Investment.
We have elected to measure our equity investment in McMoRan at fair value, and
the change in fair value of our investment is recognized as a gain or loss on investment measured at
fair value in our income statement. We determine the fair value of our investment by discounting for
lack of marketability at the reporting date. The discount factor for lack of marketability is determined by
utilizing both Protective put and Asian put option models. Both of these options are valued using a
Black-Scholes option-pricing model which utilizes various inputs including the closing price of the
McMoRan common stock, implied volatility of the instrument, number of shares being valued, length of
time that would be necessary to dispose of our investment, expected dividend and risk-free interest
rates. The use of such models requires substantial judgment with respect to the inputs used to
determine fair value.
At December 31, 2011, the McMoRan shares were valued at approximately $611.7 million, based
on McMoRan’s closing stock price of $14.55 on December 31, 2011, discounted to reflect certain
limitations on the marketability of the shares.
For a further discussion concerning our risks related to equity prices and our equity investment in
McMoRan, see Item 7A – Quantitative and Qualitative Disclosures about Market Risk – Equity Price
Risk.
Stock-based Compensation.
Our stock-based compensation cost is measured based on the fair
value of the award on the grant date and remeasured each reporting period for liability-classified
awards. The compensation cost is recognized net of estimated forfeitures over the requisite service
period.
We utilize the Black-Scholes option pricing model to measure the fair value of our stock
appreciation rights, and in the case of restricted stock unit grants that include common stock price
based performance targets, we utilize a Monte-Carlo simulation model to estimate the fair value and
the number of restricted stock units expected to be issued in the future. Expected volatility is based on
the historical volatility of our common stock and other factors. We use historical experience for
exercises to determine expected life. The use of such models requires substantial judgment with
respect to expected life, volatility, expected returns and other factors.
We recognized $49 million, $51 million and $61 million of stock-based compensation expense for
the years ended December 31, 2011, 2010 and 2009, respectively.
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