Energy costs, environmental liabilities hurt Phelps Dodge

Denver — Higher energy costs forced Phelps Dodge (PD-N) to post a first-quarter loss of US$14.7 million (or 19 per share) before a pretax, non-recurring gain of US$28.9 million.

The pretax gain came from several insurance settlements on environmental liabilities related to the late 1999 acquisition of Cyprus Amax Minerals, though the company declined to offer further information.

Net income for the quarter, after the gain, reached US$14.2 million (18 per share), compared with earnings of US$19.4 million (25 per share) in the first three months of 2000.

Electricity costs, pushed skyward by the California energy crisis, continue to weigh the company down. At presstime, Phelps Dodge had not yet disclosed its costs for the first quarter, though in the fourth quarter of 2000, they totalled US11 per kilowatt-hour.

Phelps Dodge’s share of mine production decreased to 294,200 tons copper in the first quarter, down from 304,400 tons in the first three months of 2000. The shortfall is attributed to the Morenci operation in Arizona, which made the transition from smelting to heap leaching and solvent extraction-electrowinning. The transition is also partly responsible for a drop in copper sales to 289,700, from 315,400 tonnes in the first quarter of 2000.

Revenue fell 3.5% from the year-ago period to US$726.5 million in the mining division, and 2.5% to US$1.1 billion for the company as a whole. On the bright side, revenue from the wire-and-cable and specialty chemicals divisions improved slightly.

Cash flow from operations was negative-US$9.9 million in the first quarter, compared with positive-US$124.3 million a year ago. Debt grew to US$2.85 billion, up from US$2.69 billion at the end of the fourth quarter of 2000. The debt-to-capitalization ratio was 47.9%.

Low copper prices are forcing Phelps Dodge to find further ways to cut costs. Although the average price on the Comex division of the New York Mercantile Exchange averaged US82 per lb. for the quarter (on par with a year ago), the price has since slipped to US77 per lb.

“We anticipate that current economic uncertainties will continue through the second quarter and may continue for the remainder of the year,” says Chairman Steven Whisler.

The company plans to lay off 500 mid-level employees in North and South America in an effort to improve operating income by US$30 million in 2001. The plan would see annual savings of US$100 million in 2002 and US$150 million in 2003.

In late January, Phelps Dodge implemented a plan to reduce copper production by 175 million lbs. through production curtailments at the Tyrone and Sierrita operations in New Mexico and Arizona, respectively. The plan included laying off 130 workers. Molybdenum production is to be slashed by 7 million lbs., primarily from the Henderson mine in Colorado.

In early May, Phelps Dodge expects to make a decision about development of the Sossego copper-gold project in Brazil. The US$500-million project is a 50-50 joint venture with Companhia Vale do Rio Doce (RIO-N) in the northern Amazon region of Para state. Reserves were last estimated at 240 million tons grading 1.1% copper and 0.01 oz. gold per ton. At full production, the open-pit operation would produce more than 150,000 tons copper per year, starting as soon as 2004.