Phelps Dodge cuts copper production

Vancouver A global economic slowdown prompting a deflationary spiral in commodity prices has hit the bottom line of the world’s second largest copper producer.

Phoenix-based Phelps Dodge (PD-N) posted a net loss of US$100.6 million, or US$1.28 a share in the latest quarter ended Sept. 30. This marks a dramatic drop from the US$41.5 million, or US53 cents a share, profit tallied in the corresponding period last year. Revenues fell to US$937 million, from US$1.19 billion recorded in the third quarter of last year.

"We’ve seen the price of copper fall from US80 cents per lb in March, to US65 cents per lb. in early September," says the company’s CEO, J. Steven Whisler. "With the tragic events of September 11, not only has the near-term economic outlook deteriorated in North America, but we also have seen economic malaise spread to Europe and other geographical regions."

Cash flow from operating activities tallied US$99.9 million in the latest quarter, dramatically lower than the US$148.6 million recorded last year.

"Demand for our manufactured products has suffered in most of the markets we serve. These factors resulted in a US$49 million decrease in operating income, versus last quarter and a US$158 million decrease versus last year’s third quarter," adds Whisler.

Mine production from its worldwide operations came in at 273,700 tons of copper in the third quarter and 861,700 tons in the first nine months of 2001, compared with production of 300,900 tons and 907,800 tons in the corresponding periods of 2000. The decrease in output is attributed to the temporary impact of transitioning to total mine-for-leach production at its Morenci operation in Arizona and the curtailment of certain operations at Chino, New Mexico. Copper sales for the quarter hit 294,700 tons, compared with 294,900 tons recorded in the third quarter of 2000.

For the first nine months of 2001, the mining and metals division reported an operating loss of US$69.1 million before one time charges of US$10.0 million, compared with operating income of US$203.8 million before one time charges of US$5.9 million in the first nine months of 2000.

The company’s molybdenum operations recorded an operating loss of US$6.1 million during the third quarter, compared with operating income of US$1.8 million in the corresponding period of 2000. The decrease was due to lower average realized prices and higher unit production costs. Production of molybdenum hit 11.9 million lbs. in the quarter, down from 12.9 million lbs. in the third quarter of 2000. The company sold 13.1 million lbs. of molybdenum, essentially flat from the 13 million lbs. sold in the same three-month period a year ago. The molybdenum oxide price averaged US$2.42 per lb in the third quarter, compared with US$2.66 per lb a year earlier.

At September 30, the company’s total debt stood at US$2.99 billion, compared with US$2.97 billion at June 30, 2001.

Responding to the poor results and a weak economic outlook going forward, the major announced the elimination of its quarterly dividend, as well as plans to cut copper production by 220,000 tonnes annually and to scale back North American black carbon production by 54,000 tonnes. The reductions will translate into 1,440 people losing their jobs.

"We now are facing one of the more extraordinary and uncertain economic climates in the past 30 years. Phelps Dodge consistently has taken aggressive action to shape its future, and we are determined to continue to chart a successful course independent of variables we do not control,” states Whisler.

Through a series of moves slated to be complete by Jan. 15, 2002, the major aims to close the Chino mine in New Mexico and the Miami mine in Arizona. The result will be a reduction in copper production of some 66,000 and 45,000 tonnes, respectively. Phelps Dodge also plans on reducing production at the Sierrita and Bagdad operations, both in Arizona, to half capacity lowering production by some 109,000 tonnes of copper. The elimination of the dividend will result in net cash savings of approximately US$40 million annually.

"The copper market, with its reduced demand, currently is out of balance by more than 500,000 metric tons," says Whisler. "We already have taken 300,000 metric tons, or more than 18 percent, of our annual copper production offline, and with today’s action, will have reduced copper production by approximately one third since early 1999."

The copper market responded quickly to the news, with prices for December delivery climbing US1.85 cents to US64.35 cents a lb. Spot October copper was up US1.20 cents at US63.30 a lb. The price of copper recently hit a 14-year lows at about US62 cents a lb as metal oversupply and weak demand met with a dim economic outlook, which was worsened by the Sept. 11 attacks on U.S. landmarks. Once copper prices improve the company intends to put production back online quickly.

In another move to save costs, starting Nov. 30, Phelps Dodge will curtail 54,000 tonnes of annual carbon black production from its El Dorado operation in Arkansas.

The moves are expected to result in one-time, pre-tax charges of about US$25 million.