through initiatives
to increase production and aggressively manage costs.
Industry
Overview
Copper
Copper is an internationally traded commodity, and its price is
effectively determined by the major metals exchanges
the New York Commodity Exchange (COMEX), the London Metal
Exchange (LME) and the Shanghai Futures Exchange (SHFE). Prices
on these exchanges generally reflect the worldwide balance of
copper supply and demand, but also are influenced significantly,
from time to time, by speculative actions and by currency
exchange rates.
S-4
Coppers physical attributes include superior electrical
conductivity, corrosion resistance, structural capability,
efficient heat transfer and aesthetics. Other materials that
compete with copper include aluminum, plastics, stainless steel
and fiber optics. Despite recent higher prices, substitution of
competing materials has been modest because it is difficult to
duplicate coppers unique characteristics.
Copper is a critical component of the worlds
infrastructure. The demand for copper ultimately reflects the
rate of underlying world economic growth, particularly in
industrial production and construction. Coppers end-use
markets reflect its fundamental role in the world economy.
Coppers end-use markets (and their estimated shares of
total consumption based on Brook Hunts estimate of
2006 Western world copper consumption) are
(a) construction (38 percent), (b) electrical
applications (28 percent), (c) industrial machinery
(13 percent), (d) transportation (11 percent) and
(e) consumer products (10 percent). Since 1990,
refined copper consumption grew by an estimated compound annual
growth rate of 3.1 percent to 17.6 million tons in
2006, according to published 1990 data by the World Bureau of
Metals Statistics (WBMS) and our estimates for 2006. This rate
of increase was slightly higher than the growth rate of
2.9 percent for world industrial production over the same
period. Asian copper consumption, led by China, has been
particularly strong, increasing by a compound annual rate of
approximately 6 percent from 1990. Asia now represents
approximately half of the worlds refined copper
consumption, compared with approximately 22 percent for
Western Europe and approximately 20 percent for the
Americas.
From 1990 through 2006, refined copper production has grown at
an average annual rate of approximately 3 percent, based on
published 1990 data by the WBMS and our estimates for 2006.
Absent major new discoveries of copper reserves, which have been
rare in the last decade, the industry is expected to face the
challenge of depleting reserves going forward. While a number of
expansion projects are currently being pursued, development of
major new mines requires long lead times as a result of, among
other things, technical challenges, limited availability of
equipment and experienced operators and political and regulatory
issues.
Copper consumption is closely associated with industrial
production and, therefore, tends to follow economic cycles.
During an expansion, demand for copper tends to increase thereby
driving up the price. As a result, copper prices are volatile
and cyclical. During the past 15 years, the LME price of
copper averaged $1.13 per pound and ranged from a high
annual average price of $3.05 per pound in 2006 to a low
annual average price of $0.71 per pound in 2002. In
addition, during the past 15 years, the COMEX price of
copper averaged $1.14 per pound, and has ranged from a high
annual average price of $3.09 per pound in 2006 to a low
annual average price of $0.72 per pound in 2002. The
closing
3-month LME
and active-month COMEX copper prices on March 15, 2007 were
$2.98 per pound and $2.99 per pound, respectively.
Gold
Gold continues to represent a significant portion of the
international reserve assets for most national central banks.
Due to its value as a currency and historical monetary role,
investment demand has played a significantly larger role in
determining the gold price than market fundamentals.
During 2006, the relative weakness in the U.S. dollar, a
low global interest rate environment, global political
instability and the establishment of exchange-traded funds all
contributed to increased investment demand for gold. Jewelry is
the largest single component of gold usage, comprising
approximately 67 percent of 2006 demand in dollar terms,
according to the World Gold Council. In 2006 demand for jewelry
reached a new record in dollar terms, while demand for gold in
electronics and dental applications rose to a new volume record.
Despite an approximate 10 percent decline in total volume
demand in 2006, total dollar demand for gold reached a new
record, increasing by approximately 22 percent over 2005.
Gold supply is comprised of mine production, gold scrap and
central bank sales. According to World Gold Council data, global
mine production, net of producer hedging, accounted for
approximately 60 percent of total gold supply. Gold scrap
is the second-largest source of gold, providing approximately
30 percent of 2006 supply. The remainder of gold supply
comes from central bank sales. The total gold supply in terms of
volume declined by 13 percent in 2006 according to the
World Gold Council. A decrease in central banks
S-5
sales accounted for a majority of the supply decrease. Mine
supply fell approximately 2 percent in 2006, and has
remained flat over the past three years due to a lack of new
large-scale gold mining projects.
Investment demand and record gold jewelry and industrial demand,
combined with constrained supply, created a favorable gold price
environment in 2006. The average gold price of $604 per
ounce in the 2006 London spot market represents a
36 percent increase over the 2005 average price of
$444 per ounce. Gold hit a
26-year high
of $726 per ounce in mid-May 2006. The closing London PM
Fix gold spot price on March 15, 2007 was $648.50 per
ounce.
Molybdenum
Molybdic oxide, derived from molybdenum, is used primarily in
the steel industry for corrosion resistance, strengthening and
heat resistance. Molybdenum chemicals are used in a number of
diverse applications such as lubricants, additives for water
treatment, feedstock for the production of pure molybdenum metal
and catalysts used for petroleum refining. Pure molybdenum metal
powder products are used in a number of diverse applications,
such as lighting, electronics, and specialty steel alloys.
Molybdenum demand is heavily dependent on the worldwide steel
industry, which comprises approximately 80 percent of
molybdenum demand. The balance is used in specialty chemical
applications. There are no terminal exchanges or forward markets
for molybdenum products.
The metallurgical market for molybdenum is characterized by
cyclical and volatile prices, little product differentiation and
strong competition. The chemical market is more diverse and
contains more specialty products and segments. In both markets,
prices are influenced by, among other things, production costs
of domestic and foreign competitors, worldwide economic
conditions, world and regional supply/demand balances, inventory
levels, governmental regulatory actions and currency exchange
rates. Molybdenum prices also are affected by the demand for
end-use products in, for example, the construction,
transportation and durable goods markets. A substantial portion
of world molybdenum is produced as a by-product of copper
mining, which is relatively insensitive to molybdenum price
levels. Materials that compete with molybdenum include other
metals and alloys, graphite and plastics, depending upon the
application. Despite recent high prices, substitution of
competing materials has been modest for the metallurgical
segment. Certain chemical segments have experienced some
substitution, however, it has not significantly impacted overall
chemical demand.
During 2006, primary mine production increased in both North
America and China, although production in China remains
difficult to estimate. By-product molybdenum production
decreased from 2005 levels primarily due to lower production in
South America. Tight supplies of Western, high-quality materials
continued throughout the first half of 2006, but eased in the
second half as demand slowed in the metallurgical segment.
Western roaster capacity constraints were reduced in 2006 as
increased capacity was realized and by-product supply decreased.
Overall, market fundamentals shifted from a supply deficit in
the first half of 2006 to a slight surplus late in the year,
with the overall year being relatively balanced.
During the past 15 years, Metals Week molybdenum
Dealer Oxide prices have ranged from a high of $40.00 per
pound to a low of $1.82 per pound. In 2006, the Metals
Week molybdenum Dealer Oxide mean price decreased
22 percent from the 2005 mean price of $31.73 per
pound to $24.75 per pound. Although price levels were lower
than those experienced in 2005, 2006 molybdenum prices remained
at historically high levels. Strong demand, which has outpaced
supply over the past several years, has continued and inventory
levels throughout the industry remain low. The Metals Week
molybdenum Dealer Oxide price on March 12, 2007 was
$28.00 per pound.
The
Transactions
Freeport-McMoRan acquired Phelps Dodge on March 19, 2007.
At the effective time of the acquisition, each issued and
outstanding Phelps Dodge common share was converted into the
right to receive a combination of 0.67 of a share of
Freeport-McMoRan common stock and $88.00 in cash, without
interest. At the effective time of the acquisition,
Freeport-McMoRan shareholders owned approximately
59 percent of the
S-6
combined company (62 percent on a fully diluted basis) and
former Phelps Dodge shareholders owned approximately
41 percent of the combined company (38 percent on a
fully diluted basis). Following the acquisition, Phelps Dodge
continued as a surviving corporation and became a wholly owned
subsidiary of Freeport-McMoRan; accordingly, Phelps Dodge shares
are no longer publicly traded.
Freeport-McMoRan had cash requirements of approximately
$18,500 million in connection with the acquisition,
including the cash consideration of the acquisition and
transaction costs. In order to finance a portion of these cash
requirements, the following financing transactions occurred in
connection with the closing of the acquisition:
|
|
|
|
|
borrowings under a new $11,500 million senior credit
facility, consisting of a $1,500 million revolving credit
facility (which refers to our new $1,000 million revolving
credit facility and our amended and restated $500 million
revolving credit facility), a $2,500 million five-year
Tranche A term loan facility and a $7,500 million
seven-year Tranche B term loan facility; and
|
|
|
|
the issuance of $6.0 billion in aggregate principal amount
of the notes offered by our prospectus supplement dated March
14, 2007.
|
The remainder of the cash requirements were met from cash
available at Freeport-McMoRan and Phelps Dodge.
Sources
and Uses
The table below sets forth the estimated sources and uses for
the transactions based on balances as of December 31, 2006:
|
|
|
|
|
Sources of Funds
|
|
Amount
|
|
|
|
(Dollars
|
|
|
|
in millions)
|
|
|
Cash
|
|
$
|
2,500.0
|
|
New revolving credit
facility(a)
|
|
|
|
|
New Tranche A term loan
facility
|
|
|
2,500.0
|
|
New Tranche B term loan
facility
|
|
|
7,500.0
|
|
8.375% senior notes due 2017
|
|
|
3,500.0
|
|
8.25% senior notes due 2015
|
|
|
1,500.0
|
|
Senior floating rate notes due 2015
|
|
|
1,000.0
|
|
Additional common
equity(b)
|
|
|
7,791.0
|
|
|
|
|
|
|
Total sources
|
|
$
|
26,291.0
|
|
|
|
|
|
|
|
|
|
|
|
Uses of Funds
|
|
Amount
|
|
|
|
(Dollars
|
|
|
|
in millions)
|
|
|
Equity
purchased(c)
|
|
$
|
25,791.0
|
|
Estimated fees and
expenses(d)
|
|
|
500.0
|
|
|
|
|
|
|
|
|
|
|
|
Total uses
|
|
$
|
26,291.0
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Our availability under our
revolving credit facility is approximately $1,400.0 million
as of the closing of the transactions after giving effect to
outstanding letters of credit. Going forward, we may be required
to issue additional letters of credit in connection with
financial assurances with respect to our reclamation
obligations. See Risk Factors Risks Related to
Phelps Dodges Business Mine closure
regulations may impose substantial costs.
|
|
(b)
|
|
Reflects the fair value of
Freeport-McMoRan common stock issued to Phelps Dodge
shareholders as a result of the acquisition calculated by using
the weighted average market price of Freeport-McMoRan common
stock from November 16, 2006 to November 21, 2006
multiplied by the estimated shares of Freeport-McMoRan stock
issued to Phelps Dodge shareholders.
|
|
(c)
|
|
Based on the weighted average
market price of Freeport-McMoRan common stock from
November 16, 2006 to November 21, 2006, the cash
consideration paid in the acquisition, and the estimated Phelps
Dodge common shares outstanding and issuable at
December 31, 2006.
|
|
(d)
|
|
Reflects our estimate of fees and
expenses associated with the transactions, including financing
fees, estimated change of control costs and related employee
benefits and other transaction costs and professional fees.
|
S-7
Corporate
Structure
Under the terms of the transactions, a wholly owned subsidiary
of Freeport-McMoRan merged into Phelps Dodge. Phelps Dodge was
the surviving corporation and became a wholly owned subsidiary
of Freeport-McMoRan. The diagram below shows a summary of the
corporate structure of the combined company.
Recent
Developments
Pending class actions. On November 22,
December 12 and December 14, 2006, putative class actions
were filed on behalf of Phelps Dodge shareholders in Arizona
state court, New York state court and Arizona state court,
respectively. The class actions allege breaches of fiduciary
duties by the Phelps Dodge board of directors in connection with
the acquisition. The complaints allege, among other things, that
the named defendants engaged in self-dealing, obtained for
themselves personal benefits not shared equally by Phelps Dodge
shareholders and failed to disclose all material information
concerning the acquisition to Phelps Dodge shareholders. One of
these complaints names Freeport-McMoRan as a defendant and
alleges that Freeport-McMoRan aided and abetted such alleged
violations of fiduciary duties. The plaintiffs seek, among other
things, injunctive relief barring consummation of the
acquisition and directing the defendants to obtain a transaction
that is in the best interests of Phelps Dodge shareholders.
On March 9, 2007, Freeport-McMoRan and Phelps Dodge
announced that they had reached an agreement in principle to
settle the class actions filed on behalf of Phelps Dodge
shareholders. Pursuant to the terms of the settlement agreement,
Freeport-McMoRan has agreed that if, within 12 months after
the closing of the acquisition, it sells all or substantially
all of the capital stock or assets of Phelps Dodge,
Freeport-McMoRan will pay $125 million in additional pro
rata consideration (less any fees awarded to plaintiffs
counsel with respect to such consideration) to the shareholders
of Phelps Dodge who receive the acquisition consideration. In
addition, pursuant to the terms of the settlement agreement,
Phelps Dodge agreed to make additional disclosures beyond the
information provided in the definitive joint proxy
statement/prospectus of Freeport-McMoRan and Phelps Dodge, dated
February 12, 2007, which should be read in conjunction with
the disclosure in the definitive joint proxy
statement/prospectus. The settlement is subject to court
approval. If the settlement agreement is not approved by the
court, Phelps Dodge, Freeport-McMoRan and the other named
defendants intend to vigorously defend the actions.
Concurrent public offering. Concurrently with
this offering of mandatory convertible preferred stock, we are
offering 35,000,000 shares of our common stock
(40,250,000 shares if the underwriters exercise their
S-8
overallotment option in full). The common stock will be offered
pursuant to a separate prospectus supplement. This prospectus
supplement shall not be deemed an offer to sell or a
solicitation of an offer to buy any of our common stock. There
is no assurance that our concurrent public offering of common
stock will be completed or, if completed, that it will be
completed for the amounts contemplated. The completion of this
offering is not conditioned on the completion of our concurrent
public offering of common stock.
Freeport-McMoRan Copper & Gold Inc. is a Delaware
corporation. Our principal executive offices are located at One
North Central Avenue, Phoenix, Arizona 85004, and our telephone
number at that address is
(602) 366-8100.
Our website is located at www.fcx.com. The information on our
website is not part of this prospectus supplement or the
accompanying prospectus.
S-9
THE
OFFERING
|
|
|
Issuer |
|
Freeport-McMoRan Copper & Gold Inc. |
|
Securities offered |
|
10,000,000 shares
of % mandatory
convertible preferred stock (11,500,000 shares if the
underwriters exercise their overallotment option in full), which
we refer to in this prospectus supplement as the mandatory
convertible preferred stock. |
|
Initial offering price |
|
$ per share of
mandatory convertible preferred stock. |
|
Option to purchase additional shares of mandatory convertible
preferred stock |
|
To the extent the underwriters sell more than
10,000,000 shares of our mandatory convertible preferred
stock, the underwriters have the option to purchase up to
1,500,000 additional shares of our mandatory convertible
preferred stock from us at the initial offering price, less
underwriting discounts and commissions, within 30 days from
the date of this prospectus supplement. |
|
Dividends |
|
% per share on
the liquidation preference thereof of $100.00 for each share of
our mandatory convertible preferred stock per year. Dividends
will accrue and cumulate from the date of issuance and, to the
extent that we are legally permitted to pay dividends and our
board of directors, or an authorized committee of our board of
directors, declares a dividend payable, we will pay dividends in
cash or, subject to certain limitations in common stock on each
dividend payment date. The expected dividend payable on the
first dividend payment date is
$ per share and on
each subsequent dividend payment date is expected to be
$ per share. See
Description of Mandatory Convertible Preferred
Stock Dividends. |
|
Dividend payment dates |
|
February 1, May 1, August 1 and November 1
of each year prior to the mandatory conversion date (as defined
below), and on the mandatory conversion date, commencing on
August 1, 2007. |
|
Redemption |
|
Our mandatory convertible preferred stock is not redeemable. |
|
Mandatory conversion date |
|
May 1, 2010. |
|
Mandatory conversion |
|
On the mandatory conversion date, each share of our mandatory
convertible preferred stock will automatically convert into
shares of our common stock, based on the conversion rate as
described below. |
|
|
|
Holders of mandatory convertible preferred stock on the
mandatory conversion date will have the right to receive the
dividend due on such date (including any accrued, cumulated and
unpaid dividends on the mandatory convertible preferred stock as
of the mandatory conversion date), whether or not declared
(other than previously declared dividends on the mandatory
convertible preferred stock payable to holders of record as of a
prior date), to the extent we are legally permitted to pay such
dividends at such time. |
|
Conversion rate |
|
The conversion rate for each share of our mandatory convertible
preferred stock will be not more
than shares of
common stock and not less
than shares of
common stock, depending |
S-10
|
|
|
|
|
on the applicable market value of our common stock, as described
below. |
|
|
|
The applicable market value of our common stock is
the average of the daily closing price per share of our common
stock on each of the 20 consecutive trading days ending on
the third trading day immediately preceding the mandatory
conversion date. It will be calculated as described under
Description of Mandatory Convertible Preferred
Stock Mandatory Conversion. |
|
|
|
The conversion rate is subject to certain adjustments, as
described under Description of Mandatory Convertible
Preferred Stock Anti-dilution Adjustments. |
|
|
|
The following table illustrates the conversion rate per share of
our mandatory convertible preferred stock subject to certain
anti-dilution adjustments described under Description of
Mandatory Convertible Preferred Stock Anti-dilution
Adjustments. |
|
|
|
|
|
|
|
|
|
Applicable Market Value on
|
|
Conversion Rate
|
|
|
|
less than or equal to
$
|
|
|
|
|
|
|
between
$ and
$
|
|
|
|
|
|
|
equal to or greater than
$
|
|
|
|
|
|
|
|
Optional conversion |
|
At any time prior to May 1, 2010, you may elect to convert
each of your shares of our mandatory convertible preferred stock
at the minimum conversion rate
of shares of
common stock for each share of mandatory convertible preferred
stock. This conversion rate is subject to certain adjustments as
described under Description of Mandatory Convertible
Preferred Stock Anti-dilution Adjustments. |
|
Conversion upon cash acquisition; cash acquisition make-whole
amount |
|
If we are the subject of specified cash acquisitions on or prior
to May 1, 2010, under certain circumstances we will
(i) permit conversion of our mandatory convertible
preferred stock during the period beginning on the effective
date of the cash acquisition and ending on the date that is
15 days after the effective date at a specified conversion
rate determined by reference to the price per share of our
common stock paid in such cash acquisition and (ii) pay
converting holders an amount equal to the sum of any accumulated
and unpaid dividends on shares of our mandatory convertible
preferred stock that are converted plus the present value of all
remaining dividend payments on such shares through and including
May 1, 2010, as described under Description of
Mandatory Convertible Preferred Stock Conversion
Upon Cash Acquisition; Cash Acquisition Dividend Make-Whole
Amount. The applicable conversion rate will be determined
based on the effective date and the price paid per share of our
common stock in such transaction. |
|
Anti-dilution adjustments |
|
The formula for determining the conversion rate and the number
of shares of common stock to be delivered upon conversion may be
adjusted in the event of, among other things, stock dividends or
distributions in shares of common stock or subdivisions, splits
and |
S-11
|
|
|
|
|
combinations of our common shares. See Description of
Mandatory Convertible Preferred Stock Anti-dilution
Adjustments. |
|
Liquidation preference |
|
$100.00 per share of mandatory convertible preferred stock,
plus an amount equal to the sum of all accrued, cumulated and
unpaid dividends. |
|
Voting rights |
|
Except as required by Delaware law and our amended and restated
certificate of incorporation, which will include the certificate
of designation for the mandatory convertible preferred stock,
the holders of mandatory convertible preferred stock will have
no voting rights. If dividends payable on the mandatory
convertible preferred stock are in arrears for six or more
quarterly periods, the holders of the mandatory convertible
preferred stock, voting as a single class with the shares of any
other preferred stock or securities having similar voting rights
(including our Series A Participating Cumulative Preferred
Stock, if any, and our outstanding
51/2%
Convertible Perpetual Preferred Stock) in proportion to their
respective liquidation preferences, will be entitled at the next
regular or special meeting of our shareholders to elect two
directors and the number of directors that comprise our board
will be increased by the number of directors so elected. These
voting rights and the terms of the directors so elected will
continue until such time as the dividend arrearage on the
mandatory convertible preferred stock has been paid in full. |
|
|
|
The affirmative consent of holders of at least
662/3%
of the outstanding mandatory convertible preferred stock and all
other preferred stock or securities having similar voting rights
(including our Series A Participating Cumulative Preferred
Stock, if any, and our outstanding
51/2%
Convertible Perpetual Preferred Stock) voting in proportion to
the respective liquidation preferences will be required for the
issuance of any class or series of stock ranking senior to the
mandatory convertible preferred stock as to dividend rights or
rights upon liquidation, winding-up or dissolution and for
amendments to our amended and restated certificate of
incorporation that would adversely affect the rights of holders
of the mandatory convertible preferred stock. See
Description of Mandatory Convertible Preferred
Stock Voting Rights. |
|
Ranking |
|
The mandatory convertible preferred stock will rank with respect
to dividend rights and rights upon our liquidation,
winding-up
or dissolution: |
|
|
|
senior to all of our common
stock and to all of our other capital stock issued in the future
unless the terms of that stock expressly provide that it ranks
senior to, or on a parity with, the mandatory convertible
preferred stock;
|
|
|
|
on a parity with our
Series A Participating Cumulative Preferred Stock, if any,
and our outstanding
51/2% Convertible
Perpetual Preferred Stock, and with any of our capital stock
issued in the future, the terms of which expressly provide that
it will rank on a parity with the mandatory convertible
preferred stock; and
|
S-12
|
|
|
|
|
junior to all of our capital
stock issued in the future, the terms of which expressly provide
that such stock will rank senior to the mandatory convertible
preferred stock.
|
|
Use of proceeds |
|
We intend to use the net proceeds from the offering to repay
outstanding indebtedness under our Tranche A term loan
facility and Tranche B term loan facility. See Use of
Proceeds. |
|
U.S. federal income tax consequences |
|
The material U.S. federal income tax consequences of
purchasing, owning and disposing of the mandatory convertible
preferred stock and any common stock received upon its
conversion are described in Certain U.S. Federal Tax
Considerations. |
|
Listing |
|
We intend to apply to list the mandatory convertible preferred
stock on the New York Stock Exchange, subject to satisfaction of
its minimum listing standards. |
|
Book-entry, delivery and form |
|
Initially, the mandatory convertible preferred stock will be
represented by one or more permanent global certificates in
definitive, fully registered form deposited with a custodian
for, and registered in the name of, a nominee of DTC. |
|
Common stock |
|
Our common stock is listed for trading on the NYSE under the
symbol FCX. |
|
Risk Factors |
|
Investing in our mandatory convertible preferred stock involves
substantial risks. You should carefully consider all the
information in this prospectus supplement prior to investing in
our mandatory convertible preferred stock. In particular, we
urge you to carefully consider the factors set forth under
Risk Factors. |
S-13
SUMMARY
CONSOLIDATED HISTORICAL FINANCIAL
AND OPERATING DATA OF FREEPORT-MCMORAN
The following summary consolidated historical financial data as
of and for the years ended December 31, 2004, 2005 and
2006, have been derived from the audited consolidated financial
statements of Freeport-McMoRan incorporated by reference herein.
The historical results presented below are not necessarily
indicative of results that you can expect for any future period.
You should read the table in conjunction with the sections
entitled Use of Proceeds,
Capitalization, Unaudited Pro Forma Condensed
Combined Financial Statements, Selected Consolidated
Historical Financial and Operating Data of
Freeport-McMoRan and the consolidated financial statements
of Freeport-McMoRan and the related notes incorporated by
reference herein. See Where You Can Find More
Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(Amounts in millions, except per share amounts)
|
|
|
Statement of income
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,371.9
|
|
|
$
|
4,179.1
|
|
|
$
|
5,790.5
|
|
Costs and expenses
|
|
|
1,668.3
|
|
|
|
2,001.8
|
|
|
|
2,921.8
|
|
Operating income
|
|
|
703.6
|
|
|
|
2,177.3
|
|
|
|
2,868.7
|
|
Interest expense, net
|
|
|
148.1
|
|
|
|
131.6
|
|
|
|
75.6
|
|
Net income applicable to common
stock
|
|
|
156.8
|
|
|
|
934.6
|
|
|
|
1,396.0
|
|
Basic net income per common share
|
|
|
0.86
|
|
|
|
5.18
|
|
|
|
7.32
|
|
Diluted net income per common share
|
|
|
0.85
|
|
|
|
4.67
|
|
|
|
6.63
|
|
Basic average shares outstanding
|
|
|
182.3
|
|
|
|
180.3
|
|
|
|
190.7
|
|
Diluted average shares outstanding
|
|
|
184.9
|
|
|
|
220.5
|
|
|
|
221.5
|
|
Balance sheet data at end of
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
552.0
|
|
|
$
|
763.6
|
|
|
$
|
907.5
|
|
Working
capital(a)
|
|
|
762.4
|
|
|
|
673.8
|
|
|
|
1,178.6
|
|
Total assets
|
|
|
5,087.0
|
|
|
|
5,550.2
|
|
|
|
5,389.8
|
|
Total
debt(b)
|
|
|
1,951.9
|
|
|
|
1,255.9
|
|
|
|
680.1
|
|
Stockholders equity
|
|
|
1,163.6
|
|
|
|
1,843.0
|
|
|
|
2,445.1
|
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and
investments in subsidiaries
|
|
|
142.9
|
|
|
|
143.0
|
|
|
|
257.1
|
(c)
|
Depreciation and amortization
|
|
|
206.4
|
|
|
|
251.5
|
|
|
|
227.6
|
|
Cash flow from operating
activities(d)
|
|
|
341.4
|
|
|
|
1,552.5
|
|
|
|
1,866.4
|
|
Cash flow used in investing
activities
|
|
|
64.0
|
|
|
|
134.3
|
|
|
|
223.5
|
|
Cash flow used in financing
activities
|
|
|
189.6
|
|
|
|
1,206.1
|
|
|
|
1,499.1
|
|
S-14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
PT Freeport Indonesia operating
data, net of Rio Tintos
interest(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper (recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
Production (000s of pounds)
|
|
|
996,500
|
|
|
|
1,455,900
|
|
|
|
1,201,200
|
|
Sales (000s of pounds)
|
|
|
991,600
|
|
|
|
1,456,500
|
|
|
|
1,201,400
|
|
Average realized price per pound
|
|
$
|
1.37
|
|
|
$
|
1.85
|
|
|
$
|
3.13
|
|
Net cash production cost per
pound(f)
|
|
$
|
0.40
|
|
|
$
|
0.07
|
|
|
$
|
0.60
|
|
Gold (recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1,456,200
|
|
|
|
2,789,400
|
|
|
|
1,731,800
|
|
Sales
|
|
|
1,443,000
|
|
|
|
2,790,200
|
|
|
|
1,736,000
|
|
Average realized price per ounce
|
|
$
|
412.32
|
|
|
$
|
456.27
|
|
|
$
|
566.51
|
(g)
|
PT Freeport Indonesia, 100%
operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper (recoverable) (000s of
pounds)
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1,098,600
|
|
|
|
1,688,900
|
|
|
|
1,299,500
|
|
Sales
|
|
|
1,092,700
|
|
|
|
1,689,400
|
|
|
|
1,300,000
|
|
Gold (recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1,536,600
|
|
|
|
3,439,600
|
|
|
|
1,824,100
|
|
Ore milled (metric tons per day)
|
|
|
185,100
|
|
|
|
216,200
|
|
|
|
229,400
|
|
Average ore grade
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper (percent)
|
|
|
0.87
|
|
|
|
1.13
|
|
|
|
0.85
|
|
Gold (grams per metric ton)
|
|
|
0.88
|
|
|
|
1.65
|
|
|
|
0.85
|
|
Gold (ounce per metric ton)
|
|
|
0.028
|
|
|
|
0.053
|
|
|
|
0.027
|
|
Recovery rates (percent)
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper
|
|
|
88.6
|
|
|
|
89.2
|
|
|
|
86.1
|
|
Gold
|
|
|
81.8
|
|
|
|
83.1
|
|
|
|
80.9
|
|
|
|
|
(a) |
|
Working capital represents current assets less current
liabilities. |
|
(b) |
|
Includes current portion of debt and short term borrowings. |
|
(c) |
|
Includes $4.6 million of Phelps Dodge acquisition costs. |
|
(d) |
|
Cash flow from operating activities represents net income before
non-cash charges including depreciation and amortization, losses
on early extinguishment and conversion of debt, deferred income
taxes, minority interests share of net income, equity
(earnings) losses in PT Smelting and other non-cash costs.
Changes in working capital also impact cash flow from operating
activities. |
|
(e) |
|
For a description of Rio Tintos interests, see
Freeport-McMoRans annual report on
Form 10-K
incorporated by reference herein. See Where You Can Find
More Information. |
|
(f) |
|
For a reconciliation of unit net cash costs to production and
delivery costs applicable to sales reported in
Freeport-McMoRans consolidated financial statements, see
Freeport-McMoRans annual report on
Form 10-K
incorporated by reference herein. See Where You Can Find
More Information. |
|
(g) |
|
Amount was $606.36 before a loss resulting from redemption of
Freeport-McMoRans Gold-Denominated Preferred Stock,
Series II. |
S-15
SUMMARY
CONSOLIDATED HISTORICAL FINANCIAL
AND OPERATING DATA OF PHELPS DODGE
The following summary consolidated historical financial data as
of and for the years ended December 31, 2004, 2005 and
2006, have been derived from the audited consolidated financial
statements of Phelps Dodge incorporated by reference herein. The
historical results presented below are not necessarily
indicative of results that you can expect for any future period.
You should read the table below in conjunction with the sections
entitled Use of Proceeds,
Capitalization, Unaudited Pro Forma Condensed
Combined Financial Statements, Selected Consolidated
Historical Financial and Operating Data of Phelps Dodge
and the consolidated financial statements of Phelps Dodge and
the related notes incorporated by reference herein. See
Where You Can Find More Information.
