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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
Commission file number 1-82
PHELPS DODGE CORPORATION
(a New York corporation)
13-1808503
(I.R.S. Employer Identification No.)
2600 N. Central Avenue, Phoenix, AZ 85004-3089
Registrant's telephone number: (602) 234-8100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Shares, $6.25 par value per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
_______ _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of Common Shares of the issuer held by
nonaffiliates at March 2, 1994, was approximately $3,890,388,000.
Number of Common Shares outstanding at March 2, 1994: 70,573,938 shares.
Documents Incorporated by Reference:
Document Location in 10-K
Proxy Statement for 1994 Annual Meeting Part III
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PHELPS DODGE CORPORATION
1993 Annual Report on Form 10-K
Part I
Items 1. and 2. Business and Properties
Phelps Dodge Corporation, incorporated under the laws of New York in
1885, is one of the world's largest producers of copper. In 1993, the
Corporation produced 547,700 tons of copper for its own account from its
worldwide mining operations. Gold, silver, molybdenum, copper chemicals and
sulfuric acid are also produced as by-products of the Corporation's copper
operations. Production for the Corporation's own account from its U.S.
operations constituted over 25 percent of the copper mined in the United
States in 1993 (an additional 113,700 tons of copper for the accounts of
minority interest owners were produced in two U.S. mines). Much of the Cor-
poration's copper, after electrowinning or smelting and refining, together
with additional copper purchased from others, is used by the Corporation to
produce continuous cast copper rod, the basic feed for the electrical wire
and cable industry. The Corporation is the world's largest producer of
copper rod.
Phelps Dodge's international mining interests include operations in
Chile, South Africa, Mexico and Peru. The operations produce a variety of
metals and minerals including copper, gold, fluorspar, silver, lead and
zinc. Phelps Dodge also explores for metals and minerals throughout the
world.
The Corporation manufactures engineered products principally for the
transportation and electrical sectors through a group of industrial
companies. Columbian Chemicals Company is one of the world's largest pro-
ducers of carbon black, a reinforcing agent in natural and synthetic rubber
that increases the service life of tires, hoses, belting and the like, for
the rubber industry. It also produces specialty carbon black for other
industrial applications such as printing pigments, coatings, plastics and
other non-rubber applications. In addition, Columbian Chemicals is a pro-
ducer of synthetic iron oxide, used as an inorganic colorant in paints,
building products, cosmetics and plastics. Accuride Corporation is the
largest North American manufacturer of steel wheels and rims for medium and
heavy trucks, trailers and buses. Phelps Dodge Magnet Wire Company, the
largest manufacturer of magnet wire in North America, produces magnet wire
and other copper products for sale principally to original equipment manu-
facturers for use in electrical motors, generators, transformers and other
products. Hudson International Conductors is the world's leading man-
ufacturer of specialty high-performance conductors and alloys, principally
for the aerospace and electronics industries. Phelps Dodge International
Corporation manufactures electrical and telecommunication cables for inter-
national markets in joint venture associations at eight majority owned sub-
sidiaries operating in nine countries, and has minority interests in seven
other international wire and cable manufacturers. Through several of these
companies, the Corporation is also active in the engineering and
installation of telephone lines.
The discussion of the business and properties of the Corporation
contained below in Items 1 and 2 of this report is based on the
Corporation's two business segments: (i) Phelps Dodge Mining Company and
(ii) Phelps Dodge Industries. These are more fully described in Note 21 to
the Consolidated Financial Statements which also sets forth financial
information about such segments.
(i) The Phelps Dodge Mining Company segment includes the
Corporation's worldwide copper operations from mining
through rod production, marketing and sales, other
mining operations and investments, and worldwide ex-
ploration and development programs.
(ii) The Phelps Dodge Industries segment includes the
Corporation's carbon black and synthetic iron oxide
operations, its wheel and rim business, and its magnet
wire, specialty conductor and cable operations.
Information about sales and earnings of foreign operations of the
Corporation is included in Note 21 to the Consolidated Financial Statements.
Unless the context otherwise requires, "Corporation" and "Phelps Dodge"
as used herein mean Phelps Dodge Corporation and its consolidated
subsidiaries. All references to tons in this report are to short tons and
references to ounces are to troy ounces.
The number of persons employed by the Corporation on December 31, 1993,
was 14,799.
PHELPS DODGE MINING COMPANY
Phelps Dodge Mining Company is an international business comprising a
group of companies involved in vertically integrated copper operations
including mining, concentrating, electrowinning, smelting and refining, rod
production, marketing and sales, and related activities. Copper is sold
primarily to others as rod, cathode or concentrates, and to the Phelps Dodge
Industries segment. In addition, Phelps Dodge Mining Company at times
smelts and refines copper and produces copper rod for others on a toll
basis. Phelps Dodge Mining Company also produces gold, silver, molybdenum
and copper chemicals, principally as by-products, and sulfuric acid from its
air quality control facilities. This segment also includes the Cor-
poration's other mining operations and investments (including gold,
fluorspar, silver, lead and zinc operations) and its worldwide exploration
and development programs.
Properties, Facilities and Production
Copper Operations
Phelps Dodge produces copper concentrates from open-pit mines and
concentrators located in Morenci, Arizona, and Santa Rita, New Mexico, and
from two underground mines and a concentrator located near Copiapo, Chile
(through Compania Contractual Minera Ojos del Salado, S.A. de C.V., or Ojos
del Salado, which is a wholly owned Chilean subsidiary of Phelps Dodge
Corporation). The Corporation also produced copper concentrates from an
open-pit mine and concentrator located in Tyrone, New Mexico, until February
1992 when concentrator operations were indefinitely suspended because the
higher grade sulfide copper ore reserves were substantially depleted (see
Management's Discussion and Analysis for further discussion). In addition,
the Corporation produces electrowon copper from solvent
extraction/electrowinning (SX/EW) plants at Morenci, Santa Rita and Tyrone.
The Corporation also produces copper precipitates from leaching operations
at Santa Rita, Tyrone and, to a modest extent, Bisbee, Arizona (the Bisbee
operation is wholly owned by Phelps Dodge). Precipitates, like
concentrates, must be smelted and then electrolytically refined.
The Morenci complex in southeastern Arizona comprises an open-pit mine,
two concentrators and the world's largest SX/EW facility. The Corporation
owns an 85 percent undivided interest in the Morenci complex; the remaining
15 percent interest is owned by Sumitomo Metal Mining Arizona, Inc.
(Sumitomo), a jointly owned subsidiary of Sumitomo Metal Mining Co., Ltd.
and Sumitomo Corporation. Phelps Dodge is the operator of the Morenci
properties. Sumitomo takes in kind its share of Morenci production. The
Morenci complex is the largest copper producing operation in North America
and the second largest in the world.
The allocation of available supplies of water among water users has for
several years been the subject of litigation in Arizona, where water claims
exceed water supplies. Morenci water rights were established many years ago
by agreements and judicial decrees. Nevertheless, in recent years various
Indian tribes in Arizona have filed suits in federal court claiming they
have prior and paramount rights to use waters that are presently being used
by many water users, including the Corporation, and claiming damages for
prior use in derogation of their allegedly paramount rights. In addition,
state proceedings are currently under way to adjudicate water rights on two
principal watersheds in Arizona - the Gila River watershed and the Little
Colorado watershed. These suits and adjudication proceedings could
adversely affect the water supplies for the Morenci operation and other
prospective producing properties of the Corporation in Arizona. See "Legal
Proceedings" for information concerning the status of these proceedings and
other legal proceedings initiated by or on behalf of Indian tribes that
might affect the Corporation's rights to use water.
The open-pit copper mine, concentrator and SX/EW facility in Santa
Rita, New Mexico, and a smelter in Hurley, New Mexico, are owned by Chino
Mines Company (Chino), a general partnership in which the Corporation holds
a two-thirds partnership interest. Heisei Minerals Corporation (Heisei), a
subsidiary of Mitsubishi Corporation and Mitsubishi Materials Corporation,
owns the remaining one-third interest in Chino. Phelps Dodge manages the
Chino operations.
The Tyrone mine-for-leach operation near Silver City, New Mexico, is
wholly owned by Phelps Dodge Corporation. The SX/EW plant at Tyrone is
owned and operated by Burro Chief Copper Company (Burro Chief), a wholly
owned subsidiary of the Corporation. Burro Chief also operates the SX/EW
plant at Santa Rita, which is owned by Chino Mines Company.
Phelps Dodge is the leading producer of copper using the SX/EW process.
Copper produced by SX/EW accounted for 47 percent of the Corporation's total
production in 1993, compared with 45 percent in 1992 and 36 percent in 1991.
The SX/EW method of copper production results in lower unit costs than
conventional concentrating, smelting and refining and is a major factor in
the Corporation's continuing efforts to maintain internationally competitive
costs.
The Corporation initiated SX/EW production at its Burro Chief plant
near Tyrone in 1984. In early 1992, the Corporation completed a fourth
expansion of the plant that increased its production capacity to 70,000 tons
of cathode copper per year. The Corporation expects to operate the plant
for the next 10 years or more.
The Corporation initiated SX/EW production at Morenci in late 1987.
With the completion of the Northwest Extension project in May 1992,
Morenci's SX/EW facilities now have an annual production capacity of 170,000
tons of cathode copper.
The Corporation initiated production at its Chino SX/EW plant at Santa
Rita, which is operated by Burro Chief, in August 1988. The Corporation
completed its first expansion of this plant in April 1993, increasing its
design capacity to 60,000 tons of cathode copper per year.
The Corporation owns a smelter in Hidalgo County, New Mexico, and,
through Chino Mines Company, a two-thirds interest in the Chino smelter in
Hurley, New Mexico; it operates both smelters. Phelps Dodge smelts and
refines its share of U.S. mine production and serves as a custom smelter for
other mining companies. In addition, the Corporation purchases concentrates
to keep its smelters operating at efficient levels. This has resulted
principally from the indefinite suspension of concentrator operations at
Tyrone in February 1992, which significantly reduced the amount of the
Corporation's concentrate production available to smelt at its two smelters.
Such purchases are expected to continue whenever the smelting capacity of
the Hidalgo and Chino smelters exceeds Phelps Dodge Mining Company's share
of its U.S. production.
The Corporation's copper refinery in El Paso, Texas, is one of the
largest refineries in the world, having the capacity to produce
approximately 430,000 tons of electrolytic copper annually. This capacity
is sufficient to refine all copper produced by the Corporation for its
account at its two operating smelters. During 1993, the refinery produced
at capacity. The El Paso refinery also produces gold, silver and copper
sulfate and recovers small amounts of selenium, platinum and palladium as
by-products of the copper refining process.
Phelps Dodge is the world's largest producer of continuous cast copper
rod, the basic feed for the electrical wire and cable industry. Most of the
Corporation's refined copper, and additional copper purchased by the
Corporation, is converted into rod at its continuous cast copper rod facili-
ties in El Paso, Texas, and Norwich, Connecticut. The two plants have a
combined annual design capacity of converting more than 500,000 tons of re-
fined copper into rod. During 1993, combined production of rod and other
refined copper products from the two plants was 621,600 tons.
