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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM 10-K [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 OR [  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period____________ to____________ Commission file number 1-82 PHELPS DODGE CORPORATION
(Exact name of registrant as specified in its charter) New York
    
    13-1808503(State or other jurisdiction of
    incorporation or organization)
    
    (I.R.S. Employer
    Identification No.)One North Central Avenue, Phoenix,
    AZ
    
    85004-4414(Address of principal executive offices)
    
    (Zip Code)Registrants telephone number, including
    area code: (602) 366-8100 Securities registered pursuant to Section 12(b) of the Act: Name of each exchangeTitle of each class
    
    on which registeredCommon Shares, $6.25 par value per share
Mandatory Convertible Preferred Shares,
    
    New York Stock Exchange$1.00 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 Regulation 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] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes x No . The aggregate market value of Common Shares of the issuer held by nonaffiliates
at June 30, 2003, was approximately $3,411,878,210. Number of Common Shares
outstanding at February 23, 2004: 92,747,818 shares. Documents Incorporated by Reference: Document
    
    Location in 10-KProxy Statement for 2004 Annual Meeting
    
    Part III




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i PHELPS DODGE CORPORATION
Annual Report on Form 10-K  
 Table of Contents
    
    PagePART I.Items 1. and 2. Business and Properties
    
    
    1Phelps Dodge Mining Company
    
    
    2Properties, Facilities and Production
    
    
    2U.S. Mines
    
    
    2South American Mines
    
    
    4Manufacturing and Sales Segment
    
    
    5Primary Molybdenum Segment
    
    
    5Worldwide Copper Production by Source,
Other Metal Production and Sales Data,
and Manufacturing and Sales Production
    
    
    6Phelps Dodge Copper Production Data, by Source
    
    
    7Phelps Dodge Copper Sales Data, by Source
    
    
    9Phelps Dodge Other Metal Production and Sales
    
    
    9Phelps Dodge Manufacturing and Sales Production
    
    
    10Other Mining Segment
    
    
    11Exploration
    
    
    11Process Technology
    
    
    11Other
    
    
    12Other Mining Investments
    
    
    12Ore Reserves
    
    
    12Average Drill-Hole Spacing at Ore Reserve Properties
    
    
    14Metallurgical Recovery
    
    
    14Mill and Leach Stockpiles
    
    
    14Copper and Molybdenum Prices
    
    
    15Mineralized Material
    
    
    16Sales and Competition
    
    
    17Prices, Supply and Consumption
    
    
    17Costs
    
    
    19Environmental and Other Regulatory Matters
    
    
    19Ownership of Property
    
    
    26Phelps Dodge Industries
    
    
    26Specialty Chemicals Segment
    
    
    26Wire and Cable Segment
    
    
    27Environmental Matters
    
    
    28Labor Matters
    
    
    29Research and Development
    
    
    29Other Environmental Matters
    
    
    29Item 3. Legal Proceedings
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Executive Officers of Phelps Dodge Corporation
    
    
    36PART II.Item 5. Market for the Registrants Common Equity
and Related Stockholder Matters
    
    
    37Item 6. Selected Financial Data
    
    
    37Item 7.
Managements Discussion and Analysis of Financial Condition and
Results of Operation
Managements Discussion and Analysis
    
    
    39Overview of Phelps Dodge Corporations Businesses
and Managements Assessment of Key Factors and Indicators that Could Impact Our Business, Operating
Results and Cash Flows
    
    
    39Critical Accounting Policies and Estimates
    
    
    41Results of Phelps Dodge Mining Company
    
    
    49Results of Phelps Dodge Industries
    
    
    64Other Matters Relating to the Statement
of Consolidated Operations
    
    
    66Changes in Financial Condition; Capitalization
    
    
    68Capital Outlays
    
    
    84Inflation
    
    
    84Dividends and Market Price Ranges
    
    
    84Quarterly Financial Data
    
    
    85Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    38Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
    
    
    86Report of Management
    
    
    86Report of Independent Auditors
    
    
    87Statement of Consolidated Operations
    
    
    88Consolidated Balance Sheet
    
    
    89Consolidated Statement of Cash Flows
    
    
    90Consolidated Statement of Shareholders Equity
    
    
    91Notes to Consolidated Financial Statements
    
    
    92Financial Data by Geographic Area
    
    
    132Financial Data by Business Segment
    
    
    133Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
    
    
    N/AItem 9A. Controls and Procedures
    
    
    38PART III.Item 10. Directors and Executive Officers of the Registrant
    
    
    135Item 11. Executive Compensation
    
    
    135Item 12. Security Ownership of Certain Beneficial
Owners and Management
    
    
    135Item 13. Certain Relationships and Related Transactions
    
    
    135Item 14. Principal Accounting Fees and Services
    
    
    135Item 15. Exhibits, Financial Statement Schedule
and Reports on Form 8-K
    
    
    135Valuation and Qualifying Accounts and Reserves
    
    
    138Signatures
    
    
    139EX-10.8EX-10.9EX-10.12EX-11EX-12.1EX-12.2EX-21EX-23EX-24EX-31EX-32




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1 PHELPS DODGE CORPORATION
2003 Annual Report on Form 10-K 
 PART I  
 Items 1. and 2. Business and Properties Phelps Dodge Corporation (the Company, which also may be referred to as
Phelps Dodge, PD, we, us or our) is the worlds second largest producer of
copper, among the worlds largest carbon black and magnet wire producers, and
is the worlds largest producer of continuous-cast copper rod. On October 16,
1999, we acquired Cyprus Amax Minerals Company (Cyprus Amax or Cyprus). As a
result of that acquisition, we also became one of the worlds largest
producers/processors of molybdenum and molybdenum products. The Company consists of two major divisions: (i) Phelps Dodge Mining
Company (PDMC) and (ii) Phelps Dodge Industries (PDI). (i)  PDMC includes our worldwide, vertically integrated copper operations
from mining through rod production, marketing and sales; molybdenum operations
from mining through conversion, marketing and sales; other mining operations
and investments; and worldwide mineral exploration, technology and development
programs. PDMC comprises 11 reportable segments  Morenci, Bagdad/Sierrita,
Miami/Bisbee, Chino/Cobre and Tyrone (located in the United States),
Candelaria/Ojos del Salado, Cerro Verde and El Abra (located in South America),
Manufacturing and Sales, Primary Molybdenum and Other Mining. In 2003, PDMC produced 1,059,300 tons of copper for our account from
worldwide mining operations, and an additional 246,300 tons of copper for the
accounts of our minority-interest, joint-venture partners. Gold, silver,
molybdenum, rhenium and sulfuric acid are by-products of our copper and
molybdenum operations. Production of copper for our own account from our U.S.
operations constituted approximately 53 percent of the copper mined in the
United States in 2003. Much of our U.S. cathode copper production, together
with additional copper purchased from others, is used to produce
continuous-cast copper rod, the basic feed for the electrical wire and cable
industry. Our South American mining operations produce a variety of metals and
minerals, including copper, gold and silver. We explore for metals and minerals
throughout the world. In 2003, PDMC produced 52 million pounds of molybdenum for our account
from mining operations. High-purity, chemical-grade molybdenum concentrate is
produced at our Henderson mine in Colorado. Most of the concentrate produced at
Henderson is roasted at our Fort Madison, Iowa, roasters, and is further
processed at the facilitys chemical plant into value-added molybdenum chemical
products. In addition, some of the concentrate is processed into salable
molysulfide for use primarily in the lubricant industry. Molybdenum concentrate is also produced as a by-product at two of our U.S.
copper operations. This concentrate is generally roasted at one of our three
roasting operations to produce technical grade molybdic oxide for sale into the
metallurgical markets (i.e., steel industries). We also have research and development and process technology facilities
primarily at our Process Technology Center in Safford, Arizona; and a research
and development facility for engineered molybdenum products at our Climax
Technology Center near Sahuarita, Arizona. (ii)  PDI is our manufacturing division
comprising two reportable segments  Specialty Chemicals and Wire and Cable. PDI produces engineered products
principally for the global energy, telecommunications, transportation and
specialty chemicals sectors. We produce specialty chemicals at operations in North America, Europe,
South America and Asia through Columbian Chemicals Company, one of the worlds
largest producers of carbon black. Carbon black is a reinforcing agent in
natural and synthetic rubber that increases the service life of tires, hoses,
belts and other products for the rubber industry. We also produce specialty
carbon black for other industrial applications such as pigments for printing,
coatings, plastics and other non-rubber applications. Our Wire and Cable segment has operations in the United States, Latin
America, Asia, Europe and Africa. This segment produces magnet wire, copper and
aluminum energy cables, telecommunications cables, specialty conductors and
other products for sale principally to original equipment manufacturers for use
in electrical motors, generators, transformers, medical applications and public
utilities. In 2001, we initiated
Quest for Zero, our comprehensive, lean-production program
designed to, among other things, improve operating income. PDMC
chartered business improvement teams to drive performance
improvement projects and best practices. The elimination of variance
and waste, and control of all critical processes are key factors in
this process. Quest for Zero was designed to foster the rapid transfer of best practices to all business units. The Companys Quest
for Zero stretch goal was to achieve annual operating income
improvements of $400 million by the end of 2003 when compared
with the results that were then expected for 2001. In the fourth
quarter of 2003, we achieved $91 million in improvements
bringing the current annualized run rate to approximately
$365 million, which is approximately 91 percent of the stretch goal. Note 23 to our Consolidated Financial Statements contained herein includes
financial data for each of the last three years relating to our business
segments, including data by geographic area. Phelps Dodge was incorporated as a business corporation under the laws of
the state of New York in 1885. Our world headquarters is located in Phoenix,
Arizona, and is a leased property. We employed approximately 13,000 people
worldwide on December 31, 2003. Throughout this document, unless otherwise stated, all references to tons
are to short tons, and references to ounces are to troy ounces. Available Information.Phelps Dodge files annual, quarterly and current
reports, proxy statements and other information with the U.S. Securities and
Exchange Commission (the SEC). You may read and copy any document we file at
the SECs Public Reference Room at Room 1024, 450 Fifth Street, NW, Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public
Reference Room. The SEC maintains a Web site that contains annual, quarterly
and current reports, proxy statements and other information that issuers
(including Phelps Dodge) file electronically with the SEC. The SECs Web site
is http://www.sec.gov. Phelps Dodges Web site is http://www.phelpsdodge.com. Phelps Dodge makes
available free of charge through its Internet site, via a link to the SECs Web
site at http://www.sec.gov, its annual reports




