Weak copper prices hamper Phelps Dodge’s bottom line

Vancouver — As copper prices continue to linger near lows not seen since 1987, Arizona-based Phelps Dodge (PD-N) is intent on trimming its losses by driving down operating costs.

The world’s second-largest producer reported a loss of US$55.9 million (or US67 per share) in the quarter ended Sept. 30, compared with a loss of US$100.4 million (US$1.28 per share) in the corresponding period of 2001. On the bright side, overall sales between the two periods rose modestly to US$941.2 million from US$937 million, as did cash flow from operations, to US$121.6 million from US$99.9 million.

“While the difficult global economic environment and weak metal prices continue to affect our financial results adversely, we continue to make progress through operating improvements,” says President J.S. Whisler.

Phelps Dodge realized an average copper price of US69 per lb. in the recent 3-month period, slightly better than the US67 per lb. recorded a year earlier but less than the US73 realized in the second quarter of this year.

“The average copper price during the third quarter fell US4 per pound in comparison to the second quarter, but we were able to offset the price decline partially by reducing our copper production costs by US3 per pound,” explains Whisler.

Contributing to the third-quarter loss was a series of after-tax, extraordinary charges totalling US$24 million (US27 per share). The charges included a US$26.6-million hit for the early payment of debt and a US$22.2-million special charge associated with temporary closure of two wire and cable facilities. The charges were offset by a US$28.1-million special tax benefit.

During the first nine months of 2002, the major incurred a loss of US$120 million (US$1.52 per share), compared with a loss of US$196.7 million (US$2.51 per share) in the year-earlier period. Sales between the two periods dropped to US$2.8 billion from US$3.1 billion, owing to lower sales volumes of copper wire and cable, and specialty chemicals.

However, 9-month cash flow from operations improved to US$301.3 million from US$177.2 million, thanks in part to an improved operating performance at its mining division.

During the third quarter, the company produced 254,200 tons of the red metal at a cash cost of US51 per lb., compared with 273,700 tons at US61 per lb. a year earlier.

The quarterly loss was partially offset by a US$16-million profit generated from molybdenum sales. The price for the metal averaged US$4.71 per lb. during the period, a marked improvement over the US$2.42 per lb. realized a year earlier.

Looking ahead, the company has no plans to resume production at any of its curtailed facilities. “The situation now translates into kind of a dismal copper market,” concedes Whisler. Phelps Dodge expects growth in copper consumption to come in at 1.5-2% through to the end of 2002, with weakness in the U.S. and Europe offset by strength in Asia.