The following tables give the Corporation's worldwide copper production
by source for the years 1989 through 1993; aggregate production and delivery
(sales) data for copper, gold, silver, molybdenum and sulfuric acid from
these sources for the same years; annual average copper prices; and pro-
duction from the Corporation's smelters and refinery. Major changes in
operations during the five-year period included (1) increases in capacity in
1989 and 1992 of the SX/EW facilities at Morenci and at the Burro Chief
plant at Tyrone; (2) the indefinite suspension of concentrator operations at
Tyrone in February 1992; (3) an expansion of the mill at Ojos del Salado in
1991 from 1,900 to 3,850 tons of ore per day; (4) the commissioning of the
Santa Gertrudis gold mine in May 1991; (5) at Morenci, continued development
of the Northwest Extension and the 1990 reentry into the Metcalf area; (6)
the expansion of Chino's SX/EW plant at Santa Rita in April 1993; and (7) a
severe flooding problem at Ojos del Salado's Santos mine in 1993 that re-
sulted in reduced production of copper concentrate.
- ----------------------------------------------------------------------------
PHELPS DODGE COPPER PRODUCTION DATA, BY SOURCE
(thousand tons)
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
MATERIAL MINED
Morenci 219,032 203,456 198,009 144,211 91,689
Tyrone 49,387 32,407 92,542 84,183 70,417
Chino 108,568 103,081 103,198 100,339 88,368
Ojos del Salado 1,438 1,564 1,612 897 779
------- ------- ------- ------- -------
Total material mined 378,425 340,508 395,361 329,630 251,253
Less minority participants'
shares 69,044 64,878 64,100 55,078 43,209
------- ------- ------- ------- -------
Net Phelps Dodge share 309,381 275,630 331,261 274,552 208,044
======= ======= ======= ======= =======
MILL ORE MINED
Morenci 46,990 46,562 44,529 43,107 40,659
Tyrone - 1,293 15,708 16,397 15,569
Chino 17,436 17,160 18,048 16,924 16,722
Ojos del Salado 1,314 1,513 1,159 791 709
------- ------- ------- ------- -------
Total mill ore mined 65,740 66,528 79,444 77,219 73,659
Less minority participants'
shares 12,861 12,704 12,695 12,107 11,673
------- ------- ------- ------- -------
Net Phelps Dodge share 52,879 53,824 66,749 65,112 61,986
======= ======= ======= ======= =======
GRADE OF ORE MINED - PERCENT
COPPER
Morenci 0.67 0.67 0.69 0.74 0.79
Tyrone - 0.69 0.58 0.79 0.88
Chino 0.73 0.68 0.70 0.67 0.67
Ojos del Salado 1.43 1.77 2.26 1.86 1.93
RECOVERABLE COPPER (a)
Morenci:
Concentrate and precipitate 233.3 226.5 222.8 235.3 238.8
Electrowon 170.8 162.8 119.4 100.4 63.4
Tyrone:
Concentrate and precipitate 6.0 8.5 62.6 102.8 114.8
Electrowon 73.5 70.2 59.5 56.5 38.2
Chino:
Concentrate and precipitate 95.6 94.9 102.2 98.5 93.9
Electrowon 63.9 57.3 55.2 47.9 37.6
Ojos del Salado:
Concentrate and precipitate 16.7 24.4 20.0 12.3 11.7
Bisbee precipitate and
miscellaneous 1.6 1.4 0.1 5.8 3.0
------- ------- ------- ------- -------
Total recoverable copper 661.4 646.0 641.8 659.5 601.4
Less minority participants'
shares 113.7 109.0 103.7 98.8 89.2
------- ------- ------- ------- -------
Net Phelps Dodge share 547.7 537.0 538.1 560.7 512.2
======= ======= ======= ======= =======
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
PHELPS DODGE METAL PRODUCTION AND DELIVERIES (a)
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
COPPER (THOUSAND TONS)
Total production 661.4 646.0 641.8 659.5 601.4
Less minority participants'
shares 113.7 109.0 103.7 98.8 89.2
------- ------- ------- ------- -------
Net Phelps Dodge share 547.7 537.0 538.1 560.7 512.2
======= ======= ======= ======= =======
Deliveries (b) 543.9 537.7 553.9 556.7 515.0
======= ======= ======= ======= =======
GOLD (THOUSAND OUNCES) (c)
Total production 85 105 85 60 72
Less partners' shares 29 38 25 10 12
------- ------- ------- ------- -------
Net Phelps Dodge share 56 67 60 50 60
======= ======= ======= ======= =======
Deliveries (b) 54 59 57 47 66
======= ======= ======= ======= =======
SILVER (THOUSAND OUNCES) (c)
Total production 1,387 1,403 1,931 2,562 3,255
Less partners' shares 273 315 314 288 340
------- ------- ------- ------- -------
Net Phelps Dodge share 1,114 1,088 1,617 2,274 2,915
======= ======= ======= ======= =======
Deliveries (b) 1,085 1,083 1,531 2,047 2,948
======= ======= ======= ======= =======
MOLYBDENUM (THOUSAND POUNDS)
Total production 1,200 1,729 2,078 1,237 3,123
Less minority participants'
shares 394 528 501 325 694
------- ------- ------- ------- -------
Net Phelps Dodge share 806 1,201 1,577 912 2,429
======= ======= ======= ======= =======
Deliveries 905 1,129 1,566 1,064 2,390
======= ======= ======= ======= =======
SULFURIC ACID
(THOUSAND TONS) (d)
Total production 1,379.4 1,230.0 1,301.7 1,328.8 1,132.2
Less minority participant's
share 193.9 184.4 183.0 181.7 176.4
------- ------- ------- ------- -------
Net Phelps Dodge share 1,185.5 1,045.6 1,118.7 1,147.1 955.8
======= ======= ======= ======= =======
Deliveries 718.4 733.7 855.7 932.8 925.7
======= ======= ======= ======= =======
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
COMEX COPPER PRICE (e) $ 0.85 1.03 1.05 1.19 1.25
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
PHELPS DODGE SMELTERS AND REFINERY - PRODUCTION
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Smelters (f)
Total copper (thousand
tons) 376.7 329.2 305.7 323.3 323.4
Less minority
participant's share 51.0 49.3 34.7 32.9 32.1
------- ------- ------- ------- -------
Net Phelps Dodge share 325.7 279.9 271.0 290.4 291.3
======= ======= ======= ======= =======
Refinery (g)
Copper (thousand tons) 432.4 388.1 386.0 423.2 431.4
Gold (thousand ounces) 85.8 78.8 56.8 55.5 68.8
Silver (thousand ounces) 3,144.7 2,377.0 2,199.1 2,872.3 3,726.4
- ----------------------------------------------------------------------------
Footnotes to production and delivery tables:
(a) Includes smelter production from custom receipts and fluxes
as well as tolling gains or losses.
(b) Excludes sales of purchased copper, silver and gold.
(c) Beginning in 1991, includes the Santa Gertrudis gold
project, which is operated by Phelps Dodge.
(d) Sulfuric acid production results from smelter air quality
control operations; deliveries do not include internal
usage.
(e) New York Commodity Exchange annual average spot price per
pound - cathodes.
(f) Includes production from purchased concentrates and copper
smelted for others on toll.
(g) Includes production from purchased material and copper
refined for others on toll.
- ----------------------------------------------------------------------------
Other Mining Operations and Investments
Phelps Dodge Mining (Pty.) Limited, a wholly owned subsidiary of Phelps
Dodge Corporation, operates the Witkop fluorspar mine and mill in the
western Transvaal, South Africa. The operation produces acid-grade
fluorspar concentrates for export to customers in the United States and
Europe, and acid- and metallurgical-grade fluorspar for the South African
market. Fluorspar prices continued to weaken throughout 1993 as a result of
increased volumes of lower-priced supplies from China.
Black Mountain Mineral Development Company (Pty.) Limited operates a
lead-silver-zinc-copper mine and concentrator in the Cape Province of South
Africa. The project is owned 44.6 percent by Phelps Dodge and 55.4 percent
by the Gold Fields of South Africa group. Phelps Dodge accounts for its
investment in Black Mountain on the equity basis. Low lead, zinc and silver
prices in 1993 resulted in an operating loss. No cash dividend payments
have been received from Black Mountain since the receipt of $1.6 million in
1991 ($6.3 million was received in 1990).
Compania Minera Santa Gertrudis, S.A. de C.V. was organized in 1989 to
develop the Santa Gertrudis gold project in Mexico. The company is owned 49
percent by Sonoran Mining Company, a wholly owned subsidiary of Phelps Dodge
Corporation, and 51 percent by Grupo Ariztegui of Mexico. Phelps Dodge
accounts for its investment in Santa Gertrudis on the equity basis. Santa
Gertrudis produced 38,221 ounces of gold in 1993, a 27 percent reduction
from 1992's already reduced production levels. The 1993 production
shortfalls primarily resulted from lower-than-expected ore grades and
recoveries, and production losses caused by heavy rains during the first
quarter. Phelps Dodge is currently evaluating alternatives for the sale of
its interest in Santa Gertrudis.
Phelps Dodge owns a 16.25 percent interest in Southern Peru Copper
Corporation (SPCC), which operates two copper mines, two concentrators and a
smelter in Peru. SPCC's other shareholders are ASARCO Incorporated with a
52.31 percent interest, affiliates of the Marmon Group, Inc. with a 20.70
percent interest, and Newmont Mining Corporation with a 10.74 percent
interest. SPCC's results are not included in Phelps Dodge Corporation's
earnings because the Corporation accounts for its investment in SPCC on the
cost basis. During 1993, Phelps Dodge received dividend payments of $2.9
million from SPCC, compared with $2.4 million in 1992 and $9.8 million in
1991. The 1991 dividend was the first received by the Corporation from SPCC
since 1984.
Exploration & Development
The objectives of Phelps Dodge Mining Company's exploration group are
to increase copper ore reserves through discoveries, acquisitions or joint
ventures, and to diversify into other metals or minerals and geographic
areas where appropriate.
The 1993 exploration program continued to place emphasis on the search
for and delineation of bulk minable copper and gold deposits. Additional
targets included mixed base metal sulfides and certain industrial minerals.
The Corporation expended $43.4 million on exploration during 1993, com-
pared with $34.7 million in 1992 and $36.3 million in 1991. Approximately
one-half of these expenditures occurred in the United States, with the
balance spent principally in Chile, Canada, Zambia and Mexico. In 1992,
approximately two-thirds of the exploration expenditures occurred in the
United States.
La Candelaria is a major copper-gold deposit located three miles
southwest of Ojos del Salado near Copiapo in the Atacama desert of northern
Chile. Discovered in 1987 by the Phelps Dodge exploration group, La Cande-
laria has estimated ore reserves of 403.3 million tons at an average grade
of 1.09 percent copper and containing 3 million ounces of gold. Phelps
Dodge owns an 80 percent interest in La Candelaria, and a jointly owned
subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation, both
of Japan, owns a 20 percent interest.
