Phelps Dodge slashes production (July 12, 1999)

Following a host of mine closings in the copper industry, Phelps Dodge (PD-N) has announced production cuts and restructured its wire and cable business.

The Phoenix, Ariz.-based company plans to decrease copper production by 150 million lbs. in 1999 by closing the Hidalgo smelter in southern New Mexico and one of two concentrators at the Morenci complex in southeastern Arizona. Concentrates will continue to be smelted at the Chino smelter in southwestern New Mexico, though the refinery near El Paso, Tex., will now operate at only half-capacity.

News of the cuts sent copper prices sharply higher. Within hours of the announcement, Comex spot prices on the New York Mercantile Exchange jumped to US75 cents from US71 cents per lb. — and prices have continued to climb, hitting their highest levels since September 1998. Phelps Dodge’s share price also benefited, rising more than US$2 the day after the announcement.

Phelps Dodge expects to see a US4 cents drop in cash costs as a result of the cuts, though it has not released total cost estimates. The curtailment translates into 130 million fewer pounds directly attributable to the company, and eliminates US$30 million in capital expenditures. Approximately 900 employees, including temporary and contract workers, will lose their jobs.

In the wire and cable division, 670 jobs will be lost after Phelps Dodge closes two small plants in New Jersey, one in Kentucky and one in Venezuela. Meanwhile, the company plans to cease manufacturing in Ecuador altogether.

Phelps Dodge will also suspend operations at the Columbian Chemical carbon black plant in the Philippines at the end of the year. On a yearly basis, the plant produces 18,000 tonnes of carbon black, which is used in the manufacture of tires. Beginning in 2000, the company will service customers from its new plant in Korea.

Meanwhile, in South Africa, Phelps Dodge has sold its Witkop fluorspar mine and related facilities to South African Land & Exploration. The US$12.3-million sale was expected to close by presstime.

“These changes are required to align our business with current market conditions, ensure the company’s long-term success and protect the jobs of the remaining employees,” says Phelps Dodge Chairman Douglas Yearley.

In all, the company expects to take a pretax charge of US$84.7 million in the second quarter. After taxes, the non-recurring charge amounts to US$61 million (or $1.05 per share).

The Phelps Dodge announcement came just days after Australia’s Broken Hill Proprietary (BHP-N) revealed it will close the San Manuel mine and smelter complex, north of Tucson, Ariz., and the Robinson mine, near Ely, Nev., by the end of August. As a result, more than 2,400 employees will be laid off. BHP’s cut caused the price of copper to jump by US2 cents.

In late May, British Columbia’s Highland Valley copper mine announced it too was shutting its doors, resulting in 1,100 layoffs. The mine, Canada’s largest producer of base metals, is a partnership controlled 50% by Cominco (CLT-T), 33.6% by Rio Algom (ROM-T), 13.9% by Teck (TEK-T) and the remainder by privately owned Highmont Mining.

More recently, Asarco (AR-N) has said it will cut production by 7%, totalling more than 50 million lbs. per year, by laying off 150 workers and modifying the mine plan at its Mission operation in southern Arizona.

At the Ray mine, near Hayden, Ariz., Asarco has no plans to change production levels. However, unusually hard ore has slowed throughput, reducing production by 25 million lbs. in 1999.

Asarco expects its cuts will result in a US1 cents reduction in cash costs per pound.