Energy costs squeeze Phelps Dodge in first quarter

Denver — Higher energy costs continue to hurt the bottom line for Phelps Dodge (PD-N), resulting in a loss of US$14.7 million (or 19 per share) in the first quarter of 2001, 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 1999 acquisition of Cyprus Amax Minerals.

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

Electricity costs (pushed skyward by the lengthening California energy crisis) were the most important factor weighing down the first-quarter performance. At presstime, the company had not yet released first-quarter costs. Costs reached US11 per kilowatt-hour during the fourth quarter of 2000, resulting in a production cost increase of US8 per lb. Historic costs have been between US3 and US5 per kilowatt-hour in the western U.S.

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 quarter of 2000. The Morenci operation in Arizona was blamed for the decrease. It is moving its production away from the smelter towards the cheaper heap-leach, solution extraction-electrowinning process.

The change at Morenci cut copper sales in the first quarter to 289,700 tons, compared with 315,400 tons a year ago. Sales in 2000 were higher, due to inventories from the Cyprus acquisition.

The shortfall translated further to revenues, which fell 3.5% to US$726.5 million for the mining division and 2.5% to US$1.1 billion for the company. Revenues from the wire-and-cable and specialty-chemicals divisions improved slightly in the first quarter.

Cash flow from operations was a negative US$9.9 million in the first quarter, compared with a positive US$124.3 million a year ago. The company’s debt grew to US$2.85 billion, up from US$2.69 billion three months ago. Its debt-to-capitalization ratio was 47.9%.

Low copper prices continue to put the pressure on Phelps Dodge to find ways to cut costs. While 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 now 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 Steven Whisler, the company’s chairman.

In an effort to respond to worsening conditions, Phelps Dodge has implemented a plan to improve operating income by US$30 million in 2001. This will see annual savings of US$100 million in 2002 and US$150 million in 2003. Some 500 mid-level employees will be laid off at the company’s operations in North America and South America.

The job cuts are unrelated to the renewal of the Worker Adjustment and Retraining Notification (WARN) notices to its 2,350 employees at the Chino, Tyrone and Sierrita copper operations in New Mexico and Arizona.

In late January, Phelps Dodge implemented a plan to reduce copper production by 175 million lbs. by alternating production curtailments at Tyrone, Sierrita and the Bagdad operation. Under the plan, 130 workers would be laid off and molybdenum production would be cut by 7 million lbs., primarily at the Henderson mine in Colorado.

In early May, after reviewing a recently completed feasibility study, Phelps Dodge expects to make a decision about the 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. Previously stated reserves stand 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.

A Bloomberg News report says CVRD is eager to move ahead with the project, but is waiting for Phelps Dodge’s response.