In 1993, final agreements were executed for $290 million in limited-
recourse debt project financing for La Candelaria with four lenders: the
Export-Import Bank of Japan with $200 million; the Overseas Private In-
vestment Corporation (OPIC) with $50 million; Banco de Chile with $30
million; and Kreditanstalt fur Wiederaufbau with $10 million. The initial
loan draw-down under these agreements was made in September. These
borrowings are limited recourse to the Corporation prior to satisfaction of
certain completion tests, and non-recourse thereafter.
Phelps Dodge Mining Company continued construction at La Candelaria
throughout 1993. Construction and pre-stripping are on schedule and full
production is anticipated in 1995. When completed, the $550 million project
will consist of an open-pit mine, concentrator, port and associated fa-
cilities. La Candelaria, which will be operated by Phelps Dodge, is
expected to produce more than 100,000 tons of copper and 80,000 ounces of
gold annually over the 34-year mine life.
In 1993, the Seven-Up Pete joint venture, owned 72.25 percent by Phelps
Dodge, conducted 40,000 feet of drilling at the McDonald gold deposit near
Lincoln, Montana. The majority of the drilling was part of ongoing
hydrological, geochemical and geotechnical investigations to support
detailed facility design and permit applications. Results of a final
feasibility study estimate 205 million tons of mineralized material with an
average grade of 0.025 ounces of gold per ton. Environmental baseline
studies to support permitting for the project were largely completed during
the year, as were draft operating and reclamation plans for the proposed
mine. Work continues on engineering and environmental studies to support
mine permitting. Phelps Dodge is currently evaluating restructuring
alternatives for its interest in the joint venture.
Phelps Dodge continued its evaluation of copper resources near Safford,
Arizona, during 1993. Drilling at the Dos Pobres deposit has indicated a
resource of potentially leachable copper mineralization amenable to open-pit
mining; the resource is estimated to contain 350 million tons of leach
material at an average grade of 0.33 percent copper. Dos Pobres also con-
tains an estimated 230 million tons of sulfide material at a grade of 0.89
percent copper. The collection of baseline data and other preliminary
permitting and land exchange work, which was initiated in 1993 and will
continue in 1994, must be completed before aquifer protection and other
permits can be acquired. In addition to Dos Pobres, the Corporation's
holdings in the Safford area include the Lone Star deposit, containing an
estimated 1.6 billion tons of leach material at a grade of 0.38 percent
copper. In 1993, the Corporation entered into an option agreement to
evaluate the San Juan property which is situated between the Dos Pobres and
Lone Star deposits. A drilling program to delineate the potential of this
property was under way at year-end.
During 1993, the Corporation continued to study the feasibility and
timing of a mining operation at the Coronado deposit in the Morenci
district. A drilling program to complete the delineation of this deposit
and test potential extensions is scheduled for completion in 1994. The
deposit is estimated to contain 180 million tons of milling material at a
grade of 0.69 percent copper, and 310 million tons of leach material at a
grade of 0.29 percent copper. Other exploration drilling continues around
the Morenci mine to evaluate further the potential of the district.
In New Mexico, exploration drilling at Chino Mines Company has outlined
approximately 100 million tons of sulfide mineralization for concentrator
feed at a grade of 0.8 percent copper, and 300 million tons of leachable
material at a grade of 0.27 percent copper. Additional drilling and
engineering studies will be needed to confirm the size, grade and minability
of this potential resource which could significantly extend the life of the
mine.
In Chile, underground drilling at Malaquita and Alcaparrosa continues
to define copper mineralization that can be used as feed for the Ojos del
Salado mill. Additional targets throughout Chile are being actively
evaluated.
In Zambia, the Corporation acquired exploration rights to more than
2,950 square miles, including the Lumwana area, which contains a known
resource of 480 million tons of mineralized material at a grade of 1.14
percent copper. A program of geochemical and geophysical surveys followed
by drilling and metallurgical test work is being undertaken to define the
economic potential of the concession areas.
Ore Reserves
Ore reserves at each of Phelps Dodge's copper operations and at La
Candelaria have been estimated as follows:
- ----------------------------------------------------------------------------
Estimated at December 31, 1993
------------------------------
Milling Leaching
Reserves Reserves Phelps
---------------- ---------------- Dodge
Million % Million % Interest
Tons Copper Tons Copper (%)
------- ------ ------- ------ -------
Morenci 516.1 0.69 1,159.9 0.31 85.0
Chino 264.9 0.69 117.7 0.34 66.7
Tyrone - - 163.4 0.31 100.0
La Candelaria 403.3 1.09 - - 80.0
Ojos del Salado 8.8 1.63 - - 100.0
Estimated at December 31, 1992
------------------------------
Milling Leaching
Reserves Reserves Phelps
--------------- ---------------- Dodge
Million % Million % Interest
Tons Copper Tons Copper (%)
------ ------ ------- ------ -------
Morenci 583.0 0.76 861.2 0.34 85.0
Chino 280.2 0.69 141.1 0.30 66.7
Tyrone - - 169.4 0.33 100.0
La Candelaria 403.3 1.09 - - 80.0
Ojos del Salado 14.5 1.31 - - 100.0
- ----------------
The La Candelaria and Ojos del Salado deposits are estimated to
contain, respectively, 0.008 ounces and 0.010 ounces of gold per ton.
- ----------------------------------------------------------------------------
The Corporation's estimated share of aggregate ore reserves at the
above named properties at December 31 is as follows:
- ----------------------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Milling reserves (billion tons) 0.9 1.0 1.1 1.2 0.9
Leaching reserves (billion tons) 1.2 1.0 1.1 1.0 1.1
Commercially recoverable copper
(million tons) 10.1 10.5 10.8 11.8 8.3
- ----------------
The La Candelaria reserve is not included in the 1989 estimate. It is
included on a 100 percent basis in the 1990 estimate and on an 80
percent basis in the 1991 - 1993 estimates reflecting the acquisition
by two Sumitomo companies of a 20 percent interest in the project
(representing approximately 0.8 million tons of commercially
recoverable copper) agreed to in 1991.
- ----------------------------------------------------------------------------
Ore reserves at each of Phelps Dodge's other mining operations and
investments at year-end 1993 are estimated as follows:
- ------------------------------------------------------------------------------
Ore Phelps
Reserves Gold % Dodge
Million Ounces % % % Calcium Int.
Tons Per Ton Copper Lead Zinc Fluoride (%)
-------- -------- ------ ---- ---- ------- ------
Black Mountain
Broken Hill
deposit * 13.6 - 0.45 6.8 2.9 - 44.60
Santa Gertrudis 4.2 0.048 - - - - 49.00
Southern Peru
Copper
Corporation 394.2 - 0.86 - - - 16.25
Phelps Dodge
Mining Limited 22.6 - - - - 18.40 100.00
- ----------------
* Black Mountain's Broken Hill deposit also contains an estimated 2.6
ounces of silver per ton.
- ----------------------------------------------------------------------------
Ore reserves are those estimated quantities of ore that, under condi-
tions anticipated by the Corporation, may be profitably mined and processed
for extraction of their constituent values. Estimates of the Corporation's
reserves are based upon the Corporation's engineering evaluations of assay
values derived from samplings of drill holes and other openings. In the
Corporation's opinion, the sites for such samplings are spaced sufficiently
close and the geologic characters of the deposits are sufficiently well
defined to render the estimates reliable. Stated tonnages and grades of ore
do not reflect waste dilution in mining or losses in processing. Leaching
reserves include copper estimated to be recoverable from leach reserves re-
maining to be mined at Morenci, Chino and Tyrone. Commercially recoverable
copper includes copper estimated to be recoverable from milling and leaching
reserves.
The Corporation holds various other properties containing mineral
deposits that it believes could be brought into production should market
conditions warrant. Permitting and significant capital expenditures would
be required before operations could commence at these properties. These
deposits are estimated to contain the following mineralization as of
December 31, 1993:
- ----------------------------------------------------------------------------
Sulfide Material Leach Material Phelps
---------------- --------------Gold Dodge
Million % Million % Ounces Interest
Location Tons Copper Tons Copper Per Ton (%)
-------- ----- ------ ----- ------ ------- ---
Ajo Arizona 160 0.56 - - - 100.00
Cochise Arizona - - 210 0.40 - 100.00
Copper Basin Arizona 70 0.53 - - - 100.00
Coronado Arizona 180 0.69 310 0.29 - 85.00
Dos Pobres Arizona 230 0.89 350 0.33 - 100.00
Lone Star Arizona - - 1,600 0.38 - 100.00
Southside Arizona - - 150 0.39 - 85.00
Western Copper Arizona 530 0.55 500 0.31 - 85.00
McDonald Montana - - 205 - 0.025 72.25
Black Mountain * South Africa 20 44.60
- ------------------
* The Black Mountain deposit contains an estimated 7.56 percent
lead, 3.43 percent zinc, 0.50 percent copper and 3.1 ounces of
silver per ton.
- ----------------------------------------------------------------------------
Ownership of Real Property
The Corporation owns substantially all the lands on which its copper
mines, concentrators, SX/EW facilities, smelters, refinery and rod mills are
located and holds the rest under lease. The Chino Mines partnership owns
substantially all the lands on which its copper mine, concentrator, SX/EW
facility and smelter are located and holds the rest under lease.
Sales and Competition
Most of Phelps Dodge's copper, and additional copper purchased by the
Corporation, is cast into rod. Rod sales to outside wire and cable
manufacturers constituted approximately two-thirds of Phelps Dodge Mining
Company's sales in 1993. Phelps Dodge also sells a portion of its copper as
cathode. Sales of rod and cathode are made directly to wire and cable fab-
ricators and brass mills under contracts principally of a one-year duration.
Phelps Dodge rod also is used by the Corporation's magnet wire, bare wire
and specialty conductor operations.
The Corporation sells its copper rod and cathode on the basis of
premiums, which are announced from time to time by the Corporation, over
COMEX prices. It also sells some forms of copper on the basis of prices
published by the Corporation and sells concentrates based on the prices on
the COMEX or the London Metal Exchange (LME). From time to time, Phelps
Dodge engages in hedging programs designed to enable the Corporation to
realize current average prices for metal delivered or committed to be
delivered. Other price protection arrangements also may be entered into
from time to time, depending on market circumstances (see Management's
Discussion and Analysis for a further discussion of such arrangements).
Most of the refined copper sold by Phelps Dodge is incorporated into
electrical wire and cable products worldwide for use in the construction,
electric utility, communications and transportation industries. It is also
used in industrial machinery and equipment, consumer products and a variety
of other electrical and electronic applications.
In the sale of copper as rod, cathode and concentrates, the Corporation
competes, directly or indirectly, with many other sellers, including at
least six other U.S. primary producers, as well as numerous foreign
producers, metal merchants, custom refiners and scrap dealers. Some major
foreign producers have cost advantages resulting from richer ore grades,
lower labor rates and lack of strict regulatory requirements. The
Corporation believes that its ongoing programs to contain costs and improve
productivity in its copper operations have significantly narrowed these cost
advantages and have placed the Corporation in a favorable competitive
position with respect to a number of its U.S. and foreign competitors.
