INVESTMENT COMMENTARY — Phelps Dodge seen by analyst as a low-cost producer

Despite the generally negative outlook it holds for copper prices, broker JP Morgan Securities sees upside potential in Phelps Dodge (NYSE).

“Supported by the world-class Morenci operation in Arizona and the recently completed Candelaria mine in Chile, Phelps Dodge’s annual production is expected to grow to 1.45 billion lb. at an average cost of US53 cents per lb. by 1996,” the New York-based brokerage house reports.

The firm believes copper markets are moving to a situation of supply surplus from one of supply deficit. The surplus is expected to result in increasing inventories and declining prices.

“We expect copper prices to average US$1.35 per lb. in 1995 and decline steadily to US95 cents per lb. in 1998, a year that is likely to be the next trough for copper prices,” JP Morgan reports.

It rates Phelps Dodge as a “market performer,” reflecting the expectation that declining prices for the red metal will be a drag on the sector.

All the same, the 12-month target price of US$72 per share represents a 20% gain from the issue’s current level of about US$60.

Phelps also owns an international group of industrial operations with interests in carbon black (used in the manufacture of tires), copper wire and cable, and tire rims. This subsidiary contributed US$151 million to operating income in 1994, or about 25% of the total, and JP Morgan expects operating profits to grow 35% in 1995.

Based on current estimates, 1995 earnings for Phelps Dodge are estimated at US$10.24 per share.

Earnings leverage is estimated at US$1.24 per share for each US10 cents-per-lb. change in the price of copper.

The company pays annual dividends of US$1.80, and, as of Dec. 31, 1994, had US$558 million in working capital, US$1.05 billion in long-term debt and 69.5 million shares outstanding.

By the end of 1998, the company is expected to have almost US$2 billion in working capital and about US$1 billion in long-term debt.