Downside protection trims upside for Phelps Dodge

Vancouver — Taking the position that copper prices are currently in “uncharted territory,” Phelps Dodge (PD-N) defended a previous decision to put in place copper collars and put options that shaved US$298.4 million, or US$1.46 per share, from its net earnings in the first quarter of 2006.

Phelps Dodge reported net income of US$333.8 million, or US$1.64 per share, for its latest quarter, compared with US$386.7 million, or US$1.92 per share, a year earlier. LME copper prices averaged US$2.41 per lb. in the latest quarter, compared with US$1.48 in the first quarter of 2005, but the after-tax charge for mark-to-market adjustments related to the copper price-protection program nipped what would have been another record quarter for the copper giant.

During a conference call with analysts, chairman and chief executive Steven Whisler said questions relating to the 2006 and 2007 copper price-protection programs “are mostly driven by hindsight.” He said the decisions to put the programs in place were made “after lengthy debates” at a time when the company had concerns about having adequate cash to fund aggressive capital programs at the Cerro Verde project in Peru, the Stafford mine in Arizona, and the Tenke Fungurume project in the Democratic Republic of the Congo.

“We knew we could be potentially giving up something on the upside, but we made the decision on the theory that the downside was more problematic for us,” Whisler said.

He added that in 2006, only 25% of copper production is covered by price-protection programs, and this will be reduced to 20% in 2007.

Phelps Dodge’s sales and operating revenue totalled US$2.2 billion in the latest quarter, up from U$1.8 billion a year earlier. The company ended the quarter with a cash position of about US$2.16 billion.

With copper prices now exceeding US$3 per lb., Phelps Dodge expects robust earnings for the balance of this year. Molybdenum prices, on the other hand, slipped to an average of US$22.91 per lb. in the first quarter from US$31.31 a year earlier.

Despite softer moly prices, Phelps Dodge recently approved the restart of the Climax moly mine near Leadville, Colo., subject to a positive final feasibility study and the receipt of necessary permits.

The underground mine last operated in 1995, and a capital investment of about US$200-US$250 million is required to achieve the targeted annual production rate of 20-30 million lbs. of moly in concentrates.

Phelps Dodge currently trades at about US$90 per share. In February of this year, the company’s board approved a 2-for-1 split of outstanding common stock in the form of a 100% stock dividend distributed in March. The post-split stock began trading in mid-March.