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2 on Form 10K; quarterly
reports on Form 10-Q; current reports on Form 8-K; Forms 3, 4 and 5 filed on behalf of directors and executive officers; and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Phelps Dodge makes available
free of charge on http://www.phelpsdodge.com its most recent
annual report on Form 10-K, its quarterly reports on
Form 10-Q for the current fiscal year, its most recent proxy
statement and its most recent summary annual report to shareholders,
although in some cases these documents are not available on our site
as soon as they are available on the SECs site. You will need to have on your computer the Adobe Acrobat Reader software to view some of these documents, which are in PDF format. If you
do not have Adobe Acrobat, a link to Adobes Internet site, from which you can
download the software, is provided. The information on Phelps Dodges Web site
is not incorporated by reference into this report. 
 PHELPS DODGE MINING COMPANY Our copper mines comprise five reportable segments in the United States
(Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre and Tyrone) and three
reportable segments in South America (Candelaria/Ojos del Salado, Cerro Verde
and El Abra). These segments include open-pit mining, sulfide ore
concentrating, leaching, solution extraction and electrowinning. In addition,
they produce gold and silver, and the Bagdad and Sierrita mines also produce
molybdenum as by-products. Our Manufacturing and Sales segment consists of conversion facilities,
including our smelters, refineries and rod mills, as well as sales and
marketing. The Manufacturing and Sales segment sells copper to others primarily
as rod, cathode or concentrate, and as rod to our Wire and Cable segment. In
addition, at times it smelts and refines copper and produces copper rod for
customers on a toll basis. Toll arrangements require the tolling customer to
deliver appropriate copper-bearing material to our facilities, which we then
process into a product that is returned to the customer. The customer pays PDMC
for processing its material into the specified products. Our Primary Molybdenum segment consists of the Henderson and Climax mines
and related conversion facilities. This segment is an integrated producer of
molybdenum, with mining, roasting and processing facilities producing
high-purity, molybdenum-based chemical and metallurgical products. In addition,
at times it roasts and/or processes material on a toll basis. Toll arrangements
require the tolling customer to deliver appropriate molybdenum-bearing material
to our facilities, which we then process into a product that is returned to the
customer. The customer pays PDMC for processing its material into the specified
products. Our Other Mining segment includes our worldwide mineral exploration and
development programs, a process technology center that directs its activities
at improving existing processes and developing new cost-competitive
technologies, and other ancillary operations. Our five reportable U.S. Mines segments, the Manufacturing and Sales
segment and Other Mining segment are discussed herein together, where
appropriate, as U.S. Mining Operations. Our U.S. Mining Operations and our South American Mines are discussed
herein together, where appropriate, as our Worldwide Copper Mining Operations. 
 Properties, Facilities and Production Following is a map indicating the approximate location of PDMCs U.S.
copper and molybdenum mines:  United States Mines (UNITED STATES MINES)   
 U.S. Mines We produce electrowon copper cathode at solution extraction/electrowinning
(SX/EW) operations near Tyrone and Silver City, New Mexico (Tyrone (partially
curtailed) and Chino (partially curtailed) mines, respectively) and Morenci,
Miami (curtailed since 2002), Bagdad (partially curtailed since 2002) and Green
Valley, Arizona (Sierrita, curtailed in the 2003 fourth quarter). We produce
copper concentrate from open-pit mines and concentrators located at Bagdad
(partially curtailed) and Green Valley, Arizona (partially curtailed since
2002) (Bagdad and Sierrita mines, respectively) and Silver City, New Mexico
(Chino mine). We are the worlds leading producer of copper using the SX/EW process. In
2003, we produced a total of 569,600 tons of cathode copper at our SX/EW
facilities in the United States, compared with 578,700 tons in 2002 and 585,300
tons in 2001. SX/EW is a cost-effective process for extracting copper from
certain types of ores. SX/EW is a major factor in our continuing efforts to
maintain internationally competitive costs. Our total annual capacity of
electrowon copper cathode production currently is 410,000 tons at Morenci,
105,000 tons at Miami, 75,000 tons at Chino, 84,000 tons at Tyrone, 25,000 tons
at Sierrita (although we currently are evaluating alternatives as the lease for
land on which the facility is located has expired) and 15,000 tons at Bagdad.
Additionally, Bagdad has 17,500 tons of concentrate leach capacity. The Morenci complex in southeastern Arizona comprises an open-pit mine, a
concentrator, four solution extraction facilities and three electrowinning
tankhouses. We operate Morenci and own an 85 percent undivided interest; 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. Each partner takes in kind its share of Morenci
produc-




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3 tion. Morenci is the largest copper producing operation in North America. In 2001, the Company completed its $220 million mine-for-leach project at
Morenci. As a result, the Morenci concentrator was placed on
care-and-maintenance status. The crushing facility at the Metcalf concentrator continues to process approximately 85,000 tons of ore daily
for the expanded leach operation. The new mine-for-leach facilities increased
Morencis annual electrowon cathode production capacity to 410,000 tons. Under
certain favorable economic circumstances, Morenci may produce concentrates from
primary sulfide ores. In 1999, the Metcalf concentrator was permanently closed as a result of
rebalancing PDMC operations. After the 1999 acquisition of Cyprus Amax and the
Companys decision to convert Morenci to mine-for-leach processing, it became
clear that the Metcalf concentrator would not likely operate in the future.
This resulted in a pre-tax impairment of $88 million recorded in 1999. We are presently a party to litigation that could adversely impact the
allocation of available water supplies for the Morenci operation and our other
properties in Arizona. (Refer to Item 3, Legal Proceedings, for information
concerning the status of these proceedings.) Our wholly owned Bagdad mine in northwestern Arizona primarily mines
copper sulfide ore. It produces copper and molybdenum concentrates and minor
amounts of silver. The operation consists of an open-pit mine, sulfide ore
concentrator producing copper and molybdenum concentrates, and a leaching
system with an SX/EW operation producing copper cathode. In January 2002, as a
result of the then-current economic environment, Bagdads mill throughput was
curtailed temporarily to approximately one-half capacity. At the time of this
curtailment, we estimated that approximately 70,500 tons of annual copper
production and 7 million pounds of annual by-product molybdenum production
would be reduced. In 2003 and 2002, copper production at Bagdad exceeded our
estimates due to improved production from our SX/EW operation, higher ore
grades from normal mine planning improvements, and improvements in copper
recovery and improved milling efficiency resulting from our Quest for Zero
program. As a result, 2003 and 2002
annual copper production was only reduced by approximately 27,400 tons and
44,600 tons, respectively, when compared with 2001. Throughput at Bagdad also
exceeded half capacity at various times during 2002, primarily driven by
smelter and sulfuric acid supply requirements. In January 2003, Bagdads mill
throughput increased to approximately 80 percent of capacity. Based upon the
rapid increase in copper prices, our view of market fundamentals for copper and molydenum
over the next several years, and our internal concentrate and
sulfuric acid balance, Bagdad began
increasing production in January 2004 with an
expectation that it will be producing at full capacity in the 2004 second
quarter. In February 2002, we announced that Bagdad would construct a $40 million
copper concentrate leaching demonstration plant designed to recover
commercial-grade copper cathode from chalcopyrite concentrates. The plant was
commissioned in the 2003 first quarter and achieved full production in the 2003
second quarter. During nine months of operation (April to December 2003), the
plant processed 44,200 tons of concentrate and produced approximately 24.4
million pounds of copper cathode. At full capacity, the plant can produce 35
million pounds of copper cathode from concentrate annually. This technology
could assist in our long-term cost reduction strategy. We own the Sierrita mine near Green Valley, Arizona. The facility consists
of an open-pit mine, sulfide ore concentrator producing copper and molybdenum
concentrates, two molybdenum roasters and a rhenium processing facility.
Sierrita also uses an oxide and low-grade sulfide ore stockpile leaching system
with an SX/EW operation to produce copper cathode. The Sierrita operation
leases property adjacent to its mine upon which its electrowinning tankhouse is
located. The current lease agreement expired in 2003. Future alternatives,
including extension of the lease, are being considered. As a result, Sierritas
electrowon copper cathode production has been curtailed since the 2003 fourth
quarter. Sierritas on-site roasters process molybdenum concentrates produced at
Sierrita and Bagdad as well as purchased concentrates or concentrates tolled
for third parties. The resulting metallurgical grade molybdic oxide and related
products are either packaged for shipment to customers worldwide or transported
to other Phelps Dodge facilities for further processing. At year-end 2001, as a result of the then-current economic environment,
mill throughput at the Sierrita mine was reduced temporarily to approximately
one-half of its capacity. Our estimates at the time were that these actions
would eliminate approximately 49,600 tons of annual copper production and 7
million pounds of by-product molybdenum. In 2003 and 2002, copper production at
Sierrita exceeded our estimates due to improved production from higher ore
grades from normal mine planning improvements, improvements in copper recovery
and improved milling efficiency resulting from Quest for Zeroactions, and
smelter and acid supply requirements. As a result, 2003 and 2002 annual copper
production was only reduced by approximately 35,400 tons and 44,200 tons,
respectively, when compared with 2001. Based upon the rapid increase in copper
prices, our view of market fundamentals for copper and molybdenum
over the next several years, and our internal concentrate
and sulfuric acid balance, Sierrita began increasing production in January 2004 with an expectation that it will be
producing at full capacity in the 2004 fourth quarter. Our wholly owned operations at Miami, Arizona, consist of an open-pit
copper mine, an SX/EW operation producing copper cathode, a smelter, an acid
plant, an electrolytic refinery and a copper rod plant. In January 2002, as a
result of the then-current economic environment, the Miami mine and refinery
were closed temporarily. Our estimate at the time was that this curtailment
action would eliminate approximately 49,600 tons of annual copper production.
In 2003 and 2002, Miamis copper production was improved by higher than
expected output from residual leach stockpiles, various other improvements
resulting from Quest for Zeroactions, and the use of smelter weak acid in
leaching operations. As a result, 2003 and 2002 annual copper production was
only reduced by approximately 32,000 tons and 30,400 tons, respectively, when
compared with 2001. Based upon the rapid increase in copper prices, our view of market fundamentals for copper over the next several years, and our internal concentrate and
sulfuric acid balance, the Miami smelter should resume operating at full
capacity by the 2004 third quarter.




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4  We operate an open-pit copper mine, concentrator and SX/EW facility near
Silver City, New Mexico, and a smelter in Hurley, New Mexico, that are owned by
Chino Mines Company (Chino), a general partnership in which we held a
two-thirds interest through December 18, 2003. Heisei Minerals Corporation
(Heisei), a subsidiary of Mitsubishi Materials Corporation and Mitsubishi
Corporation, owned the remaining one-third interest in Chino. On December 19, 2003, we purchased
Heiseis interest in Chino. Prior to December 19, 2003, each partner purchased
its proportionate share of Chinos copper production each month. Beginning in
late 1998 and through the first half of 1999, production was curtailed
resulting in a reduction of approximately 35,000 tons of annual copper
production. In March 2001, the concentrator was temporarily shut down, and in
January 2002, the Chino mine and smelter were closed temporarily. Our estimates
at the time were that these actions would eliminate approximately 144,400 tons
of annual copper production. We anticipated that residual leaching operations
at Chino would become uneconomic by mid-year 2002. However, copper recoveries
from leach stockpiles have been better than anticipated and leaching operations
are now expected to remain economic for several more years, even with the mine
curtailed. As a result, 2002 annual copper production was only reduced by
approximately 97,400 tons. We restarted mining for leach material on a limited
basis at Chino in April 2003. In September 2003, we resumed a full
mine-for-leach operation. Based upon the rapid increase in copper prices, our view of market fundamentals for copper over the next several years, and our internal concentrate and
sulfuric acid balance, Chinos milling operations will commence in the 2004
third quarter at one-half capacity. On December 19, 2003, a wholly owned subsidiary of the Company acquired
Heiseis one-third general partnership interest in Chino. In connection with
this transaction, Heisei paid on behalf of Chino approximately $64 million in
cash to a trust to fund closure, closeout and reclamation obligations of Chino.
That amount represents a one-third share of an estimate by the state of New
Mexico of the amount of financial assurance Chino must provide in connection
with its current permits. In addition, Heisei paid $50 million to the Companys
subsidiary to cover other Heisei obligations. Due to our business expectations
and plans, which result in significant differences in the operating life of
Chino as compared with Heisei, we recognized an extraordinary gain of
approximately $68.3 million upon completing the transaction. Phelps Dodge operates its wholly owned Tyrone open-pit mine and SX/EW
plant near Tyrone, New Mexico. Tyrone has been a mine-for-leach operation since
1992. We partially curtailed production at Tyrone in September 2003. Cobre Mining Company Inc. (Cobre), acquired in 1998, is located in
southwestern New Mexico adjacent to our Chino operations. The primary assets of
Cobre include an open-pit copper mine, two mills, and the surrounding 12,000
acres of land, including mineral rights. Subsequently, production was
indefinitely suspended, reducing copper production by approximately 35,000 tons
per year. The entire Cobre operation remained on care-and-maintenance status as
of December 31, 2003. Based upon the rapid increase in copper prices, our view of market fundamentals for copper over the next several years, and our internal concentrate and
sulfuric acid balance, Cobre is expected to resume open-pit mining and milling
operations by the 2004 third quarter. In December 2002, the Company recognized
an impairment charge to write down Cobres assets by $115.5 million (before and
after taxes). We took this action after revising mine plans and assessing
recoverability. The recommencement of our curtailed mines, in conjunction with the
one-third share of Chino acquired in December 2003, will increase our 2004
production by approximately 240 million pounds, and approximately 370 million
pounds in 2005 when we achieve full run rates. This will bring production in
2004 and 2005 to approximately 2.35 billion pounds and 2.5 billion pounds,
respectively. As a result of increased production at Sierrita and Bagdad, our
molybdenum by-product production is expected to increase by approximately 3
million pounds to a total of 33 million pounds in 2004. A $15 million increase
in capital expenditures is projected to result from the production ramp-up. Even though we remain optimistic about the copper upturn, we will remain
disciplined about our production profile. We will continue to configure our
operations so that we can quickly respond to both positive and negative market
swings. 
 South American Mines We produce electrowon copper cathode at SX/EW operations near Arequipa,
Peru, and near Calama, Chile. We produce copper concentrate from open-pit mines
and concentrators located near Copiapó, Chile. We also plan to produce copper
concentrate in 2004 from two underground mines and a concentrator located near
Copiapó, Chile (curtailed since 1998). Following is a map indicating the approximate location of PDMCs South
American mines:  South American Mines (SOUTH AMERICAN MINES)   We operate the Candelaria mine located near Copiapó in the Atacama Desert
of northern Chile. The operation consists of an open-pit copper mine,
concentrator, port and associated facilities. We own an 80 percent partnership
interest in Candelaria, a Chilean contractual mining company, through Phelps
Dodge Candelaria, Inc., a wholly owned subsidiary. Sumitomo Metal Mining Co.,
Ltd. and Sumitomo Corporation own the remaining 20 percent interest. Phelps Dodge owns a 51 percent partnership interest in Sociedad
Contractual Minera El Abra (El Abra), a Chilean contractual mining company. El
Abra holds mining concessions over more than 33,000 acres of land near Calama
in the copper-rich Second Region of northern Chile. The remaining 49 percent is
owned by the state-owned copper enterprise Corporación Nacional del Cobre de
Chile (CODELCO). The El Abra operation consists of a mine-for-leach,