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2004(a)
|
|
2005(b)
|
|
2006(c)
|
|
|
(Amounts in millions, except per share and per pound
amounts)
|
|
Statement of income
data:
|
|
|
|
|
|
|
|
|
|
Sales and other operating revenues
|
|
$
|
6,415.2
|
|
$
|
8,287.1
|
|
$
|
11,910.4
|
Operating costs and expenses
|
|
|
4,940.3
|
|
|
6,522.2
|
|
|
7,683.5
|
Operating income
|
|
|
1,474.9
|
|
|
1,764.9
|
|
|
4,226.9
|
Interest expense, net of
capitalized interest
|
|
|
122.9
|
|
|
62.3
|
|
|
19.0
|
Net income applicable to common
shares
|
|
|
1,032.8
|
|
|
1,549.6
|
|
|
3,017.8
|
Basic earning per common share
|
|
|
5.53
|
|
|
7.92
|
|
|
14.91
|
Diluted earnings per common share
|
|
|
5.29
|
|
|
7.69
|
|
|
14.83
|
Basic weighted average number of
common shares outstanding
|
|
|
186.7
|
|
|
195.7
|
|
|
202.4
|
Diluted weighted average number of
common shares outstanding
|
|
|
197.7
|
|
|
202.5
|
|
|
203.5
|
Balance sheet data at end of
period:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,200.1
|
|
$
|
1,916.7
|
|
$
|
4,947.4
|
Working
capital(d)
|
|
|
1,493.7
|
|
|
2,461.4
|
|
|
4,338.0
|
Total assets
|
|
|
8,594.1
|
|
|
10,358.0
|
|
|
14,632.3
|
Total debt
|
|
|
1,096.9
|
|
|
694.5
|
|
|
891.9
|
Shareholders equity
|
|
|
4,343.1
|
|
|
5,601.6
|
|
|
7,690.4
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
Capital expenditures and
investments, net
|
|
|
317.3
|
|
|
698.2
|
|
|
1,187.8
|
Depreciation, depletion and
amortization
|
|
|
455.5
|
|
|
441.8
|
|
|
448.7
|
Net cash provided by operating
activities
|
|
|
1,700.1
|
|
|
1,769.7
|
|
|
5,079.2
|
Net cash used in investing
activities
|
|
|
291.0
|
|
|
368.0
|
|
|
844.2
|
Net cash used in financing
activities
|
|
|
947.2
|
|
|
685.8
|
|
|
1,213.2
|
S-16
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
Copper production (million
pounds consolidated basis)(e)
|
|
|
2,521.2
|
|
|
2,456.0
|
|
|
2,437.4
|
Copper production (million
pounds pro rata basis)(f)
|
|
|
2,163.4
|
|
|
2,084.6
|
|
|
2,012.6
|
Copper sales from Phelps
Dodges mines (million pounds consolidated
basis)(g)
|
|
|
2,537.8
|
|
|
2,476.8
|
|
|
2,429.0
|
Copper sales from Phelps
Dodges mines (million pounds pro rata basis)(h)
|
|
|
2,178.2
|
|
|
2,103.2
|
|
|
2,006.2
|
COMEX copper price per pound(i)
|
|
$
|
1.29
|
|
$
|
1.68
|
|
$
|
3.09
|
LME copper price per pound(j)
|
|
$
|
1.30
|
|
$
|
1.67
|
|
$
|
3.05
|
Molybdenum production (million
pounds)
|
|
|
57.5
|
|
|
62.3
|
|
|
68.2
|
Molybdenum sales from Phelps
Dodges mines (million pounds)
|
|
|
63.1
|
|
|
59.9
|
|
|
68.8
|
Purchased molybdenum (million
pounds)
|
|
|
12.9
|
|
|
12.9
|
|
|
8.3
|
Total molybdenum sales (million
pounds)
|
|
|
76.0
|
|
|
72.8
|
|
|
77.1
|
Metals
Week molybdenum Dealer
Oxide mean price per pound(j)
|
|
$
|
16.41
|
|
$
|
31.73
|
|
$
|
24.75
|
|
|
|
(a)
|
|
Reported amounts for 2004 included
after-tax, net special charges of $50.4 million, including
$44.7 million for environmental provisions;
$30.9 million (net of minority interests) for early debt
extinguishment costs; $9.9 million for the write-down of
two cost-basis investments; $9.6 million for taxes on
anticipated foreign dividends; $9.0 million for a deferred
tax asset valuation allowance at Phelps Dodges Brazilian
wire and cable operation; $7.6 million for Phelps Dodge
Magnet Wire restructuring activities; $5.9 million for
asset impairment charges (included $4.5 million for
discontinued operations); and $0.7 million for interest on
a Texas franchise tax matter; partially offset by after-tax net
special gains of $30.0 million for the reversal of a U.S.
deferred tax asset valuation allowance; $15.7 million (net
of minority interest) for the reversal of an El Abra deferred
tax asset valuation allowance; $10.1 million for the gain
on the sale of uranium royalty rights; $7.4 million for
environmental insurance recoveries; and $4.7 million for
the settlement of historical legal matters.
|
|
(b)
|
|
Reported amounts for 2005 included
after-tax, net special charges of $54.1 million, including
$331.8 million for asset impairment charges; tax expense of
$88.1 million for foreign dividend taxes;
$86.4 million for environmental provisions;
$42.6 million associated with discontinued operations in
connection with the sale of Columbian Chemicals Company, which
is referred to in this document as Columbian, previously
disclosed as PDIs Specialty Chemicals Segment;
$41.3 million for early debt extinguishment costs;
$34.5 million (net of minority interest) for tax on
unremitted foreign earnings; $23.6 million for a tax charge
associated with minimum pension liability reversal;
$10.1 million for cumulative effect of accounting change;
$5.9 million for transaction and employee-related costs
associated with the sale of substantially all of Phelps
Dodges North American magnet wire assets; partially offset
by after-tax, net special gains of $388.0 million for the
sale of a cost-basis investment; $181.7 million for change
in interest gains at Cerro Verde and Ojos del Salado;
$15.6 million for legal matters; $11.9 million for the
reversal of Phelps Dodge Brazils deferred tax asset
valuation allowance; $8.5 million for the sale of non-core
real estate; $4.0 million for the reversal of U.S. deferred
tax asset valuation allowance; $0.4 million for
environmental insurance recoveries; and $0.1 million for
Phelps Dodge Magnet Wire restructuring activities. The
after-tax, net special charges of $42.6 million associated
with discontinued operations consisted of $67.0 million
(net of minority interests) for a goodwill impairment charge;
taxes of $7.6 million associated with the sale and
dividends paid in 2005; and $5.0 million for a loss on
disposal of Columbian associated with transactions and
employee-related costs, partially offset by a deferred income
tax effect of $37.0 million.
|
|
(c)
|
|
Reported amounts for 2006 included
after-tax,
net special gains of $344.2 million, including $330.7 million
for the Inco termination fee; $127.5 million for the reversal of
U.S. deferred tax asset valuation allowance; $2.0 million for
legal matters; $0.4 million for sale of
non-core
real estate; and $0.2 million for the reversal of Minera PD Peru
deferred tax asset valuation allowance; partially offset by
after-tax,
net special charges of $54.5 million for environmental
provisions; $30.9 million for charges associated with
discontinued operations in connection with the sale of
Columbian; $9.6 million for asset impairment charges; $7.6
million (net of minority interest) for tax on unremitted foreign
earnings; $5.1 million for transaction and employee-related
charges and loss on disposal in connection with the sale of
North American magnet wire assets; $4.7 million for transaction
and employee-related charges and loss on the disposal in
connection with the sale of HPC; $3.0 million for a lease
termination settlement; and $1.2 million associated with the
dissolution of an international wire and cable entity.
|
|
(d)
|
|
Working capital represents current
assets less current liabilities.
|
|
(e)
|
|
Consolidated basis excludes
15 percent undivided interest in the Morenci, Arizona
copper mining complex held by Sumitomo Metal Mining Arizona, Inc.
|
|
(f)
|
|
Pro rata basis reflects Phelps
Dodges ownership interests in El Abra (51%), Candelaria
(80%), and Morenci (85%) for all periods, Cerro Verde (82.5%
through May 2005 and 53.56% thereafter) and Ojos del Salado
(100% through December 2005 and 80% thereafter).
|
|
(g)
|
|
New York Commodity Exchange average
spot price per pound cathodes.
|
|
(h)
|
|
London Metal Exchange average spot
price per pound cathodes.
|
|
(i)
|
|
Annual Metals Week
molybdenum Dealer Oxide mean price per pound as quoted in Platts
Metals Week.
|
S-17
SUMMARY
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The following table sets forth summary unaudited pro forma
condensed combined financial information of Freeport-McMoRan.
The pro forma information has been derived from, and should be
read in conjunction with, the Unaudited Pro Forma
Condensed Combined Financial Statements and related notes,
which are included in this prospectus supplement and give pro
forma effect to the transactions.
The pro forma condensed combined balance sheet information gives
effect to the transactions, the issuance of our mandatory
convertible preferred stock offered hereby, the concurrent
common stock offering and the use of proceeds from the common
stock and mandatory convertible preferred stock offerings to
reduce total debt as if they occurred on December 31, 2006.
The pro forma condensed combined statements of income
information gives effect to the transactions, the issuance of
the mandatory convertible preferred stock offered hereby, the
concurrent common stock offering and the use of proceeds from
the common stock and mandatory convertible preferred stock
offerings to reduce total debt as if they occurred on
January 1, 2006. The summary unaudited pro forma condensed
combined financial information is provided for illustrative
purposes only and does not purport to represent what the actual
consolidated results of operations or the consolidated financial
position of Freeport-McMoRan would have been had the
transactions occurred on the dates assumed, nor are they
necessarily indicative of future consolidated results of
operations or consolidated financial position.
|
|
|
|
|
|
|
Pro Forma
|
|
|
Year Ended
|
|
|
December 31, 2006
|
|
|
(Dollars in millions)
|
|
Statement of income
data:
|
|
|
|
|
Revenues(a)
|
|
$
|
17,700.9
|
|
Costs and expenses
|
|
|
11,167.3
|
|
Operating income
|
|
|
6,533.6
|
|
Interest expense,
net(b)
|
|
|
1,179.8
|
|
Income from continuing operations
applicable to common
stock(a)
|
|
|
2,991.2
|
|
Balance sheet data at end of
year:
|
|
|
|
|
Cash and cash
equivalents(c)
|
|
$
|
3,383.4
|
|
Working
capital(d)
|
|
|
5,749.6
|
|
Total assets
|
|
|
40,613.8
|
|
Total
debt(e)
|
|
|
14,690.9
|
|
Stockholders equity
|
|
|
13,108.7
|
|
Other financial
data:
|
|
|
|
|
Capital expenditures and
investments in subsidiaries
|
|
$
|
1,499.3
|
|
Depreciation, depletion and
amortization
|
|
|
1,268.2
|
|
|
|
|
(a)
|
|
Amounts include charges for
mark-to-market
losses on Phelps Dodges copper price protection program
totaling $1,008.9 million in revenues and $766.8 million in
income from continuing operations applicable to common stock for
the year ended December 31, 2006.
|
|
(b)
|
|
The pro forma information presented
herein assumes a weighted average annual interest rate of 7.5%
on the notes, the Tranche A term loan facility and the
Tranche B term loan facility. A 0.125% variance in the
interest rate on the Tranche A term loan portion of the new
senior credit facilities would cause an increase or decrease of
$3.1 million in interest expense. A 0.125% variance in the
interest rate on the Tranche B term loan portion of the new
senior credit facilities would cause an increase or decrease of
$9.4 million in interest expense. A 0.125% variance on the
weighted average interest rate on the senior floating rate notes
due 2015 would cause an increase or decrease of
$1.3 million in interest expense.
|
|
(c)
|
|
At December 31, 2006,
Freeport-McMoRan and Phelps Dodge had $5,854.9 million of
combined unrestricted cash on hand.
|
|
(d)
|
|
Working capital represents current
assets less current liabilities.
|
|
(e)
|
|
Based on fair value of Phelps
Dodges debt and includes current portion of debt and
short-term
borrowings. Pro forma total debt based on book values as of
December 31, 2006 was $14,655.5 million.
|
S-18
RISK
FACTORS
In addition to the other information included or incorporated
by reference in this prospectus supplement, including the
matters addressed in Cautionary statement regarding
forward-looking statements, you should carefully consider
the risk factors set forth below before making an investment in
our mandatory convertible preferred stock offered by this
prospectus supplement. In addition, you should read and consider
the risk factors associated with each of the businesses of
Freeport-McMoRan and Phelps Dodge because these risk factors may
also affect the operations and financial results reported by the
combined company. See Where You Can Find More
Information.
Risks
Related to our Mandatory Convertible Preferred Stock
Our
holding company structure may impact your ability to receive
dividends or payments on the mandatory convertible preferred
stock.
We are a holding company with no material assets other than the
capital stock 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, debt repayment or
otherwise. Our subsidiaries do not have any obligation to pay
amounts due on the mandatory convertible preferred stock or to
make funds available for that purpose. In addition, our
subsidiaries may not be able to, or be permitted to, make
distributions to enable us to make payments in respect of our
indebtedness or pay dividends. Each of our subsidiaries is a
distinct legal entity and, under certain circumstances, legal
and contractual restrictions, as well as the financial condition
and operating requirements of our subsidiaries, may limit our
ability to obtain cash from our subsidiaries. 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 and
preferred shareholders.
We may
not be able to pay cash dividends on the mandatory convertible
preferred stock.
Some of our existing indentures and our new senior credit
facilities limit, and any indentures and other financing
agreements that we enter into in the future will likely limit,
our ability to pay cash dividends on our capital stock,
including the mandatory convertible preferred stock.
Specifically, under certain of our existing indentures, we may
pay cash dividends and make other distributions on or in respect
of our capital stock, including the mandatory convertible
preferred stock, only if certain financial tests are met. In the
event that any of our indentures or other financing agreements
in the future restrict our ability to pay cash dividends on the
mandatory convertible preferred stock, we will be unable to pay
cash dividends on the mandatory convertible preferred stock
unless we can refinance amounts outstanding under those
agreements. In addition, to the extent we make dividend payments
in shares of our common stock in connection with certain
conversions, the amount of such dividend payments in stock could
be capped if our stock price is lower than
$ . See Description of the
Mandatory Convertible Preferred Stock Method of
Payment of Dividends and Description of Mandatory
Convertible Preferred Stock Conversion Upon Cash
Acquisition; Cash Acquisition Dividend Make-Whole Amount.
Under Delaware law, cash dividends on capital stock may only be
paid from surplus or, if there is no
surplus, from the corporations net profits for
the then current or the preceding fiscal year. Unless we
continue to operate profitably, our ability to pay cash
dividends on the mandatory convertible preferred stock would
require the availability of adequate surplus, which
is defined as the excess, if any, of our net assets (total
assets less total liabilities) over our capital. Further, even
if adequate surplus is available to pay cash dividends on the
mandatory convertible preferred stock, we may not have
sufficient cash to pay dividends on the mandatory convertible
preferred stock.
A holder
of our mandatory convertible preferred stock may realize some or
all of a decline in the market value of our common
shares.
The market value of our common shares on the mandatory
conversion date may be less than the market price corresponding
to the maximum conversion rate, which we call the initial price,
in which case
S-19
holders of our mandatory convertible preferred stock will
receive shares of our common stock on the mandatory conversion
date with a market value per share that is less than the initial
price. Accordingly, a holder of mandatory convertible preferred
stock assumes the entire risk that the market value of our
common stock may decline. Any decline in the market price of
shares of our common stock and related decline in value of the
mandatory convertible preferred stock may be substantial.
Purchasers
of our mandatory convertible preferred stock may not realize any
or all of the benefit of an increase in the market price of
shares of our common stock.
The market value of our common stock that you will receive upon
mandatory conversion of our mandatory convertible preferred
stock on the mandatory conversion date will exceed the stated
amount of $100.00 per mandatory convertible preferred stock only
if the applicable market value of our common stock as defined
under Description of Mandatory Convertible Preferred
Stock Mandatory Conversion equals or exceeds
the threshold appreciation price of
$ . The threshold appreciation
price represents an appreciation of
approximately % over the initial
price. This means that the opportunity for equity appreciation
provided by an investment in our mandatory convertible preferred
stock is less than that provided by a direct investment in
shares of our common stock.
If the applicable market value of our common stock exceeds the
initial price but is less than the threshold appreciation price,
a holder of our mandatory convertible preferred stock will
realize no equity appreciation on our common stock. Furthermore,
if the applicable market value of our common stock exceeds the
threshold appreciation price, the value of the common stock
received upon conversion will be
approximately % of the value of the
common stock that could be purchased with
$ at the time of this offering.
The
opportunity for equity appreciation provided by an investment in
our mandatory convertible preferred stock is less than that
provided by a direct investment in our common stock.
The adjusted applicable market value of our common stock on
May 1, 2010, must exceed the threshold appreciation price
of $ before a holder of our
mandatory convertible preferred stock will realize any equity
appreciation in connection with a mandatory conversion.
Therefore, the opportunity for equity appreciation provided by
an investment in our mandatory convertible preferred stock is
less than that provided by a direct investment in our common
stock.
The
trading price of our common stock will directly affect the
trading price for our mandatory convertible preferred
stock.
The trading price of our common stock will directly affect the
trading price of our mandatory convertible preferred stock. It
is impossible to predict whether the price of our common stock
will rise or fall. This may result in greater volatility in the
market price of the mandatory convertible preferred stock than
would be expected for nonconvertible preferred stock. From
December 31, 2005 to December 31, 2006, the reported
high and low closing sales prices for our common stock ranged
from a low of $31.52 per share to a high of $72.20 per share.
The market price of our common stock will likely continue to
fluctuate in response to a number of factors including the
following, many of which are beyond our control:
|
|
|
|
|
actual or anticipated fluctuations in operating results;
|
|
|
|
declines in the market prices of copper, gold and molybdenum;
|
|
|
|
changes in expectations as to future financial performance or
buy/sell recommendations of securities analysts;
|
|
|
|
acquisitions, strategic alliances or joint ventures involving us
or our competitors;
|
|
|
|
actions of our current shareholders, including sales of common
stock by our directors and executive officers;
|
|
|
|
the arrival or departure of key personnel;
|
S-20
|
|
|
|
|
our, or a competitors, announcement of new products,
services or innovations; and
|
|
|
|
the operating and stock price performance of other comparable
companies.
|
Market conditions can also affect the capital markets generally,
including the New York Stock Exchange, and the price of our
common stock. These conditions may result in volatility in the
level of, and fluctuations in, the trading prices of stocks
generally and sales of substantial amounts of our common stock
in the market that could be unrelated or disproportionate to
changes in operating performance. These broad market
fluctuations may adversely affect the market prices of our
mandatory convertible preferred stock and our common stock.
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 our board of directors 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 advanced notice requirements for nominations to the
board of directors or for proposals that can be acted on at
stockholder meetings; and
|
|
|
|
limit who may call stockholder meetings.
|
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.
You may
suffer dilution of the shares of our common stock issuable upon
conversion of our mandatory convertible preferred
stock.
The number of shares of our common stock issuable upon
conversion of our mandatory convertible preferred stock is
subject to adjustment only for share splits and combinations,
share dividends and specified other transactions. The number of
shares of our common stock issuable upon conversion is not
subject to adjustment for other events, such as employee stock
option grants, offerings of our common stock for cash or in
connection with acquisitions, or other transactions which may
reduce the price of our common stock. The terms of our mandatory
convertible preferred stock do not restrict our ability to offer
common stock in the future or to engage in other transactions
that could dilute our common stock. We have no obligation to
consider the interests of the holders of our mandatory
convertible preferred stock in engaging in any such offering or
transaction.
Purchasers
of our mandatory convertible preferred stock may suffer dilution
of our mandatory convertible preferred stock upon the issuance
of a new series of preferred stock ranking equally with the
mandatory convertible preferred stock sold in this
offering.
The terms of our mandatory convertible preferred stock will not
restrict our ability to offer a new series of preferred stock
that ranks equally with our mandatory convertible preferred
stock in the future or to engage in other transactions that
could dilute our mandatory convertible preferred stock. We have
no obligation to consider the interests of the holders of our
mandatory convertible preferred stock in engaging in any such
offering or transaction.
S-21
Holders
of convertible preferred stock will have no rights as a common
shareholder until they acquire our common stock.
Until you acquire shares of our common stock upon conversion,
you will have no rights with respect to our common stock,
including voting rights (except as required by applicable state
law and as described under Description of Mandatory
Convertible Preferred Stock Voting Rights),
rights to respond to tender offers and rights to receive any
dividends or other distributions on our common stock. To
exercise any voting rights described under Description of
Mandatory Convertible Preferred Stock Voting
Rights, you may only request that we call a special
meeting of the holders of our preferred stock and you may not
call a meeting directly. Upon conversion, you will be entitled
to exercise the rights of a holder of common stock only as to
matters for which the record date occurs after the conversion
date. For example, in the event that an amendment is proposed to
our certificate of incorporation or bylaws requiring stockholder
approval, and the record date for determining the stockholders
of record entitled to vote on the amendment occurs prior to the
conversion date, you will not be entitled to vote on the
amendment, although you will nevertheless be subject to any
changes in the powers, preferences or special rights of our
common stock.
Our
mandatory convertible preferred stock will rank junior to all of
our and our subsidiaries liabilities in the event of a
bankruptcy, liquidation or winding up of our assets.
In the event of bankruptcy, liquidation or winding up, our
assets will be available to pay obligations on our mandatory
convertible preferred stock only after all of our liabilities
have been paid. In addition, our mandatory convertible preferred
stock will effectively rank junior to all existing and future
liabilities of our subsidiaries and the capital stock (other
than common stock) of our subsidiaries held by third parties.
The rights of holders of our mandatory convertible preferred
stock to participate in the assets of our subsidiaries upon any
liquidation or reorganization of any subsidiary will rank junior
to the prior claims of that subsidiarys creditors and
preferred and minority equity holders. In the event of
bankruptcy, liquidation or winding up, there may not be
sufficient assets remaining, after paying our and our
subsidiaries liabilities, to pay amounts due on any or all
of our mandatory convertible preferred stock then outstanding.
At December 31, 2006, we had total outstanding debt of
$680.1 million.
A portion
of the net proceeds of this offering will be received by
affiliates of certain of our underwriters. This may present a
conflict of interest.
Under our new senior secured credit facilities, JP Morgan
Chase Bank, N.A. is administrative agent and collateral agent,
Merrill Lynch, Pierce, Fenner & Smith Incorporated is
syndication agent, and J.P. Morgan Securities Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated are
joint bookrunners and joint lead arrangers. Affiliates of
J.P. Morgan Securities Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are also lenders under the
new senior secured credit facilities. We intend to use the net
proceeds from this offering to repay outstanding indebtedness
under our new senior secured credit facilities by repaying a
portion of the Tranche A term loan facility and
Tranche B term loan facility.
These affiliations may present a conflict of interest since
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
J.P. Morgan Securities Inc. may have an interest in the
successful completion of this offering in addition to the
underwriting discounts and commissions they would receive. This
offering is therefore being made using a qualified
independent underwriter in compliance with
Rule 2710(h) of the Conduct Rules of the National
Association of Securities Dealers, Inc., which is intended to
address potential conflicts of interest involving underwriters.
See the information under the heading Underwriters
for a more detailed description of the independent underwriting
procedures that are being used in connection with the offering.
You may
be subject to tax upon an adjustment to the conversion rate of
the mandatory convertible preferred stock even though you do not
receive a corresponding cash distribution.
The conversion rate of the mandatory convertible preferred stock
is subject to adjustment in certain circumstances, including the
payment of certain cash dividends. If the conversion rate is
adjusted as a result of a distribution that is taxable to our
common stockholders, such as a cash dividend, you will be deemed
to have
S-22
received for U.S. federal income tax purposes a taxable
dividend to the extent of our earnings and profits without the
receipt of any cash. If you are a non-U.S holder (as defined in
Certain U.S. Federal Tax Considerations), such
deemed dividend may be subject to U.S. federal withholding
tax (currently at a 30% rate, or such lower rate as may be
specified by an applicable treaty), which may be set off against
subsequent payments on the mandatory convertible preferred
stock. See Certain U.S. Federal Tax
Considerations.
Resales
of shares of Freeport-McMoRan common stock following the
transactions and future issuances of equity or equity-linked
securities by Freeport-McMoRan may cause the market price of
shares of Freeport-McMoRan common stock to fall.
As of February 28, 2007, Freeport-McMoRan had
197,375,324 shares of common stock outstanding,
23,506,613 shares authorized for issuance upon conversion
of preferred stock and convertible notes, and
7,087,689 shares authorized for issuance upon the exercise
of outstanding options or the vesting of restricted stock units.
In connection with the closing of the acquisition,
Freeport-McMoRan issued 137,042,000 shares of common stock
and assumed options exercisable for approximately 1.0 million
shares. The issuance of those new shares, our mandatory
convertible preferred stock offered hereby (including
approximately shares
issuable upon conversion of such shares), the concurrent common
stock offering, and the sale of additional shares that may
become eligible for sale in the public market from time to time
upon the exercise of options (including Freeport-McMoRan options
that have replaced Phelps Dodge options) could have the effect
of depressing the market price for shares of Freeport-McMoRan
common stock. Also, because many former Phelps Dodge
shareholders are also shareholders of Freeport-McMoRan, some may
decide to sell rather than hold the additional shares of
Freeport-McMoRan common stock they will receive in the
transactions. The sale of those shares could also have the
effect of depressing the market price for shares of
Freeport-McMoRan common stock.
Risks
Related to the Combined Company
Our
substantial indebtedness could adversely affect our financial
condition and prevent us from fulfilling our obligations under
our outstanding indebtedness.
The combined company incurred significant debt to fund a portion
of the cash consideration payable to the Phelps Dodge
shareholders in the acquisition. As of December 31, 2006,
on a pro forma basis giving effect to the transactions, the
issuance of the mandatory convertible preferred stock offered
hereby, the concurrent common stock offering and the use of
proceeds from the issuance of mandatory convertible preferred
stock and common stock to reduce outstanding debt, the
outstanding principal amount of our indebtedness would have been
approximately $14.7 billion (excluding unused availability
under our revolving credit facility of approximately
$1.4 billion after giving effect to outstanding letters of
credit). Our level of indebtedness could have important
consequences. For example, it could:
|
|
|
|
|
make it difficult for us to satisfy our obligations with respect
to our indebtedness;
|
|
|
|
increase our vulnerability to general adverse economic and
industry conditions;
|
|
|
|
require us to dedicate a substantial portion of our cash flow
from operations and proceeds of any equity issuances to payments
on our indebtedness, thereby reducing the availability of cash
flow to fund working capital, capital expenditures, acquisitions
and investments and other general corporate purposes;
|
|
|
|
make it difficult for us to optimally capitalize and manage the
cash flow for our businesses;
|
|
|
|
limit our flexibility in planning for, or reacting to, changes
in our businesses and the markets in which we operate;
|
|
|
|
place us at a competitive disadvantage to our competitors that
have less debt;
|
|
|
|
limit our ability to borrow money or sell stock to fund our
working capital, capital expenditures, acquisitions and debt
service requirements and other financing needs; and
|
|
|
|
increase our interest expense if interest rates in general
increase because a substantial portion of our indebtedness bears
interest at floating rates.
|
S-23
In addition, we may need to incur additional indebtedness in the
future in the ordinary course of business. The terms of our new
senior credit facilities and other agreements governing our
indebtedness allow us to incur additional debt subject to
certain limitations. If new debt is added to current debt
levels, the risks described above could intensify. Furthermore,
if future debt financing is not available to us when required or
is not available on acceptable terms, we may be unable to grow
our business, take advantage of business opportunities, respond
to competitive pressures or refinance maturing debt, any of
which could have a material adverse effect on our operating
results and financial condition. Moreover, the combined
companys ability to satisfy financial tests or utilize
third-party guarantees for financial assurance with respect to
reclamation obligations may be adversely impacted if its credit
ratings were downgraded below investment grade.
The
agreements governing our indebtedness contain various covenants
that limit our discretion in the operation of our business and
also require us to meet financial maintenance tests and other
covenants. The failure to comply with such tests and covenants
could have a material adverse effect on us.
The agreements governing our indebtedness contain various
covenants, including those that restrict our ability to:
|
|
|
|
|
incur additional indebtedness;
|
|
|
|
engage in transactions with affiliates;
|
|
|
|
create liens on our assets;
|
|
|
|
make payments in respect of, or redeem or acquire, debt or
equity issued by us or our
|
|
|
|
subsidiaries, including the payment of dividends on our common
stock;
|
|
|
|
make acquisitions of new subsidiaries;
|
|
|
|
make investments in or loans to entities that we do not control,
including joint ventures;
|
|
|
|
use assets as security in other transactions;
|
|
|
|
sell assets, subject to certain exceptions;
|
|
|
|
merge with or into other companies;
|
|
|
|
enter into sale and leaseback transactions;
|
|
|
|
enter into unrelated businesses;
|
|
|
|
enter into agreements or arrangements that restrict the ability
of certain of our subsidiaries to
|
|
|
|
pay dividends or other distributions;
|
|
|
|
prepay indebtedness; and
|
|
|
|
enter into certain new hedging transactions other than in the
ordinary course of business.
|
In addition, our new senior credit facilities require that we
meet certain financial tests at any time that borrowings are
outstanding under our new revolving credit facility, including a
leverage ratio test and a secured leverage ratio test. During
periods in which copper, gold or molybdenum prices or production
volumes, or other conditions reflect the adverse impact of
cyclical market trends or other factors, we may not be able to
comply with the applicable financial covenants.
Any failure to comply with the restrictions of our new senior
credit facilities or any agreement governing our other
indebtedness may result in an event of default under those
agreements. Such default may allow the creditors to accelerate
the related debt, which acceleration may trigger
cross-acceleration or cross-default provisions in other debt.
Our assets and cash flow may not be sufficient to fully repay
borrowings under our outstanding debt instruments, either upon
maturity or, if accelerated, upon an event of default.
If, when required, we are unable to repay, refinance or
restructure our indebtedness under, or amend the covenants
contained in, our new senior credit agreements, or if a default
otherwise occurs, the lenders
S-24
under our new senior credit facilities could elect to terminate
their commitments thereunder, cease making further loans,
declare all borrowings outstanding, together with accrued
interest and other fees, to be immediately due and payable,
institute foreclosure proceedings against those assets that
secure the borrowings under our new senior credit facilities and
prevent us from making payments on the notes. Any such actions
could force us into bankruptcy or liquidation, and we cannot
provide any assurance that we could repay our obligations under
the notes in such an event.
We need
significant amounts of cash to service our indebtedness. If we
are unable to generate a sufficient amount of cash to service
our indebtedness, our financial condition and results of
operations could be negatively impacted.
We need significant amounts of cash in order to service and
repay our indebtedness. Our ability to generate cash in the
future will be, to a certain extent, subject to general
economic, financial, competitive and other factors that may be
beyond our control. In addition, our ability to borrow funds in
the future to service our debt will depend on covenants in our
new senior credit facilities, indentures and other debt
agreements we may have in the future. Future borrowings may not
be available to us under our new senior credit facilities or
from the capital markets in amounts sufficient to enable us to
pay our obligations as they mature or to fund other liquidity
needs. If we are not able to obtain such borrowings or generate
cash flow from operations in an amount sufficient to enable us
to service and repay our indebtedness, we will need to refinance
our indebtedness or be in default under the agreements governing
our indebtedness. Such refinancing may not be available on
favorable terms or at all. The inability to service, repay
and/or
refinance our indebtedness could negatively impact our financial
condition and results of operations.
Declines
in the market prices of copper, gold and molybdenum could
adversely affect the combined companys earnings and cash
flows.
The earnings and cash flows of the combined company will be
affected significantly by the market prices of copper and, to a
lesser extent, gold and molybdenum. The world market prices of
these commodities have fluctuated historically and will be
affected by numerous factors beyond the control of the combined
company. Many financial analysts who follow the metals markets
are predicting that copper prices will decline significantly
from their current, historically high, levels over the next few
years. A decline in the world market price of one or more of
these commodities could adversely affect the combined
companys earnings and cash flows and therefore could
adversely affect its ability to repay its debt and depress its
stock price.