The Corporation's copper also competes with other materials, such as
aluminum, plastics, stainless steel and fiber optics, that can be
substituted for copper in certain applications.
The Corporation's principal methods of competing include pricing,
product quality, customer service and dependability of supply.
Prices, Supply and Consumption
Copper is an internationally traded commodity, and its prices are
effectively determined by the two major metals exchanges -- the COMEX and
the LME. These prices generally reflect the worldwide balance of copper
supply and demand, but are also influenced significantly from time to time
by speculative actions and by currency exchange values. The average annual
COMEX price was $1.25 in 1989, reflecting substantial reductions in excess
inventories in 1987 and 1988. A slowing world economy and higher exports
from formerly socialist countries resulted in a more balanced market in 1990
and modest surpluses in 1991 and 1992. As a result, the COMEX price was
lower in 1990 than in 1989, averaging $1.19 for the year. The COMEX price
continued to decrease in 1991 resulting in an annual average price per pound
of $1.05, and decreased further in 1992 to an annual average price per pound
of $1.03. Excess inventories that accumulated since 1992 resulted in
substantially lower copper prices in 1993; the 1993 annual average price per
pound was 85 cents.
Costs
Unit production costs of copper in 1993 were slightly higher than in
1992, principally as a result of increased depreciation charges from recent
capital projects, slightly increased mining expenses associated with longer
and steeper haulage requirements, and weather related costs in the 1993
first quarter. Unit production costs of copper generally continued to
reflect high levels of production, the cost containment programs put into
place over the last few years and increasing amounts of copper obtained
through the SX/EW process at favorable incremental costs.
Energy Supplies
The principal sources of energy for the Corporation's copper operations
are natural gas, petroleum products, waste heat generated in the smelting
processes and electricity purchased from public utilities. Each of the
Corporation's mine power plants and smelters uses natural gas as its primary
fuel, and each is capable of being converted to use oil as a substitute
fuel. The Corporation has experienced no difficulty in recent years in ob-
taining adequate fuel to maintain production.
Environmental and Other Regulatory Matters
Federal and state environmental laws and regulations affect many
aspects of the Corporation's mining operations. The federal Clean Air Act
of 1970, as amended (the Clean Air Act), and regulations thereunder to date
have had the most significant impact, particularly on the Corporation's
smelters.
The "solid wastes" of the Corporation's copper operations may be
subject to regulation under the federal Resource Conservation and Recovery
Act (RCRA) and related state laws and, to the extent these wastes affect
surface waters, under the federal Clean Water Act and relevant state water
quality laws. Mining wastes were exempted from the federal "hazardous
waste" regulations under Subtitle C of RCRA pending study by EPA and
promulgation of regulations governing "hazardous" mining waste. The EPA
study on mineral "extraction" and "beneficiation" wastes was completed and
submitted to Congress in December 1985. In 1986, EPA determined that
"extraction" and "beneficiation" wastes did not warrant "hazardous" waste
regulation under Subtitle C of RCRA. EPA determined that such mining wastes
should be regulated as "solid waste" under Subtitle D of RCRA. EPA
determined in 1991 that 20 mineral "processing" wastes also should be
regulated as "solid waste" under RCRA Subtitle D, rather than be potentially
regulated as "hazardous waste" under RCRA Subtitle C. Therefore, the gener-
ation and management of any other mineral smelting and refining waste will
be subject to "hazardous waste" regulation only if the waste exhibits a
hazardous waste characteristic or if EPA specifically designates it as a
"listed hazardous waste." These changes were effective in many states,
including Arizona, New Mexico and Texas, by the end of 1991. The
Corporation has taken steps to address hazardous waste regulation of any of
its wastes which would no longer meet the definition of mineral "processing"
wastes. RCRA Subtitle D rules governing mineral "extraction" and
"beneficiation" wastes and "processing" wastes that are exempt from RCRA
Subtitle C have not yet been promulgated by EPA, Arizona, New Mexico or
Texas. The Corporation cannot yet estimate the impact of such mining waste
regulations on its operations.
The Corporation's copper operations are also subject to federal and
state laws and regulations protecting both surface water and groundwater
quality. The Corporation possesses, has applied for, or is in the process
of applying for the necessary permits or other governmental approvals
presently required under these rules and regulations.
At the Hidalgo smelter at Playas, New Mexico, in accordance with the
discharge plan approved by the New Mexico Environmental Improvement Division
(EID) on December 30, 1987, and the renewed discharge plan approved by the
New Mexico Environment Department (NMED) (successor to EID) on December 30,
1992, the Corporation continues to monitor and report to NMED regarding
groundwater quality in the vicinity of the smelter's compacted, clay-lined
evaporation pond. The Corporation is continuing its efforts to assess the
effect on groundwater quality from operation of the evaporation pond and
will continue to investigate and implement appropriate technologies and
contingency plans to mitigate any adverse effect. The Corporation had also
agreed during the term of the earlier discharge plan to cease discharging
acidic solutions to the evaporation pond as presently constructed, to
neutralize or remove the acidic solutions present in the evaporation pond,
and to commence a groundwater remediation program for any existing
contamination. During 1991, a neutralization facility was constructed and
began operation. Additionally, a series of pumpback wells was installed and
became operational in 1992 to begin remediation of groundwater adversely
affected by past operation of the evaporation pond. The discharge plan
approved in December 1992, covering the operation of the neutralization
facility and groundwater remediation program, will be in effect for a five-
year period.
Effective September 27, 1989, Arizona adopted regulations for its
aquifer protection permit (APP) program, which replaced the then existing
Arizona groundwater quality protection permit regulations. The Corporation
is in compliance with the APP regulations, pursuant to the transition
provisions for existing facilities under those regulations. The APP
regulations require permits for new facilities, activities and structures
for mining, concentrating and smelting. The APP permits may require mitiga-
tion and discharge reduction or elimination. APP permit applications for
existing facilities deemed to be in compliance with the new regulations are
not required until requested by the State or unless a major modification at
the facility alters the existing discharge characteristics. The Corporation
has conducted groundwater studies and submitted APP applications for aquifer
protection permits for a closed tailing pile in Clarkdale, Arizona, and cer-
tain facilities at its Copper Queen branch in Bisbee, Arizona, pursuant to a
request by the Arizona Department of Environmental Quality (ADEQ). ADEQ has
requested and the Corporation will submit to ADEQ in the future an
application covering other facilities at the Copper Queen branch. Also,
ADEQ recently published a list of site-specific application deadlines for
all existing facilities known to ADEQ. The list includes several of the
Corporation's properties, which were assigned deadlines ranging from June
30, 1992, to October 30, 1996. It is not known what the APP permit re-
quirements for the listed facilities will be. The Corporation is likely to
continue to have to make expenditures to comply with the APP permit program
and regulations.
In 1992, the legislatures of Arizona, New Mexico and certain other
states amended their air quality statutes to establish authority for the
states to administer the new requirements of the 1990 Amendments to the
Clean Air Act. It is anticipated that in 1994 and coming years, these
states will promulgate regulations to further define and implement these new
requirements. EPA will administer these requirements in states which fail
to establish adequate programs by certain deadlines. These programs will
likely increase the Corporation's regulatory obligations and compliance
costs. Until the implementing regulations are adopted, it is not possible
to determine the impact of the new requirements on the Corporation.
The Corporation estimates that its share of capital expenditures for
programs to comply with applicable environmental laws and regulations that
affect its mining operations will total approximately $25.0 million in 1994
and from $10.0 million to $15.0 million in 1995; $17.0 million was spent on
such programs in 1993. The Corporation also anticipates making significant
capital and other expenditures beyond 1995 for continued compliance with
such laws and regulations. In light of the frequent changes in such laws
and regulations and the inherent uncertainty in this area, the Corporation
is unable to estimate accurately the total amount of such expenditures over
the longer term, but it may be substantial. (See the discussion of "OTHER
ENVIRONMENTAL MATTERS.")
Bills have been proposed in both the U.S. House of Representatives and
the U.S. Senate that would amend the Mining Law of 1872. The proposed
amendments would impose royalties on mining operations on unpatented lands;
restrict access to public lands for exploration, development and mining
activities; and impose more stringent environmental protection requirements.
While the effect on Phelps Dodge's current operations and other currently
owned mineral resources would be minimal, adoption of either of the proposed
bills in their current form would result in significant additional capital
expenditures and operating expenses in the development and operation of new
mines on federal lands. The resulting additional restrictions and delays in
the development of such mines would seriously impact future exploration and
development on federal lands in the United States.
In 1993, the New Mexico legislature passed the New Mexico Mining Act to
promote responsible utilization and reclamation of lands affected by
exploration and mining. The Act requires that operators of new and existing
mining operations, as well as exploration activities, submit permit
applications and reclamation plans for their operations and provide
sufficient financial assurance until reclamation or post-mining land use
goals are met. The Energy, Minerals, and Natural Resources Department of the
State of New Mexico is charged with the development of regulations by June
18, 1994, to implement the Act. The Act will increase the Corporation's
regulatory and compliance costs for its New Mexico operations. Until the
implementing regulations are adopted, it is not possible to determine the
exact impact of the new requirements on the Corporation.
The Corporation is also subject to federal and state laws and
regulations pertaining to plant and mine safety and health conditions,
including the Occupational Safety and Health Act of 1970 and the Mine Safety
and Health Act of 1977. In particular, present and proposed regulations
govern worker exposure to a number of substances and conditions present in
work environments, including dust, mist, fumes, heat and noise. The
Corporation has made and is likely to continue to have to make expenditures
to comply with such legislation and regulations.
Phelps Dodge does not expect that the additional capital and operating
costs associated with achieving compliance with the various environmental,
health and safety laws and regulations will adversely affect its competitive
position relative to other U.S. copper producers, which are subject to
comparable requirements. However, because copper is an internationally
traded commodity, these costs could significantly affect the Corporation in
its efforts to compete globally with those foreign producers that are not
subject to such stringent requirements.
Labor Matters
Employees in Phelps Dodge Mining Company's Arizona operations, El Paso
refinery, Hidalgo smelter, Burro Chief Copper Company and Norwich rod mill,
and certain employees at Tyrone and Chino are not represented by any unions.
The majority of the Tyrone mining employees are covered by a three-year
labor agreement that expires on June 30, 1994. The labor contract at the El
Paso rod mill expires on May 29, 1994. Most employees at Chino are covered
by three-year labor agreements that expire on June 30, 1996.
PHELPS DODGE INDUSTRIES
Phelps Dodge Industries is a business segment comprising a group of
international companies that manufacture engineered products principally for
the transportation and electrical sectors worldwide. Its operations are
characterized by products with significant market share, internationally
competitive cost and quality, and specialized engineering capabilities.
This business segment includes the Corporation's carbon black and synthetic
iron oxide operations through Columbian Chemicals Company and its sub-
sidiaries (Columbian Chemicals); its wheel and rim operations through
Accuride Corporation and its subsidiaries (Accuride); its magnet wire opera-
tions through Phelps Dodge Magnet Wire Company and its subsidiaries; its
U.S. specialty conductor operations (beginning in November 1989) through
Hudson International Conductors (Hudson); and its international wire and
cable manufacturing operations through Phelps Dodge International Corpora-
tion.