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5 open-pit
mining operation that uses three stages of crushing prior to leaching, an
on/off leach pad, and an SX/EW operation to produce copper cathode. In 2001, El
Abra completed a project to leach uncrushed, run-of-mine (ROM) material. The
ROM project allows El Abra to maintain tankhouse design capacity. ROM
production began in January 2002, with full production from the project achieved in the
second half of 2002. We own approximately 82 percent of the common stock of Sociedad Minera
Cerro Verde S.A.A. (Cerro Verde). Compañía de Minas Buenaventura S.A., a
long-established Peruvian mining concern, owns approximately 9 percent and the
employees of Cerro Verde and other shareholders own approximately 9 percent.
The Cerro Verde operation, located approximately 30 kilometers southwest of
Arequipa, Peru, consists of two open pits, Cerro Verde and Santa Rosa, a
heap-leach operation and an SX/EW operation to produce copper cathode. The ore
is processed through primary, secondary and tertiary crushers and placed on a
leach pad after agglomeration. Until the fourth quarter of 1998, we produced copper concentrate from two
underground mines and a concentrator located near Copiapó, Chile, through our
wholly owned Chilean subsidiary, Compañía Contractual Minera Ojos del Salado
(Ojos del Salado). We suspended operations indefinitely at Ojos del Salado in
October 1998, resulting in a reduction of more than 22,000 tons of annual
copper production. The Ojos del Salado operations remained on
care-and-maintenance status through December 31, 2003. Based upon the rapid
increase in copper prices, our view of market fundamentals for copper over the next several years, and
our internal concentrate and sulfuric acid balance, Ojos del Salado is expected
to resume underground mining and milling operations by the second quarter of
2004. In 2003, we produced a total of 346,100 tons of cathode copper at our
SX/EW facilities in South America, compared with 343,500 tons in 2002 and
324,700 tons in 2001. Our total annual design capacity of electrowon copper
cathode production is 248,000 tons at El Abra and 96,000 tons at Cerro Verde. 
 Manufacturing and Sales Segment We own and operate copper smelters in Miami, Arizona, and, through Chino
Mines Company (in which we held a two-thirds partnership interest through
December 18, 2003, and a 100 percent interest effective December 19, 2003), the
Chino smelter in Hurley, New Mexico. In January 2002, the Chino smelter was
temporarily closed. We smelt virtually all of our share of our U.S. copper
concentrate production and, depending on market circumstances and internal
production requirements, some concentrate production from Candelaria. In
addition, we may purchase concentrate to keep our smelters operating at
efficient levels. In September 1999, we suspended operations at our Hidalgo smelter in
Hidalgo County, New Mexico, due to a general lack of concentrate availability
in the United States and depressed copper market fundamentals. This suspension
was coincident with the closure of the Metcalf concentrator as previously
discussed. As a result of the successful acquisition of Cyprus Amax and the
decision to convert Morenci to a mine-for-leach operation, we concluded that
Hidalgo would probably not be operated in its historic configuration in the
foreseeable future. Accordingly, a pre-tax write-down of the Hidalgo assets of
$201.5 million was taken in 1999. However, it was anticipated at the time that
Hidalgo may have a future use for sulfuric acid production for the Companys
leach operations. As a result of the Companys ability to use acid more
efficiently and an updated assessment of PDMCs long-term acid production and
consumption balance, the Company determined that Hidalgo probably will not be
reconfigured to produce acid as originally anticipated and that the net book
value of Hidalgo assets probably would not be recovered. In December 2002, the
Company recognized an impairment charge to write down Hidalgos assets by an
additional $12.9 million (before and after taxes). Hidalgos power facilities
will continue to generate electricity when needed, and the facility will
continue to be a backup alternative as a reliable producer of acid if
conditions warrant. The remaining Hidalgo assets were written down to their
estimated fair value. The Company also recognized a $7.0 million (before and
after taxes) charge for the estimated remaining costs of its closure obligation
at Hidalgo. We refine our share of anode copper production from our smelters at our
refineries in El Paso, Texas, and Miami, Arizona. During 2003, 2002 and 2001,
the El Paso refinery operated significantly below capacity due to the late 1999
third quarter closing of the Hidalgo smelter. The closure of the Hidalgo
smelter resulted not only in a curtailment of operations at our El Paso
refinery, but also a reduction of approximately 200 refinery jobs. Our Miami
refinery has an annual production capacity of about 200,000 tons of copper
cathode, and the El Paso refinery has an annual production capacity of about
450,000 tons of copper cathode. The total combined capacity of about 650,000
tons of electrolytic copper per year is sufficient to refine all the anode
copper we produce for our account at our operating smelters, as well as anodes
from other customers that we refine on a toll basis. As a result of production
curtailments announced in the fourth quarter of 2001, the Miami refinery was
temporarily closed. Our El Paso refinery also produces copper sulfate, nickel
sulfate, copper telluride, and autoclaved slimes material containing gold,
silver, selenium, platinum and palladium. We are the worlds largest producer of continuous-cast copper rod, the
basic feed for the electrical wire and cable industry. Most of our refined
copper, and additional purchased copper, is converted into rod at our
continuous-cast copper rod facilities in El Paso, Texas; Norwich, Connecticut;
Miami, Arizona; and Chicago, Illinois. Our four plants have a collective annual
capacity to convert more than 1.1 million tons of refined copper into rod and
other refined copper products. 
 Primary Molybdenum Segment See the United States Mines map on page 2 for the location of our
molybdenum mines. Phelps Dodge owns the underground Henderson molybdenum mine near Empire,
Colorado. The operation consists of an underground block-caving mine where
molybdenite ore is mined and transported to a conventional sulfide
concentrator. The concentrator is capable of operating at a rate of 32,000 tons
of ore per day, producing molybdenum disulfide concentrate containing up to 58
percent molybdenum. Most of the concentrate is shipped to our Fort Madison
roasting and chemical processing facility in Iowa where a number of different
high-purity products are made for final sale to




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##### Table of Contents



6 customers. A portion of
Hendersons production is further refined and sold to customers as molysulfide. In May 2000, as a result of an oversupply of molybdenum and continued low
prices in the world market, Phelps Dodge announced a plan to curtail molybdenum
production by approximately 20 percent and reduce its Henderson workforce by
approximately 130 workers. In 2003, the previously announced production curtailment essentially
remained in place. Phelps Dodge also owns the Climax molybdenum mine near Leadville,
Colorado. The operation consists of both an underground and open-pit mine, and
a 16,000-ton-per-day concentrator. The Climax molybdenum mine had been placed
on care-and-maintenance in 1995 by the predecessor owner. At year-end 2003, as
well as at the acquisition, we expected to bring Climax into production
concurrent with the exhaustion of the Henderson molybdenum mine reserves for
continued long-term primary molybdenum supply for the chemicals business. The
property comprises more than 14,000 acres. Phelps Dodge processes molybdenum concentrates at its conversion plants in
the United States and Europe into such products as technical grade molybdic
oxide, ferromolybdenum, pure molybdic oxide, ammonium molybdates and
molysulfide. The Company operates molybdenum roasters at Green Valley, Arizona;
Fort Madison, Iowa; and Rotterdam, the Netherlands. The Fort Madison, Iowa, facilities consist of two molybdenum roasters, a
sulfuric acid plant, a metallurgical (technical oxide) packaging facility, and
a chemical conversion plant, which includes a wet chemicals plant and
sublimation equipment. In the chemical plant, molybdic oxide is further refined
into various high-purity molybdenum chemicals for a wide range of uses by
chemical and catalyst manufacturers. In addition to metallurgical oxide
products, the Fort Madison facilities produce ammonium dimolybdate, pure
molybdic oxide, ammonium heptamolybdate, ammonium octamolybdate, sodium
molybdate, sublimed pure molybdic oxide and molysulfide. The Rotterdam conversion plant consists of a molybdenum roaster, sulfuric
acid plant, a metallurgical packaging facility and a chemical conversion plant.
The plant produces metallurgical products primarily for third parties. Ammonium
dimolybdate and pure molybdic oxide are produced in a wet chemical plant. We also produce ferromolybdenum and molysulfide for worldwide customers at
our conversion plant located in Stowmarket, United Kingdom. The plant is
operated both as an internal and external customer tolling facility. 
 Worldwide Copper
Production by Source, Other Metal Production and Sales Data, and Manufacturing and Sales Production The following tables show our worldwide copper production by source for
the years 1999 through 2003; aggregate production and sales data for copper,
gold, silver, molybdenum and sulfuric acid from these sources for the same
years; annual average copper and molybdenum prices; and production from our
smelters and refineries. Major changes in operations during the five-year
period included:  
    
    curtailment of Chino operations beginning in the 1998 fourth quarter,
followed by temporary shut-down of the concentrator in March 2001 and
temporary closure of the mine and smelter in January 2002, a partial
restart of mining for leach material in April 2003 with a full
restart of mining for leach materials in September 2003;
    
    partial curtailment at Tyrone in September 2003;
    
    completion of the run-of-mine leach project at El Abra with
production commencing January 2002;
    
    temporary closure of the Miami mine and refinery in January 2002;
    
    curtailment of mill throughput at Sierrita and Bagdad to
approximately one-half capacity in January 2002, followed by an
increase in Bagdads mill throughput to approximately 80 percent in
January 2003;
    
    conversion of Morenci operations to mine-for-leach during 1999 and
2000, with completion in the 2001 first quarter;
    
    partial curtailment of Henderson operations beginning in the 2000
second quarter;
    
    acquisition of Cyprus Amax on October 16, 1999 (the primary assets
acquired included the Bagdad, Sierrita, Miami, El Abra and Cerro
Verde copper mines; the Henderson and Climax molybdenum mines; a
copper smelter, refinery and two rod plants; three molybdenum
roasting operations and four molybdenum conversion facilities);
    
    permanent closure of Morencis Metcalf concentrator at the end
of 1999;
    
    temporary closure of the Hidalgo smelter facilities in September
1999; and
    
    acquisition of Cobre in February 1998 followed by suspension of
operations in March 1999.




