FINANCIAL INSTRUMENTS

FCX does not purchase, hold or sell derivative financial instruments unless there is an existing asset or obligation, or it anticipates a future activity that is likely to occur and will result in exposure to market risks, which FCX intends to offset or mitigate. FCX does not enter into any derivative financial instruments for speculative purposes, but has entered into derivative financial instruments in limited instances to achieve specific objectives. These objectives principally relate to managing risks associated with commodity price changes, foreign currency exchange rates and interest rates.

Commodity Contracts. From time to time, FCX has entered into derivative contracts to hedge the market risk associated with fluctuations in the prices of commodities it purchases and sells. Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. As a result of the acquisition of the oil and gas business in 2013, FCX assumed a variety of crude oil and natural gas commodity derivatives to hedge the exposure to the volatility of crude oil and natural gas commodity prices, all of which had matured by December 31, 2015. As of December 31, 2018 and 2017, FCX had no price protection contracts relating to its mine production. A discussion of FCX’s derivative contracts and programs follows.

Derivatives Designated as Hedging Instruments – Fair Value Hedges

Copper Futures and Swap Contracts. Some of FCX’s U.S. copper rod customers request a fixed market price instead of the COMEX average copper price in the month of shipment. FCX hedges this price exposure in a manner that allows it to receive the COMEX average price in the month of shipment while the customers pay the fixed price they requested. FCX accomplishes this by entering into copper futures or swap contracts. Hedging gains or losses from these copper futures and swap contracts are recorded in revenues. FCX did not have any significant gains or losses during the three years ended December 31, 2018, resulting from hedge ineffectiveness. At December 31, 2018, FCX held copper futures and swap contracts that qualified for hedge accounting for 68 million pounds at an average contract price of $2.77 per pound, with maturities through June 2020.

A summary of (losses) gains recognized in revenues for derivative financial instruments related to commodity contracts that are designated and qualify as fair value hedge transactions, including the unrealized gains (losses) on the related hedged item for the years ended December 31 follows:



	2018			2017			2016
Copper futures and swap contracts:
Unrealized (losses) gains:
Derivative financial instruments	$	(20	)	$	4		$	16
Hedged item – firm sales commitments	20			(4		)	(16		)

Realized (losses) gains:
Matured derivative financial instruments	(22		)	30			1

Derivatives Not Designated as Hedging Instruments

Embedded Derivatives. Certain FCX concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on the LME copper price or the COMEX copper price and the LMBA gold price at the time of shipment as specified in the contract. FCX receives market prices based on prices in the specified future month, which results in price fluctuations recorded to revenues until the date of settlement. FCX records revenues and invoices customers at the time of shipment based on then-current LME or COMEX prices, which results in an embedded derivative (i.e., a pricing mechanism that is finalized after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale of the metals contained in the concentrate or cathode at the then-current LME or COMEX price. FCX applies the normal purchases and normal sales scope exception in accordance with derivatives and hedge accounting guidance to the host contract in its concentrate or cathode sales agreements since these contracts do not allow for net settlement and always result in physical delivery. The embedded derivative does not qualify for hedge accounting and is adjusted to fair value through earnings each period, using the period-end forward prices, until the date of final pricing. Similarly, FCX purchases copper and cobalt under contracts that provide for provisional pricing. Mark-to-market price fluctuations from these embedded derivatives are recorded through the settlement date and are reflected in revenues for sales contracts and in inventory for purchase contracts. A summary of FCX’s embedded derivatives at December 31, 2018, follows:



	Open	Average Price Per Unit				Maturities
	Positions	Contract		Market		Through
Embedded derivatives in provisional sales contracts:
Copper (millions of pounds)	489	$	2.78	$	2.70	May 2019
Gold (thousands of ounces)	119	1,229		1,286		April 2019
Embedded derivatives in provisional purchase contracts:
Copper (millions of pounds)	117	2.79		2.71		May 2019
Cobalt (millions of pounds)	9	19.58		19.25		March 2019

Crude Oil and Natural Gas Contracts. FCX had no outstanding crude oil or natural gas derivative contracts as of December 31, 2018 or 2017. As part of the terms of the agreement to sell its onshore California oil and gas properties, FM O&G entered into derivative contracts during October 2016. Sentinel assumed these contracts at the time of the sale in December 2016. These derivative contracts were not designated as hedges for accounting purposes, and were recorded at fair value with the mark-to-market gains and losses recorded in revenues (oil contracts) and production costs (natural gas contracts).

