Phelps Dodge takes loss in quarter (August 05, 2002)

Copper producer Phelps Dodge (PD-N) lost money in the three months ended June 30 but was able to reduce operating and overhead costs and clear off debt.

The Arizona-based company booked a loss of US$36.4 million, or US48 per share, on revenue of US$967 million. After taking into account $2.4 million in preferred stock dividends, the loss applicable to common shares was US$38.8 million. In the corresponding quarter of 2001, Phelps Dodge posted a loss of US$110.5 million on revenues of US$1.06 billion.

For the six months ended June 30, Phelps Dodge incurred a US$64.1-million net loss on revenue of US$1.9 billion. After the first half of 2001, the company was US$96.3 million in the red, with US$2.2 billion in revenue.

Compared with the first quarter, copper prices were improved, with the London Metal Exchange spot price averaging US$1,610 per tonne and the New York Comex price, US74 per lb. They were, however, lower than a year earlier. Production and sales from Phelps Dodge’s mines were also significantly lower than a year ago, which contributed to the contraction in revenue.

Operating income was US$14.5 million for the quarter, thanks to lower production costs. The company’s average cash cost of production fell to US54 per lb. (US$1,190 per tonne) for the quarter, down from US61 (US$1,345 per tonne) in the second quarter of 2001. A cost-cutting program saved about US$53 million in the quarter.

By comparison, Phelps Dodge had an operating loss of US$3.9 million in the second quarter of 2001.

Metal production, which accounted for about two-thirds of Phelps Dodge’s revenue, returned operating income of US$11.4 million; downstream chemical and copper wire production from the company’s Phelps Dodge Industries unit contributed US$20.3 million.

Pretax charge

This quarter’s net loss included a net US$12.7 million in non-recurring items. These included a pretax charge of US$46.5 million from an arbitration award to Plateau Mining, which in 1997 had made a claim against Cyprus Amax (which was subsequently taken over by Phelps Dodge). One-time gains balanced against the charges included a US$22.6-million gain on land sales and a US$18.3-million net tax benefit.

Phelps Dodge also placed 10 million common and 2 million convertible preferred shares with investment bank J.P. Morgan in June, for net proceeds of US$592 million; this brought the company’s cash to US$870 million at the end of the quarter. Most of the proceeds of the placement will be used to repurchase the company’s long-term debt.

The preferred share issue, which represents about US$194 million, has a dividend yield of 6.75% and the shares automatically convert to common shares at a 20% conversion premium in August 2005.

Phelps Dodge had about US$2.7 billion in total debt, including US$187 million in short-term debt and current long-term debt, representing about 45% of its total capitalization. That figure reflected an April repayment of US$150 million in principal on a series of notes bearing interest at 10.125%.

Since the end of the quarter, the company retired a further US$481 million in debt by buying back notes on the open market, bringing total debt to about 40% of total capitalization. The purchases cost US$511 million. These, combined with the associated costs of retiring the debt, will leave the company with a US$33-million charge against earnings in the third quarter of the year; at the same time, the company will save about US$40 million in annual interest costs. Phelps Dodge still has a goal of bringing debt down to about 35% of total capitalization.

Legal tangles

During the quarter — and not without cost — Phelps Dodge worked out some of the legal tangles involved in its 1999 takeover of Cyprus Amax. Plateau Mining, which had been a wholly owned subsidiary of Cyprus Amax, claimed payment under a 1997 tax sharing agreement with its parent. Earlier this month, an arbitration panel awarded Plateau US$36.5 million, plus deemed interest of US$10 million.

A second lawsuit, against the former Amax Oil & Gas, was settled for US$11.2 million, which was also charged against earnings in the past quarter.

Phelps Dodge has also sought judgment against two companies, U.S. Energy (USEG-Q) and its affiliate, Crested Corp. (CBAG-O), over advance royalties and environmental obligations at the Mt. Emmons molybdenum property in Colorado.

From 1974, Amax, and then Cyprus Amax, had held the Mt. Emmons property under a lease agreement with U.S. Energy and Crested, and Amax and its successors paid advance royalties on the property. The project never went into production.

Phelps Dodge cut off the royalty payments in 2001 and is asking the court for a judgment in the amount of the royalties it had paid since acquiring Cyprus Amax. It also wants the court to return the property and to transfer the responsibility for operating a water treatment plant (built by Amax in the early 1980s) to the two companies.

U.S. Energy and Crested have counter-sued, claiming that the 1999 Cyprus Amax takeover constituted Amax’s sale of the Mt. Emmons property to Phelps Dodge, and should have triggered a payment of US$3.75 million under the lease agreement.