Operations
Columbian Chemicals, headquartered in Atlanta, Georgia, is an
international producer and marketer of carbon blacks and synthetic iron
oxides. The company produces a full range of rubber and industrial carbon
blacks. Its rubber carbon blacks improve the tread wear and durability of
tires, and extend the service life on a wide range of rubber products such
as belts and hoses. The company's industrial carbon blacks are used in
diverse applications including pigmentation of coatings, inks and plastics;
ultraviolet stabilization of plastics; and as conductive insulation for wire
and cable. Its synthetic iron oxide products are used widely for
pigmentation of building products, paints, inks, plastics and toners;
specialized grades are used for a new line of toners and to make catalysts
for the chemical industry. Columbian Chemicals produces carbon black in 11
plants worldwide with approximately 60 percent of its production in North
America and the remaining production at facilities in the United Kingdom,
Germany (two), Italy, Hungary and the Philippines (owned 88.2 percent by
Columbian Chemicals). The Hungarian plant began production in December
1993. It is owned by Columbian Tiszai Carbon Ltd. which in turn is owned 60
percent by Columbian Chemicals and 40 percent by Tiszai Vegyi Kombinat Rt.,
the largest petrochemical company in Hungary. Synthetic iron oxides are
produced by Columbian Chemicals at its plant in St. Louis, Missouri. The
company also maintains sales offices in France and Japan.
Extensive research, development and engineering is performed at five
worldwide locations. The company's Operations and Technology Center at
Swartz, Louisiana, is responsible for studies specific to both industrial
and rubber applications of carbon black. Carbon black product and process
development at the Operations and Technology Center is supported by develop-
ment work at the company's North Bend, Louisiana, and Hamilton, Ontario,
plants. The European Central Laboratory at Avonmouth, United Kingdom,
provides technical support for Columbian's European operations. Synthetic
iron oxide development work is done at the St. Louis, Missouri, plant.
Columbian Chemicals also licenses rubber carbon technology to other carbon
black manufacturing companies in various countries.
Accuride, headquartered in Henderson, Kentucky, manufactures and
markets wheels and rims for medium and heavy trucks, trailers and buses.
Accuride also manufactures steel wheels for light trucks and military
vehicles. Accuride operates manufacturing plants producing steel wheel and
rims in Henderson and London, Ontario, Canada. In addition, Accuride
designs and distributes aluminum wheels for heavy trucks, trailers and
buses. Accuride has a design and test center in Henderson and a customer
service center in Taylor, Michigan. In addition, Accuride and The Goodyear
Tire and Rubber Company of Akron, Ohio, each own 50 percent of AOT Inc., a
commercial tire and wheel assembly facility located in Springfield, Ohio.
Accuride's customer base includes the major North American manufacturers of
light, medium and heavy trucks, buses and truck trailers. Accuride also
serves a network of 225 independent distributor locations throughout the
United States and Canada.
Phelps Dodge Magnet Wire Company, headquartered in Fort Wayne, Indiana,
is an international producer of magnet wire, the insulated conductor used in
most electrical systems. Its products are manufactured in the United States
at the company's Fort Wayne and Hopkinsville, Kentucky, plants, and at newly
acquired plants in El Paso, Texas, and Laurinburg, North Carolina. Phelps
Dodge Magnet Wire Company also manufactures its products at a newly acquired
plant in Mureck, Austria. The Austrian operation is a joint venture with
Eldra Elektrodraht-Erzeugung GmbH, a leading European magnet wire
manufacturer. Phelps Dodge owns a 51 percent interest in the venture; Eldra
Elektrodraht-Erzeugung GmbH owns the remaining 49 percent. In addition, the
company and Sumitomo Electric Industries, Ltd. each own a 50 percent
interest in SPD Magnet Wire Company, a joint venture established in 1990
that operates a magnet wire plant in Edmonton, Kentucky. These plants draw
and insulate copper and aluminum wire which is sold as magnet wire to
original equipment manufacturers for use in electric motors, generators,
transformers, televisions, automobiles and a variety of small electrical
appliances. Magnet wire is also sold to electrical equipment repair shops
through a network of distributors.
Hudson International Conductors, headquartered in Ossining, New York,
manufactures and markets specialty high-performance conductors for the
aerospace, automotive, biomedical, computer and consumer electronics
markets. Its principal products are highly engineered conductors of copper
and copper alloy wire electroplated with silver, tin or nickel for
sophisticated, specialty product niches. Hudson's manufacturing operations
consist of plants located in Inman, South Carolina, and Trenton, Georgia.
In addition, at a plant in Elizabeth, New Jersey, the company manufactures
specialty copper and copper alloy products. These products are sold
primarily to the aerospace, automotive, transportation and high energy
physics industries. In order to gain productivity and cost efficiencies,
Hudson recently consolidated its manufacturing of conductor products from
three facilities into its Inman facility. This consolidation, which was
initiated in response to changes in market conditions, especially in the
defense sector, resulted in the closure of its manufacturing facilities in
Ossining and Walden, New York, in 1993. Hudson maintains a warehouse and
sales office in Irvine, California, and sales offices in Europe and Japan.
The Corporation has interests in companies that are primarily involved
in the manufacture of electrical and telecommunication cables in joint
venture associations in 15 countries. Through these companies, the
Corporation is also active in the engineering and installation of telephone
lines. In order to supply the increasing demand for copper rod in certain
countries, five of the Corporation's international wire and cable companies
have continuous cast copper rod facilities. The Corporation has majority
interests in companies operating in nine countries -- Chile, Costa Rica,
Ecuador, El Salvador, Guatemala, Honduras, Panama, Thailand and Venezuela.
In December 1992, Phelps Dodge, through its 87 percent owned Venezuelan
associate company, Alambres y Cables Venezolanos, C.A. (ALCAVE), acquired
three Venezuelan companies. These companies, which operate as a group,
together with ALCAVE constitute one of the largest manufacturers of elec-
trical and telecommunication copper and aluminum wires and cables in
Venezuela and the Andean Region. The Corporation has minority interests in
companies located in Mexico, Hong Kong, Thailand and the Philippines, ac-
counted for on the equity basis, and in companies located in Greece, India
and Zambia, accounted for on the cost basis. The Corporation's interests in
these companies are managed by Phelps Dodge International Corporation, a
wholly owned subsidiary headquartered in Coral Gables, Florida. This unit
also provides management, marketing assistance, technical support and
engineering and purchasing services to these companies.
See Note 21 to the Consolidated Financial Statements for information
concerning Phelps Dodge Industries' sales to customers in the transportation
and electrical industries.
Competition and Markets
The principal competitive factors in the various markets in which
Phelps Dodge Industries competes are price, product quality, customer
service, dependability of supply, delivery lead time, breadth of product
line and research and development.
Columbian Chemicals is one of the largest producers of carbon black in
the world. Approximately 90 percent of the carbon black produced by
Columbian Chemicals is used in rubber applications, 75 percent of which is
in the tire industry. The major tire manufacturers in the United States and
Western Europe account for a substantial portion of Columbian Chemicals'
carbon black sales. In addition, Columbian Chemicals maintains a strong
competitive position in mechanical rubber goods markets based on its com-
mitment to quality and service. The Corporation is not aware of any product
that could be substituted for carbon black to a significant extent in any of
its principal applications. Including Columbian Chemicals, there are a
total of six carbon black producers in the United States, two in Canada and
three major producers in Western Europe. The carbon black industry is
highly competitive, particularly in the U.S. rubber black market. The com-
pany has expanded its production and marketing position by entry into the
emerging market in Central Europe through Columbian Tiszai Carbon Ltd. in
Hungary.
The Corporation believes that Accuride is the largest producer of steel
wheels and rims for medium and heavy trucks, trailers and buses in North
America. Accuride's sales are primarily in the United States, where a
majority of the truck, trailer and bus manufacturers are located, and in
Canada. The demand for its products fluctuates with the level of original
equipment truck, trailer and bus manufacturing activity. In the last five
years, Accuride's 10 largest customers have accounted for approximately 65
percent of its total sales. Accuride principally competes with five U.S.
companies and one major foreign company.
With the addition of newly acquired plants in El Paso, Texas, and
Laurinburg, North Carolina, the Corporation believes that Phelps Dodge
Magnet Wire Company is the largest manufacturer of magnet wire in North
America. It principally competes with four U.S. manufacturers. The company
also has expanded its production and marketing position by acquiring a
majority interest in a manufacturing company in Austria primarily to serve
the operations of its U.S. customers in Europe. In early 1994, Phelps Dodge
Magnet Wire Company will complete a $10 million modernization program for
its Fort Wayne facilities that includes the construction of a technology
center including new development laboratories with pilot manufacturing
equipment in a controlled atmosphere.
The Corporation believes Hudson is the world leader in the manufacture
of specialty high-performance conductors. Hudson's primary customers are
intermediators (insulators, assemblers, subcontractors and distributors).
More than half of Hudson's products are ultimately sold to commercial and
military aerospace companies for use in airframes, avionics, space
electronics, radar systems and ground control electronics. Hudson's
products are also used in appliances, instrumentation, computers, telecommu-
nications, military electronics, medical equipment and other products.
Hudson has one primary U.S. competitor in the specialty conductor market,
however, in those few markets where Hudson competes for high volume products
the company faces competition from several U.S. fabricators.
The Corporation's international wire and cable companies sell a
majority of their products to contractors, distributors and public
utilities. Their products are used in lighting, power distribution,
telecommunications and other electrical applications. In addition, the
companies provide engineering and installation of telephone lines in Central
and South America.
Raw Materials
Carbon black is produced from heavy residual oil, a by-product of the
crude oil refining process. Columbian Chemicals purchases substantially all
of its feedstock on a spot basis at prices that fluctuate with world oil
prices. The cost of feedstock is a significant factor in the cost of carbon
black. In order for Columbian Chemicals to achieve satisfactory financial
results during periods of increasing oil prices, it must be able to pass
through to customers any increase in its feedstock costs. The principal raw
material for the production of synthetic iron oxide is copperas.
Accuride manufactures a majority of its products from either flat roll
or section steel, except for certain finished aluminum products manufactured
to its specifications and designs by a third party.
The principal raw materials used by Phelps Dodge Magnet Wire Company's
manufacturing operations are copper, aluminum and various electrical
insulating materials.
Hudson's principal specialty conductor product line is composed of
copper, copper alloy, aluminum and copper-clad steel, usually plated with
silver, nickel or tin.
The principal raw materials used by the Corporation's international
wire and cable companies are copper, aluminum and various electrical
insulating materials. A majority of the materials used by these companies
is purchased from others.
Phelps Dodge Magnet Wire Company acquires most of its copper from the
Corporation. Phelps Dodge Industries purchases its residual oil feedstock
and other raw materials from various other suppliers. It does not believe
that the loss of any one supplier would have a material adverse effect on
its financial conditions or on the results of its operations.
