Merger pays off for Phelps Dodge

Phoenix, Ariz.-based Phelps Dodge (PD-N) attributes its first-quarter savings of US$30 million to the acquisition of Cyprus Amax Minerals late last year.

Increased purchasing power enabled Phelps Dodge to negotiate procurement contracts, which are expected to result in annual savings of more than US$20 million. In addition, Phelps Dodge reduced general and administrative expenses by US$10 million, compared with the combined expenses of Phelps Dodge and Cyprus Amax in the first quarter of 1999.

The merger was completed in December 1999, and, by the end of 2001, Phelps Dodge expects to be achieving annual cost savings of US$135 million.

The integration of Cyprus Amax resulted in a 45% increase in copper production over first quarter of 1999. During the recent quarter, Phelps Dodge cranked out 304,400 tons of copper. Copper sales jumped 50% to 315,500 tons between the two periods.

Higher copper prices translated into higher revenues for the company’s mining division. Prices rose by 28% on the Comex division of the New York Mercantile Exchange, pushing revenue up to US$753.4 million, compared with US$344.1 million in the corresponding period of 1999. Offsetting some of this increase were higher fuel prices, which increased costs at mining operations by US$7 million, or 1 per lb.

Revenue from Phelps Dodge Industries also increased, to US$366.3 million, compared with US$319 million in the year-earlier period. The increase is attributed to higher sales volumes of carbon black.

In total, revenue topped US$1.19 billion during the recent quarter, compared with US$663.1 million a year ago.

The mining division earned US$68.3 million, compared with US$5.1 million a year ago, reflecting higher copper prices and sales volumes. However, the division reported a US$3.1-million loss from molybdenum operations. Moly sales totalled 16.4 million lbs., exceeding production of 12.7 million lbs. Lower ore grades at the Candelaria copper mine in Chile also hurt quarterly income.

Phelps Dodge Industries reported operating income of US$29 million in the recent first quarter, before non-recurring charges totalling US$2.1 million. By comparison, income in the year-earlier period totalled US$34.8 million.

For the company as a whole, first-quarter earnings reached US$19.4 million (or 25 per share) after non-recurring charges totalling US$1.3 million (1 per share). A year ago, the company posted a net loss of US$3 million (5 per share) after an after-tax charge of US$3.5 million (6 per share).

Phelps Dodge reduced total debt to US$2.66 billion during the recent 3-month period, primarily as a result of selling its last coal asset, Cyprus Australia Coal, for US$150 million.

Capital expenditures during the quarter totalled US$69.7 million, including US$44.9 million for the mining division, US$11.6 million for Phelps Dodge Industries, and US$13.2 million for costs related to the Cyprus acquisition. In the first quarter of 1999, capital expenditures amounted to US$105 million.

For the remainder of the year, the company expects to invest US$350 million in the mining division, including US$132 million to shut down the concentrator at the Morenci mine in Arizona. That operation will be converted to heap leaching and solvent extraction-electrowinning.

At the end of March, the company had price protection covering 55,000 tons of cathode copper, representing about 5% of annual production. This protection ensures a minimum price of US72 per lb. and a maximum of US95 per lb.