World copper prices have historically fluctuated widely. During
the two years ended December 31, 2006, the daily closing
prices on the London spot market ranged from $1.39 to
$3.99 per pound for copper. World copper prices are
affected by numerous factors beyond our control, including:
|
|
|
|
|
the strength of the U.S. economy and the economies of other
industrialized and developing nations, including China, which
has become the largest consumer of refined copper in the world;
|
|
|
|
available supplies of copper from mine production and
inventories;
|
|
|
|
sales by holders and producers of copper;
|
|
|
|
demand for industrial products containing copper;
|
|
|
|
investment activity, including speculation, in copper as a
commodity;
|
|
|
|
the availability and cost of substitute materials; and
|
|
|
|
currency exchange fluctuations, including the relative strength
of the U.S. dollar.
|
S-25
World gold prices have historically fluctuated widely. During
the two years ended December 31, 2006, the daily closing
prices on the London spot market ranged from $411 to
$726 per ounce for gold. World gold prices are affected by
numerous factors beyond our control, including:
|
|
|
|
|
the strength of the U.S. economy and the economies of other
industrialized and developing nations, including China;
|
|
|
|
global or regional political or economic crises;
|
|
|
|
the relative strength of the U.S. dollar and other
currencies;
|
|
|
|
expectations with respect to the rate of inflation;
|
|
|
|
interest rates;
|
|
|
|
purchases and sales of gold by central banks and other holders;
|
|
|
|
demand for jewelry containing gold; and
|
|
|
|
investment activity, including speculation, in gold as a
commodity.
|
Molybdenum prices also fluctuate widely, even more so than
copper. Molybdenum demand depends heavily on the global steel
industry, which uses the metal as a hardening and corrosion
inhibiting agent. Approximately 80 percent of molybdenum
production is used in this application. The remainder is used in
specialty chemical applications such as catalysts, water
treatment agents and lubricants. Approximately 65 percent
of global molybdenum production is a by-product of copper
mining, which is relatively insensitive to molybdenum prices.
During the past 15 years, Platts Metals Week
molybdenum Dealer Oxide prices per pound have ranged from a
high of $40.00 to a low of $1.82. During the two years ended
December 31, 2006, Platts Metals Week molybdenum
Dealer Oxide price ranged from $20.50 to $40.00 per pound.
Molybdenum prices are affected by numerous factors beyond our
control, including:
|
|
|
|
|
the worldwide balance of molybdenum demand and supply;
|
|
|
|
rates of global economic growth, especially construction and
infrastructure activity that requires significant amounts of
steel;
|
|
|
|
the volume of molybdenum produced as a by-product of copper
production;
|
|
|
|
inventory levels;
|
|
|
|
currency exchange fluctuations, including the relative strength
of the U.S. dollar; and
|
|
|
|
production costs of U.S. and foreign competitors.
|
Increased
energy and other production costs could reduce the combined
companys profitability and cash flow.
Each of Freeport-McMoRan and Phelps Dodge has experienced
increases in production costs in recent years primarily as a
result of higher energy costs and costs of other consumables,
higher mining costs and higher labor costs (including pension
and health-care costs).
Energy represents a significant portion of the production costs
for the combined companys operations. The principal
sources of energy for the combined companys operations are
electricity, purchased petroleum products, natural gas and coal.
The combined company will pay more for its energy needs during
times of progressively higher energy prices. As energy is a
significant portion of its production costs, if the combined
company is unable to procure sufficient energy at reasonable
prices in the future, it could adversely affect its profits and
cash flow.
In addition to energy, the combined companys production
costs will be affected by the prices of commodities it consumes
or uses in its operations, such as sulfuric acid, grinding
media, steel, reagents, liners, explosives and diluents. The
prices of such commodities are influenced by supply and demand
trends affecting the copper industry in general and other
factors, many of which are outside the combined companys
control,
S-26
and are at times subject to volatile price movements. Increases
in the cost of these commodities could make production at
certain of the combined companys operations less
profitable, even in an environment of relatively high copper
prices. Increases in the costs of commodities that the combined
company consumes or uses may also significantly affect the
capital costs of new projects.
The
volume and grade of the ore reserves that the combined company
recovers and its rate of production may be more or less than
anticipated.
The combined companys ore reserve amounts are determined
in accordance with established mining industry practices and
standards, but are estimates of the mineral deposits that can be
recovered economically and legally based on currently available
data. Ore bodies may not conform to standard geological
expectations, and estimates may change as new data becomes
available. Because ore bodies do not contain uniform grades of
minerals, the combined companys metal recovery rates will
vary from time to time. There are also uncertainties inherent in
estimating quantities of ore reserves and copper recovered from
stockpiles. The quantity of copper contained in mill and leach
stockpiles is based upon surveyed volumes of mined material and
daily production records. The volume and grade of ore reserves
recovered, rates of production and recovered copper from
stockpiles may be less than anticipated. Additionally, as the
determination of ore reserves is based, in part, on historical
selling prices, a prospective decrease in such prices may result
in a reduction in reported and economically recoverable ore
reserves. These factors may result in variations in the volumes
of minerals that the combined company can sell from period to
period.
Some ore reserves may become unprofitable to develop if there
are unfavorable long-term market price fluctuations in copper,
gold or molybdenum, or if there are significant increases in
operating or capital costs. In addition, ore reserves are
depleted as mined.
Our ability to replenish our ore reserves is important to our
long-term viability. The combined companys exploration
programs may not result in the discovery of additional mineral
deposits that can be mined profitably.
The
combined companys business is subject to operational
risks.
Mines by their nature are subject to many operational risks and
factors that are generally outside of the combined
companys control and could impact its business, operating
results and cash flows. These operational risks and factors
include, but are not limited to:
|
|
|
|
|
unanticipated ground and water conditions and adverse claims to
water rights;
|
|
|
|
geological problems, including earthquakes and other natural
disasters;
|
|
|
|
metallurgical and other processing problems;
|
|
|
|
the occurrence of unusual weather or operating conditions and
other force majeure events;
|
|
|
|
lower than expected ore grades or recovery rates;
|
|
|
|
accidents;
|
|
|
|
delays in the receipt of or failure to receive necessary
government permits;
|
|
|
|
the results of litigation, including appeals of agency decisions;
|
|
|
|
uncertainty of exploration and development;
|
|
|
|
delays in transportation;
|
|
|
|
labor disputes;
|
|
|
|
inability to obtain satisfactory insurance coverage;
|
|
|
|
unavailability of materials and equipment;
|
S-27
|
|
|
|
|
the failure of equipment or processes to operate in accordance
with specifications or expectations; and
|
|
|
|
the results of financing efforts and financial market conditions.
|
The
combined company will operate on a broader geographical scope
than either Freeport-McMoRan or Phelps Dodge has operated
individually, and will be exposed to a broader range of
political, social and geographic risks than either company has
been exposed to on an individual basis.
Freeport-McMoRans primary operating assets are located in
Indonesia. Accordingly, the business of the combined company may
be adversely affected by Indonesian political, economic and
social uncertainties, in addition to the usual risks associated
with conducting business in a foreign country. Because Phelps
Dodge does not have any significant operations in Indonesia,
these risks are different from and in addition to those to which
the business of Phelps Dodge has historically been exposed. See
Risk Factors Risks Related to
Freeport-McMoRans Business below.
Phelps Dodge conducts mining operations in the United States,
Chile and Peru and has a significant development project in the
Democratic Republic of Congo (which is expected to begin
production by early 2009). Accordingly, the business of the
combined company may be adversely affected by political,
economic and social uncertainties in these countries, in
addition to the usual risks associated with conducting business
in a foreign country. Because Freeport-McMoRan has no
significant operations in any of these countries, these risks
are different from and in addition to those to which the
business of Freeport-McMoRan has historically been exposed. See
Risk Factors Risks Related to Phelps
Dodges Business below.
Movements
in foreign currency exchange rates or interest rates could
negatively affect the combined companys operating
results.
Substantially all of the combined companys revenues and a
significant portion of its costs will be denominated in
U.S. dollars; however, some of its costs, and certain of
its asset and liability accounts, will be denominated in
Indonesian rupiah, Chilean pesos, Peruvian nuevos soles and
other foreign currencies. As a result, the combined company will
be generally less profitable when the U.S. dollar weakens
in relation to these foreign currencies. From time to time, the
combined company may implement currency hedges intended to
reduce its exposure to changes in foreign currency exchange
rates. However, its hedging strategies may not be successful,
and any of its unhedged foreign exchange payments will continue
to be subject to market fluctuations.
Freeport-McMoRan
and Phelps Dodge may experience difficulties in integrating
their businesses, which could cause the combined company to fail
to realize many of the anticipated potential benefits of the
transactions.
Achieving the anticipated benefits of the transactions will
depend in part upon whether our two companies integrate our
businesses in an efficient and effective manner. We may not be
able to accomplish this integration process smoothly or
successfully. The difficulties of combining the two
companies businesses potentially will include, among other
things:
|
|
|
|
|
the necessity of coordinating geographically separated
organizations and addressing possible differences in corporate
cultures and management philosophies, and the integration of
certain operations following the transaction will require the
dedication of significant management resources, which may
temporarily distract managements attention from the
day-to-day
business of the combined company;
|
|
|
|
any inability of our management to integrate successfully the
operations of our two companies or to adapt to the addition of
lines of business in which Freeport-McMoRan has not historically
engaged; and
|
|
|
|
any inability of our management to cause best practices to be
applied to the combined companys businesses.
|
S-28
An inability to realize the full extent of the anticipated
benefits of the acquisition, as well as any delays encountered
in the transition process, could have an adverse effect upon the
revenues, level of expenses and operating results of the
combined company.
The
combined company will depend on its senior management team and
other key employees, and the loss of any of these employees
could adversely affect the combined companys
business.
The success of the combined company after the acquisition will
depend in part upon the ability of Freeport-McMoRan and Phelps
Dodge to retain senior management and other key employees of
both companies. Competition for qualified personnel can be very
intense. In addition, senior management and key employees may
depart because of issues relating to the uncertainty or
difficulty associated with the integration of the companies or a
desire not to remain with the combined company. Accordingly, no
assurance can be given that Freeport-McMoRan or Phelps Dodge
will be able to retain senior management and key employees to
the same extent that they have been able to do so in the past.
The
impact of purchase accounting could adversely affect the
combined companys earnings.
Purchase accounting will require the combined company to
allocate the price paid in the transaction to Phelps
Dodges assets on the basis of their fair values at the
time the transaction closed. Those adjustments are expected to
result in significant increases in the carrying values of
certain acquired assets, including, based on preliminary
estimates, increases of $3.4 billion in metal inventories
and $11.6 billion in property, plant, equipment and
development costs, as reflected in the unaudited pro forma
condensed combined balance sheet contained elsewhere in this
document. The increased value of property, plant, equipment and
development costs will increase the combined companys
depreciation expense, which will reduce reported earnings but
have no effect on cash flows.
A decline in the market price of commodities produced by the
combined company could result in a write down of metal
inventories to recoverable values and the recognition of
impairment charges to property, plant, equipment and development
costs. In addition, the increased value of metal inventories
would cause the combined companys cost of goods sold to
increase in the year those inventories are recognized as sold.
If the combined company changes the historical method of
accounting for Phelps Dodges metal inventories from the
current method of
last-in,
first-out, this increase in the combined companys cost of
goods would occur in the near term. These factors would have the
effect of reducing reported earnings, although they would have
no effect on cash flows.
In addition, the preliminary estimate of goodwill associated
with the transaction is approximately $7.8 billion, as
reflected in the unaudited pro forma condensed combined balance
sheet contained elsewhere in this document. The combined company
will annually assess this amount for impairment. If the combined
company concludes that the goodwill associated with the
transaction is impaired, the amount of the impairment would
reduce the combined companys reported earnings but would
have no effect on cash flows.
Risks
Related to Freeport-McMoRans Business
Because
Freeport-McMoRans primary operating assets are located in
the Republic of Indonesia, Freeport-McMoRans business may
be adversely affected by Indonesian political, economic and
social uncertainties, in addition to the usual risks associated
with conducting business in a foreign country.
Indonesia has faced political, economic and social
uncertainties, including separatist movements and civil and
religious strife in a number of provinces. In particular,
several separatist groups are opposing Indonesian rule over the
province of Papua, where Freeport-McMoRans mining
operations are located, and have sought political independence
for the province. In response, Indonesia enacted regional
autonomy laws, which became effective January 1, 2001. The
manner in which the new laws are being implemented and the
degree of political and economic autonomy that they may bring to
individual provinces, including Papua, are uncertain and are
ongoing issues in Indonesian politics. In Papua, there have been
sporadic attacks on civilians by separatists and sporadic but
highly publicized conflicts between separatists and the
Indonesian military.
S-29
Social, economic and political instability in Papua could
materially and adversely affect us if this instability results
in damage to our property or interruption of our activities.
Maintaining a good working relationship with the Indonesian
government is important to Freeport-McMoRan because all of
Freeport-McMoRans mining operations are located in
Indonesia and are conducted pursuant to a Contract of Work with
the Indonesian government. Accordingly, Freeport-McMoRan is also
subject to the risks associated with conducting business in and
with a foreign country, including the risk of forced
modification of existing contracts; changes in the
countrys laws and policies, including those relating to
taxation, royalties, divestment, imports, exports and currency
and the risk of having to submit to the jurisdiction of a
foreign court or arbitration panel or having to enforce the
judgment of a foreign court or arbitration panel against a
sovereign nation within its own territory. In addition,
Freeport-McMoRan is subject to the risk of expropriation.
Freeport-McMoRans insurance does not cover losses caused
by expropriation.
In February 2006, a group of illegal gold panners engaged in
conflict with Indonesian police and PT Freeport Indonesia
security personnel when they were requested to leave an area
near Freeport-McMoRans milling facilities. Following the
incident, the illegal panners blocked the road leading to the
Grasberg mine and mill in protest and Freeport-McMoRan
temporarily suspended mining and milling operations as a
precautionary measure. The panners also vandalized some of
Freeport-McMoRans light vehicles and offices near this
area, causing approximately $2 million in damages.
Freeport-McMoRans port facilities continued to operate
during the disruption and concentrate shipments were not
affected. The panners, mostly Papuans from outside
Freeport-McMoRans area of operations, presented a list of
aspirations, primarily relating to their desire to share in the
benefits of Freeport-McMoRans existing initiatives and
programs provided for the Papuans who are the traditional
residents of Freeport-McMoRans operations area. Mining and
milling operations resumed after an approximate
four-day
outage. During the incident at Freeport-McMoRans mine and
mill, protestors in Jakarta vandalized the entrance floor of the
office building housing Freeport-McMoRans Indonesian
headquarters and staged a
three-day
rally outside the building. The Indonesian police handled this
matter, which did not disrupt Freeport-McMoRans
administrative functions or damage any of
Freeport-McMoRans facilities.
Freeport-McMoRan cannot predict if there will be additional
incidents similar to the February 2006 protests or other
incidents that could disrupt Freeport-McMoRans operations.
If there were additional protests or other incidents at
Freeport-McMoRans mine and mill facilities, it could
adversely affect Freeport-McMoRans business and
profitability in ways that Freeport-McMoRan cannot predict at
this time.
In
addition to the usual risks encountered in the mining industry,
Freeport-McMoRan faces additional risks because
Freeport-McMoRans operations are located on difficult
terrain in a very remote area.
Freeport-McMoRans mining operations are located in steeply
mountainous terrain in a very remote area in Indonesia. Because
of these conditions, Freeport-McMoRan has had 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. In addition to
these special risks, Freeport-McMoRan is also subject to the
usual risks associated with the mining industry, such as the
risk of encountering unexpected geological conditions that may
result in cave-ins and flooding of mine areas.
Freeport-McMoRans insurance may not sufficiently cover an
unexpected natural or operating disaster.
On October 9, 2003, a slippage of material occurred in a
section of the Grasberg open pit, resulting in eight fatalities.
On December 12, 2003, a debris flow involving a relatively
small amount of loose material occurred in the same section of
the open pit resulting in only minor property damage. All
material involved in the affected mining areas was removed. The
events caused Freeport-McMoRan to alter its short-term mine
sequencing plans, which adversely affected
Freeport-McMoRans 2003 and 2004 production. While
Freeport-McMoRan resumed normal production activities in the
second quarter of 2004, no assurance can be given that similar
events will not occur in the future.
On March 23, 2006, a mud/topsoil slide involving
approximately 75,000 metric tons of material occurred from a
mountain ridge above service facilities supporting PT Freeport
Indonesias mining facilities.
S-30
Regrettably, three contract workers were fatally injured in the
event. The material damaged a mess hall and an adjacent area. As
a result of investigations by PT Freeport Indonesia and the
Indonesian Department of Energy and Mineral Resources,
Freeport-McMoRan conducted geotechnical studies to identify any
potential hazards to facilities from slides. The existing early
warning system for potential slides, based upon rainfall and
other factors, has also been expanded. PT Freeport Indonesia
recorded a charge of $1.9 million ($1.0 million to net
income) in the first quarter of 2006 for damages related to this
event. The event did not directly involve operations within the
Grasberg open-pit mine or PT Freeport Indonesias milling
operations.
The
terrorist attacks in the United States on September 11,
2001, subsequent attacks in Indonesia and the potential for
additional future terrorist acts and other recent events have
created economic and political uncertainties that could
materially and adversely affect Freeport-McMoRans
business.
On August 31, 2002, three people were killed and 11 others
were wounded in an ambush by a group of unidentified assailants.
The assailants shot at several vehicles transporting
international contract teachers from Freeport-McMoRans
school in Tembagapura, their family members, and other
contractors to PT Freeport Indonesia on the road near
Tembagapura, the mining town where the majority of PT Freeport
Indonesias personnel reside. Freeport-McMoRan, along with
the U.S. government, the central Indonesian government, the
Papuan provincial and local governments, and leaders of the
local people residing in the area of Freeport-McMoRans
operations condemned the attack. Indonesian authorities and the
U.S. FBI investigated the incident, which resulted in the U.S.
indictment of an alleged operational commander of the Free Papua
Movement/National Freedom Force. In January 2006, Indonesian
Police, accompanied by FBI agents, arrested the alleged
operational commander in the Free Papua Movement/National
Freedom Force and 11 other Papuans. In November 2006, verdicts
and sentencing were announced for seven of the accused in the
August 2002 shooting, including a life sentence for the
confessed leader of the attack.
On October 12, 2002, a bombing killed 202 people in the
Indonesian province of Bali, which is 1,500 miles west of
Freeport-McMoRans mining and milling operations.
Indonesian authorities arrested 35 people in connection with
this bombing and 29 of those arrested have been tried and
convicted. On August 5, 2003, 12 people were killed and
over 100 others were injured by a car bomb detonated outside of
the JW Marriott Hotel in Jakarta, Indonesia. On
September 9, 2004, 11 people were killed and over 200
others injured by a car bomb detonated in front of the
Australian embassy in Jakarta. On October 1, 2005, three
suicide bombers killed 19 people and wounded over 100 others in
Bali. The same international terrorist organizations are
suspected in each of these incidents. In November 2005,
Indonesian Police raided a house in East Java that resulted in
the death of other accused terrorists linked to the bombings
discussed above. Freeport-McMoRans mining and milling
operations were not interrupted by these incidents but their
corporate office in Jakarta had to relocate for several months
following the bombing in front of the Australian embassy.
We cannot predict whether there will be additional incidents
similar to the recent shooting or bombings. If there were to be
additional separatist, terrorist or other violence in Indonesia,
it could materially and adversely affect Freeport-McMoRans
business and profitability in ways that we cannot predict at
this time.
Terrorist attacks and other events have caused uncertainty in
the worlds financial and insurance markets and may
significantly increase global political, economic and social
instability, including in Indonesia. In addition to the Bali, JW
Marriott Hotel and Australian embassy bombings, there have been
anti-American
demonstrations in certain sections of Indonesia reportedly led
by radical Islamic activists. Radical activists have also
threatened to attack foreign interests and have called for the
expulsion of U.S. and British citizens and companies from
Indonesia.
It is possible that further acts of terrorism may be directed
against the U.S. domestically or abroad, and such acts could be
directed against properties and personnel of companies such as
our. The attacks and the resulting economic and political
uncertainties, including the potential for further terrorist
acts, have negatively impacted insurance markets. Moreover,
while Freeport-McMoRans property and business interruption
insurance covers damages to insured property directly caused by
terrorism, this insurance does not cover
S-31
damages and losses caused by war. Terrorism and war developments
may materially and adversely affect Freeport-McMoRans
business and profitability in ways that we cannot predict at
this time.
Freeport-McMoRans
Contracts of Work are subject to termination if Freeport-McMoRan
does not comply with its contractual obligations, and if a
dispute arises, Freeport-McMoRan may have to submit to the
jurisdiction of a foreign court or arbitration panel.
PT Freeport Indonesias Contracts of Work and other
Contracts of Work in which Freeport-McMoRan has an interest were
entered into under Indonesias 1967 Foreign Capital
Investment Law, which provides guarantees of remittance rights
and protection against nationalization. Freeport-McMoRans
Contracts of Work can be terminated by the Government of
Indonesia if Freeport-McMoRan does 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.
At times, certain government officials and others in Indonesia
have questioned the validity of contracts entered into by the
Government of Indonesia prior to May 1998 (i.e., during the
Suharto regime, which lasted over 30 years), including PT
Freeport Indonesias Contract of Work, which was signed in
December 1991. Freeport-McMoRan cannot assure you that the
validity of, or their compliance with, the Contracts of Work
will not be challenged for political or other reasons. PT
Freeport Indonesias Contract of Work and
Freeport-McMoRans other Contracts of Work require that
disputes with the Indonesian government be submitted to
international arbitration. Notwithstanding that provision, if a
dispute arises under the Contracts of Work, Freeport-McMoRan
faces the risk of having to submit to the jurisdiction of a
foreign court or arbitration panel, and if Freeport-McMoRan
prevails in such a dispute, Freeport-McMoRan will face the
additional risk of having to enforce the judgment of a foreign
court or arbitration panel against Indonesia within its own
territory.
Indonesian government officials have periodically undertaken
reviews regarding Freeport-McMoRans compliance with
Indonesian environmental laws and regulations and the terms of
the Contracts of Work. In 2006, the Government of Indonesia
created a joint team for Periodic Evaluation on
Implementation of the PT-FI Contract of Work (COW) to
conduct a periodic evaluation every five years. The team
consists of five working groups, whose members are from relevant
ministries or agencies, covering production, state revenues,
community development, environmental issues and security issues.
Freeport-McMoRan has conducted numerous working meetings with
these groups. The joint team has indicated that it will issue
its report shortly. While Freeport-McMoRan believes that it
complies with the Contract of Work in all material respects,
Freeport-McMoRan cannot assure you that the report will conclude
that it is complying with all of the provisions of PT Freeport
Indonesias Contract of Work. Separately, the Indonesian
House of Representatives created a working committee on PT
Freeport Indonesia. Members of this group have also visited
Freeport-McMoRans operations and held a number of hearings
in Jakarta. Freeport-McMoRan will continue to work with these
groups to respond to their questions about
Freeport-McMoRans operations and its compliance with PT
Freeport Indonesias Contract of Work.
Any
suspension of required activities under Freeport-McMoRans
Contracts of Work requires the consent of the Indonesian
government.
Freeport-McMoRans Contracts of Work permit
Freeport-McMoRan to suspend certain contractually required
activities, including exploration, for a period of one year by
making a written request to the Indonesian government. These
requests are subject to the approval of the Indonesian
government and are renewable annually. If Freeport-McMoRan does
not request a suspension or is denied a suspension, then
Freeport-McMoRan is required to continue its activities under
the Contract of Work or potentially be declared in default.
Moreover, if a suspension continues for more than one year for
reasons other than force majeure and the Indonesian government
has not approved such continuation, then the government would be
entitled to declare a default under the Contract of Work.
Freeport-McMoRan suspended its field exploration activities
outside of Block A in recent years due to safety and security
issues and regulatory uncertainty relating to a possible
conflict between its mining and
S-32
exploration rights in certain forest areas and an Indonesian
Forestry law enacted in 1999 prohibiting open-pit mining in
forest preservation areas. In 2001, Freeport-McMoRan requested
and received from the Government of Indonesia, formal temporary
suspensions of its obligations under the Contracts of Work in
all areas outside of Block A. Recent Indonesian legislation
permits open-pit mining in PT Freeport Indonesias Block B
area, subject to certain requirements. Following an assessment
of these requirements and a review of security issues, in 2007
Freeport-McMoRan plans to resume exploration activities in
certain prospective Contract of Work areas outside of Block A.
Freeport-McMoRans
mining operations create difficult and costly environmental
challenges, and future changes in environmental laws, or
unanticipated environmental impacts from Freeport-McMoRans
operations, could require it to incur increased costs.
Mining operations on the scale of Freeport-McMoRans
operations in Papua involve significant environmental risks and
challenges. Freeport-McMoRans primary challenge is to
dispose of the large amount of crushed and ground rock material,
called tailings, that results from the process by which
Freeport-McMoRan physically separates the copper-, gold- and
silver-bearing materials from the ore that it mines.
Freeport-McMoRans tailings management plan uses the river
system near its mine to transport the tailings to the lowlands
where the tailings and natural sediments are deposited in a
controlled area contained within a levee system that will be
regenerated. We incurred aggregate costs relating to tailings
management of $12.8 million in 2006, $8.7 million in
2005 and $11.8 million in 2004.
Another major environmental challenge is managing overburden,
which is the rock that must be moved aside in the mining process
in order to reach the ore. In the presence of air, water and
naturally occurring bacteria, some overburden can cause acid
rock drainage, or acidic water containing dissolved metals
which, if not properly managed, can have a negative impact on
the environment.
Certain Indonesian governmental officials have from time to time
raised issues with respect to Freeport-McMoRans tailings
and overburden management plans, including a suggestion that
Freeport-McMoRan implement a pipeline system rather than its
river deposition system for tailings disposal. Because
Freeport-McMoRans 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, more prone to catastrophic failure and involve
significant potentially adverse environmental issues. An
external panel of qualified experts, as directed in
Freeport-McMoRans 300K ANDAL (the Environmental Impact
Assessment document submitted to the Indonesian government and
approved in 1997), conducted detailed reviews and analyses of a
number of technical studies. They concluded that all significant
impacts identified were in line with the 300K ANDAL predictions,
and that the current system of riverine tailings management was
appropriate considering all site-specific factors. For these
reasons, Freeport-McMoRan does not believe that a pipeline
system is necessary or practical.
In March 2006, the Indonesian Ministry of Environment announced
the preliminary results of its PROPER environmental management
audit, acknowledging the effectiveness of PT Freeport
Indonesias environmental management practices in some
areas while making several suggestions for improvement in
others. Freeport-McMoRan is working with the Ministry of
Environment to address the issues raised as it completes the
audit process.
Freeport-McMoRan anticipates that it will continue to spend
significant financial and managerial resources on environmental
compliance. In addition, changes in Indonesian environmental
laws or unanticipated environmental impacts from
Freeport-McMoRans operations could require
Freeport-McMoRan to incur significant unanticipated costs.
Freeport-McMoRan
does not expect to mine all of its ore reserves before the
initial term of its Contract of Work expires.
All of Freeport-McMoRans current proven and probable ore
reserves, including the Grasberg deposit, are located in Block
A. The initial term of Freeport-McMoRans Contract of Work
covering these ore reserves expires at the end of 2021.
Freeport-McMoRan can extend this term for two successive
10-year
periods,
S-33
subject to the approval of the Indonesian government, which
under Freeport-McMoRans Contract of Work cannot be
withheld or delayed unreasonably. Freeport-McMoRans ore
reserves reflect estimates of minerals that can be recovered
through the end of 2041 (i.e., through the expiration of the two
10-year
extensions) and its current mine plan has been developed, and
its operations are based on the assumption that Freeport-McMoRan
will receive the two
10-year
extensions. As a result, Freeport-McMoRan will not mine all of
its ore reserves during the current term of its Contract of
Work, and there can be no assurance that the Indonesian
government will approve the extensions. Prior to the end of
2021, Freeport-McMoRan expects to mine approximately
39 percent of aggregate proven and probable recoverable ore
at December 31, 2006, representing approximately
45 percent of PT Freeport Indonesias share of
recoverable copper reserves and approximately 59 percent of
its share of recoverable gold reserves.
Risks
Related to Phelps Dodges Business
Phelps
Dodges copper price protection programs may cause
significant volatility in its financial performance.
Phelps Dodges copper price protection programs have and
may continue to cause significant volatility in its financial
performance. At December 31, 2006, Phelps Dodge had in
place zero-premium copper collars (consisting of both put and
call options) for approximately 486 million pounds of its
expected 2007 copper sales. For 2007, the annual average London
Metals Exchange (LME) call strike price (ceiling) for its
zero-premium copper collars is $2.002 per pound. At
December 31, 2006, Phelps Dodge also had in place copper
put options for approximately 730 million pounds of its
expected 2007 copper sales, with an annual average LME put
strike price (floor) of $0.95 per pound for 2007. In accordance
with generally accepted accounting principles in the United
States, transactions under these copper price protection
programs do not qualify for hedge accounting treatment and are
adjusted to fair market value based on the forward-curve price
and implied volatility as of the last day of the reporting
period, with the gain or loss recorded in revenues. These
adjustments represent non-cash events as the contracts are
settled in cash only after the end of the relevant year based on
the annual average LME copper price. For the year ended
December 31, 2006, the pre-tax charges arising from Phelps
Dodges 2006 and 2007 copper price protection programs
reduced operating income by approximately $1,009 million.
Phelps
Dodges business is subject to complex and evolving laws
and regulations and environmental and regulatory compliance may
impose substantial costs.
Phelps Dodges global operations are subject to various
federal, state and local environmental laws and regulations
relating to improving or maintaining environmental quality.
Environmental laws often require parties to pay for remedial
action or to pay damages regardless of fault and may also often
impose liability with respect to divested or terminated
operations, even if the operations were terminated or divested
many years ago. The federal Clean Air Act has had a significant
impact, particularly on Phelps Dodges smelter and power
plants. Phelps Dodge also has potential liability for certain
sites it currently operates or formerly operated and for certain
third-party sites under the federal Superfund law and similar
state laws. Phelps Dodge is also subject to claims for natural
resource damages where the release of hazardous substances is
alleged to have injured natural resources.
Phelps Dodges mining operations and exploration
activities, both inside and outside the United States, are
subject to extensive laws and regulations governing prospecting,
development, production, exports, taxes, labor standards,
occupational health, waste disposal, protection and remediation
of the environment, protection of endangered and protected
species, mine safety, toxic substances and other matters. Mining
also is subject to risks and liabilities associated with
pollution of the environment and disposal of waste products
occurring as a result of mineral exploration and production.
Compliance with these laws and regulations imposes substantial
costs and subjects Phelps Dodge to significant potential
liabilities.
The laws and regulations that apply to Phelps Dodge are complex
and are continuously evolving in the jurisdictions in which
Phelps Dodge conducts business. Costs associated with
environmental and regulatory compliance have increased over
time, and Phelps Dodge expects these costs to continue to
increase in the
S-34
future. In addition, the laws and regulations that apply to
Phelps Dodge may change in ways that could otherwise have an
adverse effect on its operations or financial results. The costs
of environmental obligations may exceed the reserves that Phelps
Dodge has established for such liabilities.
Mine
closure regulations may impose substantial costs.
