Phelps Dodge warns of production cuts

Denver — Phelps Dodge (PD-N) has alerted employees at operations in Arizona and New Mexico to the possibility of shutdowns caused by higher energy costs in California.

Electricity costs hit US11 per kilowatt-hour during the fourth quarter, more than three times the average cost over the past five years. The increase resulted in a US8-per-lb. bump in the cost of copper production.

“Until the California power crisis is resolved, its negative impact on industrial facilities in surrounding states, including our New Mexico and Arizona operations, will be huge in terms of additional plant closings and employee layoffs,” says Phelps Dodge Chairman Steven Whistler.

The company issued the warning to 2,350 workers at three operations, saying it will monitor the situation over the next 60 days to determine if curtailments in copper and molybdenum production are necessary.

California’s deepening power crisis was brought on by a surge in energy prices that took some suppliers to the brink of bankruptcy. Exacerbating the problem is the state’s 1996 deregulation scheme, which bars the utilities from passing on wholesale price hikes to ratepayers.

Heavy rains in the southwestern U.S., combined with sharply lower molybdenum prices, also hurt fourth-quarter production and earnings for Phelps Dodge. The company lost 20 million lbs. (10,000 tons) of copper production from the Morenci operation in Arizona after the weather suspended mining activities and diluted leaching solutions in October and November.

The company’s share of mine production was 292,500 tons of copper, down slightly from the fourth quarter of 1999. For the year, copper production topped 1.2 million tons, compared with 890,100 tons in 1999. The increase represents additional production from the acquisition, late in 1999, of Cyprus Amax Minerals.

Phelps Dodge achieved US$135 million in savings one year ahead of schedule as a result of combining the two companies, though much of the benefit was masked by higher energy costs.

For the December 2000 quarter, the company posted net earnings of US$5.6 million (or 7 per share). Including pretax, non-recurring gains of US$3.1 million, the net income totalled US$8.1 million (10 per share). For the corresponding period of 1999, the company reported a loss of US$212.7 million ($2.91 per share), including a US$371.3-million pretax writedown.

For all of 2000, Phelps Dodge earned US$72.3 million (92 per share). Including pretax charges of US$54.3 million, the figure totals US$29 million (37 per share). In 1999, the company incurred a loss of US$257.8 million ($4.19 per share), which included pretax writedowns of US$455.4 million.

Despite higher energy costs, cash flow remained robust for the year as a result of the Cyprus Amax transaction. Cash flow reached US$511.2 million in 2000, compared with US$204.5 million in 1999.

The company was aided by higher copper prices. Comex copper prices, on the New York Mercantile Exchange, averaged US86 in the fourth quarter and US84 for the year, compared with US80 in the previous fourth quarter and US72 in all of 1999. However, moly prices were less co-operative, falling to US$3.98 per lb. in the fourth quarter from an average of US$4.20 in the previous three months.

Revenues amounted to US$1.1 billion in the fourth quarter, and more than US$4.5 billion in 2000, compared with US$1 billion in the previous fourth quarter and US$3.1 billion in 1999. The company attributes the increase to higher prices for copper and for carbon black, which is produced by Phelps Dodge Industries.

Phelps Dodge says it is considering selling its carbon black and wire-and-cable divisions, preferring instead to focus on its core business of mining.