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##### Table of Contents



7 
 Phelps Dodge Copper Production Data, by Source(a)   2003
    
    2002
    
    2001
    
    2000
    
    1999Material mined(b)Morenci
    
    
    237,338
    
    
    
    248,505
    
    
    
    281,474
    
    
    
    274,871
    
    
    
    297,872Bagdad
    
    
    48,935
    
    
    
    42,912
    
    
    
    63,680
    
    
    
    69,101
    
    
    
    16,233Sierrita
    
    
    35,525
    
    
    
    23,066
    
    
    
    60,869
    
    
    
    75,319
    
    
    
    15,875Miami
    
    
    
    
    
    
    
    
    
    
    32,702
    
    
    
    46,446
    
    
    
    13,787Chino
    
    
    12,299
    
    
    
    220
    
    
    
    59,277
    
    
    
    61,519
    
    
    
    44,562Cobre
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,558Tyrone
    
    
    16,319
    
    
    
    45,515
    
    
    
    73,990
    
    
    
    113,937
    
    
    
    113,422Candelaria
    
    
    108,442
    
    
    
    109,211
    
    
    
    126,509
    
    
    
    128,464
    
    
    
    139,886Cerro Verde
    
    
    72,965
    
    
    
    75,982
    
    
    
    68,685
    
    
    
    61,400
    
    
    
    11,459El Abra
    
    
    87,682
    
    
    
    76,831
    
    
    
    82,737
    
    
    
    67,786
    
    
    
    10,029Total material mined
    
    
    619,505
    
    
    
    622,242
    
    
    
    849,923
    
    
    
    898,843
    
    
    
    667,683Less minority participants shares (c):Morenci
    
    
    35,601
    
    
    
    37,276
    
    
    
    42,220
    
    
    
    41,231
    
    
    
    44,681Chino (m)
    
    
    3,785
    
    
    
    73
    
    
    
    19,758
    
    
    
    20,506
    
    
    
    14,854Candelaria
    
    
    21,688
    
    
    
    21,842
    
    
    
    25,302
    
    
    
    25,693
    
    
    
    27,977El Abra
    
    
    42,964
    
    
    
    37,647
    
    
    
    40,541
    
    
    
    33,215
    
    
    
    4,914Net Phelps Dodge share
    
    
    515,467
    
    
    
    525,404
    
    
    
    722,102
    
    
    
    778,198
    
    
    
    575,257Mill ore processedMorenci
    
    
    
    
    
    
    
    
    
    
    4,301
    
    
    
    26,698
    
    
    
    38,283Bagdad
    
    
    26,103
    
    
    
    19,783
    
    
    
    31,667
    
    
    
    29,846
    
    
    
    6,211Sierrita
    
    
    26,654
    
    
    
    21,439
    
    
    
    38,133
    
    
    
    38,319
    
    
    
    8,046Chino
    
    
    
    
    
    
    
    
    
    
    3,109
    
    
    
    13,889
    
    
    
    16,056Cobre
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    654Candelaria
    
    
    26,407
    
    
    
    28,507
    
    
    
    27,365
    
    
    
    26,165
    
    
    
    22,405Total mill ore processed
    
    
    79,164
    
    
    
    69,729
    
    
    
    104,575
    
    
    
    134,917
    
    
    
    91,655Less minority participants shares (c):Morenci
    
    
    
    
    
    
    
    
    
    
    645
    
    
    
    4,004
    
    
    
    5,742Chino (m)
    
    
    
    
    
    
    
    
    
    
    1,036
    
    
    
    4,630
    
    
    
    5,352Candelaria
    
    
    5,281
    
    
    
    5,701
    
    
    
    5,473
    
    
    
    5,233
    
    
    
    4,481Net Phelps Dodge share
    
    
    73,883
    
    
    
    64,028
    
    
    
    97,421
    
    
    
    121,050
    
    
    
    76,080Leach ore placed in stockpilesMorenci
    
    
    228,940
    
    
    
    241,955
    
    
    
    258,202
    
    
    
    236,696
    
    
    
    250,680Bagdad
    
    
    
    
    
    
    328
    
    
    
    696
    
    
    
    
    
    
    
    Sierrita
    
    
    375
    
    
    
    170
    
    
    
    14,347
    
    
    
    18,386
    
    
    
    4,307Miami
    
    
    
    
    
    
    
    
    
    
    10,208
    
    
    
    11,032
    
    
    
    2,379Chino
    
    
    11,066
    
    
    
    198
    
    
    
    31,009
    
    
    
    12,875
    
    
    
    12,400Tyrone
    
    
    10,722
    
    
    
    34,835
    
    
    
    27,513
    
    
    
    51,446
    
    
    
    55,693Cerro Verde
    
    
    21,014
    
    
    
    24,096
    
    
    
    23,436
    
    
    
    17,833
    
    
    
    2,642El Abra
    
    
    80,604
    
    
    
    71,224
    
    
    
    75,875
    
    
    
    62,042
    
    
    
    8,678Total leach ore placed in stockpiles
    
    
    352,721
    
    
    
    372,806
    
    
    
    441,286
    
    
    
    410,310
    
    
    
    336,779Less minority participants shares (c):Morenci
    
    
    34,341
    
    
    
    36,293
    
    
    
    38,729
    
    
    
    35,503
    
    
    
    37,602Chino (m)
    
    
    3,376
    
    
    
    66
    
    
    
    10,336
    
    
    
    4,292
    
    
    
    4,133El Abra
    
    
    39,496
    
    
    
    34,900
    
    
    
    37,179
    
    
    
    30,401
    
    
    
    4,252Net Phelps Dodge share
    
    
    275,508
    
    
    
    301,547
    
    
    
    355,042
    
    
    
    340,114
    
    
    
    290,792




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##### Table of Contents



8 Phelps Dodge Copper Production Data, by Source(a)   2003
    
    2002
    
    2001
    
    2000
    
    1999Grade of ore mined  percent copperMorenci  mill
    
    
    
    
    
    
    
    
    
    
    0.78
    
    
    
    0.71
    
    
    
    0.68Morenci  leach
    
    
    0.28
    
    
    
    0.28
    
    
    
    0.30
    
    
    
    0.26
    
    
    
    0.26Bagdad  mill
    
    
    0.43
    
    
    
    0.43
    
    
    
    0.43
    
    
    
    0.43
    
    
    
    0.43Bagdad  leach
    
    
    
    
    
    
    0.29
    
    
    
    0.28
    
    
    
    
    
    
    
    Sierrita  mill
    
    
    0.29
    
    
    
    0.32
    
    
    
    0.29
    
    
    
    0.29
    
    
    
    0.29Sierrita  leach
    
    
    0.26
    
    
    
    0.21
    
    
    
    0.22
    
    
    
    0.20
    
    
    
    0.20Miami  leach
    
    
    
    
    
    
    
    
    
    
    0.41
    
    
    
    0.71
    
    
    
    0.52Chino  mill
    
    
    
    
    
    
    
    
    
    
    0.79
    
    
    
    0.83
    
    
    
    0.59Chino  leach
    
    
    0.80
    
    
    
    0.29
    
    
    
    0.48
    
    
    
    0.22
    
    
    
    0.25Cobre  mill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.00Tyrone  leach
    
    
    0.34
    
    
    
    0.35
    
    
    
    0.29
    
    
    
    0.26
    
    
    
    0.28Candelaria  mill
    
    
    0.97
    
    
    
    0.84
    
    
    
    0.96
    
    
    
    0.93
    
    
    
    1.22Cerro Verde  leach
    
    
    0.60
    
    
    
    0.55
    
    
    
    0.53
    
    
    
    0.59
    
    
    
    0.78El Abra  leach
    
    
    0.49
    
    
    
    0.50
    
    
    
    0.60
    
    
    
    0.56
    
    
    
    0.79Average copper grade  mill
    
    
    0.56
    
    
    
    0.56
    
    
    
    0.54
    
    
    
    0.59
    
    
    
    0.75Average copper grade  leach
    
    
    0.37
    
    
    
    0.35
    
    
    
    0.38
    
    
    
    0.33
    
    
    
    0.28Copper ProductionMorenci:Concentrate
    
    
    
    
    
    
    
    
    
    
    23.5
    
    
    
    132.3
    
    
    
    195.2Electrowon
    
    
    421.2
    
    
    
    412.7
    
    
    
    368.1
    
    
    
    284.7
    
    
    
    284.7Bagdad:Concentrate
    
    
    82.5
    
    
    
    68.4
    
    
    
    118.1
    
    
    
    111.5
    
    
    
    22.3Electrowon
    
    
    24.5
    
    
    
    15.6
    
    
    
    10.5
    
    
    
    11.8
    
    
    
    2.9Sierrita:Concentrate
    
    
    66.3
    
    
    
    60.0
    
    
    
    94.6
    
    
    
    95.9
    
    
    
    19.7Electrowon
    
    
    9.3
    
    
    
    16.2
    
    
    
    26.3
    
    
    
    26.5
    
    
    
    5.8Miami:Electrowon
    
    
    17.8
    
    
    
    10.5
    
    
    
    44.1
    
    
    
    59.3
    
    
    
    13.2Bisbee:Precipitate
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1Chino:Concentrate and precipitate
    
    
    
    
    
    
    
    
    
    
    18.3
    
    
    
    87.0
    
    
    
    74.3Electrowon
    
    
    39.9
    
    
    
    53.8
    
    
    
    59.9
    
    
    
    48.6
    
    
    
    55.8Cobre:Concentrate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.6Tyrone:Electrowon
    
    
    56.9
    
    
    
    69.9
    
    
    
    76.4
    
    
    
    79.3
    
    
    
    80.1Candelaria:Concentrate
    
    
    234.5
    
    
    
    219.5
    
    
    
    243.2
    
    
    
    224.7
    
    
    
    250.1Cerro Verde:Electrowon
    
    
    96.3
    
    
    
    95.3
    
    
    
    84.9
    
    
    
    78.7
    
    
    
    16.2El Abra:Electrowon
    
    
    249.8
    
    
    
    248.2
    
    
    
    239.8
    
    
    
    217.4
    
    
    
    52.8Manufacturing and Sales (d)
    
    
    6.6
    
    
    
    5.4
    
    
    
    3.0
    
    
    
    1.2
    
    
    
    1.5Total copper production
    
    
    1,305.6
    
    
    
    1,275.6
    
    
    
    1,410.9
    
    
    
    1,459.0
    
    
    
    1,081.3Less minority participants shares (c):Morenci
    
    
    63.3
    
    
    
    61.9
    
    
    
    58.8
    
    
    
    62.5
    
    
    
    72.0Chino (m)
    
    
    12.5
    
    
    
    17.9
    
    
    
    26.1
    
    
    
    45.2
    
    
    
    43.3Candelaria
    
    
    46.9
    
    
    
    43.9
    
    
    
    48.6
    
    
    
    45.0
    
    
    
    50.0El Abra
    
    
    122.4
    
    
    
    121.7
    
    
    
    117.5
    
    
    
    106.5
    
    
    
    25.9Manufacturing and Sales (d)
    
    
    1.2
    
    
    
    1.4
    
    
    
    (0.2
    )
    
    
    (0.5
    )
    
    
    Net Phelps Dodge share
    
    
    1,059.3
    
    
    
    1,028.8
    
    
    
    1,160.1
    
    
    
    1,200.3
    
    
    
    890.1




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##### Table of Contents



9 
 Phelps Dodge Copper Sales Data, by Source(a)   2003
    
    2002
    
    2001
    
    2000
    
    1999Copper sales  net Phelps Dodge share from own mines(e):Morenci
    
    
    357.9
    
    
    
    350.8
    
    
    
    333.0
    
    
    
    354.4
    
    
    
    415.5Bagdad
    
    
    111.0
    
    
    
    92.3
    
    
    
    132.9
    
    
    
    123.3
    
    
    
    25.2Sierrita
    
    
    79.3
    
    
    
    83.8
    
    
    
    125.1
    
    
    
    122.4
    
    
    
    25.6Miami
    
    
    20.0
    
    
    
    15.2
    
    
    
    46.6
    
    
    
    59.2
    
    
    
    13.2Bisbee
    
    
    
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.1Chino
    
    
    27.4
    
    
    
    35.8
    
    
    
    52.1
    
    
    
    90.4
    
    
    
    89.3Cobre
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.6Tyrone
    
    
    56.9
    
    
    