Phelps Dodges operations in the United States are subject
to various federal and state mine closure and
mined-land
reclamation laws. The requirements of these laws vary depending
upon the jurisdiction. Over the last several years, there have
been substantial changes in these laws and regulations in the
states in which Phelps Dodges mines are located, as well
as changes in the regulations promulgated by the federal Bureau
of Land Management (BLM) for mining operations located on
unpatented mining claims located on federal public lands. The
amended BLM regulations governing
mined-land
reclamation for mining on federal lands will likely increase
Phelps Dodges regulatory obligations and compliance costs
over time with respect to mine closure reclamation. As estimated
costs increase, Phelps Dodges mines are required to post
increasing amounts of financial assurance to ensure the
availability of funds to perform future closure and reclamation.
The amount of financial assurance that has been provided for our
Chino, Tyrone and Cobre mines, pursuant to an agreement Phelps
Dodge reached with two New Mexico state agencies, totaled
approximately $495 million at December 31, 2006. Up to
70 percent of such financial assurance is in the form of
third-party guarantees issued by Phelps Dodge on behalf of its
operating subsidiaries and the balance, or approximately
30 percent, is provided in the form of trust funds, real
property collateral and letters of credit. The actual amount
required for financial assurance is subject to the completion of
additional permitting procedures, final agency determinations
and the results of administrative appeals, all of which could
result in some changes to the closure and reclamation plans and
further increases in the cost estimates and its related
financial assurance obligations. In addition, Phelps
Dodges Arizona mining operations have obtained approval of
reclamation plans for its mined land and approval of financial
assurance totaling approximately $174 million, but applications
for approval of closure plans for groundwater quality protection
are pending for some portions of its mines. Phelps Dodge also
has approved
mined-land
reclamation plans and financial assurance in place for its two
Colorado mines totaling approximately $81 million.
Most of the financial assurance provided for Phelps Dodges
southwestern U.S. mines requires a demonstration that it meets
financial tests showing Phelps Dodges capability to
perform the required closure and reclamation. Demonstrations of
financial capability have been made for all of the financial
assurance for Phelps Dodges Arizona mines. The financial
tests required for continued use of the financial capability
demonstrations and third-party guarantees include maintaining an
investment-grade rating on its senior debt securities. If, in
the future, Phelps Dodges or the combined companys
credit rating for senior unsecured debt falls below investment
grade, a portion of Phelps Dodges financial assurance
requirements might be required to be supplied in another form,
such as letters of credit, real property collateral or cash.
Phelps Dodge has reduced its use of surety bonds in support of
financial assurance obligations in recent years due to
significantly increasing costs and because many surety companies
require a significant level of collateral supporting the bonds.
If remaining surety bonds are unavailable at commercially
reasonable terms, the combined company could be required to post
other collateral or cash or cash equivalents directly in support
of financial assurance obligations.
In addition, Phelps Dodges international mines are subject
to various mine closure and
mined-land
reclamation laws. There have recently been significant changes
in closure and reclamation programs in Peru and Chile.
Phelps
Dodges operations outside the United States are subject to
the risks of doing business in foreign countries.
In 2006, Phelps Dodges international operations provided
approximately 39 percent of its consolidated sales (including
sales through PDMCs U.S. based sales company) and Phelps
Dodges international operations (including international
exploration) contributed approximately 54 percent of its
consolidated operating income. Due to the current development of
the Tenke Fungurume project in the
S-35
Democratic Republic of Congo and expansion projects at Cerro
Verde and El Abra, Phelps Dodge expects international operations
to increase as a percentage of sales and operating income in
future years. Phelps Dodge fully consolidates the results of
certain of its domestic and international mining operations in
which it owns less than a 100 percent interest (and reports
the minority interest). During 2006, Phelps Dodges
minority partners in its South American mines were entitled to
approximately 212,400 tons, or 38 percent, of Phelps
Dodges international copper production.
Phelps Dodges international activities are conducted in
Canada, Latin America, Europe, Asia and Africa, and are subject
to certain political and economic risks, including but not
limited to:
|
|
|
|
|
political instability and civil strife;
|
|
|
|
changes in foreign laws and regulations, including those
relating to the environment, labor, tax, royalties on mining
activities and dividends or repatriation of cash and other
property to the United States;
|
|
|
|
foreign currency fluctuations;
|
|
|
|
expropriation or nationalization of property;
|
|
|
|
exchange controls; and
|
|
|
|
import, export and trade regulations.
|
S-36
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus,
including the documents incorporated by reference herein and
therein, contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933,
as amended (the Securities Act) and Section 21E
of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Such forward-looking information
about Freeport-McMoRan, Phelps Dodge and the combined company
after completion of the transactions is intended to be covered
by the safe harbor to forward-looking statements
provided by the Private Securities Litigation Reform Act of
1995. These statements may be made directly in this prospectus
supplement or the accompanying prospectus or may be incorporated
in this prospectus supplement or the accompanying prospectus by
reference to other documents and may include statements for the
period following the completion of this transaction.
Representatives of Freeport-McMoRan and Phelps Dodge may also
make forward-looking statements. When used in this document, the
words anticipates, may, can,
plans, feels, believes,
estimates, expects,
projects, intends, likely,
will, should, to be and any
similar expressions and any other statements that are not
historical facts, in each case as they relate to
Freeport-McMoRan or Phelps Dodge, the management of either such
company or the transactions are intended to identify those
assertions as forward-looking statements. In making any of those
statements, the person making them believes that its
expectations are based on reasonable assumptions. However, any
such statement may be influenced by factors that could cause
actual outcomes and results to be materially different from
those projected or anticipated. These forward-looking statements
are subject to numerous risks and uncertainties, including the
risks described in this prospectus supplement under Risk
Factors, that could cause actual results to differ
materially from those expressed in, or implied or projected by,
the forward-looking information and statements.
Some other risks and uncertainties include, but are not limited
to:
|
|
|
risks related to our substantial indebtedness;
|
|
|
our holding company structure and its potential effect on your
ability to receive dividends or payments on the mandatory
convertible preferred stock;
|
|
|
macroeconomic conditions and general industry conditions, such
as the competitive environment of the mining industry;
|
|
|
unanticipated mining, milling and other processing problems;
|
|
|
accidents that lead to personal injury or property damage;
|
|
|
persistent commodity price reductions;
|
|
|
changes in political, social or economic circumstances in areas
where Freeport-McMoRan and Phelps Dodge operate or plan to
operate;
|
|
|
expropriation;
|
|
|
variances in ore grades;
|
|
|
labor relations;
|
|
|
adverse weather conditions and natural disasters, such as
earthquakes;
|
|
|
the speculative nature of mineral exploration;
|
|
|
increases in energy and production costs;
|
|
|
fluctuations in interest rates or foreign currency exchange
rates and other adverse financial market conditions;
|
|
|
regulatory and litigation matters and risks; and
|
|
|
changes in tax and other laws.
|
S-37
The actual results or performance by Freeport-McMoRan, and
issues relating to the transactions, could differ materially
from those expressed in, or implied by, any forward-looking
statements relating to those matters. Accordingly, no assurances
can be given that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of
them do so, what impact they will have on the results of
operations or financial condition of the combined company or the
transactions. Except as required by law, we are under no
obligation, and expressly disclaim any obligation, to update,
alter or otherwise revise any forward-looking statement, whether
written or oral, that may be made from time to time, whether as
a result of new information, future events or otherwise.
S-38
USE OF
PROCEEDS
We estimate the net proceeds from the issuance and sale of
the % mandatory convertible
preferred stock, after deducting underwriting discounts and
estimated offering expenses, will be approximately
$
($
if the underwriters exercise their overallotment option in full)
at an assumed public offering price of
$ per share of
mandatory convertible preferred stock. We intend to use the net
proceeds to repay outstanding indebtedness under (i) our
Tranche A term loan facility due March 2012 with an
interest rate currently of LIBOR plus 1.50% and (ii) our
Tranche B term loan facility due March 2014 with an
interest rate of LIBOR plus 1.75%. The Tranche A term loan
facility and the Tranche B term loan facility were used to
fund a portion of the acquisition and related transaction costs.
See Prospectus Supplement Summary Sources and
Uses. Under our new senior secured credit facilities, JP
Morgan Chase Bank, N.A. is administrative agent and collateral
agent, Merrill Lynch, Pierce, Fenner & Smith
Incorporated is syndication agent, and J.P. Morgan
Securities Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated are joint bookrunners and joint lead
arrangers. Affiliates of J.P. Morgan Securities Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated are also
lenders under the new senior secured credit facilities.
S-39
CAPITALIZATION
The following table shows Freeport-McMoRans cash and cash
equivalents and capitalization as of December 31, 2006, on
an as reported basis, and cash and cash equivalents and
capitalization on a pro forma basis to reflect the transactions,
the issuance of the mandatory convertible preferred stock
offered hereby, our concurrent public offering of
35,000,000 shares of common stock (assuming no exercise of
the underwriters overallotment option) and the use of net
proceeds from the mandatory convertible preferred stock and
common stock offerings to reduce outstanding indebtedness under
the Tranche A term loan facility and the Tranche B
term loan facility on a pro rata basis, although
Freeport-McMoRan may elect to apply the net proceeds
differently. This table is unaudited and should be read in
conjunction with Unaudited Pro Forma Condensed Combined
Financial Statements, Selected Consolidated
Historical Financial and Operating Data of
Freeport-McMoRan, Selected Consolidated Historical
Financial and Operating Data of Phelps Dodge, and the
financial statements and related notes of Freeport-McMoRan and
Phelps Dodge, which are included elsewhere or incorporated by
reference in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(Dollars in millions)
|
|
|
Cash and cash
equivalents(a)
|
|
$
|
907.5
|
|
|
$
|
3,383.4
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Existing indebtedness of
Freeport-McMoRan
|
|
|
|
|
|
|
|
|
8,375% senior notes due 2017
|
|
$
|
|
|
|
$
|
3,500.0
|
|
8.25% senior notes due 2015
|
|
|
|
|
|
|
1,500.0
|
|
Senior floating rate notes due 2015
|
|
|
|
|
|
|
1,000.0
|
|
101/8% senior
notes due 2010
|
|
|
272.4
|
|
|
|
272.4
|
|
7% convertible notes due 2011
|
|
|
7.1
|
|
|
|
7.1
|
|
67/8% notes
due 2014
|
|
|
340.3
|
|
|
|
340.3
|
|
Existing indebtedness of Phelps
Dodge(b)
|
|
|
|
|
|
|
|
|
7.375% notes due 2007
|
|
$
|
|
|
|
$
|
60.6
|
|
8.75% notes due 2011
|
|
|
|
|
|
|
108.8
|
|
7.125% debentures due 2027
|
|
|
|
|
|
|
115.0
|
|
9.50% notes due 2031
|
|
|
|
|
|
|
196.8
|
|
6.125% notes due 2034
|
|
|
|
|
|
|
149.8
|
|
New senior credit facilities
|
|
|
|
|
|
|
|
|
Revolving credit
facility(a)
|
|
$
|
|
|
|
$
|
|
|
Tranche A term loan facility
|
|
|
|
|
|
|
1,770.9
|
|
Tranche B term loan facility
|
|
|
|
|
|
|
5,312.6
|
|
Other
debt(c)
|
|
|
60.3
|
|
|
|
321.2
|
|
|
|
|
|
|
|
|
|
|
Total
debt(b)
|
|
$
|
680.1
|
|
|
$
|
14,655.5
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.10 par
value:
|
|
|
|
|
|
|
|
|
51/2% convertible
perpetual preferred stock
|
|
|
1,100.0
|
|
|
|
1,100.0
|
|
% mandatory convertible preferred
stock:
|
|
|
|
|
|
|
1,000.0
|
|
Common stock, $0.10 par value:
Authorized 700,000,000 shares; issued and
outstanding
196,964,996(b) shares,
actual, and 369,417,324 shares as
adjusted(d)
|
|
|
31.0
|
|
|
|
34.5
|
|
Capital in excess of par value
|
|
|
2,668.1
|
|
|
|
12,371.9
|
|
Retained earnings
|
|
|
1,414.8
|
|
|
|
1,371.1
|
|
Accumulated other comprehensive loss
|
|
|
(19.9
|
)
|
|
|
(19.9
|
)
|
Treasury stock
|
|
|
(2,748.9
|
)
|
|
|
(2,748.9
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,445.1
|
|
|
|
13,108.7
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
3,125.2
|
|
|
$
|
27,764.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Our availability under our
revolving credit facility is approximately $1,400.0 million
as of the closing of the transactions after giving effect to
outstanding letters of credit. Going forward, we may be required
to issue additional letters of credit in connection with
financial assurances with respect to our reclamation
obligations. See Risk Factors Risks Related to
Phelps Dodges Business Mine closure
regulations may impose substantial costs.
|
(b)
|
|
Pro forma total debt as of
December 31, 2006 shown above is based on Phelps
Dodges book values. Total debt as reflected in the pro
forma financial statements is based on the December 31,
2006 fair value of Phelps Dodges debt.
|
(c)
|
|
Actual amounts include equipment
capital leases and other ($54.5 million), Atlantic Copper
debt ($5.6 million) and other Freeport-McMoRan debt
($0.2 million). Pro forma amounts include, in addition,
certain project financing and subsidiary debt financing
($202.2 million), various pollution control and industrial
development revenue bonds ($25.0 million) and short-term
debt ($33.7 million) of Phelps Dodge.
|
(d)
|
|
Based on shares outstanding as of
February 28, 2007, approximately 137,042,000 shares
issued in connection with the closing of the acquisition and
35,000,000 shares offered in the concurrent common stock
offering. This number excludes 234,450 shares issuable upon
conversion of our 7% convertible senior notes and
23,272,163 shares issuable upon conversion of our 5.5%
perpetual convertible preferred stock. This number also excludes
an aggregate of 8,087,689 shares issuable upon exercise of
outstanding stock options and restricted stock units or the
vesting of restricted stock awards, approximately 1,000,000 of
which were assumed as part of the acquisition. Our outstanding
stock options as of February 28, 2007 had a weighted
average exercise price of $43.03 per share. This number also
excludes approximately shares
issuable upon conversion of our %
mandatory convertible preferred stock offered hereby.
|
S-40
PRICE
RANGE OF COMMON STOCK
Our common stock is listed and traded on the New York Stock
Exchange under the symbol FCX. The following table
sets forth, for the periods indicated, the high and low closing
prices per share of the common stock on the New York Stock
Exchange.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2005
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
43.90
|
|
|
$
|
35.12
|
|
Second quarter
|
|
|
40.31
|
|
|
|
31.52
|
|
Third quarter
|
|
|
49.48
|
|
|
|
37.12
|
|
Fourth quarter
|
|
|
56.35
|
|
|
|
43.41
|
|
2006
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
65.00
|
|
|
$
|
47.11
|
|
Second quarter
|
|
|
72.20
|
|
|
|
43.10
|
|
Third quarter
|
|
|
62.29
|
|
|
|
47.58
|
|
Fourth quarter
|
|
|
63.70
|
|
|
|
47.60
|
|
2007
|
|
|
|
|
|
|
|
|
First quarter (through
March 16, 2007)
|
|
$
|
61.99
|
|
|
$
|
48.85
|
|
On March 16, 2007, the last reported sale price of our
common stock on the New York Stock Exchange was $60.71 per
share. As of February 12, 2007, there were approximately
8,100 holders of record of our common stock.
S-41
DIVIDEND
POLICY
In February 2003, the Board of Directors initiated a cash
dividend for FCXs common stock of $0.09 per share
quarterly beginning May 1, 2003. In October 2003, the Board
authorized an increase in the cash dividend to an annual rate of
$0.80 per share and increased the dividend again in October
2004 to an annual rate of $1.00 per share. In December
2004, the Board authorized a supplemental common stock dividend
of $0.25 per share, and during 2005 the Board authorized
three supplemental dividends of $0.50 per share paid on
March 31, 2005, September 30, 2005 and
December 30, 2005. In November 2005, the Board authorized
an increase in our annual common stock dividend to
$1.25 per share (from $1.00 per share) payable
quarterly ($0.3125 per share) beginning with the
February 1, 2006 dividend payment. In 2006, the Board
authorized four supplemental dividends totaling $3.50 per
share. Freeport-McMoRan expects to continue its regular annual
common stock dividend of $1.25 per share and to discontinue
its practice of paying supplemental dividends for the
foreseeable future.
Below is a summary of the common stock cash dividends declared
and paid during 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Amount Per Share
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
Amount Per Share
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
First Quarter
|
|
$
|
0.3125
|
|
|
|
Jan. 17, 2006
|
|
|
|
Feb. 1, 2006
|
|
|
$
|
0.25
|
|
|
|
Jan. 14, 2005
|
|
|
|
Feb. 1, 2005
|
|
Supplemental dividend
|
|
|
0.50
|
|
|
|
Mar. 15, 2006
|
|
|
|
Mar. 31, 2006
|
|
|
|
0.50
|
|
|
|
Mar. 15, 2005
|
|
|
|
Mar. 31, 2005
|
|
Second Quarter
|
|
|
0.3125
|
|
|
|
Apr. 17, 2006
|
|
|
|
May 1, 2006
|
|
|
|
0.25
|
|
|
|
Apr. 15, 2005
|
|
|
|
May 1, 2005
|
|
Supplemental dividend
|
|
|
0.75
|
|
|
|
June 15, 2006
|
|
|
|
June 30, 2006
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
0.3125
|
|
|
|
July 17, 2006
|
|
|
|
Aug. 1, 2006
|
|
|
|
0.25
|
|
|
|
July 15, 2005
|
|
|
|
Aug. 1, 2005
|
|
Supplemental dividend
|
|
|
0.75
|
|
|
|
Sept. 14, 2006
|
|
|
|
Sept. 29, 2006
|
|
|
|
0.50
|
|
|
|
Sept. 15, 2005
|
|
|
|
Sept. 30, 2005
|
|
Fourth Quarter
|
|
|
0.3125
|
|
|
|
Oct. 16, 2006
|
|
|
|
Nov. 1, 2006
|
|
|
|
0.25
|
|
|
|
Oct. 14, 2005
|
|
|
|
Nov. 1, 2005
|
|
Supplemental dividend
|
|
|
1.50
|
|
|
|
Dec. 14, 2006
|
|
|
|
Dec. 29, 2006
|
|
|
|
0.50
|
|
|
|
Dec. 15, 2005
|
|
|
|
Dec. 30, 2005
|
|
Freeport-McMoRan paid the first quarterly payment of its annual
dividend of $0.3125 per share on February 1, 2007. The
declaration and payment of dividends is at the discretion of our
Board and will depend on our financial results, cash
requirements, future prospects and other factors deemed relevant
by the Board. The amount of our current quarterly cash dividend
($0.3125 per share) on our common stock and the possible
payment of additional future supplemental cash dividends will
depend upon many factors, including, but not limited to, our
cash flows and financial position, future prospects, copper and
gold prices, general economic and market conditions, and other
factors deemed relevant by our Board of Directors. In addition,
since we are a holding company, our ability to pay cash
dividends depends in large measure on our subsidiaries
ability to make distributions of cash or property to us. Payment
of dividends on our common stock and purchases of common stock
are also subject to limitations under our
101/8% senior
notes due 2010,
67/8% senior
notes due 2014, 8.25% senior notes due 2015,
8.375% senior notes due 2017, senior floating rate notes
due 2015, and, in certain circumstances, our new senior credit
facilities. Further, we are restricted by certain of our
borrowing arrangements from paying cash dividends in certain
circumstances without the prior written consent of the lenders.
S-42
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements
presented herein, which have been prepared by the management of
Freeport-McMoRan, are derived from the historical consolidated
financial statements of Freeport-McMoRan and Phelps Dodge. The
unaudited pro forma condensed combined financial statements are
prepared using the purchase method of accounting, with the
transactions, the issuance of our mandatory convertible
preferred stock offered hereby, the concurrent common stock
offering and the use of proceeds from the issuance of common
stock and mandatory convertible preferred stock to reduce
outstanding debt assumed to have occurred on January 1,
2006, for statement of income purposes and on December 31,
2006, for balance sheet purposes using accounting principles
generally accepted in the United States, referred to as
U.S. GAAP. The pro forma adjustments to reflect fair value
of Phelps Dodges net reported assets and other purchase
accounting adjustments are based on available data as of
December 31, 2006. At the effective time of the
acquisition, the pre-combination shareholders of
Freeport-McMoRan owned approximately 59 percent
(62 percent on a fully diluted basis) of the combined
company and the pre-combination shareholders of Phelps Dodge
owned approximately 41 percent (38 percent on a fully
diluted basis). In addition to considering these relative
shareholdings, Freeport-McMoRan also considered the proposed
composition and terms of the board of directors, the proposed
structure and members of the executive management team of
Freeport-McMoRan and the premium paid by Freeport-McMoRan to
acquire Phelps Dodge, in determining the accounting acquirer.
Based on the weight of these factors, Freeport-McMoRan
management concluded that Freeport-McMoRan was the accounting
acquirer.
The pro forma amounts have been developed from (i) the
audited consolidated financial statements of Freeport-McMoRan
contained in its annual report on
Form 10-K
for the year ended December 31, 2006 and (ii) the
audited consolidated financial statements of Phelps Dodge
contained in its annual report on
Form 10-K
for the year ended December 31, 2006, each of which were
prepared in accordance with U.S. GAAP and are incorporated
by reference herein.
The unaudited pro forma condensed combined financial statements
are provided for illustrative purposes only and do not purport
to represent what the actual consolidated results of operations
or the consolidated financial position of Freeport-McMoRan would
have been had the combination occurred on the dates assumed, nor
are they necessarily indicative of future consolidated results
of operations or consolidated financial position. In this
regard, the reader should note that the unaudited pro forma
condensed combined financial statements do not give effect to
(i) any integration costs that may be incurred as a result
of the acquisition, (ii) synergies, operating efficiencies
and cost savings that are expected to result from the
acquisition, (iii) benefits expected to be derived from the
combined companys growth projects or brownfield expansions
or (iv) changes in commodities prices subsequent to the
dates of such unaudited pro forma condensed combined financial
statements.
Freeport-McMoRan has not yet developed formal plans for
combining the two companies operations. Accordingly,
additional liabilities may be incurred in connection with the
business combination and any ultimate restructuring. These
additional liabilities and costs have not been contemplated in
the unaudited pro forma condensed combined financial statements
because information necessary to reasonably estimate such costs
and to formulate detailed restructuring plans is not available
to Freeport-McMoRan. The allocation of the purchase price to
acquired assets and liabilities in the unaudited pro forma
condensed combined financial statements are based on
managements preliminary internal valuation estimates. Such
allocations will be finalized based on valuation and other
studies to be performed by management with the services of
outside valuation specialists after the closing of the business
combination. Accordingly, the purchase price allocation
adjustments and related impacts on the unaudited pro forma
condensed combined financial statements are preliminary and are
subject to revision, which may be material, after the closing of
the business combination.
The unaudited pro forma condensed combined financial statements
should be read in conjunction with the separate historical
consolidated financial statements and accompanying notes of
Freeport-McMoRan and Phelps Dodge incorporated by reference into
this prospectus supplement. See Where you can find more
information.
S-43
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
|
|
Freeport-
|
|
|
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
McMoRan
|
|
|
Phelps Dodge
|
|
|
(Note 3)
|
|
|
Combined
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
Revenues
|
|
$
|
5,790.5
|
|
|
$
|
11,910.4
|
(Note 4)
|
|
$
|
|
|
|
$
|
17,700.9
|
(Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production and delivery
|
|
|
2,524.9
|
|
|
|
6,807.2
|
|
|
|
74.4
|
(A)
|
|
|
9,387.5
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.0
|
)(M)
|
|
|
|
|
Depreciation, depletion and
amortization
|
|
|
227.6
|
|
|
|
448.7
|
|
|
|
581.0
|
(J)
|
|
|
1,268.2
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
2,752.5
|
|
|
|
7,255.9
|
|
|
|
647.3
|
|
|
|
10,655.7
|
|
Selling, general and
administrative expenses
|
|
|
157.1
|
|
|
|
207.0
|
|
|
|
8.3
|
(A)
|
|
|
372.4
|
|
Exploration and research expenses
|
|
|
12.2
|
|
|
|
127.0
|
|
|
|
|
|
|
|
139.2
|
|
Special items and provisions, net
|
|
|
|
|
|
|
93.6
|
|
|
|
(93.6
|
)(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
2,921.8
|
|
|
|
7,683.5
|
|
|
|
562.0
|
|
|
|
11,167.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,868.7
|
|
|
|
4,226.9
|
|
|
|
(562.0
|
)
|
|
|
6,533.6
|
|
Interest expense, net
|
|
|
(75.6
|
)
|
|
|
(73.0
|
)
|
|
|
54.0
|
(A)
|
|
|
(1,179.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1,245.3
|
)(N)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160.1
|
(O)
|
|
|
|
|
Capitalized interest
|
|
|
|
|
|
|
54.0
|
|
|
|
(54.0
|
)(A)
|
|
|
|
|
Equity in PT Smelting and
affiliated companies earnings
|
|
|
6.5
|
|
|
|
|
|
|
|
4.6
|
(A)
|
|
|
11.1
|
|
Losses on early extinguishment and
conversion of debt
|
|
|
(32.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(32.0
|
)
|
Gains on sales of assets
|
|
|
30.6
|
|
|
|
|
|
|
|
|
|
|
|
30.6
|
|
Inco termination fee, net of
expenses
|
|
|
|
|
|
|
435.1
|
|
|
|
|
|
|
|
435.1
|
|
Other income, net
|
|
|
27.7
|
|
|
|
190.9
|
|
|
|
|
|
|
|
218.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before taxes and minority interests in consolidated subsidiaries
|
|
|
2,825.9
|
|
|
|
4,833.9
|
|
|
|
(1,642.6
|
)
|
|
|
6,017.2
|
|
Provision for income taxes
|
|
|
(1,201.2
|
)
|
|
|
(1,010.2
|
)
|
|
|
276.5
|
(F)
|
|
|
(1,934.9
|
)
|
Minority interests in net income
of consolidated subsidiaries
|
|
|
(168.2
|
)
|
|
|
(792.4
|
)
|
|
|
|
|
|
|
(960.6
|
)
|
Equity in net earnings of
affiliated companies
|
|
|
|
|
|
|
4.6
|
|
|
|
(4.6
|
)(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
1,456.5
|
|
|
|
3,035.9
|
(Note 4)
|
|
|
(1,370.7
|
)
|
|
|
3,121.7
|
(Note 4)
|
Preferred dividends
|
|
|
(60.5
|
)
|
|
|
|
|
|
|
(70.0
|
)(O)
|
|
|
(130.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
applicable to common stock
|
|
$
|
1,396.0
|
|
|
$
|
3,035.9
|
|
|
$
|
(1,440.7
|
)
|
|
$
|
2,991.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share from continuing
operations applicable to common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
7.32
|
|
|
$
|
15.00
|
|
|
|
|
|
|
$
|
8.24
|
|
Diluted
|
|
$
|
6.63
|
|
|
$
|
14.92
|
|
|
|
|
|
|
$
|
7.70
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
190.7
|
|
|
|
|
|
|
|
|
|
|
|
362.9
|
(L)
|
Diluted
|
|
|
221.5
|
|
|
|
|
|
|
|
|
|
|
|
411.2
|
(L)
|
See accompanying notes to these pro forma condensed combined
financial statements.
S-44
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
|
|
Freeport-
|
|
|
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
McMoRan
|
|
|
Phelps Dodge
|
|
|
(Note 3)
|
|
|
Combined
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
907.5
|
|
|
$
|
4,947.4
|
|
|
$
|
16,000.0
|
(K)
|
|
$
|
3,383.4
|
|
|
|
|
|
|
|
|
|
|
|
|
(330.0
|
)(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100.0
|
)(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.0
|
(H)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66.5
|
)(E)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,000.0
|
)(B)
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
25.4
|
|
|
|
|
|
|
|
25.4
|
|
Accounts receivable, less allowance
|
|
|
485.7
|
|
|
|
1,264.8
|
|
|
|
|
|
|
|
1,750.5
|
|
Mill and leach stockpiles
|
|
|
|
|
|
|
90.8
|
|
|
|
1,412.0
|
(D)
|
|
|
1,502.8
|
|
Product inventories
|
|
|
384.2
|
|
|
|
356.0
|
|
|
|
1,293.0
|
(D)
|
|
|
2,033.2
|
|
Materials and supplies
|
|
|
340.1
|
|
|
|
247.9
|
|
|
|
|
|
|
|
588.0
|
|
Prepaid expenses and other current
assets
|
|
|
33.5
|
|
|
|
116.3
|
|
|
|
|
|
|
|
149.8
|
|
Deferred income taxes
|
|
|
|
|
|
|
552.3
|
|
|
|
|
|
|
|
552.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,151.0
|
|
|
|
7,600.9
|
|
|
|
233.5
|
|
|
|
9,985.4
|
|
Investments and long-term
receivables
|
|
|
|
|
|
|
193.1
|
|
|
|
|
|
|
|
193.1
|
|
Property, plant, equipment and
development costs, net
|
|
|
3,098.5
|
|
|
|
5,873.5
|
|
|
|
11,620.4
|
(D)
|
|
|
20,592.4
|
|
Long-term mill and leach stockpiles
|
|
|
|
|
|
|
181.8
|
|
|
|
723.6
|
(D)
|
|
|
905.4
|
|
Goodwill
|
|
|
|
|
|
|
12.5
|
|
|
|
7,754.9
|
(D)
|
|
|
7,767.4
|
|
Trust assets
|
|
|
|
|
|
|
588.3
|
|
|
|
|
|
|
|
588.3
|
|
Other assets and deferred charges
|
|
|
140.3
|
|
|
|
182.2
|
|
|
|
330.0
|
(C)
|
|
|
581.8
|
|
|
|
|
|
|
|
|
|
|
|
|
(27.0
|
)(D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43.7
|
)(O)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,389.8
|
|
|
$
|
14,632.3
|
|
|
$
|
20,591.7
|
|
|
$
|
40,613.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
789.0
|
|
|
$
|
2,705.8
|
|
|
$
|
|
|
|
$
|
3,494.8
|
|
Current portion of long-term debt
and short-term borrowings
|
|
|
19.1
|
|
|
|
121.8
|
|
|
|
0.4
|
(D)
|
|
|
141.3
|
|
Accrued income taxes
|
|
|
164.4
|
|
|
|
435.3
|
|
|
|
|
|
|
|
599.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
972.5
|
|
|
|
3,262.9
|
|
|
|
0.4
|
|
|
|
4,235.8
|
|
Long-term debt, less current portion
|
|
|
661.0
|
|
|
|
770.1
|
|
|
|
35.0
|
(D)
|
|
|
14,549.6
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000.0
|
(K)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,916.5
|
)(O)
|
|
|
|
|
Deferred income taxes
|
|
|
800.3
|
|
|
|
768.6
|
|
|
|
4,499.6
|
(F)
|
|
|
6,068.5
|
|
Accrued postretirement benefits and
other liabilities
|
|
|
297.9
|
|
|
|
890.7
|
|
|
|
|
|
|
|
1,188.6
|
|
Minority interests
|
|
|
213.0
|
|
|
|
1,249.6
|
|
|
|
|
|
|
|
1,462.6
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible perpetual preferred
stock
|
|
|
1,100.0
|
|
|
|
|
|
|
|
|
|
|
|
1,100.0
|
|
Mandatory convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
1,000.0
|
(O)
|
|
|
1,000.0
|
|
Common stock
|
|
|
31.0
|
|
|
|
1,275.1
|
|
|
|
13.7
|
(G)
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,275.1
|
)(I)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
(O)
|
|
|
|
|
Capital in excess of par value of
common stock
|
|
|
2,668.1
|
|
|
|
1,372.7
|
|
|
|
7,777.1
|
(G)
|
|
|
12,358.2
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,372.7
|
)(I)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,913.0
|
(O)
|
|
|
|
|
Retained earnings
|
|
|
1,414.8
|
|
|
|
5,221.4
|
|
|
|
(5,221.4
|
)(I)
|
|
|
1,371.1
|
|
|
|
|
|
|
|
|
|
|
|
|
(43.7
|
)(O)
|
|
|
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(19.9
|
)
|
|
|
(178.8
|
)
|
|
|
178.8
|
(I)
|
|
|
(19.9
|
)
|
Common stock held in treasury
|
|
|
(2,748.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,748.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,445.1
|
|
|
|
7,690.4
|
|
|
|
2,973.2
|
|
|
|
13,108.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
5,389.8
|
|
|
$
|
14,632.3
|
|
|
$
|
20,591.7
|
|
|
$
|
40,613.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these pro forma condensed combined
financial statements.
