Phelps Dodge to boost production

Improved prices and strong demand for copper have prompted Phelps Dodge (PD-N) to increase production from operations that were either suspended or curtailed during the industry downturn of the late 1990s.

Steven Whisler, chairman and CEO, says the decision to boost production at core operations in North and South America reflects a major turnaround in the copper market that began last fall.

In early October 2003, prices stood at US81 per lb. By year-end, prices had climbed to US$1.04 per lb., primarily driven by a dramatic surge in demand from China and by a strengthening U.S. economy. Prices for the red metal surged again early this year, owing to production shortfalls and disruptions at major copper operations, such as the massive Grasberg mine in Indonesia. A contributing factor was the rapid depreciation of the U.S. dollar.

Phelps Dodge anticipates continued strength in the copper market this year, with prices averaging US$1.10 per lb. in the first quarter.

Whisler cautions that although the company is optimistic about the strength of the industry upturn, it intends to maintain a disciplined approach to production.

“We will continue to configure our operations so we can quickly respond to market swings, both positive and negative,” Whisler says. “Changes we make to our production profile will be made with ‘swing-production’ in mind.”

As the world’s second-largest copper producer, Phelps Dodge is strongly positioned to benefit from the surge in demand and improving prices. Much of the benefits of the planned increase in production will flow to core operations in the U.S.

“We are excited about being able to increase production and put people back to work,” Whisler says.

The operations slated for increased production were chosen to allow a balance between mining sites and downstream processing facilities. They include the following:

— Concentrator operations at the Bagdad and Sierrita mines in Arizona, which have been operating at reduced capacity since 2002, are now being increased to full capacity. Bagdad will produce at full capacity by the second quarter of 2004, whereas Sierrita will be on-stream by year-end. An estimated 50 jobs will be added at Bagdad, plus 100 more at Sierrita.

— The concentrator at the Chino mine in New Mexico, temporarily closed in 2001, will resume operations at half-capacity by the fall of this year. About 100 jobs will be added in 2004, with 50 more to follow in 2005.

— Mining and concentrator operations will resume at Cobre, in New Mexico, by the third quarter. These facilities were temporarily closed in 2001.

— Mining and milling at the Ojos del Salado operation in Chile will resume by mid-2004, adding about 100 jobs. These facilities were temporarily closed in 1998.

Phelps Dodge has been running its Miami smelter in Arizona at a reduced rate since 2002. By the third quarter, the smelter will be operating at full capacity, but with minimal effect on employment levels.

Resuming curtailed production will allow the company to boost production to an estimated 2.8 billion lbs. copper (2.35 billion lbs. for its account) this year, and 3 billion lbs. (2.5 billion lbs. for its account) in 2005. In 2003, the company produced 2.6 billion lbs. copper (2.1 billion lbs. for its account).

The scaling-up of operations at Sierrita and Bagdad will also increase production of byproduct molybdenum to about 33 million lbs. this year from 30 million lbs. in 2003. However, production is expected to fall back to 30 million lbs. in 1995, owing to declining grades at Sierrita.

The recent dramatic improvement in copper prices allowed Phelps Dodge to report net income of US$134.6 million for the last quarter of 2003, compared with a fourth-quarter loss of US$225.3 million in 2002. The company’s share price has doubled in the past year as a result of this improved performance.

The company’s bottom line also benefited from the company’s “Quest for Zero” productivity program. In the last quarter of 2003, this program achieved US$91 million in improvements, bringing the total in 2003 to US$330 million.

The company’s full unit cost of copper production was US66 per lb. in the recent fourth quarter, down from US68 in the final three months of 2002.

The recent surge in copper prices and demand is largely attributed to what’s being called “China’s Industrial Revolution.”

China’s growth in gross domestic product, attributed to a building boom brought about by the rapid liberalization and urbanization of the economy, is the best news copper producers have had in years. Some analysts predict that the country’s annual growth rate, currently estimated at 7-9%, is being under-reported. Whether this is true or not, most base metal producers seem to be banking on continued strength in the Chinese economy in the years ahead.

Demand for copper also appears to be strong elsewhere in the world. Arthur Miele, senior vice-president of marketing for Phelps Dodge, says global consumption growth was about 4% in 2003, with strong demand from China offsetting weakness in other markets. The copper market was in deficit by about 350,000 tonnes that year, which prompted producers such as Phelps Dodge to resume curtailed production. Strong evidence of a recovery in the U.S. economy late last year was icing on the cake.

“Overall, we’re expecting world consumption to grow by 5% this year,” Miele told analysts during a recent conference call. “But China will continue to be the bright spot in the copper market.”

Miele noted that in 2003, Chinese consumption reached 3 million tonnes, based on a near 20% growth rate.

“Our forecast for 2004 assumes that copper production in China will moderate to 10% as the government moves to manage economic growth to a more sustainable level,” Miele added. “However, the Chinese market has surprised us in the past. It may do so again.”

On the supply side, Phelps Dodge expects a deficit of about 500,000 tonnes this year, resulting from continued strong demand in most major markets and supply disruptions and production shortfalls at operations such as Grasberg.