Operational changes and restructuring charges at two of its operations are expected to depress second-quarter earnings for
The copper miner expects earnings in the 3-month period to dip to as low as US2 per share, and to US60 for the full year. By comparison, the company earned US2 per share in the second quarter of 1999 and US35 for all of last year.
The market responded to the announcement by sending the price of Phelps Dodge shares down more than $3 to a 52-week low of US$37.81.
Among the operational changes will be a reduction of mining activity at the Miami mine in Arizona. Phelps Dodge, which acquired the open-pit mine when it merged with Cyprus Amax Minerals late last year, will suspend stripping and eliminate 65 jobs.
Phelps Dodge expects to record a US$1.1-million after-tax charge (or 1 per share) for severance costs and equipment relocation. The smelter, refinery and rod mill will not be affected by the change.
The suspension of stripping will not affect copper production during the remainder of 2000, though production in 2001 will be decreased by a projected 35 million lbs. By 2002, production will be down 85 million lbs. However, the move is expected to improve earnings by US$8.7 million (or 7 per share) in 2000, and by US$25 million (20 per share) in 2001.
Higher electricity and fuel costs also conspired against Phelps Dodge during the second quarter. Unusually warm weather in the western U.S. pushed power costs higher, resulting in higher-than-expected production costs. Phelps Dodge expects these costs will be US1.1 per lb. higher than in the first quarter. Combine this with a projected production loss of 3.5 million lbs. as a result of power interruptions, and earnings should dip by about US$8 million (6 per share).
Diesel fuel costs have gone up 10%, while natural gas costs are up 25%, in comparison with the first quarter — a double-whammy that threatens to push production costs up by US$3 million (2 per share).
Meanwhile in Chile, Phelps Dodge is experiencing production difficulties at the El Abra copper mine, in which the company acquired a half-stake following the merger with Cyprus Amax.
Transitional ore (containing a mix of leachable oxide and non-leachable sulphide ore) was mistakenly placed on the heap-leach pad, resulting in a production loss of 6 million lbs. copper in the second quarter. The blunder will cost the company US$4 million in earnings (or 4 per share).
The company has begun actions to correct the problem, including improving ore control, developing a new orebody model and additional drilling for a more accurate mine plan. The company has also upgraded the ore-delivery system. In May, the operation delivered a record tonnage to the pads. Despite this improvement, El Abra is not expected to return to budgeted levels until the fourth quarter.
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