    69.9
    
    
    
    76.4
    
    
    
    79.2
    
    
    
    81.7Candelaria
    
    
    187.4
    
    
    
    174.6
    
    
    
    190.1
    
    
    
    181.5
    
    
    
    187.4Cerro Verde
    
    
    95.6
    
    
    
    94.9
    
    
    
    84.7
    
    
    
    78.8
    
    
    
    16.5El Abra
    
    
    128.4
    
    
    
    129.6
    
    
    
    126.7
    
    
    
    109.5
    
    
    
    29.3Manufacturing and Sales (d)
    
    
    5.4
    
    
    
    4.1
    
    
    
    2.9
    
    
    
    1.8
    
    
    
    1.5Total copper sales  net Phelps Dodge share from own mines
    
    
    1,069.3
    
    
    
    1,051.1
    
    
    
    1,170.8
    
    
    
    1,200.6
    
    
    
    891.9Purchased copper:Morenci
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Candelaria
    
    
    22.1
    
    
    
    35.8
    
    
    
    37.0
    
    
    
    5.0
    
    
    
    El Abra
    
    
    7.3
    
    
    
    56.5
    
    
    
    5.8
    
    
    
    
    
    
    
    Manufacturing and Sales (d)
    
    
    345.1
    
    
    
    350.7
    
    
    
    418.4
    
    
    
    490.0
    
    
    
    289.6Total purchased copper
    
    
    374.5
    
    
    
    443.0
    
    
    
    461.2
    
    
    
    495.0
    
    
    
    289.7Total sales
    
    
    1,443.8
    
    
    
    1,494.1
    
    
    
    1,632.0
    
    
    
    1,695.6
    
    
    
    1,181.6
 
 Phelps Dodge Other Metal Production and Sales(a)  2003
    
    2002
    
    2001
    
    2000
    
    1999Gold(thousand ounces)Total production
    
    
    129
    
    
    
    132
    
    
    
    140
    
    
    
    151
    
    
    
    173Less minority participants shares (c)
    
    
    26
    
    
    
    24
    
    
    
    31
    
    
    
    33
    
    
    
    37Net Phelps Dodge share
    
    
    103
    
    
    
    108
    
    
    
    109
    
    
    
    118
    
    
    
    136Sales (e)
    
    
    108
    
    
    
    136
    
    
    
    77
    
    
    
    120
    
    
    
    138Silver(thousand ounces)Total production
    
    
    2,754
    
    
    
    2,582
    
    
    
    3,773
    
    
    
    4,985
    
    
    
    4,284Less minority participants shares (c)
    
    
    265
    
    
    
    225
    
    
    
    490
    
    
    
    657
    
    
    
    877Net Phelps Dodge share
    
    
    2,489
    
    
    
    2,357
    
    
    
    3,283
    
    
    
    4,328
    
    
    
    3,407Sales (e)
    
    
    2,292
    
    
    
    3,317
    
    
    
    2,504
    
    
    
    4,813
    
    
    
    3,415Molybdenum(thousand pounds)Primary Molybdenum:Henderson
    
    
    22,247
    
    
    
    20,517
    
    
    
    18,603
    
    
    
    19,727
    
    
    
    1,718By-product
    
    
    29,747
    
    
    
    24,448
    
    
    
    36,912
    
    
    
    31,751
    
    
    
    6,585Total production
    
    
    51,994
    
    
    
    44,965
    
    
    
    55,515
    
    
    
    51,478
    
    
    
    8,303Less minority participants shares (c):Chino
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    419
    
    
    
    241Net Phelps Dodge share
    
    
    51,994
    
    
    
    44,965
    
    
    
    55,465
    
    
    
    51,059
    
    
    
    8,062Sales  Net Phelps Dodge share from own mines (e)
    
    
    54,158
    
    
    
    46,665
    
    
    
    55,105
    
    
    
    57,988
    
    
    
    11,391Purchased molybdenum
    
    
    8,199
    
    
    
    7,393
    
    
    
    1,609
    
    
    
    
    
    
    
    26Total sales
    
    
    62,357
    
    
    
    54,058
    
    
    
    56,714
    
    
    
    57,988
    
    
    
    11,417Sulfuric acid(thousand tons)Total production from copper smelters (f)
    
    
    647.6
    
    
    
    748.6
    
    
    
    1,236.7
    
    
    
    1,231.8
    
    
    
    1,172.1Less minority participants shares (c)
    
    
    
    
    
    
    1.6
    
    
    
    190.2
    
    
    
    186.3
    
    
    
    212.5Net Phelps Dodge share
    
    
    647.6
    
    
    
    747.0
    
    
    
    1,046.5
    
    
    
    1,045.5
    
    
    
    959.6Sales from copper smelters (f)
    
    
    45.5
    
    
    
    14.5
    
    
    
    15.9
    
    
    
    35.0
    
    
    
    625.5




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##### Table of Contents



10 Prices   2003
    
    2002
    
    2001
    
    2000
    
    1999COMEX copper price (g)
    
    $
    0.81
    
    
    
    0.72
    
    
    
    0.73
    
    
    
    0.84
    
    
    
    0.72LME copper price (h)
    
    $
    0.81
    
    
    
    0.71
    
    
    
    0.72
    
    
    
    0.82
    
    
    
    0.71Metals Week- molybdenum Dealer Oxide mean price (i)
    
    $
    5.32
    
    
    
    3.77
    
    
    
    2.36
    
    
    
    2.56
    
    
    
    2.65
  
 Phelps Dodge Manufacturing and Sales Production(a)  2003
    
    2002
    
    2001
    
    2000
    
    1999Smelters(j)Total copper (thousand tons)
    
    
    200.8
    
    
    
    243.8
    
    
    
    463.5
    
    
    
    439.8
    
    
    
    267.4Less minority participants shares (c)
    
    
    
    
    
    
    0.5
    
    
    
    36.7
    
    
    
    49.5
    
    
    
    57.0Net Phelps Dodge share
    
    
    200.8
    
    
    
    243.3
    
    
    
    426.8
    
    
    
    390.3
    
    
    
    210.4Refineries(k)Copper (thousand tons)
    
    
    284.6
    
    
    
    319.6
    
    
    
    502.6
    
    
    
    471.2
    
    
    
    422.6Gold (thousand ounces) (n)
    
    
    
    
    
    
    79.0
    
    
    
    86.6
    
    
    
    52.6
    
    
    
    72.9Silver (thousand ounces) (n)
    
    
    
    
    
    
    1,786.0
    
    
    
    3,719.1
    
    
    
    3,838.9
    
    
    
    3,681.5Rod(l)Total copper (thousand tons)
    
    
    825.8
    
    
    
    850.6
    
    
    
    879.8
    
    
    
    1,153.9
    
    
    
    805.1
   Footnotes to tables on pages 7 through 10:(a)
    
    Includes Cyprus Amax production and sales from the time it was acquired on October 16, 1999.(b)
    
    Includes material mined for leaching operations.(c)
    
    Interests in mining
joint ventures in which we own more than 50 percent are reported
using the proportional consolidation method.
Cerro Verde, in which we own 82 percent of its common stock, is reported using the full consolidation method.(d)
    
    Includes smelter production from custom receipts and fluxes as well as tolling gains or losses.(e)
    
    Excludes sales of purchased copper, molybdenum, silver and gold.(f)
    
    Sulfuric acid production results from smelter air quality control operations; sales do not include internal usage.(g)
    
    New York Commodity Exchange annual average spot price per pound  cathodes.(h)
    
    London Metal Exchange annual average spot price per pound  cathodes.(i)
    
    Annual Metals Weekmolybdenum Dealer Oxide mean price per pound  as quoted in Platts Metals Week.(j)
    
    Includes production from purchased concentrates and copper smelted for others on a toll basis.(k)
    
    Includes production from purchased material and copper refined for others on a toll basis.(l)
    
    Includes rod, wire, oxygen-free billets/cakes, scrap and other shapes.(m)
    
    Reflects a one-third partnership interest from January 1, 2003 to December 18, 2003.(n)
    
    El Paso closed its precious metals processing facility in the fourth quarter of 2002.




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##### Table of Contents



11 
 Other Mining Segment This segment includes our worldwide mineral exploration and development
programs, a process technology center that directs its activities at improving
existing processes and developing new cost-competitive technologies, and other
ancillary operations. 
 Exploration Our exploration groups primary objectives are to increase PDMCs reserve
base through discoveries and joint ventures and, where appropriate, to
diversify into other metals, minerals and geographic areas. Exploration is
focused on finding large-scale copper, and copper/gold deposits in the four
principal copper-producing regions of the world: southwest U.S. /Mexico, South
American Cordillera, Central Africa, and Australia, as well as in other highly
prospective areas. This group operates in more than 12 countries and maintains
offices in Australia, Brazil, Canada, Chile, India, Mexico, Peru and the United
States. In 2003, Phelps Dodge expended $25.8 million on worldwide exploration,
compared with $20.0 million in 2002 and $36.8 million in 2001. Approximately 29
percent of the 2003 expenditures occurred in the United States with 25 percent
being spent at our U.S. mine sites. This compares with 33 percent in 2002 (24
percent at U.S. mine sites) and 14 percent in 2001 (13 percent at U.S. mine
sites). The balance of our exploration expenditures was spent principally in
Australasia, Brazil, Chile, Mexico, Canada, Peru and Central Africa, including
6 percent at our South American mine sites. During 2003, exploration efforts continued at our existing copper
operations. Work continued on an underground decline at Candelaria to provide
exploration drilling access to a high-grade underground zone of mineralization
at depth adjacent to the Candelaria open pit. At our Morenci mine, the first
phase drilling of two district targets intersected promising mineralized
intercepts. Environmental permitting continues at our Safford project in eastern
Arizona to enable development of the Dos Pobres and San Juan deposits. The
Final Environmental Impact Study for the Safford project was published by the
Bureau of Land Management in December 2003. The two deposits contain an
estimated total of 533 million tons of leachable reserves with an ore grade of
0.37 percent copper. Phelps Dodge Australasia, Inc., a subsidiary of Phelps Dodge Corporation,
sold its Australian exploration property portfolio to Red Metal Limited, a
newly formed junior mining exploration company that listed on the Australian
Stock Exchange in October 2003. As consideration, Phelps Dodge Australasia
acquired a 15 percent shareholding in Red Metal Limited and rights to acquire
interests in properties explored. In August 2003, the Ambatovy nickel/cobalt deposit in central Madagascar
was optioned to Dynatec Corporation in consideration for a cash payment of $0.5
million and completion of a feasibility study that will earn it a 53 percent
interest in the project. Previous studies estimated mineralized material of 210
million tons at an estimated grade of 1.1 percent nickel and 0.1 percent
cobalt. In August 2002, Phelps Dodge announced it had replaced BHP Billiton as
option holder under an existing agreement among BHP Billiton, Tenke Mining
Corp. and others to acquire a controlling interest and operatorship in the
Tenke Fungurume Mining (TFM) copper/cobalt project in the Democratic Republic
of the Congo. On January 16, 2004, Phelps Dodge Exploration Corporation entered
into a joint venture with Tenke Holdings Limited with respect to the
exploration, development and, if warranted, commercial production associated
with the TFM copper/cobalt mineral deposit. Phelps Dodge has a 70 percent
interest in the joint venture, which has a 55 percent ownership in TFM. In December 2001, we recorded a charge of $3.9 million to write off the
net book value of the Piedras Verdes project in Sonora, Mexico, as it no longer
met our development criteria. In March 2002, Phelps Dodge reached an agreement
with Frontera Copper Corporation to sell its interest in the Piedras Verdes
project in Mexico. In accordance with the agreement, Phelps Dodge received $0.5
million in cash plus other consideration, which are subject to a number of
conditions, not to exceed $16 million. In October 2001, Phelps Dodge sold its 50 percent interest in Mineração
Serra do Sossego to Companhia Vale do Rio Doce (CVRD) for $42.5 million in
cash. Sossego is a copper-gold deposit in the Carajas region of Brazil. 
 Process Technology The objective of PDMCs process technology center (PTC) in Safford,
Arizona, is to enhance and strengthen Phelps Dodges competitive position in
the world copper market. PTC was established in 1996 to provide metallurgical
process development capabilities, process optimization services, metallurgical
testing and advanced material characterization services to meet the needs of
PDMC and its operations. PTC is ISO-9001 certified. The activities at PTC are
directed at continuous improvement of existing processes and the development of
new cost-competitive technologies, and are an integral part of our Quest for
Zeroprogram. PTC employs approximately 78 engineers, scientists and technical
support staff. The facilities include:  
    
    a large-diameter column leach facility for testing run-of-mine
material, which is capable of processing up to approximately 600 tons
of ore annually;
    
    a continuous SX/EW test facility capable of producing 1.5 tons of
cathode copper per day;
    
    a small-diameter column leach facility with a capacity of 250
individual tests per year for crushed material;
    
    a metallurgical laboratory for the development of biological leaching
processes and enhancements and other biological applications; and
    
    a state-of-the-art material characterization laboratory with advanced
mineralogy, analytical chemistry and metallography capabilities. The principal areas of activity include hydrometallurgy, mineral
processing (grinding and flotation), material characterization and technical
information services. Some of the most important projects and milestones in
2003 were:  
    