S-45
NOTES TO
THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements,
which have been prepared by Freeport-McMoRan management, have
been derived from historical consolidated financial statements
of Freeport-McMoRan and Phelps Dodge incorporated by reference
into this prospectus supplement.
At the effective time of the acquisition, the pre-combination
shareholders of Freeport-McMoRan owned approximately
59 percent of the combined company (62 percent on a
fully diluted basis) and the pre-combination shareholders of
Phelps Dodge, owned approximately 41 percent of the
combined company (38 percent on a fully diluted basis). In
addition to considering these relative shareholdings,
Freeport-McMoRan management also considered the proposed
composition and terms of the board of directors, the proposed
structure and members of the executive management team of
Freeport-McMoRan, and the premium paid by Freeport-McMoRan to
acquire Phelps Dodge in determining the accounting acquirer.
Based on the weight of these factors, Freeport-McMoRan
management concluded that Freeport-McMoRan was the accounting
acquirer.
Freeport-McMoRan acquired all the issued and outstanding common
shares of Phelps Dodge for $88.00 in cash and 0.67 of a share of
Freeport-McMoRan common stock for each Phelps Dodge common
share. Based on Freeport-McMoRans closing stock price of
$57.40 per share on November 17, 2006, the implied
value of the merger consideration is $126.46, composed of $88.00
in cash and stock worth $38.46 per share.
The acquisition will be accounted for under the purchase method
of accounting. The pro forma adjustments reflect
Freeport-McMoRans acquisition of 100 percent of
Phelps Dodges net reported assets at their fair values at
December 31, 2006 for the pro forma condensed combined
balance sheet, and at January 1, 2006, for the pro forma
condensed combined statement of income, and the subsequent
accounting for Phelps Dodge as a wholly owned subsidiary. The
pro forma adjustments also reflect the application of the net
proceeds from the issuance of mandatory convertible preferred
stock offered hereby and the concurrent common stock offering to
reduce long-term debt.
S-46
The purchase price consideration for the business combination is
estimated to include $18.0 billion in cash,
$7.8 billion in Freeport-McMoRan common stock and
$167 million for costs and fees of the acquisition as shown
below:
|
|
|
|
|
|
|
(In millions, except
|
|
|
|
per share amount)
|
|
|
Freeport-McMoRans
acquisition of Phelps Dodge:
|
|
|
|
|
Common shares outstanding and
issuable
|
|
|
204.540
|
|
Exchange offer ratio of
Freeport-McMoRan common stock for each Phelps Dodge common share
|
|
|
0.67
|
|
Approximate shares of
Freeport-McMoRan common stock issued
|
|
|
137.042
|
|
Weighted average market price of
each share of Freeport-McMoRan common stock from
November 16-21,
2006
|
|
$
|
56.85
|
|
|
|
|
|
|
Cash consideration for each Phelps
Dodge common share
|
|
$
|
88.00
|
|
|
|
|
|
|
Fair value of Freeport-McMoRan
common stock issued, comprising par value of $13.7
($0.10 per share) and capital in excess of par of $7,777.1
|
|
$
|
7,791
|
|
Cash consideration of $88.00 for
each Phelps Dodge common share
|
|
|
18,000
|
|
Estimated change of control costs
and related employee benefits
|
|
|
67
|
|
Estimated transaction costs
|
|
|
100
|
|
|
|
|
|
|
Purchase price
|
|
$
|
25,958
|
|
|
|
|
|
|
|
|
3.
|
Pro forma
assumptions and adjustments
|
The following assumptions and related pro forma adjustments give
effect to the business combination of Freeport-McMoRan and
Phelps Dodge, the issuance of our mandatory convertible
preferred stock offered hereby, the concurrent common stock
offering and the use of proceeds from the issuance of common
stock and mandatory convertible preferred stock to reduce
outstanding debt as if such transactions occurred on
January 1, 2006, in the unaudited pro forma condensed
combined statement of income for the year ended
December 31, 2006, and on December 31, 2006, for the
unaudited pro forma condensed combined balance sheet.
The unaudited pro forma condensed combined financial statements
are provided for illustrative purposes only and do not purport
to represent what the actual consolidated results of operations
or the consolidated financial position of Freeport-McMoRan would
have been had the business combination with Phelps Dodge
occurred on the respective dates assumed, nor are they
necessarily indicative of future consolidated operating results
or financial position.
The unaudited pro forma condensed combined financial statements
do not reflect and do not give effect to (i) any
integration costs that may be incurred as a result of the
acquisition, (ii) synergies, operating efficiencies and
cost savings that are expected to result from acquisition,
(iii) benefits expected to be derived from the combined
companys growth projects or brownfield expansions or
(iv) changes in commodities prices subsequent to the dates
of such unaudited pro forma condensed combined financial
statements.
Additionally, Freeport-McMoRan believes that cost savings will
be realized upon the consolidation and integration of the
companies. Freeport-McMoRan has not developed formal plans for
combining the operations. Accordingly, additional liabilities
may be incurred in connection with the business combination and
ultimate restructuring. These additional liabilities and costs
have not been contemplated in the unaudited pro forma condensed
combined financial statements because information necessary to
reasonably estimate such costs and to formulate detailed
restructuring plans is not yet available to Freeport-McMoRan.
Accordingly, the allocation of the purchase price cannot be
estimated with a reasonable degree of accuracy and may differ
materially from the amounts assumed in the unaudited pro forma
condensed combined financial statements.
As shown in adjustment D below, Freeport-McMoRan expects the
accounting for the acquisition of Phelps Dodge to result in a
significant amount of goodwill. Goodwill is the excess cost of
the acquired company over the sum of the amounts assigned to
assets acquired less liabilities assumed. U.S. GAAP
requires that goodwill not be amortized, but instead allocated
to a level within the reporting entity referred to as the
S-47
reporting unit and tested for impairment, at least annually.
There is currently diversity in the mining industry associated
with certain aspects of the accounting for business combinations
and related goodwill. This diversity includes how companies
define Value Beyond Proven and Probable reserves (referred to in
this document as VBPP) (see further discussion in adjustment J
below), what an appropriate reporting unit is and how goodwill
is allocated among reporting units. The methods of allocating
goodwill have included allocations primarily to a single
exploration reporting unit and allocations among individual mine
reporting units depending on the relevant circumstances. We
understand the industry is also evaluating other methodologies
for allocating goodwill. The method of allocating goodwill will
likely have an impact on the amount and timing of any future
goodwill impairment, if any. Freeport-McMoRan has not completed
its determination of the combined companys reporting units
nor its method of allocating goodwill to those reporting units.
Our ultimate accounting for VBPP and goodwill may not be
comparable to other companies within the mining industry.
The unaudited pro forma condensed combined financial statements
include the following pro forma assumptions and adjustments:
(A) Reclassifications have been made to the Phelps Dodge
historical consolidated financial information to conform to
Freeport-McMoRans presentation. This included
reclassifying amounts described by Phelps Dodge on a single line
item as Special items and provisions, net into
production and delivery costs, into depreciation, depletion and
amortization and into selling, general and administrative
expenses based on Freeport-McMoRans reporting for these
items. The reclassifications also reflect the reporting of
Phelps Dodges Capitalized interest as a
component of Interest expense, net and Phelps
Dodges Equity in net earnings of affiliated
companies as a component of Equity in PT Smelting
and affiliated companies earnings to conform to
Freeport-McMoRans reporting.
(B) This pro forma adjustment represents payment of the
cash component of the purchase price for Phelps Dodge common
shares.
(C) Freeport-McMoRan estimates it incurred approximately
$430 million of transaction costs, consisting primarily of
financing costs, financial advisory fees, legal and accounting
fees, financial printing and other charges related to the
purchase of Phelps Dodge. Approximately $330 million of
these transaction costs will be recorded as deferred charges on
the combined companys balance sheet and the remaining
approximately $100 million will be recorded as part of the
cost to purchase Phelps Dodge. These estimates are preliminary
and, therefore, are subject to change.
(D) The pro forma adjustments to reflect fair value of
Phelps Dodges net reported assets and other purchase
accounting adjustments were based on available data as of
December 31, 2006. On this basis, the pro forma adjustments
to reflect the fair value of Phelps Dodges net reported
assets and other purchase accounting adjustments are estimated
as follows:
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Phelps Dodge net assets on
December 31, 2006
|
|
$
|
7,690
|
|
Adjustment to fair value mill and
leach stockpiles inventory current
|
|
|
1,412
|
|
Adjustment to fair value mill and
leach stockpiles inventory long-term
|
|
|
724
|
|
Adjustment to fair value product
inventory
|
|
|
1,293
|
|
Adjustment to fair value property,
plant, equipment and development costs
|
|
|
11,620
|
|
Adjustment to fair value debt
issuance costs
|
|
|
(27
|
)
|
Adjustment to fair value debt
|
|
|
(35
|
)
|
Adjustment to deferred taxes to
reflect fair value adjustments (see F)
|
|
|
(4,500
|
)
|
Cash proceeds from assumed
exercise of stock options (see H)
|
|
|
25
|
|
|
|
|
|
|
Net tangible assets and
liabilities acquired
|
|
$
|
18,203
|
*
|
Allocation to goodwill
|
|
|
7,755
|
**
|
|
|
|
|
|
Total purchase price
|
|
$
|
25,958
|
|
|
|
|
|
|
S-48
_
_
|
|
|
*
|
|
Represents the sum of tangible
assets and liabilities acquired before rounding.
|
|
|
|
**
|
|
The allocation to goodwill was
reduced by $776 million from the amount reflected in the
amended joint proxy statement/prospectus filed on
February 12, 2007, because of changes in the fair value of
Phelps Dodges net assets from September 30, 2006 to
December 31, 2006, primarily because of changes in metal
price assumptions and a change in accounting for defined benefit
pension and other postretirement plans resulting from the
adoption of a new accounting standard on December 31, 2006.
|
The allocation of the purchase price is based upon
managements preliminary estimates and certain assumptions
with respect to the fair value increment associated with the
assets to be acquired and the liabilities to be assumed. The
actual fair values of the assets and liabilities will be
determined as of the date of acquisition and may differ
materially from the amounts disclosed above in the assumed pro
forma purchase price allocation because of changes in fair
values of the assets and liabilities between December 31,
2006 and the date of the acquisition, and as further analysis
(including of identifiable intangible assets, for which no
amounts have been estimated and included in the preliminary
amounts shown above) is completed. Consequently, the actual
allocation of the purchase price may result in different
adjustments in the unaudited pro forma condensed combined
statement of income. Going forward, the earnings of the combined
company will reflect the impact of purchase accounting
adjustments, including the effect of changes in the cost bases
of both tangible and identifiable intangible assets and
liabilities on production costs and depreciation, depletion and
amortization expense. The unaudited pro forma condensed combined
statement of income reflects Phelps Dodges metal
inventories on its historical accounting method of
last-in,
first-out. Inventories are subject to a lower of cost or
market assessment and a decline in metal prices could result in
a write down of metal inventory values and a corresponding
charge to future earnings of the combined company.
(E) This pro forma adjustment recognizes certain estimated
change of control obligations arising from the combination of
Phelps Dodge and Freeport-McMoRan.
(F) The estimated income tax effect of the pro forma
adjustments has been recorded based upon statutory tax rates in
effect in the various tax jurisdictions in which Phelps Dodge
operates, resulting in an estimated tax rate of approximately
10 percent for interest costs and 30 percent for all
other items. The statutory tax rates range from 20 percent
to 35 percent. The estimated tax rates are a weighted
calculation of the various statutory tax rates and consider tax
credits, exempt income and non-deductible expenses. The
estimated tax rate for interest costs of 10 percent has
been derived from a preliminary analysis of the applicable rules
for interest cost allocation required by U.S. tax
regulations and considers their associated limitation on the
utilization of foreign tax credits. These rates will vary
depending on the mix of income derived in the respective
countries of operation and the allocation of interest and other
expenses. The actual tax rates will also be affected by any tax
planning opportunities that may result from the combination of
the companies after the transaction. The business combination is
expected to be non-taxable to the respective companies, with
Phelps Dodges historical tax bases surviving for income
tax reporting purposes. Additional deferred income taxes have
been recognized based on the pro forma fair value adjustments to
assets and liabilities.
Provisions for pro forma income tax expense have been recorded
as pro forma adjustments to the unaudited pro forma condensed
combined statement of income.
(G) These pro forma adjustments reflect the issuance of
137.0 million shares of Freeport-McMoRan common stock in
connection with the offer for all the outstanding common shares
of Phelps Dodge. The common stock of Freeport-McMoRan totals
$13.7 million at $0.10 per share par value and capital
in excess of par of $7,777.1 million. These shares include
the shares issuable in connection with the stock options and
restricted stock of Phelps Dodge outstanding at December 31,
2006.
(H) This pro forma adjustment gives effect to
$25 million of proceeds to be received from the assumed
exercise of Phelps Dodges
in-the-money
stock options. Freeport-McMoRan has assumed
S-49
that all eligible Phelps Dodge stock options are exercised and
all eligible restricted stock is vested prior to the purchase
transaction.
(I) These pro forma adjustments eliminate the historical
shareholders equity accounts of Phelps Dodge.
(J) This pro forma adjustment represents the estimated
increase to depreciation, depletion and amortization expense
associated with the preliminary fair value adjustment of
approximately $11,620 million allocated to plant, property,
equipment and development costs as further discussed in
adjustment D. Freeport-McMoRan has not completed an assessment
of the fair values of assets and liabilities of Phelps Dodge and
the related business integration plans and synergies. The
ultimate purchase price allocation will include possible
adjustments to the fair values of depreciable tangible assets,
proven and probable reserves, reserves related to current
development projects, VBPP and intangible assets after a full
review has been completed. The concept of VBPP is described in
Financial Accounting Standards Board Emerging Issue Task Force
Issue
No. 04-3
(EITF 04-3)
and has been interpreted differently by mining companies. Our
preliminary adjustment to property, plant, equipment and
development costs, as discussed below, includes VBPP
attributable to mineralized material that Freeport-McMoRan
believes could be brought into production should market
conditions warrant. Mineralized material is a mineralized body
that has been delineated by appropriately spaced drilling
and/or
underground sampling to support reported tonnage and average
grade of metal(s). Such a deposit may not qualify as proven and
probable reserves until legal and economic feasibility are
concluded based upon a comprehensive evaluation of unit costs,
grade, recoveries and other material factors. Our preliminary
adjustments to property, plant, equipment and development costs
do not include adjustments attributable to inferred mineral
resources or exploration potential referred to in the EITF
04-3 Working
Group Report No. 1. We intend to allocate a portion of the
purchase price to all VBPP, including inferred mineral resources
and exploration potential, in accordance with EITF
04-3 after
performing a more thorough analysis to determine the fair value
of these assets.
The preliminary allocation of $11,620 million to property,
plant, equipment and development costs is primarily based on a
fair value assessment of estimated cash flows from Phelps
Dodges pro rata share of estimated proven and probable
reserves, an estimated market value of Phelps Dodges
estimated VBPP attributable to mineralized material and
valuation multiples applied to certain tangible assets.
Freeport-McMoRan has not completed an assessment of the fair
values of assets and liabilities of Phelps Dodge and the related
business integration plans and synergies. The ultimate purchase
price allocation will include possible adjustments to fair
values of depreciable tangible assets, proven and probable
reserves, reserves related to current development projects, mill
and leach stockpiles, product inventories, VBPP and intangible
assets after a full review has been completed.
For the purpose of preparing the unaudited pro forma condensed
combined statements of income, Freeport-McMoRan assumed an
average estimated remaining useful life of 20 years, which
was based on an analysis of Phelps Dodges estimated mine
lives and on the estimated useful lives of other property, plant
and equipment disclosed in Phelps Dodges public filings
and
life-of-mine
plans provided to Freeport-McMoRan. A one-year change in the
estimated useful life would have a 5 percent impact on the
pro forma depreciation, depletion and amortization expense.
Additionally, for each $1 billion that the final fair value
of property, plant, equipment and development costs differs from
the pro forma fair value, related depreciation, depletion and
amortization expense would increase or decrease approximately
$50 million annually, assuming a weighted
average 20-year
life.
(K) This pro forma adjustment relates to borrowings under
new $10.0 billion term loan facilities and
$6.0 billion of the notes. The proceeds from borrowings
under these facilities, in conjunction with available cash, were
used for: (i) the $88.00 per share cash payment to
Phelps Dodge shareholders and (ii) payments for related
transaction fees and expenses.
(L) Pro forma weighted average common stock and common
stock equivalents outstanding are estimated as follows:
S-50
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
(In millions)
|
|
|
Average number of shares of
historical Freeport-McMoRan common stock outstanding
|
|
|
190.7
|
|
|
|
221.5
|
|
Shares of Freeport-McMoRan common
stock issued in connection with the business combination
(Note 2)
|
|
|
137.0
|
|
|
|
137.0
|
|
Shares to be issued or issuable in
connection with the issuance of our mandatory convertible
preferred stock offered hereby and the concurrent common stock
offering
|
|
|
35.1
|
|
|
|
52.6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
362.9
|
*
|
|
|
411.2
|
*
|
_
_
* Represents
the sum of the numbers before rounding.
The average number of common shares outstanding gives effect to
outstanding Phelps Dodge stock options and restricted stock, all
eligible shares of which are assumed to be exercised or vested.
Based upon public information reported and the current exchange
offer ratio, Freeport-McMoRan estimates that the incremental
number of shares of Freeport-McMoRan stock issuable upon the
exercise and vesting of Phelps Dodge stock options and
restricted stock would be approximately 1.4 million.
(M) This pro forma adjustment eliminates amortization
expense for past service costs and net actuarial losses relating
to postretirement benefits recorded by Phelps Dodge.
(N) This pro forma adjustment recognizes imputed interest
expense for the year ended December 31, 2006, resulting
from the fair value adjustment of Phelps Dodges long-term
debt and acquisition-related debt discussed in Note
(K) above at an assumed weighted average annual interest
rate of approximately 7.5 percent. A 0.125% variance in the
interest rate on the Tranche A term loan portion of the new
senior credit facilities would cause an increase or decrease of
$3.1 million in interest expense. A 0.125% variance in the
interest rate on the Tranche B term loan portion of the new
senior credit facilities would cause an increase or decrease of
$9.4 million in interest expense. A 0.125% variance in the
weighted average effective interest rate on the notes would
cause an increase or decrease of $1.3 million in interest
expense.
(O) This pro forma adjustment recognizes the issuance of
our mandatory convertible preferred stock offered hereby and the
concurrent common stock offering and assumes that the net
proceeds are used to reduce the Tranche A term loan by
$729.1 million and the Tranche B term loan by
$2,187.4 million, although Freeport-McMoRan may elect to
apply the net proceeds differently. The prepayment of long-term
debt also results in the acceleration of $43.7 million of
amortization of deferred financing costs which is recorded as
part of the pro forma adjustment to interest expense.
Amounts include charges for
mark-to-market
losses on Phelps Dodges 2006 and 2007 copper price
protection programs totaling $1,008.9 million in revenues
and $766.8 million in income from continuing operations for
the year ended December 31, 2006.
S-51
SELECTED
CONSOLIDATED HISTORICAL FINANCIAL
AND OPERATING DATA OF FREEPORT-MCMORAN
The following selected historical consolidated financial data,
as of and for the years ended December 31, 2002, 2003,
2004, 2005 and 2006, have been derived from the audited
consolidated financial statements of Freeport-McMoRan for those
periods. The historical results presented below are not
necessarily indicative of results that you can expect for any
future period. You should read the table in conjunction with the
sections entitled Use of Proceeds,
Capitalization, Unaudited Pro Forma Condensed
Combined Financial Statements, Summary Historical
Financial and Operating Data of Freeport-McMoRan, and the
consolidated financial statements of Freeport-McMoRan and the
related notes incorporated by reference herein. See Where
You Can Find More Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In dollars, except average shares, and in millions, except
per share amounts)
|
|
|
Statement of operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,910.5
|
|
|
$
|
2,212.2
|
|
|
$
|
2,371.9
|
|
|
$
|
4,179.1
|
|
|
$
|
5,790.5
|
|
Operating income
|
|
|
640.1
|
|
|
|
823.3
|
|
|
|
703.6
|
(d)
|
|
|
2,177.3
|
|
|
|
2,868.7
|
(g)
|
Net income before cumulative effect
of changes in accounting principles
|
|
|
130.1
|
|
|
|
169.8
|
(b)
|
|
|
156.8
|
(d)(e)
|
|
|
934.6
|
(f)
|
|
|
1,396.0
|
(g)(h)
|
Cumulative effect of changes in
accounting principles, net
|
|
|
(3.0
|
)(a)
|
|
|
(15.6
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
stock
|
|
|
127.1
|
|
|
|
154.2
|
(b)
|
|
|
156.8
|
(d)(e)
|
|
|
934.6
|
(f)
|
|
|
1,396.0
|
(g)(h)
|
Basic net income per common share
|
|
|
0.88
|
|
|
|
0.99
|
|
|
|
0.86
|
|
|
|
5.18
|
|
|
|
7.32
|
|
Diluted net income per common share
|
|
|
0.87
|
|
|
|
0.97
|
(b)(c)
|
|
|
0.85
|
(d)(e)
|
|
|
4.67
|
(f)
|
|
|
6.63
|
(g)(h)
|
Dividends paid per common share
|
|
|
|
|
|
|
0.27
|
|
|
|
1.10
|
|
|
|
2.50
|
|
|
|
4.75
|
|
Basic average shares outstanding
|
|
|
144.6
|
|
|
|
155.8
|
|
|
|
182.3
|
|
|
|
180.3
|
|
|
|
190.7
|
|
Diluted average shares outstanding
|
|
|
146.4
|
|
|
|
159.1
|
|
|
|
184.9
|
|
|
|
220.5
|
|
|
|
221.5
|
|
Balance sheet data at end of
year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents(i)
|
|
$
|
115.8
|
|
|
$
|
498.6
|
|
|
$
|
552.0
|
|
|
$
|
763.6
|
|
|
$
|
907.5
|
|
Total assets
|
|
|
4,192.2
|
|
|
|
4,718.4
|
|
|
|
5,087.0
|
|
|
|
5,550.2
|
(g)
|
|
|
5,389.8
|
(g)
|
Total
debt(j)
|
|
|
2,038.4
|
|
|
|
2,228.3
|
(c)
|
|
|
1,951.9
|
|
|
|
1,255.9
|
|
|
|
680.1
|
|
Redeemable preferred stock
|
|
|
450.0
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
266.8
|
|
|
|
776.0
|
|
|
|
1,163.6
|
|
|
|
1,843.0
|
|
|
|
2,445.1
|
(g)
|
S-52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2002
|
|
2003
|
|
|
2004
|
|
2005
|
|
2006
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PT Freeport Indonesia operating
data, net of Rio Tintos interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper (recoverable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production (000s of pounds)
|
|
|
1,524,200
|
|
|
1,291,600
|
|
|
|
996,500
|
|
|
1,455,900
|
|
|
1,201,200
|
|
Production (metric tons)
|
|
|
691,400
|
|
|
585,900
|
|
|
|
452,000
|
|
|
660,400
|
|
|
544,900
|
|
Sales (000s of pounds)
|
|
|
1,522,300
|
|
|
1,295,600
|
|
|
|
991,600
|
|
|
1,456,500
|
|
|
1,201,400
|
|
Sales (metric tons)
|
|
|
690,500
|
|
|
587,700
|
|
|
|
449,800
|
|
|
660,700
|
|
|
544,900
|
|
Average realized price per pound
|
|
$
|
0.71
|
|
$
|
0.82
|
|
|
$
|
1.37
|
|
$
|
1.85
|
|
$
|
3.13
|
|
Gold (recoverable ounces)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
2,296,800
|
|
|
2,463,300
|
|
|
|
1,456,200
|
|
|
2,789,400
|
|
|
1,731,800
|
|
Sales
|
|
|
2,293,200
|
|
|
2,469,800
|
|
|
|
1,443,000
|
|
|
2,790,200
|
|
|
1,736,000
|
|
Average realized price per ounce
|
|
$
|
311.97
|
|
$
|
366.60
|
(k)
|
|
$
|
412.32
|
|
$
|
456.27
|
|
$
|
566.51
|
(l)
|
Atlantic Copper operating
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrate and scrap treated
(metric tons)
|
|
|
1,016,700
|
|
|
964,400
|
|
|
|
768,100
|
|
|
975,400
|
|
|
953,700
|
|
Anodes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production (000s of pounds)
|
|
|
657,000
|
|
|
640,000
|
|
|
|
494,400
|
|
|
626,600
|
|
|
581,300
|
|
Production (metric tons)
|
|
|
298,000
|
|
|
290,300
|
|
|
|
224,300
|
|
|
284,200
|
|
|
263,700
|
|
Sales (000s of pounds)
|
|
|
101,200
|
|
|
97,000
|
|
|
|
36,700
|
|
|
85,100
|
|
|
59,800
|
|
Sales (metric tons)
|
|
|
45,900
|
|
|
44,000
|
|
|
|
16,600
|
|
|
38,600
|
|
|
27,100
|
|
Cathodes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production (000s of pounds)
|
|
|
552,200
|
|
|
544,700
|
|
|
|
454,700
|
|
|
545,300
|
|
|
518,900
|
|
Production (metric tons)
|
|
|
250,500
|
|
|
247,100
|
|
|
|
206,200
|
|
|
247,300
|
|
|
235,400
|
|
Sales (including wire rod and
wire)
(000s of pounds)
|
|
|
556,500
|
|
|
546,800
|
|
|
|
479,200
|
|
|
548,600
|
|
|
529,200
|
|
(metric tons)
|
|
|
252,400
|
|
|
248,000
|
|
|
|
217,400
|
|
|
248,800
|
|
|
240,000
|
|
Gold sales in anodes and slimes
(ounces)
|
|
|
813,900
|
|
|
929,700
|
|
|
|
316,700
|
|
|
542,800
|
|
|
666,500
|
|
|
|
|
(a)
|
|
Effective January 1, 2002,
Freeport-McMoRan changed the methodology used in the
determination of depreciation associated with PT Freeport
Indonesias mining and milling
life-of-mine
assets.
|
|
(b)
|
|
Includes losses on early
extinguishment and conversion of debt totaling
$31.9 million ($0.20 per share), net of related
reduction of interest expense.
|
|
(c)
|
|
Effective January 1, 2003,
Freeport-McMoRan adopted Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations, and recorded a $9.1 million
($0.06 per share) cumulative effect gain. Effective
July 1, 2003, Freeport-McMoRan adopted
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, and recorded a $24.7 million ($0.16 per
share) cumulative effect charge. Freeport-McMoRans
mandatorily redeemable preferred stock was classified as debt
effective July 1, 2003. SFAS No. 150 does not
allow restatement of prior periods.
|
|
(d)
|
|
Includes a $95.0 million
($48.8 million to net income or $0.26 per share) gain
on insurance settlement related to the fourth-quarter 2003
slippage and debris flow events at the Grasberg open pit and a
$12.0 million ($12.0 million to net income or
$0.06 per share) charge related to Atlantic Coppers
workforce reduction plan.
|
|
(e)
|
|
Includes a $20.4 million
($0.11 per share) gain from the sale of a parcel of land in
Arizona held by a Freeport-McMoRan joint venture, a
$7.5 million ($0.04 per share) gain from Atlantic
Coppers sale of its wire rod and wire assets, and
$7.4 million ($0.04 per share) of losses on early
extinguishment and conversion of debt, net of related reduction
of interest expense.
|
|
(f)
|
|
Includes $40.2 million
($0.18 per share) of losses on early extinguishment and
conversion of debt, net of related reduction of interest
expense, and a $4.9 million ($0.02 per share) gain
from the sale of a parcel of land in Arizona held by a
Freeport-McMoRan joint venture.
|
|
(g)
|
|
Effective January 1, 2006,
Freeport-McMoRan adopted Emerging Issues Task Force Issue
No. 04-6,
Accounting for Stripping Costs Incurred during Production
in the Mining Industry (EITF
04-6) and
recorded its deferred mining costs asset ($285.4 million)
at December 31, 2005, net of taxes, minority interest share
and inventory effects ($135.9 million), as a cumulative
effect adjustment to reduce retained earnings on January 1,
2006. As a result of adopting EITF
04-6, income
before income taxes and minority interests for 2006 was
$35.4 million lower and net income was $18.8 million
($0.08 per share) lower than if Freeport-McMoRan had not
adopted EITF
04-6.
