Phelps Dodge Posts 988% Rise in Quarterly Net Income
By Jon A. Nones
29 Jan 2007 at 06:54 PM EST
resourceinvestor.com
St. LOUIS (ResourceInvestor.com) -- Phelps Dodge [NYSE:PD], the world's third-largest copper producer, said that fourth-quarter profit surged to a record high because of higher average copper prices, a gain from its failed takeover of Inco and some well-timed copper hedging. Net income rose 988% year-on-year and 92% for the whole year.
According to quarterly figures, net income jumped to $1.32 billion, or $6.50 a share, from $121.3 million, or 60 cents a share, a year earlier. Net income for the year rose to $3,017.8 million, or $14.83 per share from $1,556.4 million, or $7.69 per share, in 2005.
“Our 2006 net income exceeded $3 billion and set a record for a third consecutive year. As a result of actions we took during the past few years, we are in excellent condition both operationally and financially,” said CEO and Chairman J. Steven Whisler in a statement.
On Jan. 10, the company slashed its forecast for fourth-quarter earnings to $1-$1.30 a share, down from a previous estimate of $4.15-$4.40 a share. Even excluding $364.1 million, or $1.79 a share, in one-time items which included a breakup fee of $231 million after the acquisition of Inco failed, profit was $4.71 a share - above the original forecast.
“We continue to benefit from strong prices for copper and molybdenum, each of which reflects solid market fundamentals,” said Whisler.
Copper prices jumped 64% to $3.21 a pound on average during the fourth quarter but fell nearly 8% from the third quarter. The company reported 77 cents a share in gains from its copper collars, a result of a year-end sell-off in copper prices.
Total operating income increased $845.5 million, or 147%, to $1.4 billion for the quarter. The company attributed the increase to higher average copper prices and lower net copper pricing adjustments for its copper collars and copper put options.
However, the company cited higher production costs, higher other net pricing adjustments for provisionally priced copper contracts and lower by-product molybdenum revenues.
Whisler said in a conference call today that copper production slipped about 1% to 609 million pounds, while copper sales slipped 3.7% to 599 million pounds. Both levels came in under the company's forecasts.
He said that it produced less copper than it had originally anticipated because of overly ambitious forecasts for its Cerro Verde, Peru mine construction.
“The shortfall in the quarter was simply a matter of aggressive forecasting on our part,” he added.
In today’s press release, Whisler said the company had made its first shipment of copper concentrate from the new concentrator at the Cerro Verde mine in Peru of approximately 9,500 metric tonnes.
He added that the new concentrator continues to work through “normal adjustments associated with the start-up of a major operation, and we expect to achieve full production during the first half of 2007.”
The company reported consolidated sales and other operating revenues of $3,235.3 million for Q4 and $11,910.4 million for the year, up 43% from $2,255.6 million and 44% from $8,287.1 million in the corresponding 2005 periods.
Consolidated cash totalled $4.9 billion, with $1.11 billion held at international operations, as of December 31, 2006. Cash provided by operating activities was $1.75 billion in Q4 and $5.07 billion in the year 2006, compared with $470.6 million and $1.77 billion in the corresponding 2005 periods.
The company's total debt was $891.9 million, compared with $921.6 million at September 30, 2006, and $694.5 million at December 31, 2005. The company's ratio of debt to total capitalization is 9.1%, versus 10.4% at September 30, 2006, and 9.6% at December 31, 2005.
Freeport-McMoRan Takeover
On Nov. 20, Freeport-McMoRan [NYSE:FCX] announced a friendly merger with Phelps Dodge worth $25.9 billion to create the world’s largest publicly traded copper company and the largest North American-based mining company.
“This transaction provides Phelps Dodge shareholders a significant premium for their shares and gives them the opportunity to participate in the upside potential of a geographically diverse industry leader possessing the scale and asset quality to compete on the global stage successfully,” said Whisler.
Phelps Dodge management has accepted the offer of $88 in cash and 0.67 of a Freeport share. But the deal is subject to the approval of shareholders of both companies.
Freeport has won support for the acquisition from New York hedge fund Atticus Capital LP, Phelps Dodge's biggest investor with 20.2 million shares or about 10%. Paulson & Co., a New York-based hedge fund who owns 4.5 million shares or about 2.2%, also said it will support the deal.
However, SAC Capital Advisors LLC, a $10 billion hedge fund, opposes the offer. SAC owns 4 million Phelps Dodge shares and 4.4 million options.
Both Freeport and Phelps Dodge are confident that the deal will go through this quarter.
“We are looking forward to working with Freeport-McMoRan to realize all the benefits and potential created by combining our two companies,” said Whisler.
Last week, Freeport-McMoRan reported an 8% drop in Q4 profit as a result of lower copper and gold output. According to a company statement, net earnings dropped to $426 million, or $1.99 per share, compared with $463 million, or $2.19 per share, a year earlier. Revenue in the quarter rose to $1.64 billion from $1.49 billion a year ago.
But like Phelps Dodge, copper output fell to 435 million pounds from 474 million year on year, while gold production fell to 514,000 from 1.12 million ounces.
Copper Price Outlook
Copper gained about 38% last year after starting at about $2/lb. In mid-May 2006, copper set a new record, breaching the $4/lb mark, for a 100% gain. This year, however, copper has lost almost 12%.
Today, March copper futures were down 3.8%, or 10.2 cents, at $2.534/lb on Nymex after climbing 4.8% last week. Copper stockpiles monitored by Nymex remained unchanged at 36,410 short tonnes.
Despite the drop, William Adams, metals analyst for BaseMetals.com, said today in an e-mailed note that base metals “at one stage or another” are showing signs of strength on the London Metal Exchange (LME).
LME Copper Price
“Indeed the close above $5,800 looks constructive and means that copper is now only a skip and a jump away from the $5,935 level above which copper would start to look much more constructive,” he said.
Last week, copper stockpiles monitored by the LME surpassed 200,000 metric tonnes for the first time in more than two years. Inventories rose 5,425 metric tonnes, or 2.7%, to 203,375 tonnes - the biggest daily increase since Jan. 2.
But Adams noted China’s copper consumption growth in excess of 15% in 2006 and said that market may have been led into “a false sense of security recently as destocking masked the real level of demand.”
The State Reserve Bureau (SRB) has not released any official statistics on its destocking of copper, so an exact figure on how much the SRB dumped in 2006 is hard to ascertain. However, short positions were estimated at 100,000 to 150,000 tonnes.
“With the destocking now likely to be winding down, the impact of strong real consumption may start to be felt far and wide,” said Adams. “Indeed copper's overall tight conditions may rise to the surface again, although this time with the market already destocked, conditions may tighten up quickly.”
Copper stockpiles in Shanghai Futures Exchange (SHFE) warehouses fell 21% this week. Deliverable stockpiles of the metal fell by 6,488 metric tonnes to 24,071 tonnes based on a survey of five warehouses in Shanghai, the SHFE said on its website.
In contrast to inventories in New York and London, Shanghai stockpiles have fallen by almost one third the during last four months as copper imports in 2006 fell 19%.
China's copper imports in December 2006 surged by 55% year-on-year to 101,340 tonnes, according to the General Administration of Customs. And as the world’s biggest consumer of copper, China posted economic growth of 10.7% in 2006.
In addition, the U.S. housing market recently showed signs of bottoming out. The Commerce Department reported that sales of newly built family homes rose 4.8% last month to an annual pace of 1.12 million - the fastest since April. The average American home contains 400 pounds of copper.
“As such we would not be surprised to see copper prices start to climb again and that could lead to a pick-up in momentum across those metals that have tended to lag recently,” concluded Adams. |