    The commissioning of a new concentrate pressure leaching demonstration
plant at the Bagdad mine. The facility is the first of its kind in the
world to use high-temperature pressure leaching to process chalcopyrite
concentrates. The technology is proprietary and is covered under a
Technology Development Agreement between Phelps Dodge and Placer Dome Inc.
The plant was de-




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##### Table of Contents



12  signed to produce 35 million pounds of copper cathode annually. The plant was
commissioned in the first quarter of 2003 and achieved full production in the
second quarter of 2003. During nine months of operation (April to December
2003), the plant processed 44,200 tons of concentrate and produced
approximately 24.4 million pounds of copper cathode. Average extraction of
copper from concentrate was 98.5 percent, slightly more than design recovery.
Plant availability averaged 85 percent during the nine-month period of
operation.
    
    The continued development of a new medium-temperature
pressure leaching process for copper concentrate
treatment at the Hazen Research facility in Golden,
Colorado. This process is designed to minimize acid
production and has potential application for the
processing of concentrates where sulfuric acid cannot
be beneficially used in stockpile or heap leaching
operations.
    
    The continued development of a direct electrowinning
technology for use in conjunction with the pressure
leaching technology described above.
    
    The continued advancement of proprietary technology
for heap and stockpile leaching of low-grade
chalcopyrite ores.
    
    The investigation of alternative technologies to
reduce the cost of copper electrowinning.
    
    The investigation of alternative sulfuric acid
production techniques.
    
    The successful installation and commissioning of a
third QemSCAN scanning electron microscope in the
second quarter of 2003. Total expenditures for PTC in 2003 were approximately $18 million,
compared with $13 million in 2002 and $11 million in 2001. PDMC intends to
advance all of these research and development projects aggressively in 2004;
however, there is no assurance that any of these technologies will be
commercialized. 
 Other Additionally, this segment includes our Tohono copper operation in south
central Arizona, which includes an SX/EW facility capable of producing copper
cathode. The facility is located on lands leased from the Tohono Oodham
Nation. Although mining of ore ceased in July 1997, production of copper
continued from existing leach stockpiles until February 1999 when the facility
was placed on care-and-maintenance status. The property has mineralized
material for which, at higher copper prices, various alternatives could be
considered. 
 Other Mining Investments We own a 14.0 percent interest in Southern Peru Copper Corporation (SPCC),
which operates two open-pit copper mines, two concentrators, an SX/EW
operation, a smelter and a refinery in Peru. SPCCs other principal
shareholders are a subsidiary of Grupo Mexico, S.A. de C.V., with a 54.2
percent interest, and Cerro Trading Company, Inc., with a 14.2 percent
interest. A total of 17.6 percent interest is publicly held. SPCCs results are
not included in our earnings because we account for our investment in SPCC on
the cost basis. Based on the composition of SPCCs board of directors, Grupo
Mexico has majority control, and the two principal minority shareholders cannot
override Grupo Mexicos decisions. On January 29, 2004, the two directors of
SPCC that we nominated resigned from SPCCs board of directors. During 2003, we
received dividend payments of $6.3 million from SPCC, compared with $4.0
million in 2002 and 2001. In May 1997, we acquired an indirect 40 percent voting interest,
representing a 26.67 percent economic interest, in a Peruvian zinc mining
company, Compañía San Ignacio de Morococha S.A. (SIMSA) and its San Vicente
mine. SIMSAs other shareholder with voting shares was the Jesus Arias family.
We accounted for our investment in SIMSA on the equity basis. During the fourth
quarter of 2001, the investment was written down by $9.1 million due to the
impact of low zinc prices on the operations ability to generate cash flows to
cover operational and debt costs and our belief that we could not recover our
investment. In November 2002, we sold our interest in SIMSA to the Arias family
for $0.2 million. 
 Ore Reserves Ore reserves are those estimated quantities of proven and probable
material that may be economically mined and processed for extraction of their
constituent values. Estimates of our ore reserves are based upon engineering
evaluations of assay values derived from sampling of drill holes and other
openings. In our opinion, the sites for such samplings are spaced sufficiently
close and the geologic characteristics of the deposits are sufficiently well
defined to render the estimates reliable. The ore reserve estimates include
assessments of the resource, mine and metallurgy as well as consideration of
economic, marketing, legal, environmental, social and governmental factors. Phelps Dodge uses several additional factors to determine mine design
limits that it believes maximize the value of future cash flows including
time-valued concepts to recognize, for example, any elapsed time between mining
of overburden and the mining of ore. Our mine designs recognize capital and
other expenditures required to extract the ore reserves over the life of the
mine. Cutoff grade strategies are implemented to maximize time-valued cash
flows. Phelps Dodge believes its ore reserve estimation methodology is prudent
and consistent with appropriate industry standards. Proven and probable ore reserves at December 31, 2003, and 2002, for each
of our operating, curtailed and development properties are summarized on the
following page.




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##### Table of Contents



13  Total Reserves Estimated at December 31, 2003 (1)Leachable Reserves
    
    PhelpsMillable Reserves
    
    Crushed Leach
    
    Run-of-Mine (ROM)
    
    DodgeMillion
    
    %
    
    %
    
    Million
    
    %
    
    Million
    
    %
    
    InterestTons
    
    Copper
    
    Moly
    
    Tons
    
    Copper
    
    Tons
    
    Copper
    
    (%)Operating and Curtailed OperationsMorenci (2)
    
    
    178.7
    
    
    
    0.46
    
    
    
    
    
    
    
    575.3
    
    
    
    0.54
    
    
    
    2,044.6
    
    
    
    0.18
    
    
    
    85.0Bagdad (3)
    
    
    797.9
    
    
    
    0.36
    
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    14.8
    
    
    
    0.28
    
    
    
    100.0Sierrita (4)
    
    
    1,199.9
    
    
    
    0.26
    
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    35.8
    
    
    
    0.18
    
    
    
    100.0Miami (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126.3
    
    
    
    0.37
    
    
    
    100.0Chino (6)
    
    
    182.1
    
    
    
    0.61
    
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    239.0
    
    
    
    0.42
    
    
    
    100.0Cobre (5)
    
    
    57.6
    
    
    
    0.55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77.8
    
    
    
    0.26
    
    
    
    100.0Tyrone
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    252.2
    
    
    
    0.31
    
    
    
    100.0Candelaria (7)
    
    
    332.2
    
    
    
    0.76
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.0Ojos del Salado (5) (7)
    
    
    18.7
    
    
    
    1.32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0Cerro Verde (8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156.8
    
    
    
    0.69
    
    
    
    104.0
    
    
    
    0.32
    
    
    
    82.0El Abra
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    267.8
    
    
    
    0.53
    
    
    
    269.5
    
    
    
    0.29
    
    
    
    51.0Primary Molybdenum:Climax (5) (9)
    
    
    156.4
    
    
    
    
    
    
    
    0.19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0Henderson
    
    
    165.8
    
    
    
    
    
    
    
    0.21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0Undeveloped Copper Reserves require substantial capital investments to bring into productionCerro Verde
    
    
    464.0
    
    
    
    0.61
    
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82.0Safford
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    447.2
    
    
    
    0.40
    
    
    
    86.1
    
    
    
    0.20
    
    
    
    100.0
  Total Reserves Estimated at December 31, 2002 (1)Leachable Reserves
    
    PhelpsMillable Reserves
    
    Crushed Leach
    
    Run-of-Mine (ROM)
    
    DodgeMillion
    
    %
    
    %
    
    Million
    
    %
    
    Million
    
    %
    
    InterestTons
    
    Copper
    
    Moly
    
    Tons
    
    Copper
    
    Tons
    
    Copper
    
    (%)Operating and Curtailed OperationsMorenci
    
    
    181.5
    
    
    
    0.47
    
    
    
    
    
    
    
    587.7
    
    
    
    0.57
    
    
    
    2,303.0
    
    
    
    0.19
    
    
    
    85.0Bagdad
    
    
    873.6
    
    
    
    0.36
    
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    17.2
    
    
    
    0.29
    
    
    
    100.0Sierrita
    
    
    1,040.9
    
    
    
    0.27
    
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    26.7
    
    
    
    0.19
    
    
    
    100.0Miami
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126.9
    
    
    
    0.37
    
    
    
    100.0Chino
    
    
    187.0
    
    
    
    0.62
    
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    263.8
    
    
    
    0.42
    
    
    
    66.7Cobre
    
    
    57.6
    
    
    
    0.55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77.8
    
    
    
    0.26
    
    
    
    100.0Tyrone
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224.5
    
    
    
    0.32
    
    
    
    100.0Candelaria
    
    
    387.0
    
    
    
    0.70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.0Ojos del Salado
    
    
    18.7
    
    
    
    1.32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0Cerro Verde
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198.8
    
    
    
    0.66
    
    
    
    133.5
    
    
    
    0.30
    
    
    
    82.0El Abra
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    309.3
    
    
    
    0.54
    
    
    
    281.2
    
    
    
    0.27
    
    
    
    51.0Primary Molybdenum:Climax
    
    
    145.2
    
    
    
    
    
    
    
    0.23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0Henderson
    
    
    170.7
    
    
    
    
    
    
    
    0.21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0Undeveloped Copper Reserves require substantial capital investments to bring into productionCerro Verde
    
    
    464.0
    
    
    
    0.61
    
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82.0Safford
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    447.2
    
    
    
    0.40
    
    
    
    86.1
    
    
    
    0.20
    
    
    
    100.0
   (1)
    
    Total reserves estimated (i) are 100% basis, (ii) include only in-situ
tonnages, and (iii) do not include stockpiled ores.(2)
    
    Morenci ore reserves decreased from 2002 primarily as a result of 2003 production.(3)
    
    Bagdad ore reserves decreased due to new mine design.(4)
    
    Sierrita ore reserves increased due to a new pit design and a change in
cutoff grade strategy.(5)
    
    Cobre, Climax, Miami and Ojos del Salado properties have been on
care-and-maintenance status with no mining taking place. The Company has
announced that Cobre and Ojos del Salado will resume mining in 2004.(6)
    
    Heiseis one-third interest in Chino was purchased by Phelps Dodge on
December 19, 2003.(7)
    
    The Candelaria and Ojos del Salado deposits also contain, respectively,
0.006 ounces and 0.008 ounces of gold per ton. Candelaria reserve decreased due
to 2003 production.(8)
    
    Cerro Verde leach reserves decreased due to 2003 production as well as remodeling of the Cerro Negro deposit.(9)
    
    Climax ore tonnages were modified to include only those reserves in the
redesigned open pit; the underground material previously characterized as ore
reserves was reclassified as mineralized material.




