Phelps Dodge Corp., the largest copper producer in Arizona and the second largest in the world, is showing plenty of luster these days.
The price of copper, the company’s profits and the value of its stock are all up — and by all indications they will stay that way for awhile.
The evidence was in the second quarter earnings report released on July 27: A net profit of $226.6 million, or $2.30 a share, compared with a net loss of $15.2 million in the same quarter a year ago. Revenue was also way up to $1.6 billion from $962 million the previous year.
The company expects even better results in the third quarter — a profit of $2.45 to $2.70 a share.
Meanwhile, Phelps Dodge stock has doubled in value from $38 a share one year ago to more than $77 a share during the past week. In June, the company announced it will resume paying a regular quarterly dividend after a nearly threeyear suspension.
The reason for the dramatic turnaround for the Phoenix-based company is simple: The price of copper is way up, driven by strong demand in China, the United States, and even in Europe. The current price is hovering around $1.30 a pound, not a record, but the highest since the mid-1990s. For the year the average has been about $1.23 a pound on the New York Commodity Exchange. Last year the average price was 81 cents a pound.
"We are very highly leveraged to the price of copper," said Ken Vaughn, manager of corporate communications.
As the price of copper has risen, Phelps Dodge has stepped up its mining activities in Arizona and New Mexico, the source of about 70 percent of its supplies worldwide. One hundred fifty employees have been added this year at its operations at Bagdad, Ariz., and the Sierrita mine near Green Valley. The company also is reopening a mill in Chino, N.M., and has reopened a small mine in Chile.
The company expects to produce 2.8 billion pounds of copper this year and 3 billion next year, compared to 2.6billion last year. Phelps Dodge also is developing a new open-pit mine about eight miles north of Safford. On July 2 the U.S. Bureau of Land Management approved a land exchange with the company that advances the project. Although regulatory hurdles remain, "we’re feeling good about it," Vaughn said.
The mine, which would provide about 350 jobs, could be open by 2008.
New technology also has allowed the company to continue production at low-grade mines in Arizona. For example, the company continues production in Bisbee by leaching copper out of an old ore stockpile, Vaughn said.
The leaching process, called solution extraction electrowinning, eliminates the need for the traditional concentrating and smelting processes for some types of ores, he said.
Last year, Phelps Dodge opened the world’s first plant that leaches copper from concentrates, which will open up more types of ores to that advanced process, he said.
"Technology is important to continue to produce from these mines," Vaughn said.
While Phelps Dodge has benefited from higher copper prices, it has been hurt by higher production costs, primarily higher energy prices and the cost of ramping up production at curtailed mines. That caused the second quarter results to fall short of some analysts’ projections.
"Costs were higher than we expected," said Victor Lazarovici, analyst with BMO Nesbitt Burns Equity Research. "Costs will stay high and likely go higher, so based on our expectations, we have reduced our estimates for the rest of the year and next year."
He added the company’s second quarter output was less than he expected too.
Still, he maintains an "outperform" rating for the company.
"Demand (for copper) is also stronger than we expected, and prices are holding up despite the recent economic slowdown. There will be a structural deficit in copper until new capacity is developed, so this is a pretty good time to be in Phelps Dodge."
Lazarovici thinks the company would be better off in the long run if it were more diversified instead of relying largely on copper and, to a lesser extent, molybdenum and carbon black. Reliance of a few commodities "tends to make you more volatile," he said.
Vaughn said, however, that Phelps Dodge will stick to its historic focus.
"We think copper has an excellent future," he said, adding the company’s goals are to hold down costs and make its operations as efficient as possible.