Phelps Dodge drives down costs

The world’s second-largest copper producer, Phoenix, Ariz.-based Phelps Dodge (PD-N), is starting to show success in its efforts to reduce operating costs at its mines around the world.

Dubbed “Quest for Zero,” the cost-reduction program was launched in May 2001 with an initial goal of delivering US$150 million in annual savings. The figure has since been ratcheted up to US$400 million, which translates into an implied production cost of US60 per lb. copper

The “zero” in the quest refers to zero safety and environmental incidents, zero variability in production processes and costs, zero waste and zero product defects.

By the end of 2001, the program had delivered US$55 million in cost savings, thanks to the many steps the company took to reduce costs, including:

q building additional electrical-generating capacity;

q cutting 220,000 tonnes of annual copper production and 54,000 tonnes of North American carbon black output;

q placing a US$900-million debt offering in order to pay down existing higher-yield debt;

q laying off 1,600 employees and terminating 500 positions; and

q eliminating dividends.

During the first quarter of 2002, Phelps Dodge recorded an implied unit cost of US69 per lb. of copper production, or 12 less than in the first quarter of 2001 but a penny higher than in the fourth quarter of 2001.

During the recent quarter, the company produced 257,200 tonnes copper, compared with 294,200 tonnes during the corresponding period last year. Copper prices on the London Metal Exchange were US71 per lb. during the first quarter, up US6 from the fourth quarter but still off US9 from a year earlier.

Phelps Dodge posted a better-than-forecast net loss for the quarter, including special items, of US$27.7 million (US35 per share) on sales of US$918.5 million, compared with a year-earlier profit of US$14.2 million (US18) on sales of US$1.1 billion.

For all of 2001, Phelps Dodge lost US$297.5 million (US$3.79 per share), compared with a profit of US$72.3 million (US92 per share) in 2000. Operating cash flow plunged to US$302.7 million from US$511.2 million between the two periods, and total debt rose to US$2.85 billion from US$2.69 billion.

At the annual meeting in late April, Phelps Dodge President J.S. Whisler told shareholders that “while we still have significant work ahead to achieve our goals, there’s no doubt that the improvements we have made thus far position us well so that we may capture returns as soon as the cyclical copper market begins its upswing.”

He concluded that, “in the longer term, we remain confident [that] strong copper fundamentals will prevail. . . . Copper is a building block of society and has a long life ahead of it.”

Of note, in early 2002, Phelps Dodge announced the construction of a demonstration plant to prove a new leaching process for copper concentrates, and, in 2001, the company completed a US$220-million project to convert its Morenci operation in Arizona to 100% low-cost solvent-extraction/electrowinning production.

Phelps Dodge’s total debt at March 31, 2002, stood at US$2.83 billion, so that the company’s debt-to-capitalization ratio remains steady at 50.8%.

With respect to its byproduct molybdenum business, the company says that even though global moly consumption exceeded production during 2001, a “severe excess” of inventories built up during the prior three years, coupled with sagging demand in all markets in the U.S. The combined effect has been a weak molybdenum market.

However, the company remains optimistic that the moly market will recover.