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##### Table of Contents



14 
 Average Drill-Hole Spacing at Ore Reserve Properties The following table sets forth the average drill-hole spacing for proven
and probable ore reserves by process types:  As of December 31, 2003Proven
    
    Probable(average spacing feet)
    
    (average spacing feet)Property
    
    Mill
    
    Leach
    
    Mill
    
    LeachMorenci
    
    
    283
    
    
    
    283
    
    
    
    400
    
    
    
    400Bagdad
    
    
    190
    
    
    
    81
    
    
    
    441
    
    
    
    323Sierrita
    
    
    229
    
    
    
    141
    
    
    
    348
    
    
    
    245Miami
    
    
    N/A
    
    
    
    200
    
    
    
    N/A
    
    
    
    300Chino
    
    
    141
    
    
    
    200
    
    
    
    200
    
    
    
    283Cobre
    
    
    150
    
    
    
    200
    
    
    
    200
    
    
    
    300Tyrone
    
    
    N/A
    
    
    
    283
    
    
    
    N/A
    
    
    
    283Candelaria
    
    
    115
    
    
    
    N/A
    
    
    
    230
    
    
    
    N/AOjos del Salado
    
    
    82
    
    
    
    N/A
    
    
    
    164
    
    
    
    N/ACerro Verde
    
    
    196
    
    
    
    121
    
    
    
    444
    
    
    
    303El Abra
    
    
    N/A
    
    
    
    197
    
    
    
    N/A
    
    
    
    328Climax
    
    
    200
    
    
    
    N/A
    
    
    
    200
    
    
    
    N/AHenderson
    
    
    65
    
    
    
    N/A
    
    
    
    290
    
    
    
    N/ASafford
    
    
    N/A
    
    
    
    200
    
    
    
    N/A
    
    
    
    400
  
 Metallurgical Recovery The following table sets forth the average expected metallurgical recovery
by process type:  As of December 31, 2003Copper
    
    MolybdenumProperty
    
    Mill % (a)
    
    Leach % (b)
    
    Mill % (c)Morenci
    
    
    79.5
    
    
    
    58.5
    
    
    
    N/ABagdad
    
    
    87.3
    
    
    
    38.0
    
    
    
    67.7Sierrita
    
    
    83.7
    
    
    
    52.7
    
    
    
    78.4Miami
    
    
    N/A
    
    
    
    65.1
    
    
    
    N/AChino
    
    
    78.0
    
    
    
    68.3
    
    
    
    17.4Cobre
    
    
    85.5
    
    
    
    69.1
    
    
    
    N/ATyrone
    
    
    N/A
    
    
    
    64.5
    
    
    
    N/ACandelaria
    
    
    92.0
    
    
    
    N/A
    
    
    
    N/AOjos del Salado
    
    
    90.1
    
    
    
    N/A
    
    
    
    N/ACerro Verde
    
    
    84.8
    
    
    
    71.4
    
    
    
    59.4El Abra
    
    
    N/A
    
    
    
    62.1
    
    
    
    N/AClimax
    
    
    N/A
    
    
    
    N/A
    
    
    
    85.1Henderson
    
    
    N/A
    
    
    
    N/A
    
    
    
    85.7Safford
    
    
    N/A
    
    
    
    70.0
    
    
    
    N/A
   (a)
    
    Mill recoveries include expected mill and smelter recoveries and an
allowance for concentrate transportation losses.(b)
    
    Leach recoveries are the expected total recoveries over multiple leach
cycles.(c)
    
    Molybdenum recoveries include mill recoveries and roaster deductions. 
 Mill and Leach Stockpiles Stockpiled copper-bearing material that has been removed from the mine,
and for which we have reasonable certainty of processing, is summarized below:  (in million tons)
    
    2003ContainedStockpile
    
    Copper
    
    Recovery
    
    RecoverableMaterial
    
    (%)*
    
    (%)
    
    CopperMill stockpiles:100% basis
    
    
    63
    
    
    
    0.45
    
    
    
    83.6
    
    
    
    0.2Phelps Dodge share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Leach stockpiles:100% basis
    
    
    7,974
    
    
    
    0.27
    
    
    
    7.3
    
    
    
    1.6Phelps Dodge share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4
   *
    
    Copper grade when placed. (in million tons)
    
    2002ContainedStockpile
    
    Copper
    
    Recovery
    
    RecoverableMaterial
    
    (%)*
    
    (%)
    
    CopperMill stockpiles:100% basis
    
    
    45
    
    
    
    0.46
    
    
    
    91.9
    
    
    
    0.2Phelps Dodge share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Leach stockpiles:100% basis
    
    
    7,745
    
    
    
    0.27
    
    
    
    6.9
    
    
    
    1.4Phelps Dodge share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
   *
    
    Copper grade when placed.Note: We did not have stockpiled molybdenum-bearing material that had been
removed from the mine at December 31, 2003 and 2002. We employ reasonable estimation methods to determine copper contained in
mill and leach stockpiles. Mill Stockpiles Mill stockpiles contain low-grade ore that has been extracted from the
mine and is available for processing to recover the contained copper by
milling, concentrating, smelting and refining. The quantity of material
delivered to the stockpiles is based on surveyed volumes of mined material and
daily production records. Sampling and assaying of blast-hole cuttings
determine the estimated amount of copper contained in the material delivered to
the mill stockpiles. Expected copper recovery rates are determined by metallurgical testing.
The recoverable copper in mill stockpiles can be extracted into copper
concentrate almost immediately upon processing. Estimates of copper contained
in mill stockpiles are reduced as material is removed and fed to the mill.




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##### Table of Contents



15 Leach Stockpiles Leach stockpiles contain low-grade ore that has been extracted from the
mine and is available for processing to recover the contained copper through a
leaching process. Leach stockpiles are exposed to acidic solutions that
dissolve contained copper and deliver the copper in solution to the extraction
processing facilities. The quantity of material is based on surveyed volumes of
mined material and daily production records. Sampling and assaying of
blast-hole cuttings determine the estimated amount of copper contained in
material delivered to the leach stockpiles. Expected copper recovery rates are determined using small-scale laboratory
tests, medium-scale column testing (which simulates the production-scale
process), historical trends and other factors, including mineralogy of the ore
and rock type. Ultimate recovery of copper contained in leach stockpiles can vary from a
very low percentage to more than 90 percent depending on several variables,
including type of processing, mineralogy and particle size of the rock.
Although as much as 70 percent of the copper ultimately recoverable may be
extracted during the first year of processing, recovery of the remaining copper
may take several years. The estimated recoverable copper contained in stockpiles at each mine was
as follows:   December 31,2003
    
    2002Mill stockpiles:Candelaria
    
    
    0.2
    
    
    
    0.2Leach stockpiles:Morenci
    
    
    0.4
    
    
    
    0.4Bagdad
    
    
    0.1
    
    
    
    0.1Sierrita
    
    
    0.1
    
    
    
    0.1Miami
    
    
    0.1
    
    
    
    0.1Chino
    
    
    0.6
    
    
    
    0.4Tyrone
    
    
    0.1
    
    
    
    0.1Cerro Verde
    
    
    0.1
    
    
    
    0.1El Abra
    
    
    0.1
    
    
    
    0.11.6
    
    
    
    1.4Total
    
    
    1.8
    
    
    
    1.6Phelps Dodge share
    
    
    1.6
    
    
    
    1.4
  Note: The mill stockpiles are expected to be processed late in
the Candelaria mines life as milling capacity is available. The leach
stockpiles are expected to be processed over the lives of the respective mines.
We began capitalization of costs for mill and leach stockpiles when we had
reasonable certainty that the material would be processed. The capitalized
costs are evaluated periodically to ensure carrying amounts are stated at the
lower of cost or market. (Refer to Notes 1 and 7 to the Consolidated Financial Statements for additional
financial information regarding mill and leach stockpiles.) Our estimated share of aggregate copper and molybdenum ore reserves as of
December 31 was as follows:  2003
    
    2002
    
    2001
    
    2000
    
    1999Milling reserves (billion tons)
    
    
    3.5
    
    
    
    3.4
    
    
    
    3.6
    
    
    
    4.3
    
    
    
    4.2Leaching reserves (billion tons)
    
    
    4.0
    
    
    
    4.3
    
    
    
    5.2
    
    
    
    3.8
    
    
    
    4.1Commercially recoverable copper
(million tons):Ore reserves
    
    
    19.5
    
    
    
    19.6
    
    
    
    22.1
    
    
    
    23.1
    
    
    
    23.7Stockpiles and in-process inventories
    
    
    1.6
    
    
    
    1.4
    
    
    
    0.9
    
    
    
    1.0
    
    
    
    0.7Total
    
    
    21.1
    
    
    
    21.0
    
    
    
    23.0
    
    
    
    24.1
    
    
    
    24.4Commercially recoverable molybdenum
(billion of pounds)
    
    
    2.0
    
    
    
    2.1
    
    
    
    2.1
    
    
    
    2.2
    
    
    
    2.2
  Ore reserves reported to us by SPCC, in which we hold a 14.0 percent
interest, as of December 31, 2003, for its Peruvian properties were
approximately 1.9 billion tons of millable reserves at a grade of 0.68 percent
copper and approximately 2.0 billion tons of leachable reserves at an average
grade of 0.19 percent copper. These ore reserves are the combined totals for
both the Cuajone and Toquepala properties. SPCC is controlled by its majority
shareholder, Grupo Mexico. We have relied on SPCC and have not conducted an
independent review of its ore reserves. 
 Copper and Molybdenum Prices The volatility of copper and molybdenum prices is reflected in the
following table, which gives the high, low and average COMEX price of
high-grade copper and the Platts Metals Weekmean price of molybdenum oxide for
each of the last 15 years:  Cents per pound
    
    Dollars per poundof Copper
    
    of Molybdenum Dealer OxideCOMEX
    
    Platts Metals WeekYear
    
    High
    
    Low
    
    Average
    
    High
    
    Low
    
    Mean1989
    
    
    160
    
    
    
    99
    
    
    
    125
    
    
    
    3.89
    
    
    
    2.44
    
    
    
    3.401990
    
    
    138
    
    
    
    96
    
    
    
    119
    
    
    
    3.30
    
    
    
    2.52
    
    
    
    2.851991
    
    
    120
    
    
    
    96
    
    
    
    105
    
    
    
    2.78
    
    
    
    2.08
    
    
    
    2.381992
    
    
    116
    
    
    
    93
    
    
    
    103
    
    
    
    2.44
    
    
    
    1.82
    
    
    
    2.211993
    
    
    107
    
    
    
    72
    
    
    
    85
    
    
    
    2.80
    
    
    
    1.82
    
    
    
    2.321994
    
    
    140
    
    
    
    78
    
    
    
    107
    
    
    
    17.00
    
    
    
    2.68
    
    
    
    4.511995
    
    
    146
    
    
    
    121
    
    
    
    135
    
    
    
    17.50
    
    
    
    3.90
    
    
    
    8.081996
    
    
    131
    
    
    
    86
    
    
    
    106
    
    
    
    5.50
    
    
    
    2.90
    
    
    
    3.791997
    
    
    123
    
    
    
    76
    
    
    
    104
    
    
    
    4.90
    
    
    
    3.52
    
    
    
    4.311998
    
    
    86
    
    
    
    64
    
    
    
    75
    
    
    
    4.60
    
    
    
    2.00
    
    
    
    3.411999
    
    
    85
    
    
    
    61
    
    
    
    72
    
    
    
    2.90
    
    
    
    2.48
    
    
    
    2.652000
    
    
    93
    
    
    
    74
    
    
    
    84
    
    
    
    2.98
    
    
    
    2.15
    
    
    
    2.562001
    
    
    87
    
    
    
    60
    
    
    
    73
    
    
    
    2.65
    
    
    
    2.15
    
    
    
    2.362002
    
    
    78
    
    
    
    65
    
    
    
    72
    
    
    
    8.30
    
    
    
    2.40
    
    
    
    3.772003
    
    
    104
    
    
    
    71
    
    
    
    81
    
    
    
    7.80
    
    
    
    3.15
    
    
    
    5.32
  Phelps Dodges reported ore reserves are economic at the most-recent
three-year historical average COMEX copper price of 75 cents per pound and the
most-recent three-year historical average molybdenum price of $3.82 per pound
(Metals Weekmean Dealer Oxide).




