Phelps balances priorities

Vancouver — Robust prices for copper and molybdenum allowed Phelps Dodge (PD-N) to post record net income of US$682.3 million, or US$6.75 per share, for its latest quarter ended June 30. This brings net income for the 2005 first half to US$1.06 billion, or US$10.59 per share.

For comparison purposes, the copper giant reported net income of US$226.6 million and US$412.3 million for the second quarter and first half of 2004, respectively.

With profits pouring in at this clip, the Phoenix-based company intends to balance “four priorities” for its cash in the coming years, including new growth opportunities in the world-famous copper belt of central Africa. The company plans to invest in its existing businesses, improve the quality of its asset base (including a number of growth projects), reward shareholders, and improve its balance sheet and financial flexibility.

Closest to home, the company will invest US$210 million to re-start an existing concentrator and build the first-ever commercial-scale, concentrate-leaching facility at its existing operations in Morenci, Ariz. The new technology follows conventional milling and allows copper sulphide ores to be transformed into copper cathode through a pressure-leaching and electrowinning process, instead of traditional smelting and refining.

Also in Arizona, the company has regulatory approval to develop a proposed copper mine near Safford. The proposed project will exploit two deposits, Dos Pobres and San Juan.

For longer-term growth, Phelps Dodge is looking to play a lead role in developing the large, Tenke Fungurume copper-cobalt project in the Democratic Republic of Congo (DRC). If all goes as planned, the company will hold an effective 57.75% interest in the project, which hosts measured and indicated resources estimated at 223 million tonnes grading 2.9% copper and 0.3% cobalt, plus 314.3 million tonnes of 4% copper and 0.25% cobalt in the inferred category.

An open-pit mining operation is proposed that could produce an estimated 100,000 tonnes per year of copper cathode and 8,000 tonnes per year of cobalt cathode, with potential for expansion.

In Peru, the company completed a restructuring of the Cerro Verde project that will boost the company’s share of annual production to more than 100 million lbs. copper. Japanese partner Sumitomo acquired a 21% equity position in Cerro Verde by agreeing to help fund a significant portion of an US$850-million expansion program. The transaction reduced Phelps Dodge’s interest to 53.6% from 82.5%.

To reward shareholders, the company increased its annual dividend by 50% to US$1.50 per share this year. The company also purchased about US$280 million of long-term debt and made a US$250-million contribution to a pension trust to reduce funding obligations.

On the financial front, Phelps Dodge filed a U$1-billion shelf prospectus to access capital markets, if events warrant. At the end of June, the company’s total cash balance stood at US$2.7 billion, up from US$1.2 billion at the end of 2004.

Phelps Dodge’s latest financial results reflect some extraordinary items, including a pre-tax gain of US$438.4 million (US$388 million after-tax) from the sale of its holdings in Southern Peru Copper (PCU-N) in June of this year, and a pre-tax gain of US$159.5 million associated with the Cerro Verde transaction. These gains were partially offset by a pre-tax write-down of US$419.1 million at the Tyrone and Cobre mines, and the Chino smelter and Miami refinery, resulting from the decision to build the concentrate-leach, direct-electrowinning plant at Morenci. As a result, the company’s second quarter net income included after-tax, net special gains of $225.8 million.

Operating income before special items and provisions climbed 83% to US$619.7 million in the latest quarter from a year earlier, mostly because of higher copper prices (about US$180 million) and molybdenum earnings (about US$183 million). On the other hand, production costs rose by about US$130 million over the comparable periods, reflecting higher energy, maintenance, and transportation costs.