Energy
Phelps Dodge Industries' operations generally use purchased electricity
and natural gas as their principal sources of energy. Phelps Dodge Magnet
Wire Company's principal manufacturing equipment that uses natural gas is
also equipped to burn alternative fuels.
Environmental Matters
Environmental laws and regulations affect many aspects of the
Corporation's industrial operations. Phelps Dodge Industries estimates that
its capital expenditures for programs to comply with applicable envi-
ronmental laws and regulations will total approximately $4.0 million in 1994
and from $5.0 million to $10 million in 1995; $2.1 million was spent on
these programs in 1993. The Corporation also anticipates making significant
capital and other expenditures beyond 1995 for continued compliance with
such laws and regulations. In light of the frequent changes in such laws
and regulations and the inherent uncertainty in this area, the Corporation
is unable to estimate accurately the total amount of such expenditures over
the longer term, but it may be substantial. (See "OTHER ENVIRONMENTAL MAT-
TERS.")
Labor Agreements
Phelps Dodge Industries has labor agreements covering most of its U.S.
and international plants. Accuride has a three-year agreement that was
renewed in January 1994 that covers approximately 625 employees at its
Canadian plant. Hudson has a three-year agreement that will expire in July
1994 that covers approximately 60 employees at its Elizabeth, New Jersey,
plant. Phelps Dodge International Corporation has two agreements expiring
in 1994 at associate company plants in Mexico and the Philippines.
Ownership of Real Property
Phelps Dodge Industries owns all of its plants and the land on which
they are located except for the facilities of Accuride at Henderson, which
are leased, and the land, which also is leased, on which six international
plants are located.
RESEARCH AND DEVELOPMENT
The Corporation conducts research and development programs relating to
exploration for minerals, recovery of metals from ores, concentrates and
solutions, smelting and refining of copper, and metal processing and product
development. It also conducts research and development programs related to
its carbon black and synthetic iron oxide products through its Columbian
Chemicals subsidiary, its wheel and rim products through its Accuride
subsidiary, its wire insulating processes and materials through Phelps Dodge
Magnet Wire Company, and conductor materials and processes through Hudson
International Conductors. Expenditures for all of these research and de-
velopment programs, together with contributions to industry and government-
supported programs, totaled $16.3 million in 1993, compared with $17.9 mil-
lion in 1992 and $17.0 million in 1991.
OTHER ENVIRONMENTAL MATTERS
The Corporation is subject to federal, state and local environmental
laws, rules and regulations, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA or Superfund), as
amended by the Superfund Amendments and Reauthorization Act of 1986. Under
Superfund, the Environmental Protection Agency (EPA) has identified
approximately 35,000 sites throughout the United States for review, ranking
and possible inclusion on the National Priorities List (NPL) for possible
response. Among the sites identified, EPA has included 13 sites owned by
the Corporation. The Corporation believes that most, if not all, of its
sites so identified will not qualify for listing on the NPL.
In addition, the Corporation may be required to remove hazardous waste
or remediate the alleged effects of hazardous waste on the environment
associated with past disposal practices at sites not owned by the Corpora-
tion. The Corporation has received notice that it is a Potentially
Responsible Party (PRP) from EPA and/or individual states under CERCLA or a
state equivalent and is participating in environmental assessment and
remediation activity at 34 sites. For further information about these
proceedings, see Item 3. Legal Proceedings, Part IV.
At December 31, 1993, the Corporation had reserves of $74.0 million for
remediation of certain of the sites referred to above and other
environmental costs in accordance with its policy to record liabilities for
environmental expenditures when it is probable that obligations have been
incurred and the costs can reasonably be estimated. The Corporation's
estimates of these costs are based upon currently available facts, existing
technology, and presently enacted laws and regulations. Where the available
information is sufficient to estimate the amount of liability, that estimate
has been used; where the information is only sufficient to establish a range
of probable liability and no point within the range is more likely than any
other, the lower end of the range has been used.
The amounts of these liabilities are very difficult to estimate due to
such factors as the unknown extent of the remedial actions that may be re-
quired and, in the case of sites not owned by the Corporation, the unknown
extent of the Corporation's probable liability in proportion to the probable
liability of other parties. Moreover, the Corporation has other probable
environmental liabilities that cannot in its judgment reasonably be
estimated, and losses attributable to remediation costs are reasonably
possible at other sites. The Corporation cannot now estimate the total
additional loss it may incur for such environmental liabilities, but such
loss could be substantial.
The possibility of recovery of some of the environmental remediation
costs from insurance companies or other parties exists; however, the
Corporation does not recognize these recoveries in its financial statements
until they become probable.
The Corporation's operations are subject to myriad environmental laws
and regulations in jurisdictions both in the United States and in other
countries in which it does business. For further discussion of these laws
and regulations, please see "Environmental and Other Regulatory Matters" and
"Environmental Matters." The estimates given in those discussions of the
capital expenditures for programs to comply with applicable environmental
laws and regulations in 1994 and 1995, and the expenditures for those
programs in 1993, are separate from the reserves and estimates described
above.
The Environmental, Health and Safety Committee of the Board of
Directors, comprising six non-employee directors, was established in 1991.
The Committee met three times in 1993 to review, among other things, the
Corporation's policies with respect to environmental, health and safety
matters and the adequacy of management's programs for implementing those
policies. The Committee reports on such reviews and makes recommendations
with respect to those policies to the Board of Directors and to management.
Item 3. Legal Proceedings
I. In October 1980, the Corporation, the American Mining Congress,
and several mining and energy development companies filed a petition in the
U.S. Court of Appeals for the District of Columbia for review of EPA's
August 1980 regulations (45 Fed. Reg. 52,729 and 52,735) relating to the
prevention of significant deterioration (PSD) of air quality. In February
1982, the industry petitioners and EPA entered into a settlement agreement
pursuant to which EPA would propose amendments to the PSD and particulate
matter regulations. The court of appeals stayed the petition for review,
pending implementation of the settlement agreement.
In August 1983, EPA proposed regulations (48 Fed. Reg. 38,742) which,
if adopted, would have substantially implemented the settlement agreement
dealing with fugitive emissions, but on October 26, 1984, EPA promulgated
final regulations inconsistent with the August 1983 proposal. In December
1984, the Corporation, the American Mining Congress and several mining and
energy development companies filed a petition (No. 84-1609) in the U.S.
Court of Appeals for the District of Columbia for review of the October 26,
1984, regulations, asserting that the terms of the February 1982 settlement
agreement had not been carried out. The court stayed the petition pending
the outcome of further EPA rulemakings.
The further EPA rulemakings also have been challenged by the American
Mining Congress and others in federal court actions filed in 1989 and 1993.
All of the pre-1993 cases are being held in abeyance at the request of the
parties. Currently before the court in the 1993 case is a joint motion by
the American Mining Congress and EPA to hold that case in abeyance while the
parties engage in settlement discussions that could resolve some of the
contested issues. Also, on October 7, 1993, the American Mining Congress
filed with the Administrator of EPA a petition for reconsideration of yet
another related rulemaking (58 Fed. Reg. 31,622). EPA's response to the
petition also could resolve some of the contested issues in the stayed
lawsuits.
II. Reference is made to the discussion of "Copper Operations" in this
report for information regarding proceedings that pertain to water used by
the Corporation's Morenci, Arizona operations.
A. The following state water rights adjudication proceedings are
pending in Arizona Superior Court:
1. In re the General Adjudication of All Rights to Use
Water in the Little Colorado River System and Source, No. 6417
(Superior Court of Arizona, Apache County).
(a) Petition was filed by the Corporation on or about
February 17, 1978, and process has been served on all potential
claimants. Virtually all statements of claimant have been filed.
(b) The principal parties, in addition to the
Corporation, are the State of Arizona, the Navajo Tribe of Indians, the
Hopi Indian Tribe, the San Juan Southern Paiute group of Indians and
the United States on its own behalf and on behalf of those Indian
tribes. In this adjudication and in the adjudications reported in
items 2.(a), (b) and (c) below, the United States and the Indian tribes
seek to have determined and quantified their rights to use water
arising under federal law on the basis that, when the Indian
reservations and other federal reservations were established by the
United States, water was reserved from appropriation under state law
for the use of those reservations.
(c) This proceeding could affect, among other things,
the Corporation's rights to impound water in Show Low Lake and Blue
Ridge Reservoir and to transport this water into the Salt River and
Verde River watersheds for exchange with the Salt River Valley Water
Users' Association. The Corporation has filed statements of claimant
for these and other water claims. The legal issues and procedures in
this adjudication are presently being defined. Trial of the
Corporation's Show Low Lake water rights under state law will likely
be held during 1994.
2. In re the General Adjudication of All Rights to Use
Water in the Gila River System and Source, Nos. W-1 (Salt River), W-2
(Verde River), W-3 (Gila River) and W-4 (San Pedro River) (Superior
Court of Arizona, Maricopa County). As a result of consolidation
proceedings, this action now includes general adjudication proceedings
with respect to the following three principal river systems and
sources:
(a) The Gila River System and Source Adjudication:
(i) Petition was filed by the Corporation on
February 17, 1978. Process has been served on water claimants in the
upper and lower reaches of the watershed and virtually all statements
of claimant have been filed.
(ii) The principal parties, in addition to the
Corporation, are the Gila Valley Irrigation District, the San Carlos
Irrigation and Drainage District, the State of Arizona, the San Carlos
Apache Tribe, the Gila River Indian Community and the United States on
its own behalf and on behalf of the tribe and the community.
(iii) This proceeding could affect, among other
things, the Corporation's claim to the approximately 3,000 acre-feet of
water that it diverts annually from Eagle Creek, Chase Creek or the San
Francisco River and its claims to percolating groundwater that is
pumped from wells located north of its Morenci Branch operations in the
Mud Springs and Bee Canyon areas and in the vicinity of the New Cor-
nelia Branch at Ajo. The Corporation has filed statements of claimant
with respect to waters that it diverts from these sources.
(iv) By a letter agreement dated September 7,
1990, the Corporation and the San Carlos Apache Tribe agreed upon
principles to settle the water claims of that Tribe. Legislation
authorizing that settlement was enacted into law on October 30, 1992.
A comprehensive settlement agreement is presently being negotiated.
The settlement will become effective if it is approved by the Arizona
Superior Court and certain conditions are met by December 31, 1994.
(b) The Salt River System and Source Adjudication:
(i) Petition was filed by the Salt River
Valley Water Users' Association on or about April 25, 1974. Process
has been served, and statements of claimant have been filed by
virtually all claimants.
(ii) Principal parties, in addition to the
Corporation, include the petitioner, the State of Arizona and the
United States, on its own behalf and on behalf of various Indian
tribes and communities including the White Mountain Apache Tribe,
the San Carlos Apache Tribe, the Fort McDowell Mohave-Apache Indian
Community, the Salt River Pima-Maricopa Indian Community and the Gila
River Indian Community.