Effective January 1, 2006, Freeport-McMoRan adopted
Statement of Financial Accounting Standards No. 123
|
S-53
|
|
|
|
|
(revised 2004), Share-Based
Payment or SFAS No. 123R. As a
result of adopting SFAS No. 123R, income before income
taxes and minority interests for 2006 was $27.8 million
lower and net income was $16.1 million ($0.07 per
share) lower than if Freeport-McMoRan had not adopted
SFAS No. 123R. Results for prior years have not been
restated.
|
|
(h)
|
|
Includes $30.3 million
($0.14 per share) of losses on early extinguishment and
conversion of debt, net of related reduction of interest
expense, and gains of $29.7 million ($0.13 per share)
at Atlantic Copper from the disposition of land and certain
royalty rights.
|
|
(i)
|
|
For 2002 and 2003, values include
$107.9 million and $35.0 million, respectively, of
restricted cash and investments.
|
|
(j)
|
|
Includes current portion and
short-term borrowings.
|
|
(k)
|
|
Amount was $357.61 before a gain
resulting from redemption of Freeport-McMoRans
Gold-Denominated Preferred Stock.
|
|
(l)
|
|
Amount was $606.36 before a loss
resulting from redemption of Freeport-McMoRans
Gold-Denominated Preferred Stock, Series II.
|
S-54
SELECTED
CONSOLIDATED HISTORICAL FINANCIAL
AND OPERATING DATA OF PHELPS DODGE
The following selected historical consolidated financial data,
as of and for the years ended December 31, 2002, 2003,
2004, 2005 and 2006, have been derived from the audited
consolidated financial statements of Phelps Dodge for those
periods. The historical results presented below are not
necessarily indicative of results that you can expect for any
future period. You should read the table below in conjunction
with the sections entitled Use of Proceeds,
Capitalization, Unaudited Pro Forma Condensed
Combined Financial Statements, Summary Historical
Financial and Operating Data of Phelps Dodge and the
consolidated financial statements of Phelps Dodge and the
related notes contained in Phelps Dodges annual report on
Form 10-K
for the year ended December 31, 2006 filed with the
Securities and Exchange Commission and incorporated by reference
herein. See Where You Can Find More Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,(f)
|
|
|
|
2002(a)
|
|
|
2003(b)
|
|
|
2004(c)
|
|
|
2005(d)
|
|
|
2006(e)
|
|
|
|
(Dollars in millions, except per share amounts)
|
|
|
Statement of operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and other operating revenues
|
|
$
|
3,173.2
|
|
|
$
|
3,498.5
|
|
|
$
|
6,415.2
|
|
|
$
|
8,287.1
|
|
|
$
|
11,910.4
|
|
Operating income (loss)
|
|
|
(257.4
|
)
|
|
|
142.8
|
|
|
|
1,474.9
|
|
|
|
1,764.9
|
|
|
|
4,226.9
|
|
Income (loss) from continuing
operations before extraordinary item and cumulative effect of
accounting changes
|
|
|
(356.5
|
)
|
|
|
(21.1
|
)
|
|
|
1,023.6
|
|
|
|
1,583.9
|
|
|
|
3,035.9
|
|
Income (loss) from discontinued
operations, net of
taxes(g)
|
|
|
41.3
|
|
|
|
39.2
|
|
|
|
22.7
|
|
|
|
(17.4
|
)
|
|
|
(18.1
|
)
|
Income (loss) before extraordinary
item and cumulative effect of accounting changes
|
|
|
(315.2
|
)
|
|
|
18.1
|
|
|
|
1,046.3
|
|
|
|
1,566.5
|
|
|
|
3,017.8
|
|
Net income (loss)
|
|
|
(338.1
|
)
|
|
|
94.8
|
|
|
|
1,046.3
|
|
|
|
1,556.4
|
|
|
|
3,017.8
|
|
Basic earnings (loss) per common
share from continuing
operations(h)
|
|
|
(2.17
|
)
|
|
|
(0.19
|
)
|
|
|
5.41
|
|
|
|
8.06
|
|
|
|
15.00
|
|
Diluted earnings (loss) per common
share from continuing
operations(h)
|
|
|
(2.17
|
)
|
|
|
(0.19
|
)
|
|
|
5.18
|
|
|
|
7.82
|
|
|
|
14.92
|
|
Basic earnings (loss) per common
share from discontinued operations, extraordinary item and
cumulative effect of accounting
changes(h)
|
|
|
0.11
|
|
|
|
0.65
|
|
|
|
0.12
|
|
|
|
(0.14
|
)
|
|
|
(0.09
|
)
|
Diluted earnings (loss) per common
share from discontinued operations, extraordinary item and
cumulative effect of accounting
changes(h)
|
|
|
0.11
|
|
|
|
0.65
|
|
|
|
0.11
|
|
|
|
(0.13
|
)
|
|
|
(0.09
|
)
|
Basic earnings (loss) per common
share(h)
|
|
|
(2.06
|
)
|
|
|
0.46
|
|
|
|
5.53
|
|
|
|
7.92
|
|
|
|
14.91
|
|
Diluted earnings (loss) per common
share(h)
|
|
|
(2.06
|
)
|
|
|
0.46
|
|
|
|
5.29
|
|
|
|
7.69
|
|
|
|
14.83
|
|
Cash dividends declared per common
share(i)
|
|
|
|
|
|
|
|
|
|
|
0.25
|
|
|
|
3.125
|
|
|
|
4.788
|
|
Balance sheet data at end of
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
349.8
|
|
|
$
|
683.8
|
|
|
$
|
1,200.1
|
|
|
$
|
1,916.7
|
|
|
$
|
4,947.4
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.8
|
|
|
|
25.4
|
|
Current assets (including cash)
|
|
|
1,428.2
|
|
|
|
1,790.0
|
|
|
|
2,661.7
|
|
|
|
4,070.7
|
|
|
|
7,600.9
|
|
Total assets
|
|
|
7,029.0
|
|
|
|
7,272.9
|
|
|
|
8,594.1
|
|
|
|
10,358.0
|
|
|
|
14,632.3
|
|
Total debt
|
|
|
2,110.6
|
|
|
|
1,959.0
|
|
|
|
1,096.9
|
|
|
|
694.5
|
|
|
|
891.9
|
|
Long-term debt
|
|
|
1,948.4
|
|
|
|
1,703.9
|
|
|
|
972.2
|
|
|
|
677.7
|
|
|
|
770.1
|
|
Shareholders equity
|
|
|
2,813.6
|
|
|
|
3,063.8
|
|
|
|
4,343.1
|
|
|
|
5,601.6
|
|
|
|
7,690.4
|
|
S-55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,(f)
|
|
|
|
2002(a)
|
|
|
2003(b)
|
|
|
2004(c)
|
|
|
2005(d)
|
|
|
2006(e)
|
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper production (thousand short
tons)(j)
|
|
|
1,012.1
|
|
|
|
1,042.5
|
|
|
|
1,260.6
|
|
|
|
1,228.0
|
|
|
|
1,218.7
|
|
Copper sales from own mines
(thousand short
tons)(j)
|
|
|
1,034.5
|
|
|
|
1,052.6
|
|
|
|
1,268.9
|
|
|
|
1,238.4
|
|
|
|
1,214.5
|
|
COMEX copper price (per
pound)(k)
|
|
$
|
0.72
|
|
|
$
|
0.81
|
|
|
$
|
1.29
|
|
|
$
|
1.68
|
|
|
$
|
3.09
|
|
LME copper price (per
pound)(l)
|
|
$
|
0.71
|
|
|
$
|
0.81
|
|
|
$
|
1.30
|
|
|
$
|
1.67
|
|
|
$
|
3.05
|
|
|
|
|
(a)
|
|
Reported amounts for 2002 included
after-tax, net special charges of $153.5 million, or 91
cents per common share, for PDMC asset impairment charges and
closure provisions; $53.0 million, or 31 cents per common
share, for historical lawsuit settlements; $45.0 million,
or 27 cents per common share, for a historical arbitration
award; $26.6 million, or 16 cents per common share, for
early debt extinguishment costs; $23.0 million, or 14 cents
per common share, for restructuring activities;
$22.9 million, or 13 cents per common share, for the
cumulative effect of an accounting change; $14.0 million,
or 8 cents per common share, for environmental provisions
(included a gain of $0.6 million for discontinued
operations); $1.2 million, or 1 cent per common share, for
the write-off of two cost-basis investments; and
$1.0 million, or 1 cent per common share, for the
settlement of legal matters; partially offset by after-tax, net
special gains of $66.6 million, or 40 cents per common
share, for the tax benefit relating to the net operating loss
carryback prior to 2002 resulting from a change in U.S. tax
legislation; $29.1 million, or 17 cents per common share,
for environmental insurance recoveries; $22.6 million, or
13 cents per common share, for the gain on the sale of a
non-core parcel of real estate; and $13.0 million, or 8
cents per common share, for the release of deferred taxes
previously provided with regard to Plateau Mining Corporation.
|
|
(b)
|
|
Reported amounts for 2003 included
after-tax, net special gains of $68.3 million, or 38 cents
per common share, for an extraordinary gain associated with the
acquisition of Phelps Dodges partners one-third
interest in Chino Mines Company; $8.4 million, or 5 cents
per common share, for the cumulative effect of an accounting
change; $6.4 million, or 4 cents per common share, for the
sale of a cost-basis investment; $2.4 million, or 1 cent
per common share, for the termination of a foreign
postretirement benefit plan associated with discontinued
operations; $1.0 million, or 1 cent per common share, for
the tax benefit relating to additional 2001 net operating
loss carryback; $0.5 million for environmental insurance
recoveries; and $0.2 million for the reassessment of prior
restructuring programs; partially offset by after-tax, net
special charges of $27.0 million, or 16 cents per common
share, for environmental provisions (included a gain of
$0.5 million for discontinued operations);
$8.0 million or 4 cents per common share, for a potential
Texas franchise tax matter; $2.9 million, or 2 cents per
common share, for the settlement of historical legal matters;
and $2.6 million, or 1 cent per common share, for asset and
goodwill impairments.
|
|
(c)
|
|
Reported amounts for 2004 included
after-tax, net special charges of $44.7 million, or 23
cents per common share, for environmental provisions;
$30.9 million (net of minority interests), or 15 cents per
common share, for early debt extinguishment costs;
$9.9 million, or 5 cents per common share, for the
write-down of two cost-basis investments; $9.6 million, or
5 cents per common share, for taxes on anticipated foreign
dividends; $9.0 million, or 5 cents per common share, for a
deferred tax asset valuation allowance at Phelps Dodges
Brazilian wire and cable operation; $7.6 million, or 4
cents per common share, for Phelps Dodge Magnet Wire
restructuring activities; $5.9 million, or 3 cents per
common share, for asset impairments (included $4.5 million,
or 2 cents per common share, for discontinued operations); and
$0.7 million for interest on a Texas franchise tax matter;
partially offset by after-tax, net special gains of
$30.0 million, or 15 cents per common share, for the
reversal of a U.S. deferred tax asset valuation allowance;
$15.7 million (net of minority interest), or 8 cents per
common share, for the reversal of an El Abra deferred tax asset
valuation allowance; $10.1 million, or 5 cents per common
share, for the gain on the sale of uranium royalty rights;
$7.4 million, or 4 cents per common share, for
environmental insurance recoveries; and $4.7 million, or 3
cents per common share, for the settlement of historical legal
matters.
|
|
(d)
|
|
Reported amounts for 2005 included
after-tax, net special charges of $331.8 million, or
$1.64 per common share, for asset impairments; tax expense
of $88.1 million, or 44 cents per common share, for
foreign dividend taxes; $86.4 million, or 42 cents per
common share, for environmental provisions; $42.6 million,
or 21 cents per common share, associated with discontinued
operations in connection with the sale of Columbian;
$41.3 million, or 20 cents per common share, for early
debt extinguishment costs; $34.5 million (net of minority
interest), or 17 cents per common share, for tax on
unremitted foreign earnings; $23.6 million, or
12 cents per common share, for a tax charge associated with
minimum pension liability reversal; $10.1 million, or
5 cents per common share, for cumulative effect of
accounting change; $5.9 million, or 3 cents per common
share, for transaction and employee-related costs associated
with the sale of substantially all of Phelps Dodges North
American magnet wire assets; partially offset by after-tax, net
special gains of $388.0 million, or $1.92 per common
share, for the sale of a cost-basis investment;
$181.7 million, or 89 cents per common share, for
change in interest gains at Cerro Verde and Ojos del Salado;
$15.6 million, or 8 cents per common share, for legal
matters; $11.9 million, or 6 cents per common share,
for the reversal of Phelps Dodge Brazils deferred tax
asset valuation allowance; $8.5 million, or 4 cents
per common share, for the sale of non-core real estate;
$4.0 million, or 2 cents per common share, for the
reversal of U.S. deferred tax asset valuation allowance;
$0.4 million for environmental insurance recoveries; and
$0.1 million for Phelps Dodge Magnet Wire restructuring
activities. The after-tax, net special charges of
$42.6 million associated with discontinued operations
consisted of $67.0 million (net of minority interests), or
33 cents per common share, for a goodwill impairment
charge; taxes of $7.6 million, or 4 cents per common
share, associated with the sale and dividends
|
S-56
|
|
|
|
|
paid in 2005; and
$5.0 million, or 2 cents per common share, for a loss on
disposal of Columbian associated with transaction and
employee-related costs; partially offset by a deferred income
tax effect of $37.0 million, or 18 cents per common share.
|
|
(e)
|
|
Reported amounts for 2006 included
after-tax, net special gains of $330.7 million, or
$1.62 per common share, for the Inco termination fee;
$127.5 million, or 63 cents per common share, for the
reversal of U.S. deferred tax asset valuation allowance;
$2.0 million, or 1 cent per common share, for legal
matters; $0.4 million for sale of non-core real estate; and
$0.2 million for the reversal of Minera PD Peru deferred
tax asset valuation allowance; partially offset by after-tax,
net special charges of $54.5 million, or 27 cents per
common share, for environmental provisions; $30.9 million,
or 15 cents per common share, for charges associated with
discontinued operations in connection with the sale of
Columbian; $9.6 million, or 5 cents per common share, for
asset impairment charges; $7.6 million (net of minority
interest), or 4 cents per common share, for tax on unremitted
foreign earnings; $5.1 million, or 3 cents per common
share, for transaction and employee-related charges and loss on
disposal in connection with the sale of substantially all of
Phelps Dodges North American magnet wire assets;
$4.7 million, or 2 cents per common share, for transaction
and employee-related charges and loss on the disposal in
connection with the sale of Phelps Dodges HPC;
$3.0 million, or 1 cent per common share, for a lease
termination settlement; and $1.2 million associated with
dissolution of an international wire and cable entity.
|
|
(f)
|
|
2004, 2005 and 2006 reflected full
consolidation of El Abra and Candelaria; 2002 and 2003 reflected
El Abra and Candelaria on a pro rata basis (51 percent and
80 percent, respectively).
|
|
(g)
|
|
As a result of Phelps Dodges
sale of Columbian, the operating results for Columbian have been
reported separately from continuing operations and shown as
discontinued operations for all periods presented in the
consolidated statement of income data.
|
|
(h)
|
|
Basic and diluted earnings per
common share have been adjusted to reflect the March 10,
2006, two-for-one stock split for all periods presented.
|
|
(i)
|
|
All periods presented reflect
dividends per common share on a post-March 10, 2006,
two-for-one
stock split basis.
|
|
(j)
|
|
2004, 2005 and 2006 reflected
copper production and copper sales on a consolidated basis; 2002
and 2003 reflected that information on a pro rata basis.
|
|
(k)
|
|
New York Commodity Exchange average
spot price per pound cathodes.
|
|
(l)
|
|
London Metal Exchange average spot
price per pound cathodes.
|
S-57
RATIO OF
EARNINGS TO FIXED CHARGES
Freeport-McMoRans ratio of earnings to fixed charges was
as follows for the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
Pro Forma
|
|
Ratio of earnings to fixed charges
|
|
|
3.4
|
x
|
|
|
3.9
|
x
|
|
|
4.7
|
x
|
|
|
15.7
|
x
|
|
|
32.8
|
x
|
|
|
5.3
|
x
|
Ratio of earnings to fixed charges
and preferred stock dividends
|
|
|
2.5
|
x
|
|
|
3.0
|
x
|
|
|
2.8
|
x
|
|
|
8.1
|
x
|
|
|
14.2
|
x
|
|
|
4.6
|
x
|
For the ratio of earnings to fixed charges calculation, earnings
consist of pre-tax income from continuing operations before
minority interests in consolidated subsidiaries, income or loss
from equity investees and fixed charges. Fixed charges include
interest and that portion of rent deemed representative of
interest. For the ratio of earnings to fixed charges and
preferred stock dividends calculation, we assumed that our
preferred stock dividend requirements were equal to the pre-tax
earnings that would be required to cover those dividend
requirements. We computed those pre-tax earnings using actual
tax rates for each year.
The pro forma ratio of earnings to fixed charges and the pro
forma ratio of earnings to fixed charges and preferred stock
dividends were calculated on a pro forma basis after giving
effect to the transactions, the issuance of the mandatory
convertible preferred stock offered hereby and the use of
proceeds therefrom to reduce outstanding debt.
S-58
OVERVIEW
OF FINANCIAL CONDITION, LIQUIDITY AND
CAPITAL RESOURCES OF THE COMBINED COMPANY
Our financial policy has been to reduce debt and return cash to
shareholders through dividends and share purchases. Our
acquisition of Phelps Dodge required us to incur significant
debt. As of December 31, 2006, on a pro forma basis after
giving effect to the transactions, the issuance of the mandatory
convertible preferred stock offered hereby, the concurrent
common stock offering and the use of proceeds from the issuance
of the mandatory convertible preferred stock and common stock to
reduce outstanding debt, the combined company had approximately
$14.7 billion in total debt, including $7.1 billion of
debt under its new senior credit facilities, and
$6.0 billion in aggregate principal amount of the
8.25% senior fixed rate notes due 2015, the 8.375% senior
fixed rate notes due 2017 and the senior floating rate notes due
2015. In addition, approximately $1.6 billion of existing
Freeport-McMoRan and Phelps Dodge debt remains outstanding
following the transactions. The combined company has a new
$1.5 billion senior secured revolving credit facility. Our
availability under our revolving credit facility is
approximately $1,400.0 million after giving effect to
outstanding letters of credit. We may be required to issue
additional letters of credit in connection with financial
assurances with respect to our reclamation obligations. See
Risk Factors Risks Related to Phelps
Dodges Business Mine closure regulations may
impose substantial costs. The combined companys cash
and cash equivalents, on a pro forma basis, after giving effect
to the transactions, totaled approximately $3.4 billion at
December 31, 2006. The combined company expects to have
capital expenditures of approximately $1.9 billion in 2007.
This debt could limit the combined companys financial and
operating flexibility, including by requiring the combined
company to dedicate a substantial portion of its cash flows from
operations and the proceeds of any equity issuances to the
repayment of its debt and the interest on its debt, making it
more difficult for the combined company to obtain additional
financing on favorable terms, limiting the combined
companys ability to capitalize on significant business
opportunities and making the combined company more vulnerable to
economic downturns. Additionally, the combined companys
ability to satisfy financial tests or utilize third-party
guarantees for financial assurance with respect to reclamation
obligations may be adversely impacted. See Risk
Factors Risks Related to the Combined
Company Our substantial indebtedness could adversely
affect our financial condition and prevent us from fulfilling
our obligations under our outstanding indebtedness.
The combined company is required to comply with various
covenants contained in the agreements governing its
indebtedness. These covenants will limit our discretion in the
operation of our business. See Risk Factors
Risks Related to the Combined Company for further
discussion of these factors.
The combined companys business strategy will be focused on
continuing to maximize free cash flow and strengthen our
financial profile through continued pursuit of active programs
to maximize production volumes, aggressively manage costs and
use available cash flow to reduce debt. At the same time, we
will continue to focus on maximizing the long-term value of our
mineral deposits through development programs to grow our
production and ore reserves. In addition, we will consider
possible opportunities to reduce debt of the combined company
through potential asset sales.
S-59
Combined company debt maturities. Below is a
summary of long-term debt maturities for the combined company
based on loan balances as of December 31, 2006, on a pro
forma basis after giving effect to the transactions, the
issuance of mandatory convertible preferred stock offered hereby
and the concurrent common stock offering and assuming the net
proceeds therefrom are used to reduce outstanding indebtedness
under the Tranche A term loan facility and the
Tranche B term loan facility on a pro rata basis, although
Freeport-McMoRan may elect to apply the net proceeds differently.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
|
(Dollars in millions)
|
|
|
Existing debt of
Freeport-McMoRan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment loans and other
|
|
$
|
13.5
|
|
|
$
|
13.5
|
|
|
$
|
13.5
|
|
|
$
|
10.2
|
|
|
$
|
3.8
|
|
|
$
|
|
|
|
$
|
|
|
Atlantic Copper debt
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101/8% senior
notes due 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% convertible senior notes
due 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
67/8% senior
notes due 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340.3
|
|
7.20% senior notes due 2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Freeport-McMoRan
|
|
$
|
19.1
|
|
|
$
|
13.5
|
|
|
$
|
13.5
|
|
|
$
|
282.6
|
|
|
$
|
10.9
|
|
|
$
|
|
|
|
$
|
340.5
|
|
Existing debt of Phelps
Dodge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.375% notes due 2007
|
|
$
|
60.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
8.75% notes due 2011
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
108.0
|
|
|
|
|
|
|
|
|
|
9.50% notes due 2031
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
196.5
|
|
6.125% notes due 2034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149.8
|
|
7.125% debentures due 2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115.0
|
|
Cerro Verde project financing and
subsidiary debt financing
|
|
|
25.4
|
|
|
|
25.3
|
|
|
|
25.2
|
|
|
|
25.2
|
|
|
|
25.2
|
|
|
|
25.3
|
|
|
|
50.6
|
|
Various pollution control and
industrial development revenue bonds due through 2009
|
|
|
2.0
|
|
|
|
|
|
|
|
23.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Phelps Dodge
|
|
$
|
121.8
|
|
|
$
|
25.7
|
|
|
$
|
48.5
|
|
|
$
|
25.5
|
|
|
$
|
133.2
|
|
|
$
|
25.3
|
|
|
$
|
511.9
|
|
New debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Tranche A term loan facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145.9
|
|
|
|
250.0
|
|
|
|
1,375.0
|
|
|
|
|
|
Tranche B term loan facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,312.6
|
|
8.25% senior notes due 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500.0
|
|
8.375% senior notes due 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,500.0
|
|
Senior floating rate notes due 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
145.9
|
|
|
$
|
250.0
|
|
|
$
|
1,375.0
|
|
|
$
|
11,312.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
140.9
|
|
|
$
|
39.2
|
|
|
$
|
62.0
|
|
|
$
|
454.0
|
|
|
$
|
394.1
|
|
|
$
|
1,400.3
|
|
|
$
|
12,165.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-60
Combined company other contractual
obligations. In addition to the debt maturities
shown above, the combined company will have other contractual
obligations and commitments, which it expects to fund with
projected operating cash flows, available credit facilities or
future financing transactions, if necessary. These obligations
and commitments for each company are more fully described in
Phelps Dodges Annual Report on
Form 10-K
for the year ended December 31, 2006 and in Freeport
McMoRans Annual Report on
Form 10-K
for the year ended December 31, 2006, each of which is
filed with the Securities and Exchange Commission and
incorporated by reference herein. See Where You Can Find
More Information. The following table summarizes these
obligations and commitments as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
or Less
|
|
|
Years 2-3
|
|
|
Years 4-5
|
|
|
5 Years
|
|
|
|
(Dollars in millions, except concentrates)
|
|
|
Freeport-McMoRan
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PT Freeport Indonesia mine closure
and reclamation fund
|
|
$
|
20.1
|
|
|
$
|
0.8
|
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
|
$
|
16.5
|
|
Atlantic Copper contractual
obligation to insurance company
|
|
$
|
94.9
|
|
|
$
|
9.5
|
|
|
$
|
19.0
|
|
|
$
|
19.0
|
|
|
$
|
47.4
|
|
Atlantic Copper contracts to
purchase concentrates at market prices (in thousand metric tons)
|
|
|
1,425
|
|
|
|
505
|
|
|
|
700
|
|
|
|
220
|
|
|
|
|
|
Aggregate operating leases,
including Rio Tintos share
|
|
$
|
29.9
|
|
|
$
|
8.9
|
|
|
$
|
14.3
|
|
|
$
|
6.4
|
|
|
$
|
0.3
|
|
Open purchase orders at
December 31, 2006
|
|
$
|
216.5
|
|
|
$
|
216.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phelps Dodge
obligations & commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled interest payment
obligations
|
|
$
|
979.5
|
|
|
$
|
61.2
|
|
|
$
|
112.9
|
|
|
$
|
99.9
|
|
|
$
|
705.5
|
|
Asset retirement obligations
|
|
$
|
106.0
|
|
|
$
|
58.2
|
|
|
$
|
45.2
|
|
|
$
|
2.3
|
|
|
$
|
0.3
|
|
Take-or-pay
contracts
|
|
$
|
1,502.3
|
|
|
$
|
1,295.5
|
|
|
$
|
126.2
|
|
|
$
|
49.4
|
|
|
$
|
31.2
|
|
Operating lease obligations
|
|
$
|
73.6
|
|
|
$
|
16.6
|
|
|
$
|
28.8
|
|
|
$
|
21.4
|
|
|
$
|
6.8
|
|
Mineral royalty obligations
|
|
$
|
18.1
|
|
|
$
|
1.9
|
|
|
$
|
3.8
|
|
|
$
|
3.0
|
|
|
$
|
9.4
|
|
Standby letters of credit
|
|
$
|
186.3
|
|
|
$
|
56.0
|
|
|
$
|
9.0
|
|
|
$
|
3.0
|
|
|
$
|
118.3
|
|
Corporate guarantees
|
|
$
|
412.4
|
|
|
$
|
0.8
|
|
|
$
|
0.4
|
|
|
|
|
|
|
$
|
411.2
|
|
Sales performance guarantees
|
|
$
|
74.5
|
|
|
$
|
49.5
|
|
|
$
|
24.5
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
Surety bonds
|
|
$
|
97.4
|
|
|
$
|
2.1
|
|
|
$
|
2.0
|
|
|
|
|
|
|
$
|
93.3
|
|
Asset pledges
|
|
$
|
74.2
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
$
|
74.2
|
|
S-61
BUSINESS
OF THE COMBINED COMPANY
Freeport-McMoRan Copper & Gold Inc. is one of the
worlds largest producers of copper and gold.
Freeport-McMoRans Grasberg minerals district in Papua,
Indonesia contains the worlds single largest copper
reserve and the worlds single largest gold reserve. Phelps
Dodge Corporation is one of the worlds leading producers
of copper and molybdenum. Phelps Dodge has mines in operation or
under development in North and South America, and Africa,
including the Tenke Fungurume development project in the
Democratic Republic of Congo.
On November 19, 2006, Freeport-McMoRan and Phelps Dodge
announced that they signed a merger agreement pursuant to which
Freeport-McMoRan acquired Phelps Dodge on March 19, 2007 for
approximately $25.9 billion in cash and stock, based on
Freeport-McMoRans closing stock price on November 17,
2006, creating one of the worlds largest publicly-traded
copper companies and one of North Americas largest mining
companies. Freeport-McMoRan will use the proceeds from this
offering to repay outstanding indebtedness under our Trache A
term loan facility and Tranche B term loan facility.
Acquisition
Rationale
The combination of Freeport-McMoRan and Phelps Dodge will
dramatically expand Freeport-McMoRans operations, reserves
and project pipeline, while diversifying both its geographic and
commodity portfolio. The significant benefits of the acquisition
include:
|
|
|
|
|
our increased scale of operations, management depth and
strengthened cash flows will provide an improved platform from
which to capitalize on growth opportunities in the global market;
|
|
|
|
we will be well-positioned to benefit from the positive copper
market at a time when there is a scarcity of large-scale copper
development projects combined with strong global demand for
copper;
|
|
|
|
we will have long-lived, geographically diverse ore reserves
totaling 77.2 billion pounds of copper, 38.3 million
ounces of gold and 1.8 billion pounds of molybdenum, net of
minority interests of all joint venture partners and minority
owners;
|
|
|
|
we expect to generate strong cash flows, which will enable
significant debt reduction;
|
|
|
|
our future growth will be supported by a project pipeline with
the potential to add nearly one billion pounds of additional
copper production capacity on a consolidated basis by the end of
2009; and
|
|
|
|
we will have exploration rights with significant potential in
copper regions around the world, including
Freeport-McMoRans prospective acreage in Papua, Indonesia,
and Phelps Dodges opportunities at its Tenke Fungurume
concessions in the Democratic Republic of Congo, in the United
States and in South America.
|
Our
Business
The combined company will be a new industry leader with large,
long-lived, geographically diverse assets and significant proven
and probable reserves of copper, gold and molybdenum. The
combined company will have significant, geographically diverse
ore reserves. At December 31, 2006, on a pro forma basis
after giving effect to the transactions, the combined
companys ore reserves on a consolidated basis totaled
93.6 billion pounds of copper, 42.4 million ounces of
gold and 2.0 billion pounds of molybdenum, and the combined
companys equity share of those ore reserves, net of the
interests of all joint venture partners and minority owners, of
those reserves totaled 77.2 billion pounds of copper,
38.3 million ounces of gold and 1.8 billion pounds of
molybdenum. The combined companys mines will have lives
ranging from 6 years to 37 years based on current ore
reserves and mine plans. The combined companys
consolidated implied reserve lives, calculated by dividing
reserves by estimated production rates, will be 21 years
for copper, 22 years for
S-62
gold and 25 years for molybdenum. The charts below
illustrate the composition and diversity of the combined
companys portfolio by geography and commodity:
|
|
|
|
|
|
|
|
Freeport-McMoRan conducts its operations primarily through its
principal operating subsidiaries, PT Freeport Indonesia and
Atlantic Copper, S.A., which operates a copper smelter and
refinery in Huelva, Spain. In addition, Freeport-McMoRan holds
exploration rights covering approximately 2.2 million acres
in Papua, Indonesia. PT Freeport Indonesias operations in
Papua, Indonesia, involve mineral exploration and development,
mining and milling of ore containing copper, gold and silver and
the worldwide marketing of concentrates containing those metals.
PT Freeport Indonesias principal asset is the
world-class Grasberg mine discovered in 1988. The Grasberg
minerals district contains the worlds largest single
copper reserve and worlds largest single gold reserve. PT
Freeport Indonesia is also a 25 percent owner of PT
Smelting, which operates a copper smelter and refinery in
Gresik, Indonesia.
Phelps Dodge conducts its operations primarily through its two
divisions, Phelps Dodge Mining Company (PDMC) and
Phelps Dodge Industries (PDI). PDMC is a fully
integrated producer of copper and molybdenum, with mines and
processing facilities in North America, South America and Europe
and processing capabilities for other minerals as by-products,
such as gold, silver and rhenium. PDI consists of Phelps Dodge
Wire and Cable, which manufactures engineered products
principally for the global energy sector.
S-63
DESCRIPTION
OF MANDATORY CONVERTIBLE PREFERRED STOCK
The following is a summary of certain provisions of the
certificate of designation for
our % mandatory convertible
preferred stock (which we will refer to for purposes of this
section as the Convertible Preferred Stock). A copy
of the certificate of designation and the form of Convertible
Preferred Stock share certificate are available upon request
from us at the address set forth under Where You Can Find
More Information. The following summary of the terms of
Convertible Preferred Stock does not purport to be complete and
is subject to, and qualified in its entirety by reference to,
the provisions of the certificate of designation. As used in
this section, the terms the Company, us,
we or our refer to Freeport-McMoRan
Copper & Gold, Inc. and not any of its subsidiaries.
General
Under our amended and restated certificate of incorporation, our
board of directors is authorized, without further shareholder
action, to issue up to 50,000,000 shares of preferred
stock, par value $0.01 per share, in one or more series,
with such voting powers or without voting powers, and with such
designations, and relative preferences, participating, optional
or other special rights, and qualifications, limitations or
restrictions, as shall be set forth in the resolutions providing
therefor. We have 46,400,000 shares of authorized preferred
stock which are undesignated. We have 2,500,000 shares of
preferred stock which are designated as Series A
Participating Cumulative Preferred Stock, none of which are
currently outstanding, and 1,099,985 shares of preferred
stock which are designated as
51/2% Convertible
Perpetual Preferred Stock, all of which are currently
outstanding. At the consummation of this offering, we will issue
10,000,000 shares of Convertible Preferred Stock. In
addition, we have granted the underwriters an option to purchase
up to 1,500,000 additional shares in accordance with the
procedures set forth in Underwriters. Please read
Description of Freeport-McMoRan Capital Stock in the
accompanying prospectus.
When issued, the Convertible Preferred Stock and any common
stock issued upon the conversion of the Convertible Preferred
Stock will be fully paid and nonassessable. The holders of the
Convertible Preferred Stock will have no preemptive or
preferential right to purchase or subscribe to stock,
obligations, warrants or other securities of the Company of any
class. The transfer agent, registrar, redemption, conversion and
dividend disbursing agent for shares of both the Convertible
Preferred Stock and common stock is Mellon Investor Services LLC.