Copper Forward Contracts. Atlantic Copper, FCX’s wholly owned smelting and refining unit in Spain, enters into copper forward contracts designed to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match. These economic hedge transactions are intended to hedge against changes in copper prices, with the mark-to-market hedging gains or losses recorded in cost of sales. At December 31, 2018, Atlantic Copper held net copper forward sales contracts for 8 million pounds at an average contract price of $2.76 per pound, with maturities through February 2019.

Summary of (Losses) Gains. A summary of the realized and unrealized (losses) gains recognized in operating income (loss) for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, for the years ended December 31 follows:



	2018			2017			2016
Embedded derivatives in provisional sales contracts^a
Copper	$	(310	)	$	489		$	262
Gold and other	(7		)	26			4
Crude oil options and swaps^a	—			—			(35		)
Copper forward contracts^b	18			(15		)	5


a.	Amounts recorded in revenues.


b.	Amounts recorded in cost of sales as production and delivery costs.

Unsettled Derivative Financial Instruments

A summary of the fair values of unsettled commodity derivative financial instruments follows:



	December 31,
	2018		2017
Commodity Derivative Assets:
Derivatives designated as hedging instruments:
Copper futures and swap contracts	$	—	$	11
Derivatives not designated as hedging instruments:
Embedded derivatives in provisional copper, gold and cobalt
sales/purchase contracts	23		155
Copper forward contracts	—		1
Total derivative assets	$	23	$	167



Commodity Derivative Liabilities:
Derivatives designated as hedging instruments:
Copper futures and swap contracts	$	9	$	—
Derivatives not designated as hedging instruments:
Embedded derivatives in provisional copper, gold and cobalt
sales/purchase contracts	39		55
Copper forward contracts	—		2
Total derivative liabilities	$	48	$	57

FCX’s commodity contracts have netting arrangements with counterparties with which the right of offset exists, and it is FCX’s policy to generally offset balances by contract on its balance sheet. FCX’s embedded derivatives on provisional sales/purchase contracts are netted with the corresponding outstanding receivable/payable balances.

A summary of these unsettled commodity contracts that are offset in the balance sheet follows:



	Assets at December 31,				Liabilities at December 31,
	2018		2017		2018		2017

Gross amounts recognized:
Commodity contracts:
Embedded derivatives in provisional
sales/purchase contracts	$	23	$	155	$	39	$	55
Copper derivatives	—		12		9		2
	23		167		48		57

Less gross amounts of offset:
Commodity contracts:
Embedded derivatives in provisional
sales/purchase contracts	7		—		7		—
Copper derivatives	—		1		—		1
	7		1		7		1

Net amounts presented in balance sheet:
Commodity contracts:
Embedded derivatives in provisional
sales/purchase contracts	16		155		32		55
Copper derivatives	—		11		9		1
	$	16	$	166	$	41	$	56

Balance sheet classification:
Trade accounts receivable	$	3	$	151	$	24	$	—
Other current assets	—		11		—		—
Accounts payable and accrued liabilities	13		4		17		56
	$	16	$	166	$	41	$	56

Credit Risk. FCX is exposed to credit loss when financial institutions with which it has entered into derivative transactions (commodity, foreign exchange and interest rate swaps) are unable to pay. To minimize the risk of such losses, FCX uses counterparties that meet certain credit requirements and periodically reviews the creditworthiness of these counterparties. FCX does not anticipate that any of the counterparties it deals with will default on their obligations. As of December 31, 2018, the maximum amount of credit exposure associated with derivative transactions was $16 million.

Other Financial Instruments. Other financial instruments include cash and cash equivalents, restricted cash, restricted cash equivalents, accounts receivable, investment securities, legally restricted funds, accounts payable and accrued liabilities, dividends payable and long-term debt. The carrying value for cash and cash equivalents (which included time deposits of $2.3 billion at December 31, 2018, and $2.9 billion at December 31, 2017), restricted cash, restricted cash equivalents, accounts receivable, accounts payable and accrued liabilities, and dividends payable approximates fair value because of their short-term nature and generally negligible credit losses (refer to Note 15 for the fair values of investment securities, legally restricted funds and long-term debt).

In addition, as of December 31, 2018, FCX has contingent consideration assets related to certain 2016 asset sales (refer to Note 15 for the related fair value and to Note 2 for further discussion of these instruments).

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents. The following table provides a reconciliation of total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows to the components presented in the consolidated balance sheets:



	December 31, 2018		December 31, 2017
Balance sheet components:
Cash and cash equivalents	$	4,217	$	4,526
Restricted cash and restricted cash equivalents included in:
Other current assets	110		52
Other assets	128		132
Total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows	$	4,455	$	4,710