(iii) The Corporation has filed a statement of
claimant to assert its interest in the water exchange agreement with
the Salt River Valley Water Users' Association by virtue of which it
diverts from the Black River water claimed by the Association and
repays the Association with water impounded in Show Low Lake and Blue
Ridge Reservoir on the Little Colorado River Watershed, and to assert
its interest in "water credits" to which the Corporation is entitled as
a result of its construction of the Horseshoe Dam on the Verde River.
(iv) The Salt River Pima-Maricopa Indian
Community, Salt River Valley Water Users' Association, the principal
Salt River Valley Cities, the State of Arizona and others have
negotiated a settlement as among themselves for the Verde and Salt
River system. The settlement has been approved by Congress, the
President and the Arizona Superior Court. Under the settlement, the
Salt River Pima-Maricopa Indian Community waived all water claims it
has against all other water claimants (including the Corporation) in
Arizona.
(v) Active proceedings with respect to other
claimants have not yet commenced in this adjudication.
(c) The Verde River System and Source Adjudication:
(i) Petition was filed by the Salt River
Valley Water Users' Association on or about February 24, 1976, and
process has been served. Virtually all statements of claimant have
been filed.
(ii) The principal parties, in addition to the
Corporation, are the petitioner, the Fort McDowell Mohave-Apache Indian
Community, the Payson Community of Yavapai Apache Indians, the Salt
River Pima-Maricopa Indian Community, the Gila River Indian Community,
the United States on its own behalf and on behalf of those Indian com-
munities, and the State of Arizona.
(iii) This proceeding could affect, among other
things, the Corporation's Horseshoe Dam "water credits" with the Salt
River Valley Water Users' Association resulting from its construction
of the Horseshoe Dam on the Verde River. (See the Black River water
exchange referred to in Paragraph II.A. 2.(b)(iii) above.) The
Corporation has filed statements of claimant with respect to Horseshoe
Dam and water claims associated with the former operations of the
United Verde Branch.
(iv) The Fort McDowell Mohave-Apache Indian
Community, Salt River Valley Water Users' Association, the principal
Salt River Valley Cities, the State of Arizona and others have
negotiated a settlement as among themselves for the Verde River system.
This settlement has been approved by Congress, the President and the
Arizona Superior Court. Under this settlement, the Fort McDowell
Mohave-Apache Indian Community waived all water claims it has against
all other water claimants (including the Corporation) in Arizona.
B. The following proceedings involving water rights adjudication
are pending in the U.S. District Court for the District of Arizona:
1. On June 29, 1988, the Gila River Indian Community filed a
complaint-in-intervention in United States v. Gila Valley Irrigation
District, et al., Globe Equity No. 59 (D. Ariz.). The underlying
action was initiated by the United States in October 1925 to determine
conflicting claims to water rights in certain portions of the Gila
River watershed. Although the Corporation was named and served as a
defendant in that action, it was dismissed without prejudice as a de-
fendant in March 1935. In June 1935, the Court entered a decree
setting forth the water rights of numerous parties, but not those of
the Corporation. The Court retained, and still has, jurisdiction of
the case. The complaint-in-intervention does not name the Corporation
as a defendant; however, it does name the Gila Valley Irrigation
District as a defendant. Therefore, the complaint-in-intervention
could affect the approximately 3,000 acre-feet of water that the
Corporation diverts annually from Eagle Creek, Chase Creek or the San
Francisco River pursuant to the agreement between the Corporation and
the Gila Valley Irrigation District. In April 1990, the Court entered
Findings of Fact and Conclusions of Law on four of the counts in the
complaint-in-intervention. Trial on additional issues (primarily is-
sues raised by plaintiff-in-intervention San Carlos Apache Tribe) was
conducted in November 1991. In November 1992, after submission of
post-trial briefs, the Court entered a judgment on the additional
issues. The Corporation believes that neither the Findings of Fact or
the Conclusions of Law entered in 1990 nor the judgment entered in 1992
should affect the 3,000 acre feet of water that the Corporation diverts
annually pursuant to the agreement with the Gila Valley Irrigation
District. An appeal of the 1992 judgment, however, has been noticed by
the Gila Valley Irrigation District and others.
The major users on the mainstream of the Gila River (decreed
right holders) are engaged in continuing mandatory settlement
discussions under the supervision of the Court. It will be several
months before the likelihood of any comprehensive settlement can be
ascertained.
2. On December 30, 1982, the Gila River Indian Community
initiated an action styled Gila River Indian Community v. Gila Valley
Irrigation District, et al., No. CIA 82-2185 (D. Ariz.), complaining
about allegedly improper uses by approximately 17,000 named defendants
of "water from within the Gila River watershed." The Corporation was
named as a defendant in the complaint, but it has not yet been served
with process. The complaint seeks an injunction restraining future
uses of water that interfere with the alleged prior rights of the Gila
River Indian Community as well as compensatory and punitive damages in
an unspecified amount.
3. Prior to December 1982, various Indian tribes filed
several suits in the U.S. District Court for the District of Arizona
claiming prior and paramount rights to use waters which are presently
being used by many water users, including the Corporation, and claiming
damages for prior use in derogation of their allegedly paramount
rights. These federal proceedings have been stayed pending final
adjudication in the state courts.
III. Prior to the mid-1960s, a predecessor of Phelps Dodge Industries,
Inc. (PDI), a subsidiary of the Corporation, manufactured and sold some
cable and wire products that were insulated with material containing as-
bestos. PDI believes that the use of these products did not result in sig-
nificant releases of airborne asbestos fibers. PDI and the Corporation are
collectively referred to herein as PDI.
Since October 1991, PDI has been served with 26 complaints naming it as
a defendant in the Ingalls Shipyard asbestos litigation pending in Pasca-
goula, Mississippi. These cases involved about 12,503 claimants, each
seeking from $2 million to $20 million in compensatory and punitive damages
from approximately 100 to 150 defendants. By Order dated April 21, 1993,
PDI was dismissed without prejudice from the consolidated action encaptioned
Abrams, et al. v. GAF Corporation, et al., No. 88-5422(2). As a result, ap-
proximately 6,562 of the claims against PDI were dismissed. Subsequently,
PDI was dismissed from another 14 lawsuits pending in Mississippi during
1993, thus bringing to 9,806 the total number of claims dismissed in that
jurisdiction during 1993. In addition to the claims dismissed in
Mississippi, 605 other claims against PDI brought in federal and state
courts in Alabama, Arkansas, California, Louisiana, Michigan, New Jersey,
Ohio, Pennsylvania and Washington were dismissed during 1993.
As of December 31, 1993, approximately 2,697 claims were pending
against PDI in Mississippi. In addition, PDI is currently defending 347
claims in 12 other jurisdictions. In these various proceedings, plaintiffs
allege bodily injury or death from exposure to asbestos and claim damages
based on theories of strict liability and negligence. PDI is vigorously
contesting and defending these cases.
IV. Claims under CERCLA and related state acts involving the
Corporation have been raised with respect to the remediation of 34 waste
disposal and other sites. Most are sites where the Corporation has received
information requests or other indications that the Corporation may be a
Potentially Responsible Party (PRP) under CERCLA. CERCLA is intended to
expedite the remediation of hazardous substances without regard to fault.
Responsible parties for each site include present and former owners,
operators, transporters, and generators of the substances at the site.
Liability is strict, joint and several. Because of the ambiguity of the
regulations, the difficulty of identifying the responsible parties for any
particular site, the complexity of allocating the remediation costs among
them, the uncertainty as to the most desirable remediation techniques and
the amount of remediation costs, and the time period during which such costs
may be incurred, the Corporation is unable to reasonably estimate the full
cost of compliance with CERCLA or equivalent state statutes.
With respect to these 34 sites, based on currently available
information, which in many cases is preliminary and incomplete, the
Corporation has no reason to believe that its ultimate responsibility for
remediation costs will exceed $0.5 million at any site and believes most
will be substantially under $0.1 million.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 1993 to a vote
of security holders, through the solicitation of proxies or otherwise.
Executive Officers of Phelps Dodge Corporation
The executive officers of Phelps Dodge Corporation are elected to serve
at the pleasure of its Board of Directors. As of March 1, 1994, the
executive officers of Phelps Dodge Corporation were as follows:
Age at Officer of the
Name 3/1/94 Position Corporation since
---- ------ -------- -----------------
Douglas C. Yearley 58 Chairman of the Board, President and
Chief Executive Officer 1981
Bernard G. Rethore 52 Senior Vice President 1989
Patrick J. Ryan 57 Senior Vice President 1981
Thomas M. St. Clair 58 Senior Vice President and
Chief Financial Officer 1989
J. Steven Whisler 39 Senior Vice President 1987
Except as stated below, all of the above have been officers of Phelps
Dodge Corporation for the past five years.
Mr. Rethore was elected Senior Vice President in July 1989. Prior to
joining Phelps Dodge he had been associated with Microdot Inc., a
diversified manufacturer of industrial components, for 16 years, serving as
President and Chief Executive Officer of Microdot Industries (the
manufacturing division of Microdot Inc.) since 1984.
Mr. St. Clair was elected Senior Vice President and Chief Financial
Officer in May 1989. Prior to joining Phelps Dodge he had been associated
with Koppers Company, Inc., a producer of road materials and chemicals, for
30 years, serving as Vice President, Treasurer and Chief Financial Officer
since 1984.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information called for by Item 5 appears in Management's Discussion
and Analysis.
Item 6. Selected Financial Data
(In millions except per share amounts)
1993 1992 1991 1990 1989 (a/b)
---- ---- ---- ---- ----------
Sales and other
operating revenues $ 2,595.9 2,579.3 2,434.3 2,635.7 2,699.6
Income before cumulative
effect of accounting
changes (c) $ 187.9 301.6 272.9 454.9 267.0
Per common share: (d)
- primary (e) $ 2.66 4.28 3.93 6.56 3.80
- fully diluted (f) $ 2.66 4.28 3.93 6.56 3.73
Cumulative effect of
accounting changes (g) $ - (79.9) - - -
Per common share: (d)
- primary (e) $ - (1.13) - - -
- fully diluted (f) $ - (1.13) - - -
Net income (c) $ 187.9 221.7 272.9 454.9 267.0
Per common share: (d)
- primary (e) $ 2.66 3.15 3.93 6.56 3.80
- fully diluted (f) $ 2.66 3.15 3.93 6.56 3.73
Total assets $ 3,720.9 3,441.2 3,051.2 2,827.4 2,504.6
Long-term debt $ 547.3 373.8 382.0 403.5 431.5
Dividends per common
share: (d)
Regular dividends $ 1.65 1.61 1.50 1.50 1.43
Extraordinary dividends $ - - - - 5.00
(a) Hudson International Conductors was acquired in November 1989.
(b) Reported 1989 net income of $267.0 million ($3.73 per fully
diluted common share) includes income of $504.0 million ($7.04 per
share) less a non-recurring after-tax charge of $237.0 million
($3.31 per share) primarily reflecting write-downs of certain non-
producing assets.
(c) 1992 includes a non-taxable gain of $36.4 million (52 cents per
common share) on a subsidiary's stock issuance from two Sumitomo
companies' acquisition of a 20 percent interest in the La
Candelaria copper-gold project in Chile.