Ranking
The Convertible Preferred Stock, with respect to dividend rights
or rights upon our liquidation,
winding-up
or dissolution, ranks:
|
|
|
|
|
senior to our common stock and to each other class of capital
stock or series of preferred stock established after the
original issue date of the Convertible Preferred Stock (which we
will refer to as the Issue Date), the terms of which
do not expressly provide that such class or series ranks senior
to or on a parity with the Convertible Preferred Stock as to
dividend rights or rights upon our liquidation,
winding-up
or dissolution (which we will refer to collectively as
Junior Stock);
|
|
|
|
on parity with our Series A Participating Cumulative
Preferred Stock, if any, and our outstanding 5
1/2%
Convertible Perpetual Preferred Stock and with any class of
capital stock or series of preferred stock established after the
Issue Date, the terms of which expressly provide that such class
or series will rank on a parity with the Convertible Preferred
Stock as to dividend rights or rights upon our liquidation,
winding-up
or dissolution (which we will refer to collectively as
Parity Stock); and
|
|
|
|
junior to each class of capital stock or series of preferred
stock established after the Issue Date, the terms of which
expressly provide that such class or series will rank senior to
the Convertible Preferred Stock as to dividend rights or rights
upon our liquidation,
winding-up
or dissolution (which we will refer to collectively as
Senior Stock).
|
S-64
Dividends
Holders of shares of Convertible Preferred Stock will be
entitled to receive, when, as and if declared by our board of
directors out of funds legally available for payment, cumulative
dividends at the rate per annum
of % per share on the
liquidation preference thereof of $100.00 per share of
Convertible Preferred Stock (equivalent to
$ per annum per share), payable in
cash, by delivery of shares of our common stock or through any
combination of cash and our common stock. See
Method of Payment of Dividends below.
Dividends on the Convertible Preferred Stock will be payable
quarterly on February 1, May 1, August 1 and
November 1 of each year up to and including the mandatory
conversion date (as defined below), commencing August 1,
2007 (each, a Dividend Payment Date) at such annual
rate, and shall accumulate from the most recent date as to which
dividends shall have been paid or, if no dividends have been
paid, from the Issue Date of the Convertible Preferred Stock,
whether or not in any dividend period or periods there have been
funds legally available for the payment of such dividends.
Dividends will be payable to holders of record as they appear on
our stock register on the immediately preceding January 15,
April 15, July 15 and October 15 (each, a Record
Date). Accumulations of dividends on shares of Convertible
Preferred Stock do not bear interest. Dividends payable on the
Convertible Preferred Stock for any period other than a full
dividend period (based upon the number of days elapsed during
the period) are computed on the basis of a
360-day year
consisting of twelve
30-day
months. The initial dividend on the Convertible Preferred Stock
for the first dividend period, assuming the issue date
is , 2007, is expected to be
$ per share (based on the annual
dividend rate of % and a
liquidation preference of $100.00 per share) and will be
payable, when and if declared on August 1, 2007. Each
subsequent quarterly dividend on the Convertible Preferred
Stock, when and if declared, will be
$ per share (based on the annual
dividend rate of % and a
liquidation preference of $100.00 per share), subject to
adjustments for stock splits, contributions, reclassifications
or other similar events involving our Convertible Preferred
Stock.
No dividend will be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the
Convertible Preferred Stock with respect to any dividend period
unless all dividends for all preceding dividend periods have
been declared and paid or declared and a sufficient sum or
number of shares of common stock have been set apart for the
payment of such dividend, upon all outstanding shares of
Convertible Preferred Stock.
Our ability to declare and pay cash dividends and make other
distributions with respect to our capital stock, including the
Convertible Preferred Stock, is limited by the terms of our
outstanding indebtedness. In addition, our ability to declare
and pay dividends may be limited by applicable Delaware law. See
Risk Factors Risks Related to our Mandatory
Convertible Preferred Stock We may not be able to
pay cash dividends on the mandatory convertible preferred
stock.
Method of
Payment of Dividends
Subject to the dividend cap described below, we may pay any
dividend (or any portion of any dividend) on the Convertible
Preferred Stock (whether or not for a current dividend period or
any prior dividend period, and including in connection with the
payment of accrued, accumulated and unpaid dividends pursuant to
the provisions described under Mandatory
Conversion, Conversion at the Option of
the Holder and Conversion Upon Cash
Acquisition; Cash Acquisition Dividend Make-Whole Amount),
determined in our sole discretion:
|
|
|
|
|
in cash;
|
|
|
|
by delivery of shares of our common stock; or
|
|
|
|
through any combination of cash and our common stock.
|
If we elect to make any such payment, or any portion thereof, in
shares of our common stock, such shares shall be valued for such
purpose, in the case of any dividend payment, or portion
thereof, at 97% of the average of the daily closing price per
share of our common stock on each of the five consecutive
trading days ending on the second trading day immediately
preceding the payment date for such dividend.
S-65
We will make each dividend payment on the Convertible Preferred
Stock in cash, except to the extent we elect to make all or any
portion of such payment in shares of our common stock. We will
give the holders of the Convertible Preferred Stock notice of
any such election and the portion of such payment that will be
made in cash and the portion that will be made in common stock
10 trading days prior to the payment date for such dividend.
No fractional shares of common stock will be delivered to the
holders of the Convertible Preferred Stock, but we will instead
pay a cash adjustment to each holder that would otherwise be
entitled to a fraction of a share of common stock. Any portion
of any such payment that is declared and not paid through the
delivery of shares of common stock will be paid in cash.
Notwithstanding the foregoing, in no event will the number of
shares of our common stock delivered in connection with any
dividend payment made in connection with a conversion exceed an
amount equal to the total dividend payment divided by
$ (representing approximately 33%
of the initial price, as defined below), subject to adjustment
in the same manner as each fixed conversion rate as set forth
under Anti-dilution Adjustments. We
refer to this provision as the dividend cap. To the
extent we do not deliver shares as a result of this dividend
cap, we may, notwithstanding any notice by us to the contrary,
pay the remaining declared and unpaid dividend in cash.
To the extent a shelf registration statement is required in
connection with the issuance of or for resales of common stock
issued as payment of a dividend, including dividends paid in
connection with a conversion, we will, to the extent such a
registration statement is not currently filed and effective, use
our reasonable best efforts to file and maintain the
effectiveness of such a shelf registration statement until the
earlier of such time as all such shares of common stock have
been resold thereunder and such time as all such shares are
freely tradeable without registration.
Unless all accrued, cumulated and unpaid dividends on the
Convertible Preferred Stock for all past quarterly dividend
periods shall have been paid in full, we will not:
|
|
|
|
|
declare or pay any dividend or make any distribution of assets
on any Junior Stock, other than dividends or distributions in
the form of Junior Stock and cash solely in lieu of fractional
shares in connection with any such dividend or distribution;
|
|
|
|
redeem, purchase or otherwise acquire any shares of Junior Stock
or pay or make any monies available for a sinking fund for such
shares of Junior Stock, other than (A) upon conversion or
exchange for other Junior Stock or (B) the purchase of
fractional interests in shares of any Junior Stock pursuant to
the conversion or exchange provisions of such shares of Junior
Stock;
|
|
|
|
declare or pay any dividend or make any distribution of assets
on any shares of Parity Stock, other than dividends or
distributions in the form of Parity Stock or Junior Stock and
cash solely in lieu of fractional shares in connection with any
such dividend or distribution; or
|
|
|
|
redeem, purchase or otherwise acquire any shares of Parity
Stock, except upon conversion into or exchange for other Parity
Stock or Junior Stock and cash solely in lieu of fractional
shares in connection with any such conversion or exchange.
|
When dividends are not paid in full upon the shares of
Convertible Preferred Stock, as discussed above, all dividends
declared on the Convertible Preferred Stock and any other Parity
Stock shall be paid either (a) pro rata so that the amount
of dividends so declared on the shares of Convertible Preferred
Stock and each such other class or series of Parity Stock shall
in all cases bear to each other the same ratio as accumulated
dividends on the shares of Convertible Preferred Stock and such
class or series of Parity Stock bear to each other or
(b) on another basis that is at least as favorable to the
holders of the Convertible Preferred Stock entitled to receive
such dividends.
Redemption
The Convertible Preferred Stock will not be redeemable.
S-66
Liquidation
Preference
In the event of our voluntary or involuntary liquidation,
winding-up
or dissolution, each holder of Convertible Preferred Stock will
be entitled to receive and to be paid out of our assets
available for distribution to our shareholders, before any
payment or distribution is made to holders of Junior Stock
(including our common stock), a liquidation preference in the
amount of $100.00 per share of the Convertible Preferred
Stock, plus accumulated and unpaid dividends on the shares to
the date fixed for liquidation,
winding-up
or dissolution. If, upon our voluntary or involuntary
liquidation,
winding-up
or dissolution, the amounts payable with respect to the
liquidation preference of the Convertible Preferred Stock and
all Parity Stock are not paid in full, the holders of the
Convertible Preferred Stock and the Parity Stock will share
equally and ratably in any distribution of our assets in
proportion to the full liquidation preference and accumulated
and unpaid dividends to which they are entitled. After payment
of the full amount of the liquidation preference and accumulated
and unpaid dividends to which they are entitled, the holders of
the Convertible Preferred Stock will have no right or claim to
any of our remaining assets. Neither the sale of all or
substantially all our assets or business (other than in
connection with our liquidation,
winding-up
or dissolution), nor our merger or consolidation into or with
any other person, will be deemed to be our voluntary or
involuntary liquidation,
winding-up
or dissolution.
The certificate of designation will not contain any provision
requiring funds to be set aside to protect the liquidation
preference of the Convertible Preferred Stock even though it is
substantially in excess of the par value thereof.
Voting
Rights
The holders of the Convertible Preferred Stock will have no
voting rights except as set forth below or as otherwise required
by Delaware law from time to time.
If dividends on the Convertible Preferred Stock are in arrears
and unpaid for six or more quarterly periods (whether or not
consecutive), the holders of the Convertible Preferred Stock,
voting as a single class with any Parity Stock having similar
voting rights that are exercisable (including our Series A
Participating Cumulative Preferred Stock, if any, and our
outstanding
51/2%
Convertible Perpetual Preferred Stock), will be entitled at our
next regular or special meeting of shareholders to elect two
additional directors to our board of directors. Upon the
election of any additional directors, the number of directors
that comprise our board shall be increased by such number of
additional directors. Such voting rights and the terms of the
directors so elected will continue until such time as the
dividend arrearage on the Convertible Preferred Stock has been
paid in full. At any time after voting power to elect directors
shall have become vested and be continuing in the holders of the
Convertible Preferred Stock, or if a vacancy shall exist in the
office of any such additional director, our board of directors
may, and upon written request of the holders of record of at
least 25% of the outstanding Convertible Preferred Stock
addressed to the chairman of our board shall, call a special
meeting of the holders of the Convertible Preferred Stock
(voting separately as a class with all other series of Parity
Stock upon which like voting rights have been conferred and are
exercisable) for the purpose of electing the directors that such
holders are entitled to elect. At any meeting held for the
purpose of electing such a director, the presence in person or
by proxy of the holders of at least a majority of the
Convertible Preferred Stock shall be required to constitute a
quorum of such Convertible Preferred Stock.
In addition, the affirmative vote or consent of the holders of
at least
662/3%
of the outstanding shares of Convertible Preferred Stock and all
other Parity Stock having similar voting rights that are
exercisable (including our Series A Participating
Cumulative Preferred Stock, if any, and our outstanding
51/2% Convertible
Perpetual Preferred Stock), voting as a single class, in person
or by proxy, at an annual meeting of our stockholders or at a
special meeting called for such purpose, or by written consent
in lieu of such meeting, will be required to alter, repeal or
amend, whether by merger, consolidation, combination,
reclassification or otherwise, any provisions of our amended and
restated certificate of incorporation or the certificate of
designation if the amendment would amend, alter or affect the
powers, preferences or rights of the Convertible Preferred Stock
so as to adversely affect the holders thereof, including,
without limitation, the creation of, increase in the authorized
number of, or issuance of, shares of any class or series of
Senior Stock. The
S-67
certificate of designation will provide that the authorization
of, the increase in the authorized amount of, or the issuance of
any shares of any class or series of Parity Stock or Junior
Stock will not require the consent of the holders of the
Convertible Preferred Stock, and will not be deemed to adversely
affect the powers, preferences or rights of the holders of the
Convertible Preferred Stock.
The number of votes that each share of Convertible Preferred
Stock and any Parity Stock participating in the votes described
above shall have shall be in proportion to the liquidation
preference of such share. In all cases in which the holders of
Convertible Preferred Stock shall be entitled to vote as a
single class with holders of Parity Stock with a liquidation
preference of $1,000, each share of Convertible Preferred Stock
shall be entitled to one-tenth of one vote (which shall be
aggregated among all votes cast by holders of Convertible
Preferred Stock).
Mandatory
Conversion
Each share of the Convertible Preferred Stock, unless previously
converted, will automatically convert on May 1, 2010 (the
mandatory conversion date), into a number of shares
of common stock equal to the conversion rate described below. In
addition to the common stock issuable upon conversion of each
share of Convertible Preferred Stock on the mandatory conversion
date, holders will have the right to receive an amount equal to
all accrued, cumulated and unpaid dividends on the Convertible
Preferred Stock, whether or not declared prior to that date, for
the then-current dividend period ending on the mandatory
conversion date and all prior dividend periods (other than
previously declared dividends on the Convertible Preferred Stock
payable to holders of record as of a prior date), provided
that we are legally permitted to pay such dividends at such
time.
The conversion rate, which is the number of shares of common
stock issuable upon conversion of each share of Convertible
Preferred Stock on the applicable conversion date, will, subject
to adjustment as described under Anti-dilution
Adjustments below, be as follows:
|
|
|
|
|
if the applicable market value (as defined below) of our common
stock is equal to or greater than
$ , which we call the
threshold appreciation price, then the conversion
rate will be shares of common
stock per share of Convertible Preferred Stock (the
minimum conversion rate), which is equal to $100.00
(appropriately adjusted for stock splits, contributions,
reclassifications or other similar events involving our
Convertible Preferred Stock) divided by the threshold
appreciation price;
|
|
|
|
if the applicable market value of our common stock is less than
the threshold appreciation price but greater than
$ , which we call the initial
price, then the conversion rate will be equal to $100.00
(appropriately adjusted for stock splits, contributions,
reclassifications or other similar events involving our
Convertible Preferred Stock) divided by the applicable market
value of our common stock; or
|
|
|
|
if the applicable market value of our common stock is less than
or equal to the initial price, then the conversion rate will
be shares of common stock per
share of Convertible Preferred Stock (the maximum
conversion rate), which is equal to $100.00 (appropriately
adjusted for stock splits, contributions, reclassifications or
other similar events involving our Convertible Preferred Stock)
divided by the initial price.
|
We refer to the minimum conversion rate and the maximum
conversion rate collectively as the fixed conversion
rates. The fixed conversion rates, the initial price and
the threshold appreciation price are each subject to adjustment
as described under Anti-dilution
Adjustments below.
Accordingly, assuming that the market price of our common stock
on the mandatory conversion date is the same as the applicable
market value, the aggregate market value of the shares of common
stock you receive upon conversion will be:
|
|
|
|
|
greater than the liquidation preference of the Convertible
Preferred Stock, if the applicable market value is greater than
the threshold appreciation price,
|
S-68
|
|
|
|
|
equal to the liquidation preference, if the applicable market
value is less than or equal to the threshold appreciation price
and greater than or equal to the initial price, and
|
|
|
|
less than the liquidation preference, if the applicable market
value is less than the initial price.
|
Applicable market value means the average of the
daily closing price per share of our common stock on each of the
20 consecutive trading days ending on the third trading day
immediately preceding the mandatory conversion date.
The initial price is the daily closing price of our
common stock on the New York Stock Exchange on
March , 2007. The threshold appreciation
price represents an
approximately % appreciation over
the initial price.
The daily closing price of our common stock or any
securities distributed in a spin-off, as the case may be, on any
date of determination means the closing sale price or, if no
closing sale price is reported, the last reported sale price of
shares of our common stock or such other securities on the New
York Stock Exchange on that date. If our common stock or such
other securities are not traded on the New York Stock Exchange
on any date of determination, the closing price of our common
stock or such other securities on any date of determination
means the closing sale price as reported in the composite
transactions for the principal U.S. national or regional
securities exchange on which our common stock or such other
securities are so listed or quoted, or if our common stock or
such other securities not so listed or quoted on a
U.S. national or regional securities exchange, as reported
by the Nasdaq stock market, or, if no closing price for our
common stock or such other securities are so reported, the last
quoted bid price for our common stock or such other securities
are in the
over-the-counter
market as reported by the National Quotation Bureau or similar
organization, or, if that bid price is not available, the market
price of our common stock or such other securities are on that
date as determined by a nationally recognized independent
investment banking firm retained by us for this purpose.
A trading day is a day on which shares of our common
stock:
|
|
|
|
|
are not suspended from trading on any national or regional
securities exchange or association or
over-the-counter
market at the close of business; and
|
|
|
|
has traded at least once on the national or regional securities
exchange or association or
over-the-counter
market that is the primary market for the trading of our common
stock.
|
All references herein to the daily closing price of our common
stock on the New York Stock Exchange shall be such daily closing
price as reflected on the website of the New York Stock Exchange
(www.nyse.com) and as reported by Bloomberg Professional
Service; provided that in the event that there is a
discrepancy between the daily closing sale price as reflected on
the website of the New York Stock Exchange and as reported by
Bloomberg Professional Service, the daily closing sale price on
the website of the New York Stock Exchange shall govern.
Conversion
Conversion into shares of common stock will occur on the
mandatory conversion date, unless you have converted your shares
of Convertible Preferred Stock prior to the mandatory conversion
date, in the manner described in Conversion at
the Option of the Holder or Conversion
Upon Cash Acquisition; Cash Acquisition Dividend Make-Whole
Amount.
On the mandatory conversion date, if shares of Convertible
Preferred Stock are held in certificated form and you have
complied with some additional procedures set forth in the
certificate of designation, certificates representing shares of
our common stock will be issued and delivered to you or your
designee upon presentation and surrender of the certificate
evidencing the Convertible Preferred Stock.
The person or persons entitled to receive the shares of common
stock issuable upon conversion of the Convertible Preferred
Stock will be treated as the record holder(s) of such shares as
of the close of business on the applicable conversion date.
Prior to the close of business on the applicable conversion
date, the shares
S-69
of common stock issuable upon conversion of the Convertible
Preferred Stock will not be deemed to be outstanding for any
purpose and you will have no rights with respect to such shares
of common stock, including voting rights, rights to respond to
tender offers and rights to receive any dividends or other
distributions on the common stock, by virtue of holding the
Convertible Preferred Stock.
Conversion
at the Option of the Holder
Other than during the cash acquisition conversion period (as
defined below), holders of the Convertible Preferred Stock have
the right to convert the Convertible Preferred Stock, in whole
or in part, at any time prior to the mandatory conversion date,
into shares of our common stock at the minimum conversion rate
of shares of common stock per
share of Convertible Preferred Stock, subject to adjustment as
described under Anti-dilution
Adjustments below.
In addition to the number of shares of common stock issuable
upon conversion of each share of Convertible Preferred Stock at
the option of the holder on the effective date of any early
conversion (herein referred to as the early conversion
date), each converting holder will have the right to
receive an amount equal to all accrued, cumulated and unpaid
dividends on such converted share(s) of Convertible Preferred
Stock, whether or not declared prior to that date, for all prior
dividend periods ending on or prior to the dividend payment date
immediately preceding the early conversion date (other than
previously declared dividends on our Convertible Preferred Stock
payable to holders of record as of a prior date), provided
that we are then legally permitted to pay such dividends.
Except as described above, upon any optional conversion of our
Convertible Preferred Stock, we will make no payment or
allowance for unpaid dividends on our Convertible Preferred
Stock.
Conversion
Upon Cash Acquisition; Cash Acquisition Dividend Make-Whole
Amount
General. If a cash acquisition (as defined
below) occurs, we will provide for the conversion of shares of
the Convertible Preferred Stock and a cash acquisition dividend
make-whole amount (as defined below) by:
|
|
|
|
|
permitting holders to submit their shares of the Convertible
Preferred Stock for conversion at any time during the period
(the cash acquisition conversion period) beginning
on the effective date of such cash acquisition (the
effective date) and ending on the date that is
15 days after the effective date at the conversion rate
(the cash acquisition conversion rate) specified in
the table below; and
|
|
|
|
paying converting holders an amount equal to the sum of
(a) any accumulated and unpaid dividends on their shares of
the Convertible Preferred Stock plus (b) the present value
of all remaining dividend payments on their shares of
Convertible Preferred Stock through and including the mandatory
conversion date, calculated as set forth below (subject to our
ability to satisfy the make-whole amount by increasing the
number of shares to be issued on conversion).
|
We will notify holders, at least 20 days prior to the
anticipated effective date of such cash acquisition, of the
anticipated effective date of such transaction. In addition, if
we elect to deliver some or all of the amount of cumulated and
unpaid dividends and the present value of all remaining dividend
payments on your Convertible Preferred Stock through and
including the mandatory conversion date, in shares of our common
stock (as described below), such notice will indicate whether
such amount will be payable in full in shares of our common
stock or any combination of cash and shares of our common stock,
and we will specify the combination in the notice.
S-70
Cash Acquisition Conversion Rate. The
following table sets forth the cash acquisition conversion rate
per share of Convertible Preferred Stock for each hypothetical
stock price and effective date set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Price on Effective Date
|
|
Effective
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A cash acquisition will be deemed to have occurred
at such time after the original issuance of the Convertible
Preferred Stock upon the consummation of any acquisition
(whether by means of a liquidation, share exchange, tender
offer, consolidation, recapitalization, reclassification, merger
of us or any sale, lease or other transfer of the consolidated
assets of ours and our subsidiaries) or a series of related
transactions or events pursuant to which 90% or more of our
common stock is exchanged for, converted into or constitutes
solely the right to receive cash, securities or other property
more than 10% of which consists of cash, securities or other
property that are not, or upon issuance will not be, traded on
the New York Stock Exchange or quoted on the Nasdaq National
Market.
The cash acquisition conversion rate will be determined by
reference to the table above and is based on the effective date
and the price (the stock price) paid per share of
our common stock in such transaction. If the holders of our
common stock receive only cash in the cash acquisition, the
stock price shall be the cash amount paid per share. Otherwise
the stock price shall be the average of the daily closing price
per share of our common stock on each of the 10 consecutive
trading days up to but not including the effective date.
The stock prices set forth in the first row of the table
(i.e., the column headers) will be adjusted as of any
date on which the fixed conversion rates of our Convertible
Preferred Stock are adjusted. The adjusted stock prices will
equal the stock prices applicable immediately prior to such
adjustment multiplied by a fraction, the numerator of which is
the minimum conversion rate immediately prior to the adjustment
giving rise to the stock price adjustment and the denominator of
which is the minimum conversion rate as so adjusted. Each of the
conversion rates in the table will be subject to adjustment in
the same manner as each fixed conversion rate as set forth under
Anti-dilution Adjustments.
The exact stock price and effective dates may not be set forth
on the table, in which case:
if the stock price is between two stock price
amounts on the table or the effective date is between two dates
on the table, the cash acquisition conversion rate will be
determined by straight-line interpolation between the cash
acquisition conversion rates set forth for the higher and lower
stock price amounts and the two dates, as applicable, based on a
365-day year;
if the stock price is in excess of
$ per share (subject to adjustment
as described above), then the cash acquisition conversion rate
will be the minimum conversion rate, subject to
adjustment; and
if the stock price is less than
$ per share (subject to adjustment
as described above), then the cash acquisition conversion rate
will be the maximum conversion rate, subject to adjustment.
Cash Acquisition Dividend Make-Whole
Payment. For any shares of Convertible Preferred
Stock that are converted during the cash acquisition conversion
period, in addition to the shares of common stock issued upon
conversion, we must, in our sole discretion, either (a) pay
you in cash, to the extent we are legally permitted to do so,
the sum of (which we refer to as the cash acquisition
dividend make-whole amount) (1) an amount equal to
any accumulated and unpaid dividends on your shares of our
Convertible Preferred Stock, whether or not declared, and
(2) the present value of all remaining dividend payments on
your shares of Convertible Preferred Stock through and including
the mandatory conversion date, in each case, out of legally
available assets, or (b) increase the number of shares of
our common stock to be issued on conversion by an amount equal
to the cash acquisition dividend make-whole amount, divided by
the stock price (as defined
S-71
above) of shares of our common stock; provided that, in
no event shall we increase the number of shares of our common
stock to be issued in excess of the amount equal to the cash
acquisition dividend make-whole amount divided by
$ , subject to adjustments in the
same manner as each fixed conversion rate as set forth under
Anti-dilution Adjustments. We may make
the election to pay cash or increase the conversion rate, in
whole or in part, as set forth in our cash acquisition notice
described above. The present value of the remaining dividend
payments will be computed using a discount rate equal
to %.
Our obligation to deliver shares at the cash acquisition
conversion rate and pay the cash acquisition dividend make-whole
amount could be considered a penalty, in which case the
enforceability thereof would be subject to general principles of
reasonableness of economic remedies.
Fractional
Shares
No fractional common shares will be issued to holders of our
Convertible Preferred Stock upon conversion. In lieu of any
fractional common share otherwise issuable in respect of the
aggregate number of shares of our Convertible Preferred Stock of
any holder that are converted, that holder will be entitled to
receive an amount in cash (computed to the nearest cent) equal
to the same fraction of:
|
|
|
|
|
in the case of mandatory conversion or a merger early
conversion, the average of the daily closing price per common
share on each of the five consecutive trading days preceding the
trading day immediately preceding the date of conversion; or
|
|
|
|
in the case of each early conversion at the option of a holder,
the closing price per common share determined as of the second
trading day immediately preceding the effective date of
conversion.
|
If more than one share of our Convertible Preferred Stock is
surrendered for conversion at one time by or for the same
holder, the number of full common shares issuable upon
conversion thereof shall be computed on the basis of the
aggregate number of shares of our Convertible Preferred Stock so
surrendered.
Anti-dilution
Adjustments
Each fixed conversion rate will be adjusted if:
(1) We pay dividends (or other distributions) on our common
stock in shares of common stock.
(2) We issue to all holders of our common stock rights or
warrants (other than rights or warrants issued pursuant to a
dividend reinvestment plan or share purchase plan or other
similar plans) entitling them, for a period of up to
45 days from the date of issuance of such rights or
warrants, to subscribe for or purchase our shares of common
stock at less than the current market price, as
defined below, of our common stock on the date fixed for the
determination of shareholders entitled to receive such rights or
warrants.
(3) We subdivide, split or combine our common stock.
(4) We distribute to all holders of our common stock
evidences of our indebtedness, shares of capital stock,
securities, cash or other assets (excluding any dividend or
distribution covered by clauses (1) or (3) above, any
rights or warrants referred to in (2) above, any dividend
or distribution paid exclusively in cash, any consideration
payable in connection with a tender or exchange offer made by us
or any of our subsidiaries, and any dividend of shares of
capital stock of any class or series, or similar equity
interests, of or relating to a subsidiary or other business unit
in the case of certain spin-off transactions as described
below), in which event each fixed conversion rate in effect
immediately prior to the close of business on the date fixed for
the determination of shareholders entitled to receive such
distribution will be multiplied by a fraction,
|
|
|
|
|
the numerator of which is the current market price per share of
our common stock on the date fixed for determination, and
|
S-72
|
|
|
|
|
the denominator of which is the current market price per share
of our common stock minus the fair market value, as determined
by our board of directors, except as described in the following
paragraph, of the portion of the evidences of indebtedness,
shares, securities, cash or other assets so distributed
applicable to one share of common stock.
|
In the event that we make a distribution to all holders of our
common shares consisting of capital stock of, or similar equity
interests in, or relating to a subsidiary or other business unit
of ours (herein referred to as a spin-off), each
fixed conversion rate will be adjusted by multiplying such fixed
conversion rate in effect immediately prior to the close of
business on the date fixed for the determination of shareholders
entitled to receive such distribution by a fraction, the
numerator of which is the current market price per share of our
common stock as of the fifteenth trading day after the
ex-date for such distribution, plus the fair market
value of the portion of those shares of capital stock or similar
equity interests so distributed applicable to one share of
common stock as of the fifteenth trading day after the
ex-date for such distribution (or, if such shares of
capital stock or equity interests are listed on a national or
regional securities exchange, the average of the daily closing
price of such securities on each of the five consecutive trading
days ending on such fifteenth trading day), and the denominator
of which is the current market price per share of our common
stock, in each case as of the fifteenth trading day after the
ex-date for such distribution.
(5) We make a distribution consisting exclusively of cash
to all holders of our common stock, excluding (a) any cash
dividend on our common stock to the extent that the aggregate
cash dividend per share of our common stock does not exceed
$0.3125 in any fiscal quarter (the dividend threshold
amount), (b) any cash that is distributed in a
reorganization event (as described below) or as part of a
distribution referred to in clause (4) above, (c) any
dividend or distribution in connection with our liquidation,
dissolution or winding up, and (d) any consideration
payable in connection with a tender or exchange offer made by us
or any of our subsidiaries, in which event, each fixed
conversion rate in effect immediately prior to the close of
business on the date fixed for determination of the holders of
our common stock entitled to receive such distribution will be
multiplied by a fraction:
|
|
|
|
|
the numerator of which will be the current market price of our
common stock on the date fixed for such determination; and
|
|
|
|
the denominator of which will be the current market price of our
common stock on the date fixed for such determination less the
amount per share of such dividend or distribution.
|
If an adjustment is required to be made as set forth in this
clause as a result of a distribution (1) that is a
regularly scheduled quarterly dividend, the amount per share of
such dividend or distribution for purposes of the second bullet
point above will be deemed to be the amount by which such
dividend exceeds the applicable dividend threshold amount or
(2) that is not a regularly scheduled quarterly dividend,
the amount per share of such dividend or distribution for
purposes of the second bullet point above will be deemed to be
the full amount of such distribution.
The dividend threshold amount is subject to adjustment on an
inversely proportional basis whenever fixed conversion rates are
adjusted; provided that no adjustment will be made to the
dividend threshold amount for adjustments made to the fixed
conversion rates pursuant to this clause (5).
(6) We or any of our subsidiaries successfully complete a
tender or exchange offer for our common stock that involves an
aggregate consideration that, together with (a) any cash
and other consideration payable in a tender or exchange offer by
us or any of our subsidiaries for shares of common stock
expiring within the then-preceding 12 months in respect of
which no adjustment has been made and (b) the aggregate
amount of any such all-cash distributions referred to in
clause (5) above to all holders of shares of common stock
within the then-preceding 12 months in respect of which no
adjustments have been made, exceeds 15% of our market
capitalization on the expiration of
S-73
such tender offer, in which event each fixed conversion rate in
effect immediately prior to the opening of business on the
eighth trading day after the date of expiration of the tender or
exchange offer will be divided by a fraction:
|
|
|
|
|
the numerator of which shall be equal to (A) the product of
(I) the current market price per share of our common stock
on the seventh trading day after the date of expiration of the
tender or exchange offer multiplied by (II) the number of
shares of common stock outstanding (including any shares validly
tendered and not withdrawn) at such time less (B) the
amount of cash plus the fair market value, as determined by our
board of directors, of the aggregate consideration payable for
all the shares of common stock purchased in such tender or
exchange offer, and
|
|
|
|
the denominator of which will be the product of the number of
shares of common stock outstanding (including any shares validly
tendered and not withdrawn) less the number of all shares
validly tendered and not withdrawn as of the expiration time and
the current market price per common share on the seventh trading
day next succeeding the expiration of the tender or exchange
offer.
|
(7) To the extent that we have a rights plan in effect with
respect to our common stock on any conversion date, upon
conversion of any shares of the Convertible Preferred Stock, you
will receive, in addition to our common stock, the rights under
the rights plan, unless, prior to such conversion date, the
rights have separated from our common stock, in which case each
fixed conversion rate will be adjusted at the time of separation
as if we made a distribution to all holders of our common stock
as described in clause (4) above, subject to readjustment
in the event of the expiration, termination or redemption of
such rights.