(d) All per share amounts reflect average shares outstanding for the
respective periods after giving effect to a two-for-one stock
split in May 1992.
(e) Based on average number of shares outstanding after preference
dividend requirements.
(f) Assumes the conversion to common shares of all of the
Corporation's outstanding convertible exchangeable preference
shares. (All such preference shares were converted or redeemed on
or before April 1, 1989.)
(g) Includes one-time, after-tax charges in 1992 for the adoption of
new accounting methods for postretirement and postemployment
benefits and income taxes (see Notes 5, 16 and 17 to the
Consolidated Financial Statements for a description of these
accounting changes).
Note: See Management's Discussion and Analysis for a discussion of the
effect on the Corporation's results of material changes in the
price the Corporation receives for copper or in its unit
production costs.
Item 7. Management's Discussion and Analysis
The information called for by Item 7 appears in Management's
Discussion and Analysis.
Item 8. Financial Statements and Supplementary Data
The information called for by Item 8 appears in the Consolidated
Financial Statements and Notes thereto.
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Phelps Dodge reported 1993 consolidated net income of $187.9 million, or
$2.66 per common share, including after-tax revenues of $26.0 million, or 37
cents per common share, from copper price protection arrangements. Net
income in 1993 was adversely affected by the passage of the Omnibus Budget
Reconciliation Act of 1993 in the third quarter that retroactively raised
the maximum corporate income tax rate from 34 percent to 35 percent
effective January 1, 1993. The Corporation raised its 1993 tax provision by
approximately $9.0 million, or 13 cents per common share, including $3.0
million for the effect of the tax rate increase on 1993 earnings and an
additional $6.0 million for deferred taxes at December 31, 1992. All per
share amounts in this report reflect average shares outstanding for the
respective periods after giving effect to a two-for-one stock split in May
1992.
The Corporation reported 1992 income of $301.6 million, or $4.28 per
common share, before the cumulative effect of accounting changes. This 1992
income included a non-taxable gain of $36.4 million, or 52 cents per common
share, on a subsidiary's stock issuance from two Sumitomo companies'
acquisition of a 20 percent interest in the La Candelaria copper-gold
project in Chile. Income taxes were not provided by Phelps Dodge on the
$36.4 million book gain because the proceeds were indefinitely reinvested in
the Chilean company. Consolidated net income for 1992 was $221.7 million,
or $3.15 per common share, after recognizing the cumulative effect of
accounting changes with respect to postretirement and postemployment
benefits and income taxes. The Corporation reported net income of $272.9
million, or $3.93 per common share, in 1991.
The Corporation's consolidated financial results for the last three
years are summarized below (in millions except per common share amounts):
- ----------------------------------------------------------------------------
1993 1992 1991
---- ---- ----
Sales and other operating revenues $ 2,595.9 2,579.3 2,434.3
Operating income 314.4 407.8 411.9
Earnings from operations 314.4 408.4 415.0
Earnings before cumulative effect of
accounting changes 187.9 301.6 272.9
Cumulative effect of accounting changes - (79.9) -
Net income 187.9 221.7 272.9
Per common share:
Before cumulative effect of accounting
changes 2.66 4.28 3.93
Cumulative effect of accounting changes - (1.13) -
Net income 2.66 3.15 3.93
- ----------------------------------------------------------------------------
Any material change in the price the Corporation receives for copper,
or in its unit production costs, has a significant effect on the
Corporation's results. The Corporation's present share of annual production
is approximately 1.1 billion pounds of copper. Accordingly, each 1 cent per
pound change in the average annual copper price received by the Corporation,
or in average annual unit production costs, causes a variation in annual
operating income before taxes of approximately $11 million. The New York
Commodity Exchange (COMEX) spot price per pound of copper cathode, upon
which the Corporation bases its selling price, averaged 85 cents in 1993,
compared with $1.03 in 1992 and $1.05 in 1991. The COMEX price averaged 85
cents per pound for the first two months of 1994, closing at 87 cents per
pound on March 2, 1994.
The Corporation enters into price protection arrangements from time to
time, depending on market circumstances, to ensure a minimum price for a
portion of its expected future mine production. With respect to 1993
production, the Corporation entered into contracts with several financial
institutions that provided for a minimum average annual realized price of 95
cents per pound for 475 million pounds of copper cathode, about 44 percent
of 1993 production. These contracts were based on the average London Metal
Exchange (LME) price for the entire year. During 1993, the Corporation
recognized revenues of $39.4 million before taxes ($26.0 million, or 37
cents per common share, after taxes) from these arrangements. With respect
to 1994 production, as of December 31, 1993, the Corporation had entered
into contracts with several financial institutions that provide for minimum
1994 quarterly average prices of 75 cents per pound for 214 million pounds
of copper cathode. As of March 2, 1994, total production covered by such
contracts had been increased to 244 million pounds of copper cathode,
approximately 22 percent of the Corporation's anticipated production for
1994. These contracts are based on the average LME price each quarter.
Consolidated 1993 revenues were $2,595.9 million, compared with
$2,579.3 million in 1992. Sales decreases in 1993 that resulted from lower
average copper prices were more than offset by a higher volume of copper
sold (including copper purchased for resale), a higher volume of wheels and
rims sold, and increased sales by the international wire and cable
operations (principally reflecting a late 1992 acquisition in Venezuela). A
6 percent increase in consolidated revenues from $2,434.3 million in 1991 to
$2,579.3 million in 1992 also resulted from a higher volume of copper sold
(including copper purchased for resale) and a higher volume of wheels and
rims sold. In addition, the sales volume of wire and cable products
increased in 1992 over 1991.
Three new accounting standards adopted by the Corporation in the 1992
fourth quarter were treated as though they were in effect since the
beginning of that year. As a result of its decision to elect early adoption
of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," No. 109,
"Accounting for Income Taxes," and No. 112, "Employers' Accounting for
Postemployment Benefits," the Corporation recorded a non-recurring, after-
tax transition charge of $79.9 million that was reflected in revised 1992
first quarter results. More information on the effects of these new
accounting standards is included later in Management's Discussion and
Analysis, and in Notes 5, 16 and 17 to the Consolidated Financial
Statements. The adoption of these new standards had no effect on cash flow.
Phelps Dodge's results for 1993, 1992 and 1991 can be meaningfully
compared by separate reference to its reporting segments, Phelps Dodge
Mining Company and Phelps Dodge Industries. Phelps Dodge Mining Company
includes the Corporation's worldwide copper operations from mining through
rod production, marketing and sales, other mining operations and invest-
ments, and worldwide exploration and development programs. Phelps Dodge
Industries includes the Corporation's carbon black and synthetic iron oxide
operations, its wheel and rim business, and its magnet wire, specialty
conductor and cable operations.
Within each such segment, significant events and transactions have
occurred which, as indicated in the separate discussions presented below,
are material to an understanding of the particular year's results and to a
comparison with results of the other periods. Note 21 to the Consolidated
Financial Statements contains further information to which reference should
be made for a fuller understanding of the following discussion and analysis.
Statistics on reserves and production can be found in "Copper Operations"
and "Ore Reserves."
RESULTS OF PHELPS DODGE MINING COMPANY
Phelps Dodge Mining Company is an international business comprising a group
of companies involved in vertically integrated copper operations including
mining, concentrating, electrowinning, smelting and refining, rod
production, marketing and sales, and related activities. Copper is sold
primarily to others as rod, cathode or concentrates, and to the Phelps Dodge
Industries segment. In addition, Phelps Dodge Mining Company at times
smelts and refines copper and produces copper rod for others on a toll
basis. Phelps Dodge Mining Company also produces gold, silver, molybdenum
and copper chemicals, principally as by-products, and sulfuric acid from its
air quality control facilities. This segment also includes the
Corporation's other mining operations and investments (including gold,
fluorspar, silver, lead and zinc operations) and its worldwide exploration
and development programs.
- ----------------------------------------------------------------------------
1993 1992 1991
---- ---- ----
Copper (from own mines - thousand tons) *
Production 547.7 537.0 538.1
Deliveries 543.9 537.7 553.9
COMEX average spot copper price
per pound - cathodes $ 0.85 1.03 1.05
(millions of dollars)
Sales and other operating revenues $ 1,320.3 1,397.7 1,325.3
Operating income 227.1 366.0 367.9
Equity losses (3.5) (2.2) (0.4)
Earnings from operations 223.6 363.8 367.5
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* The Corporation's worldwide copper production and deliveries shown in
the above table exclude the amounts attributable to (i) the 15 percent
undivided interest in the Morenci, Arizona, copper mining complex held
by Sumitomo Metal Mining Arizona, Inc. (Sumitomo) and (ii) the one-
third partnership interest in Chino Mines Company in New Mexico held by
Heisei Minerals Corporation (Heisei). Excluded production amounts for
1993, 1992 and 1991 were 60,500 tons, 58,200 tons and 51,100 tons
produced at Morenci for the account of Sumitomo and 53,200 tons, 50,800
tons and 52,600 tons produced at Chino for the account of Heisei.
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Phelps Dodge Mining Company recorded 1993 earnings from operations of
$223.6 million, compared with $363.8 million in 1992 and $367.5 million in
1991. The decrease in operating earnings in 1993 resulted from lower
average copper prices, offset in part by increased copper sales volume and
the effect of price protection arrangements. Unit production costs of
copper in 1993 were slightly higher than in 1992, principally as a result of
increased depreciation charges from recent capital projects, slightly
increased mining expenses associated with longer and steeper haulage
requirements, and weather-related costs in the 1993 first quarter. Earnings
in 1992 compared with 1991 were affected by slightly lower average realized
copper prices and volumes of copper sold, partially offset by lower unit
costs of copper production.
The stability of unit production costs for the three-year period
primarily have resulted from additional production of low-cost cathode
copper at solvent extraction/electrowinning (SX/EW) plants in Morenci,
Arizona; Tyrone, New Mexico; and Santa Rita, New Mexico, and from the clo-
sure of the higher cost concentrator operations at Tyrone. Copper produced
by SX/EW accounted for 47 percent of the Corporation's total production in
1993, compared with 45 percent in 1992 and 36 percent in 1991. The SX/EW
method of copper production results in lower unit costs than conventional
concentrating, smelting and refining, and is a major factor in the
Corporation's continuing efforts to maintain internationally competitive
costs. Annual production capacity at Chino's SX/EW facility at Santa Rita
was raised to 60,000 tons of cathode copper, an increase of 15,000 tons, by
an expansion project completed in April 1993.
Substantial capital programs completed in 1992 also assisted in con-
taining the escalation of unit production costs. Phelps Dodge Mining
Company completed construction on the Northwest Extension mining project in
May 1992. This project added 70,000 tons of SX/EW production capacity per
year from a copper deposit adjacent to and north of the existing Morenci
mine. Morenci now has an annual production capacity of 170,000 tons of
cathode copper. In addition, reentry into the Metcalf area of the Morenci
mine continued during the year, and the Corporation successfully completed
an extension and relocation of the in-pit ore crushing and conveying
systems. Each of these projects was d