The current market price is the average of the daily
closing price per share of our common stock on each of the five
consecutive trading days preceding the earlier of the day
preceding the date in question and the day before the
ex-date with respect to the issuance or distribution
requiring such computation. For purposes of this paragraph, the
term ex-date, when used with respect to any such
issuance or distribution, means the first date on which shares
of our common stock trade without the right to receive such
issuance or distribution. For the purposes of determining the
adjustment to the fixed conversion rate for the purposes of
clause (4) in the event of a spin-off, the current
market price per share of our common stock means the
average of the daily closing price on each of the first ten
consecutive trading days commencing on and including the fifth
trading day following the ex-date for such
distribution.
In the event of (a) any consolidation or merger of us with
or into another person (other than a merger or consolidation in
which we are the continuing corporation and in which the shares
of our common stock outstanding immediately prior to the merger
or consolidation are not exchanged for cash, securities or other
property of us or another person), (b) any sale, transfer,
lease or conveyance to another person of all or substantially
all of our property and assets, (c) any reclassification of
our common stock into securities including securities other than
our common stock, or (d) any statutory exchange of our
securities with another person (other than in connection with a
merger or acquisition) (herein referred to as
reorganization events), each share of Convertible
Preferred Stock outstanding immediately prior to such
reorganization event shall, without the consent of the holders
of the Convertible Preferred Stock, become convertible into the
kind of securities, cash and other property that such holder
would have been entitled to receive if such holder had converted
its Convertible Preferred Stock into common stock immediately
prior to such reorganization event. For purposes of the
foregoing, the type and amount of consideration that a holder of
Convertible Preferred Stock would have been entitled to receive
as a holder of our common stock in the case of any
reorganization event or other transaction that causes our common
stock to be converted into the right to receive more than a
single type of consideration (determined based in part upon any
form of stockholder election) will be deemed to be the weighted
average of the types and amounts of consideration received by
the holders of our common stock that affirmatively make such an
election. In such event, on the applicable conversion date, the
applicable conversion rate then in effect will be applied to
determine the amount and value of securities, cash or property a
holder of one share of common stock would have received in such
transaction (without interest thereon and
S-74
without any right to dividends or distributions thereon which
have a record date prior to the date such shares of Convertible
Preferred Stock are actually converted). The applicable
conversion rate shall be (a) the minimum conversion rate,
in the case of an early conversion date, and (b) determined
based upon the definition of the conversion rate in the case of
the mandatory conversion date, in each case, determined using
the applicable market value of the exchanged property. Holders
have the right to convert their shares of Convertible Preferred
Stock early in the event of certain cash mergers as described
under Conversion Upon Cash Acquisition; Cash
Acquisition Dividend Make-Whole Amount.
In addition, we may make such increases in each fixed conversion
rate as we deem advisable in order to avoid or diminish any
income tax to holders of our common stock resulting from any
dividend or distribution of our shares (or issuance of rights or
warrants to acquire our shares) or from any event treated as
such for income tax purposes or for any other reason. We may
only make such a discretionary adjustment if we make the same
proportionate adjustment to each fixed conversion rate.
In the event of a taxable distribution to holders of our common
shares that results in an adjustment of each fixed conversion
rate or an increase in each fixed conversion rate in our
discretion, holders of Convertible Preferred Stock may, in
certain circumstances, be deemed to have received a distribution
subject to U.S. federal income tax as a dividend. In
addition,
non-U.S. holders
of Convertible Preferred Stock may, in certain circumstances, be
deemed to have received a distribution subject to
U.S. federal withholding tax requirements. See
Certain U.S. Federal Tax Considerations
Tax Consequences to U.S. Holders Constructive
Dividends in this prospectus supplement.
Adjustments to the conversion rate will be calculated to the
nearest 1/10,000th of a share. Prior to May 1, 2010,
no adjustment in the conversion rate will be required unless the
adjustment would require an increase or decrease of at least one
percent in the conversion rate. If any adjustment is not
required to be made because it would not change the conversion
rate by at least one percent, then the adjustment will be
carried forward and taken into account in any subsequent
adjustment; provided, however, that with respect
to adjustments to be made to the conversion rate in connection
with cash dividends paid by us, we will make such adjustments,
regardless of whether such aggregate adjustments amount to one
percent or more of the conversion rate no later
than of
each calendar year; provided further that
on ,
adjustments to the conversion rate will be made with respect to
any such adjustment carried forward and which has not been taken
into account before such date.
No adjustment to the conversion rate need be made if holders may
participate in the transaction that would otherwise give rise to
such adjustment, so long as the distributed assets or securities
the holders would receive upon conversion of the Convertible
Preferred Stock if such assets or securities are
convertible, exchangeable, or exercisable are
convertible, exchangeable or exercisable, as applicable, without
any loss of rights or privileges for a period of at least
45 days following conversion of the Convertible Preferred
Stock.
The applicable conversion rate will not be adjusted:
(a) upon the issuance of any common stock pursuant to any
present or future plan providing for the reinvestment of
dividends or interest payable on our securities and the
investment of additional optional amounts in common stock under
any plan;
(b) upon the issuance of any common stock or rights or
warrants to purchase those shares pursuant to any present or
future employee, director or consultant benefit plan or program
of or assumed by us or any of our subsidiaries;
(c) upon the issuance of any common stock pursuant to any
option, warrant, right or exercisable, exchangeable or
convertible security outstanding as of the date the Convertible
Preferred Stock were first issued;
(d) for a change in the par value or no par value of our
common stock; or
(e) for accrued, cumulated and unpaid dividends.
S-75
We will be required, as soon as practicable after the conversion
rate is adjusted, to provide or cause to be provided written
notice of the adjustment to the holders of shares of Convertible
Preferred Stock. We will also be required to deliver a statement
setting forth in reasonable detail the method by which the
adjustment to each fixed conversion rate was determined and
setting forth each revised fixed conversion rate.
If an adjustment is made to the fixed conversion rates, an
inversely proportional adjustment also will be made to the
threshold appreciation price and the initial price solely for
the purposes of determining which clauses of the definition of
the conversion rate will apply on the conversion date.
Book-Entry,
Delivery and Form
The certificates representing the Convertible Preferred Stock
will be issued in fully registered form. Ownership of beneficial
interests in a Global Security will be limited to persons who
have accounts with the Depository Trust Company
(DTC) (participants) or persons who hold
interests through such participants. Ownership of beneficial
interests in a Global Security will be shown on, and the
transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with
respect to interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or
holder of a Global Security, DTC or such nominee, as the case
may be, will be considered the sole owner or holder of the
Convertible Preferred Stock represented by such Global Security
for all purposes under the certificate of designations and the
securities. No beneficial owner of an interest in a Global
Security will be able to transfer that interest except in
accordance with the applicable procedures of DTC in addition to
those provided for under the certificate of designations.
Payments of dividends on the Global Security will be made to DTC
or its nominee, as the case may be, as the registered owner
thereof. None of the Company, the transfer agent, registrar,
redemption, conversion or dividend disbursing agent will have
any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership
interests in a Global Security or for maintaining, supervising
or reviewing any records relating to such beneficial ownership
interests.
The Company expects that DTC or its nominee, upon receipt of any
payment of dividends in respect of a Global Security, will
credit participants accounts with payments in amounts
proportionate to their respective beneficial interests in the
principal amount of such Global Security as shown on the records
of DTC or its nominee, as the case may be. The Company also
expects that payments by participants to owners of beneficial
interests in such Global Security held through such participants
will be governed by standing instructions and customary
practices, as is now the case with securities held for the
accounts of customers registered in the names of nominees for
such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the
ordinary way in accordance with DTC rules and will be settled in
same-day
funds.
The Company understands that DTC is:
|
|
|
|
|
a limited purpose trust company organized under the laws of the
State of New York;
|
|
|
|
a banking organization within the meaning of New
York Banking Law;
|
|
|
|
a member of the Federal Reserve System;
|
|
|
|
a clearing corporation within the meaning of the
Uniform Commercial Code; and
|
|
|
|
a Clearing Agency registered pursuant to the
provisions of Section 17A of the Exchange Act.
|
DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the
need for physical movement of certificates. Participants include:
|
|
|
|
|
securities brokers and dealers;
|
S-76
|
|
|
|
|
banks, trust companies; and
|
|
|
|
clearing corporations and certain other organizations.
|
Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either
directly or indirectly (indirect participants).
Although DTC is expected to follow the foregoing procedures in
order to facilitate transfers of interests in a Global Security
among its participants, it is under no obligation to perform or
continue to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the transfer
agent, registrar, redemption, conversion or dividend disbursing
agent will have any responsibility for the performance by DTC or
its participants or indirect participants of their respective
obligations under the rules and procedures governing their
operations.
If DTC is at any time unwilling or unable to continue as a
depositary for the Global Security and a successor depositary is
not appointed by the Company within 90 days, the Company
will issue certificated shares in exchange for the Global
Securities. Holders of an interest in a Global Security may
receive certificated shares, at the option of the Company, in
accordance with the rules and procedures of DTC in addition to
those provided for under the certificate of designations.
Beneficial interests in Global Securities held by any direct or
indirect participant may also be exchanged for certificated
shares upon request to DTC by such direct participant (for
itself or on behalf of an indirect participant), to the transfer
agent in accordance with their respective customary procedures.
The information in this section concerning DTC and its
book-entry system has been obtained from sources that the
Company believes to be reliable, but the Company takes no
responsibility for the accuracy thereof.
S-77
CERTAIN
U.S. FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the material
U.S. federal income tax consequences and certain estate tax
consequences of the ownership and disposition of our mandatory
convertible preferred stock and our common stock received in
respect thereof. This discussion only applies to mandatory
convertible preferred stock or common stock that is held as a
capital asset for U.S. federal income tax purposes.
This discussion does not describe all of the tax consequences
that may be relevant to a holder in light of the holders
particular circumstances or to holders subject to special rules,
such as:
|
|
|
|
|
certain financial institutions;
|
|
|
|
insurance companies;
|
|
|
|
dealers in securities;
|
|
|
|
persons holding the mandatory convertible preferred stock or
common stock as part of a hedge, straddle,
integrated transaction or similar transaction;
|
|
|
|
U.S. holders (as defined below) whose functional currency
is not the U.S. dollar;
|
|
|
|
partnerships or other entities classified as partnerships for
U.S. federal income tax purposes;
|
|
|
|
tax-exempt entities;
|
|
|
|
persons subject to the alternative minimum tax; or
|
|
|
|
non-U.S. holders
(as defined below) that own, or are deemed to own, more than 5%
of our common stock or more than 5% of the mandatory convertible
preferred stock.
|
If an entity that is classified as a partnership for
U.S. federal income tax purposes holds mandatory
convertible preferred stock or common stock, the
U.S. federal income tax treatment of a partner generally
will depend on the status of the partner and upon the activities
of the partnership. Partnerships holding mandatory convertible
preferred stock or common stock and partners in such
partnerships should consult their tax advisors as to the
particular U.S. federal income tax consequences of holding
and disposing of the mandatory convertible preferred stock or
the common stock.
This summary is based on the Internal Revenue Code of 1986, as
amended (the Code), administrative pronouncements,
judicial decisions and final, temporary and proposed Treasury
Regulations, changes to any of which subsequent to the date of
this prospectus supplement may affect the tax consequences
described herein. This discussion does not address any tax
consequences arising under the laws of any state, local or
foreign jurisdiction. Prospective holders are urged to consult
their tax advisors with respect to the particular tax
consequences to them of owning and disposing of the mandatory
convertible preferred stock and the common stock, including the
consequences under the laws of any state, local or foreign
jurisdiction.
Tax
Consequences to U.S. Holders
As used herein, the term U.S. holder means a
beneficial owner of a share of mandatory convertible preferred
stock or common stock that is, for U.S. federal income tax
purposes:
|
|
|
|
|
a citizen or resident of the United States;
|
|
|
|
a corporation, or other entity taxable as a corporation, created
or organized in or under the laws of the United States or of any
political subdivision thereof; or
|
|
|
|
an estate or trust the income of which is subject to
U.S. federal income taxation regardless of its source.
|
The term U.S. holder also includes certain
former citizens and residents of the United States.
S-78
Taxation
of distributions
Distributions paid on our mandatory convertible preferred stock
or common stock, other than certain pro rata distributions of
common shares paid on our common stock, will be treated as a
dividend to the extent paid out of our current or accumulated
earnings and profits (as determined under U.S. federal
income tax principles) and will be includible in income by the
U.S. holder and taxable as ordinary income when received.
If a distribution exceeds our current and accumulated earnings
and profits, the excess will be first treated as a tax-free
return of the U.S. holders investment, up to the
U.S. holders tax basis in our mandatory convertible
preferred stock or common stock. Any remaining excess will be
treated as capital gain.
If we make a distribution on the mandatory convertible preferred
stock in the form of common stock, such distribution will be
taxable for U.S. federal income tax purposes in the same
manner as distributions described above. The amount of such
distribution will be equal to the fair market value of our
common stock on the date of the distribution. A
U.S. holders tax basis in such common stock will also
be equal to the fair market value of such common stock on the
distribution date, and such U.S. holders holding
period for such common stock will begin on the day following the
distribution date.
Provided certain holding period requirements are satisfied,
non-corporate U.S. holders generally will be subject to
U.S. federal income tax at a maximum rate of 15% on
distributions treated as dividends for taxable years beginning
before January 1, 2011.
Distributions taxable as dividends received by corporate
U.S. holders will be eligible for the dividends-received
deduction, subject to various limitations. The benefits of the
dividends-received deduction to a corporate U.S. holder may
be reduced or eliminated by many exceptions and restrictions,
including restrictions relating to the corporate
U.S. holders taxable income, holding period of our
mandatory convertible preferred stock or common stock and debt
financing.
A dividend that exceeds certain thresholds in relation to a
U.S. holders tax basis in our mandatory convertible
preferred stock or common stock could be characterized as an
extraordinary dividend (as defined in
Section 1059 of the Code). Generally, a corporate
U.S. holder that receives an extraordinary dividend is
required to reduce its stock basis by the portion of such
dividend that is not taxed because of the dividends-received
deduction. If the amount of the reduction exceeds such
U.S. holders tax basis in our mandatory convertible
preferred stock or common stock, the excess is treated as
taxable gain. Non-corporate U.S. holders who receive an
extraordinary dividend would be required to treat any losses on
the sale of our mandatory convertible preferred stock or common
stock as long-term capital losses to the extent of the dividends
received by them that qualify for the 15% tax rate.
U.S. holders should consult their own tax advisors
regarding the availability of the reduced dividend tax rate or
the dividends-received deduction, and the potential
applicability of the extraordinary dividend rules, in light of
their particular circumstances.
Constructive
dividends
The conversion rate of the mandatory convertible preferred stock
will be adjusted in certain circumstances as described above
under Description of Mandatory Convertible Preferred
Stock Anti-dilution Adjustments. Under the
Code and applicable Treasury Regulations, adjustments that have
the effect of increasing a holders interest in our assets
or earnings and profits may, in some circumstances, result in a
deemed distribution to the holder.
If we were to make a distribution of cash or property to holders
of our common stock (for example, distributions of indebtedness
or assets, but generally not dividends of stock or rights to
subscribe for our common stock) and the conversion rate of the
mandatory convertible preferred stock were increased pursuant to
the anti-dilution provisions, such increase would be deemed to
be a distribution to the U.S. holders of the mandatory
convertible preferred stock. In addition, any other increase in
the conversion rate of the mandatory convertible preferred stock
may, depending on the circumstances, be deemed to be a
distribution to the U.S. holders of the mandatory
convertible preferred stock. However, a reasonable increase in
the conversion
S-79
rate in the event of stock dividends or distributions of rights
to subscribe for our common stock generally will not give rise
to a taxable constructive dividend.
In addition, in certain circumstances, the failure to make an
adjustment of the conversion rate may result in a taxable
distribution to holders of our mandatory convertible preferred
stock or common stock, if as a result of such failure, the
proportionate interests of the holders of our mandatory
convertible preferred stock or common stock, as applicable, in
our assets or earnings and profits is increased.
Any deemed distribution will be taxed in the same manner as an
actual distribution. See Taxation of distributions
above.
Conversion
of mandatory convertible preferred stock into common
stock
A U.S. holders conversion of mandatory convertible
preferred stock into common stock generally will not be a
taxable event, except that the receipt of cash or shares of
common stock in respect of accrued and unpaid dividends will be
taxable as described under Taxation of distributions
above and except that the receipt of cash in lieu of a
fractional share of common stock will result in capital gain or
loss (measured by the difference between the cash received in
lieu of the fractional share and the U.S. holders tax
basis in the fractional share).
A U.S. holders tax basis in the common stock received
upon a conversion of mandatory convertible preferred stock
(other than common stock received with respect to accrued and
unpaid dividends, but including any basis allocable to a
fractional share) will generally equal the tax basis of the
mandatory convertible preferred stock that was converted. A
U.S. holders tax basis in a fractional share will be
determined by allocating the holders tax basis in the
common stock between the common stock received upon conversion
and the fractional share, in accordance with their respective
fair market values.
The U.S. holders holding period for the common stock
received (other than common stock received with respect to
accrued and unpaid dividends) will include such holders
holding period for the mandatory convertible preferred stock
converted.
If a U.S. holder elects to convert such holders
mandatory convertible preferred stock in the event of a cash
acquisition and, in respect of such conversion, we pay the
U.S. holder a cash acquisition dividend make-whole amount
or satisfy the make-whole amount by adjusting the conversion
rate (as described under Description of Mandatory
Convertible Preferred Stock Conversion Upon Cash
Acquisition; Cash Acquisition Dividend Make-Whole Amount),
the tax treatment of the receipt of cash or shares of our common
stock attributable to the present value of future dividends is
uncertain. It is possible that the payment of shares of our
common stock or cash attributable to the present value of future
dividends will be treated as a distribution on the mandatory
convertible preferred (with the resulting tax consequences
described above under Taxation of distributions).
Alternatively, the payment of shares of our common stock
attributable to the present value of future dividends may be
treated as an adjustment to the conversion rate (as described
above under Constructive dividends) and a
U.S. holder may be required to recognize gain, but not
loss, with respect to the payment of cash attributable to the
present value of future dividends. In such circumstance, a
U.S. holders gain with respect to the payment of cash
attributable to the present value of future dividends would be
equal to the excess of the sum of the fair market value of the
common stock and cash received (other than amounts attributable
to accrued and unpaid dividends, which will be taxable as
described above under Taxation of distributions)
over the holders tax basis in the mandatory convertible
preferred stock, but in no event would the gain recognized
exceed the amount of cash received that is attributable to the
present value of future dividends. It is unclear whether such
gain would be treated as capital gains or as dividend income. A
U.S. holders tax basis in the common stock received
(other than common stock received with respect to accrued and
unpaid dividends but including any basis allocable to a
fractional share) will equal the tax basis of the mandatory
convertible preferred stock that was converted, reduced by the
amount of cash received with respect to the present value of
future dividends and increased by the amount of gain, if any,
recognized (other than with respect to a fractional share, but
including any gain treated as dividend income). Any capital gain
S-80
will be long-term capital gain if at the time of conversion the
mandatory convertible preferred stock has been held for more
than one year. Long-term capital gains recognized in tax years
beginning prior to January 1, 2011 by non-corporate
U.S. holders will be subject to reduced tax rates.
U.S. holders should consult their own tax advisors
regarding the tax treatment of the receipt of a cash acquisition
dividend make-whole amount or additional shares of common stock
upon a cash acquisition.
In the event a U.S. holders mandatory convertible
preferred stock is converted pursuant to certain other
transactions, including our consolidation or merger into another
person, the tax treatment of such a conversion will depend upon
the facts underlying the particular transaction triggering such
a conversion. U.S. holders should consult their own tax
advisors to determine the specific tax treatment of a conversion
under such circumstances.
Sale
or exchange
Upon the sale or exchange of a U.S. holders shares of
mandatory convertible preferred stock (other than a conversion
into common stock) or common stock, a U.S. holder will
recognize taxable gain or loss equal to the difference between
the amount realized on the sale or exchange and the
U.S. holders adjusted tax basis in the mandatory
convertible preferred stock or common stock.
Gain or loss realized on the sale or exchange of mandatory
convertible preferred stock or common stock will generally be
capital gain or loss and will be long-term capital gain or loss
if at the time of sale or exchange the mandatory convertible
preferred stock or common stock has been held for more than one
year. Long-term capital gains recognized in tax years beginning
prior to January 1, 2011 by non-corporate U.S. holders
will be subject to reduced tax rates. The deductibility of
capital losses may be subject to limitations.
Information
reporting and backup withholding
Information returns will be filed with the Internal Revenue
Service in connection with payments of dividends and the
proceeds from a sale or other disposition of our mandatory
convertible preferred stock or common stock. A U.S. holder
will be subject to U.S. backup withholding on these
payments if the U.S. holder fails to provide its taxpayer
identification number to the paying agent and comply with
certain certification procedures or otherwise establish an
exemption from backup withholding. The amount of any backup
withholding from a payment to a U.S. holder will be allowed
as a credit against such U.S. holders
U.S. federal income tax liability and may entitle such
holder to a refund, provided that the required
information is furnished to the Internal Revenue Service.
Tax
Consequences to
Non-U.S. Holders
As used herein, the term
non-U.S. holder
means a beneficial owner of mandatory convertible preferred
stock or common stock that is, for U.S. federal income tax
purposes:
|
|
|
|
|
a nonresident alien individual;
|
|
|
|
a foreign corporation; or
|
|
|
|
a foreign estate or trust.
|
Non-U.S. holder
does not include a holder who is an individual present in the
United States for 183 days or more in the taxable year of
disposition of the mandatory convertible preferred stock or
common stock and who is not otherwise a resident of the United
States for U.S. federal income tax purposes. Such a holder
is urged to consult his or her own tax advisor regarding the
U.S. federal income tax consequences of the sale, exchange
or other disposition of the mandatory convertible preferred
stock or common stock.
Taxation
of distributions
Dividends (including constructive dividends, dividends of common
stock on mandatory convertible preferred stock and any amounts
received on conversion attributable to accrued and unpaid
dividends) paid to
S-81
a
non-U.S. holder
of mandatory convertible preferred stock or common stock
generally will be subject to withholding tax at a 30% rate or a
reduced rate specified by an applicable income tax treaty
(except in the circumstances described in the following
paragraphs). In order to obtain a reduced rate of withholding, a
non-U.S. holder
will be required to provide an Internal Revenue Service
Form W-8BEN
certifying its entitlement to benefits under a treaty.
In the case of any constructive dividend, it is possible that
the U.S. federal tax on the constructive dividend would be
withheld from cash dividends, shares of common stock or sales
proceeds subsequently paid or credited to a
non-U.S. holder.
A
non-U.S. holder
who is subject to withholding tax under such circumstances
should consult its own tax advisor as to whether it can obtain a
refund for all or a portion of the withholding tax.
If at least 80% of our gross income for the relevant period
(described below) is foreign source income attributable to
non-U.S. active
business operations, as determined under applicable tax rules,
payments of dividends on mandatory convertible preferred stock
and on the common stock will be subject to withholding tax only
to the extent of that portion of the dividend which corresponds
to the portion of our total gross income for the relevant period
that is derived from U.S. sources. The relevant period is
the three-year period ending with the close of our taxable year
preceding our taxable year in which the dividend is paid. We
have determined that this special exception to dividend
withholding will apply to any dividends paid in the 2007 taxable
year, and significantly less than 20% of our dividend
distributions to
non-U.S. holders
in the 2007 taxable year will be subject to withholding tax.
However, there can be no assurances that this special exception
will apply to dividends paid after the 2007 taxable year.
The withholding tax does not apply to dividends paid to a
non-U.S. holder
who provides an Internal Revenue Service
Form W-8ECI,
certifying that the dividends are effectively connected with the
non-U.S. holders
conduct of a trade or business within the United States.
Instead, the effectively connected dividends will be subject to
regular U.S. income tax as if the
non-U.S. holder
were a U.S. resident, subject to an applicable income tax
treaty providing otherwise. A
non-U.S. corporation
receiving effectively connected dividends may also be subject to
an additional branch profits tax imposed at a rate
of 30% (or a lower treaty rate).
Gain
on disposition
A
non-U.S. holder
generally will not be subject to U.S. federal income tax on
gain realized on a sale or other disposition of mandatory
convertible preferred stock (except, on conversion, to the
extent amounts are received with respect to accrued and unpaid
dividends, which will be treated in the manner described under
Taxation of distributions above) or common stock
unless:
|
|
|
|
|
the gain is effectively connected with a trade or business of
the
non-U.S. holder
in the United States, subject to an applicable treaty providing
otherwise, or
|
|
|
|
we are or have been a U.S. real property holding
corporation, as described below, at any time within the
five-year period preceding the disposition or the
non-U.S. holders
holding period, whichever period is shorter, and our mandatory
convertible preferred stock or common stock (as applicable) has
ceased to be traded on an established securities market prior to
the beginning of the calendar year in which the sale or
disposition occurs.
|
Generally, a corporation is a U.S. real property holding
corporation if the fair market value of its U.S. real
property interests, as defined in the Code and applicable
regulations, equals or exceeds 50% of the aggregate fair market
value of its worldwide real property interests and its other
assets used or held for use in a trade or business. We believe
that we are not currently a U.S. real property holding
corporation; however, we cannot assure holders that we will not
become a U.S. real property holding corporation prior to a
non-U.S. holders
disposition of common stock.
If a
non-U.S. holder
is engaged in a trade or business in the United States and gain
recognized by the
non-U.S. holder
on a sale or other disposition of mandatory convertible
preferred stock or common stock is effectively connected with
the conduct of such trade or business, the
non-U.S. holder
will generally be taxed in the same manner as a
U.S. holder, subject to an applicable income tax treaty
providing otherwise.
S-82
Non-U.S. holders
whose gain from dispositions of mandatory convertible preferred
stock or common stock may be effectively connected with the
conduct of a trade or business in the United States are urged to
consult their own tax advisors with respect to the U.S. tax
consequences of the ownership and disposition of mandatory
convertible preferred stock and common stock, including the
possible imposition of a branch profits tax.
Information
reporting and backup withholding
Information returns will be filed with the Internal Revenue
Service in connection with payments of dividends and the
proceeds from a sale or other disposition of mandatory
convertible preferred stock or common stock. A
non-U.S. holder
may have to comply with certification procedures to establish
that it is not a United States person in order to avoid
information reporting and backup withholding tax requirements.
The certification procedures required to claim a reduced rate of
withholding under a treaty will satisfy the certification
requirements necessary to avoid the backup withholding tax as
well. The amount of any backup withholding from a payment to a
non-U.S. holder
will be allowed as a credit against such holders United
States federal income tax liability and may entitle such holder
to a refund, provided that the required information is
furnished to the Internal Revenue Service.
Federal
estate tax
An individual
non-U.S. holder
who is treated as the owner of, or has made certain lifetime
transfers of, an interest in the mandatory convertible preferred
stock or common stock will be required to include the value of
the stock in his or her gross estate for U.S. federal
estate tax purposes, and may be subject to U.S. federal
estate tax unless an applicable estate tax treaty provides
otherwise.
S-83
UNDERWRITERS
We are offering the shares of mandatory convertible preferred
stock described in this prospectus supplement through a number
of underwriters. Merrill Lynch, Pierce, Fenner & Smith
Incorporated and J.P. Morgan Securities Inc. are acting as
joint book-running managers of the offering and as
representatives of the underwriters. We have entered into an
underwriting agreement with the underwriters. Subject to the
terms and conditions of the underwriting agreement, we have
agreed to sell to the underwriters, and each underwriter has
severally agreed to purchase, at the public offering price less
the underwriting discounts and commissions set forth on the
cover page of this prospectus supplement, the number of shares
of mandatory convertible preferred stock listed next to its name
in the following table:
|
|
|
|
|
|
|
Number
|
|
Underwriter
|
|
of Shares
|
|
|
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated
|
|
|
|
|
J.P. Morgan Securities
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,000,000
|
|
|
|
|
|
|
The underwriters are committed to purchase all the preferred
shares offered by us if they purchase any shares. The
underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting
underwriters may also be increased or the offering may be
terminated.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of
1933.
Overallotment
Option
The underwriters have an option to buy up to 1,500,000
additional shares of mandatory convertible preferred stock from
us to cover sales of shares by the underwriters which exceed the
number of shares specified in the table above. The underwriters
have 30 days from the date of this prospectus supplement to
exercise this overallotment option. If any shares are purchased
with this overallotment option, the underwriters will purchase
shares in approximately the same proportion as shown in the
table above. If any additional shares of mandatory convertible
preferred stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the shares
are being offered.
Commissions
and Discounts
The underwriters propose to offer the preferred shares directly
to the public at the initial public offering price set forth on
the cover page of this prospectus supplement and to certain
dealers at that price less a concession not in excess of
$ per share. Any such dealers
may resell shares to certain other brokers or dealers at a
discount of up to $ per share
from the public offering price. After the public offering of the
shares, the offering price and other selling terms may be
changed by the underwriters. Sales of shares made outside of the
United States may be made by affiliates of the underwriters.
The following table shows the public offering price,
underwriting discount and proceeds before expenses to us. The
information assumes either no exercise or full exercise by the
underwriters of their overallotment option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
Without Option
|
|
|
With Option
|
|
|
Public offering price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Underwriting discount
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to us
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
S-84
We estimate that the total expenses of this offering, including
registration, filing and listing fees, printing fees and legal
and accounting expenses, but excluding the underwriting
discounts and commissions, will be approximately
$ .
Electronic
Distribution
A prospectus supplement in electronic format may be made
available on the web sites maintained by one or more
underwriters, or selling group members, if any, participating in
the offering. The underwriters may agree to allocate a number of
shares to underwriters and selling group members for sale to
their online brokerage account holders. Internet distributions
will be allocated by the representatives to underwriters and
selling group members that may make Internet distributions on
the same basis as other allocations.
No Sales
of Similar Securities
Other than our concurrent offering of common stock, we have
agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement
under the Securities Act relating to, any shares of our
mandatory convertible preferred stock or common stock or
securities convertible into or exchangeable or exercisable for
any shares of our mandatory convertible preferred stock or
common stock, or publicly disclose the intention to make any
offer, sale, pledge, disposition or filing, without the prior
written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated and J.P. Morgan Securities Inc. for a
period of 90 days after the date of this prospectus
supplement, except that we may issue shares of our common stock
upon the exercise of an option or the conversion of a securities
outstanding on the date hereof (in addition to our mandatory
convertible preferred stock) or issued pursuant to any employee
stock option plan, non-employee director stock plan or dividend
reinvestment plan.
The Chairman of our Board of Directors, our Chief Executive
Officer and our Chief Financial Officer have entered into
lock-up
agreements with the underwriters prior to the commencement of
this offering pursuant to which each of these persons, with
limited exceptions, for a period of 90 days after the date
of this prospectus supplement, may not, without the prior
written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated and J.P. Morgan Securities Inc.,
(1) offer, pledge, announce the intention to sell, grant
any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of our
mandatory convertible preferred stock or common stock
(including, without limitation, mandatory convertible preferred
stock or common stock which may be deemed to be beneficially
owned by such persons in