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##### Table of Contents



16 Phelps Dodge develops its business plans using a time horizon that is
reflective of the historical, moving average for the full price cycle. We
currently use a long-term average COMEX price of 90 cents per pound of copper
and an average molybdenum price of $3.40 per pound (Metals Weekmean Dealer
Oxide), along with near-term price forecasts reflective of the current price
environment to develop mine plans and production schedules. The per pound COMEX copper price during the past 10 years, 15 years and 20
years averaged 91 cents, 96 cents and 91 cents, respectively. The per pound
Metals Weekmean Dealer Oxide molybdenum price over the same periods averaged $4.08, $3.59 and $3.51,
respectively. 
 Mineralized Material We hold various properties containing mineralized material that we believe
could be brought into production should market conditions warrant. Permitting
and significant capital expenditures would likely be required before operations
could commence at these properties. The deposits are estimated to contain the
following mineralized material as of December 31, 2003:  Milling Material
    
    Leaching MaterialProperty/Deposit
    
    Location
    
    Millions of Tons
    
    % Copper
    
    Millions of Tons
    
    % Copper
    
    % Nickel
    
    Phelps Dodge Interest (%)Ambatovy (1)
    
    Madagascar
    
    
    
    
    
    
    
    
    
    
    210
    
    
    
    
    
    
    
    1.10
    
    
    
    100.0Ajo
    
    Arizona
    
    
    205
    
    
    
    0.50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0Candelaria Norte (2)
    
    Chile
    
    
    12
    
    
    
    2.15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.0Cerro Verde (3)
    
    Peru
    
    
    600
    
    
    
    0.52
    
    
    
    150
    
    
    
    0.30
    
    
    
    
    
    
    
    82.0Cochise/Bisbee
    
    Arizona
    
    
    
    
    
    
    
    
    
    
    276
    
    
    
    0.47
    
    
    
    
    
    
    
    100.0El Abra
    
    Chile
    
    
    650
    
    
    
    0.53
    
    
    
    100
    
    
    
    0.31
    
    
    
    
    
    
    
    51.0Lumwana (4)
    
    Zambia
    
    
    220
    
    
    
    0.83
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49.0Lone Star (Safford)
    
    Arizona
    
    
    
    
    
    
    
    
    
    
    1,600
    
    
    
    0.38
    
    
    
    
    
    
    
    100.0Morenci
    
    Arizona
    
    
    
    
    
    
    
    
    
    
    567
    
    
    
    0.25
    
    
    
    
    
    
    
    85.0Niagara (Tyrone)
    
    New Mexico
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    0.29
    
    
    
    
    
    
    
    100.0Safford
    
    Arizona
    
    
    330
    
    
    
    0.65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0Sanchez (Safford)
    
    Arizona
    
    
    
    
    
    
    
    
    
    
    230
    
    
    
    0.29
    
    
    
    
    
    
    
    100.0Tohono
    
    Arizona
    
    
    276
    
    
    
    0.70
    
    
    
    404
    
    
    
    0.63
    
    
    
    
    
    
    
    100.0Milling MaterialProperty/Deposit
    
    Location
    
    Millions of Tons
    
    % Molybdenum
    
    
    
    
    
    
    
    
    
    
    
    
    
    Phelps Dodge Interest (%)Climax (5)
    
    Colorado
    
    
    87
    
    
    
    0.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0
   (1)
    
    Ambatovy deposit
also contains 0.10% cobalt. During 2003, the
Company entered into a joint venture agreement with Dynatec Corporation
whereby it will earn a 53% interest in the project if it carries 100% of
project expenses through to a feasibility study.(2)
    
    Candelaria Norte is a potential underground mine that would utilize the
existing process facilities and infrastructure. The stated tonnage also
contains 0.015 ounces of gold per ton.(3)
    
    Cerro Verdes mineralized material reflects additional drilling and
analysis on the deposit.(4)
    
    We have entered into a letter of intent agreement with Equinox Resources
Ltd. to sell our remaining 49%.(5)
    
    Climax underground material previously characterized as ore reserves were
reclassified to mineralized material in 2003 pending future detailed planning.Note: Mineralized material has been delineated by appropriately spaced drilling
and/or underground sampling to support the reported tonnage and average grade
of metal(s). Such a deposit does not qualify as an ore reserve until legal and
economic feasibility is concluded based upon a comprehensive evaluation of
implied unit costs, grade, recoveries and other material factors.




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##### Table of Contents



17 
 Sales and Competition U.S. Mining Operations The majority of our copper produced or purchased at our U.S. Mining
Operations is cast into rod. Rod sales to outside wire and cable manufacturers
constituted approximately 65 percent of PDMCs U.S. sales in 2003, 70 percent
in 2002 and 65 percent in 2001. The remainder of our U.S. copper sales are
primarily in the form of copper cathode or copper concentrate. Sales of rod and
cathode are made directly to wire and cable fabricators and brass mills under
contracts principally of a one-year duration. Our rod also is used by our Wire
and Cable segment. We generally sell our copper rod and cathode produced at our
U.S. Mining Operations at a premium over New York Commodity Exchange (COMEX)
prices. South American Mines The production from our South American Mines is sold as copper concentrate
or as copper cathode. Our Candelaria mine sells its production in the form of
copper concentrates primarily to copper smelters located in Japan and the rest
of Asia under long-term, multi-year contracts or on a spot or long-term basis
through merchants. In addition, a portion of Candelarias production is shipped
to North America for further processing at our U.S. smelting operations. El
Abra produces copper cathodes that are sold primarily under annual or
multi-year contracts to Asian or European rod or brass mill customers or to
merchants. Cerro Verde produces copper cathodes; the majority of which are
shipped to our U.S. rod mills for processing. The remainder of Cerro Verdes
production is sold under annual contracts to South American customers or to
merchants on a spot basis. The copper cathode sold by our international
operations generally is sold at a premium over London Metal Exchange (LME)
prices. We also sell copper concentrate based on COMEX or LME prices. Worldwide Copper Mining Operations Most of the refined copper we sell is incorporated into electrical wire
and cable products worldwide for use in the construction, electric utility,
communications and transportation industries. It also is used in industrial
machinery and equipment, consumer products and a variety of other electrical
and electronic applications. When we sell copper as rod, cathode and concentrate, we compete, directly
or indirectly, with many other sellers, including at least two other U.S.
primary producers, as well as numerous foreign producers, metal merchants,
custom refiners and scrap dealers. Some major producers outside the United
States have cost advantages resulting from richer ore grades, lower labor costs
and in some cases, a lack of strict regulatory requirements. We believe our
ongoing programs to contain costs, improve productivity and employ new
technologies will significantly narrow these cost advantages and place us in a
more competitive position with respect to a number of our international
competitors. Other materials that compete with copper include aluminum, plastics,
stainless steel and fiber optics. Our principal methods of competing include
pricing, product properties, product quality, customer service and
dependability of supply. From time to time, we engage in hedging programs designed to enable us to
realize current average prices for metal delivered or committed to be
delivered. We also have entered into price protection arrangements from time to
time, depending on market circumstances, to ensure a minimum price for a
portion of expected future sales. Primary Molybdenum Segment Molybdic oxide is used primarily in the steel industry for corrosion
resistance, strengthening and heat resistance. Molybdenum chemicals are used in
a number of diverse applications such as lubricants, additives for water
treatment, feedstock for the production of pure molybdenum metal and catalysts
used for petroleum refining. A substantial portion of Phelps Dodges expected
2004 molybdenum production is committed for sale throughout the world pursuant
to annual or quarterly agreements based primarily on prevailing market prices
one month prior to the time of sale. The metallurgical market for molybdenum is characterized by cyclical and
volatile prices, little product differentiation and strong competition. The
chemical market is more diverse and contains more specialty products and
segments. In both markets, prices are influenced by production costs of
domestic and foreign competitors, worldwide economic conditions, world
supply/demand balances, inventory levels, the U.S. dollar exchange rate and
other factors. Molybdenum prices also are affected by the demand for end-use
products in, for example, the construction, transportation and durable goods
markets. A substantial portion of world molybdenum is produced as a by-product
of copper mining, which is relatively insensitive to molybdenum price levels.
By-product production is estimated to account for between 50 to 60 percent of
global production. 
 Prices, Supply and Consumption Worldwide Copper Mining Operations Copper is an internationally traded commodity, and its prices are
effectively determined by the three major metals exchanges  COMEX, LME and
Shanghai Futures Exchange (SHFE). The prices on these exchanges 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 rates. Copper is a critical component of the worlds infrastructure. The demand
for copper ultimately reflects the rate of underlying world economic growth,
particularly the growth in industrial production, construction and durable
goods. Coppers end-use markets reflect its fundamental role in the world
economy. Estimated percentages of copper consumption by end-use markets
comprise (i) construction  37 percent, (ii) electrical applications  26
percent, (iii) industrial machinery  15 percent, (iv) transportation  11
percent, and (v) consumer products  11 percent. Since 1990, refined copper
consumption grew by an estimated annual compound rate of 2.9 percent to 15.5
million tons according to published data by the World Bureau of Metals
Statistics (WBMS) and Phelps Dodges estimate for 2003. This rate of increase
was slightly higher than the growth of world industrial production, which grew
at an estimated compound annual rate of 2.3 percent over the same period. Asian
copper consumption, led by China, was particularly strong, increasing by 6.3
percent per year from 1990 through 2003. Asia now represents approximately 46
percent of world refined copper consumption compared with 24 percent for Europe
and 22 percent for the Americas. The strong




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18 demand for copper in Asia has been driven by the increasing standard of
living in this region as well as production of value-added products for export
to the developed world. From 1990 through 2003, refined copper production has grown at an average
annual rate of 2.7 percent according to WBMS (based on published data through
2002) and Phelps Dodges estimates for 2002 and 2003. This growth was
influenced by a number of factors. First, limited investment in new mine
production in the latter half of the 1980s coupled with growing demand for
copper during that period resulted in market deficits and declining copper
inventories that in turn encouraged new investment. Second, an improved
investment climate in Latin America, particularly Chile, encouraged investment
in this region. In 2003, Latin America represented 46 percent of world mine
production, a significant increase from 25 percent in 1990. Third, SX/EW
technology made some previously uneconomic resources viable investments. Copper demand and price tend to follow economic cycles and, therefore,
copper price has historically experienced significant fluctuations. Considering
the period from 1990 to 2003, the LME price of copper averaged 94 cents per
pound and ranged from a high annual average price of $1.33 per pound in 1995 to
a low annual average price of 71 cents per pound in 2002. The COMEX price of
copper averaged 94 cents per pound from 1990 through 2003, but has ranged from
a high annual average price of $1.35 per pound in 1995 to a low annual average
price of 72 cents per pound in 2002. In 2003, the average COMEX price of 81.1 cents per pound was almost 10
cents higher than the 2002 average price. The higher price levels were driven
by moderate consumption rates combined with flat production growth and a
depreciating U.S. dollar. A U.S. economic recovery in the second half of the
year with continued strong growth rates in Asia led by China boosted
consumption levels in 2003. Global demand for copper in 2003 is estimated to have grown by 3.5 percent
led by Asia and specifically China, which grew at 18 percent. Chinas double
digit consumption rate continues to be based on domestic economic growth and a
burgeoning export market. Speculative activity, in anticipation of a U.S.
recovery that reached record amounts in October 2003, led to a large price
increase in the 2003 fourth quarter. On the production side, a number of disruptions due to accidents and
strikes offset restarts from some major producers. Global refined production is
estimated to have declined slightly (0.3 percent) in 2003. The rise in
consumption combined with production disruptions led to an approximate 495,000
metric ton reduction in global exchange inventories, which were just over
800,000 metric tons at year-end 2003. This also led to an estimated deficit for
the global copper market of approximately 360,000 metric tons for the year. In 2002, the average COMEX copper price of 71.7 cents per pound was 1 cent
less than the 2001 average price. Continued low prices resulted from weak
global economic conditions and a resulting modest production surplus. More than
175,000 metric tons of excess metal in the market was delivered into LME and
COMEX warehouses, bringing the combined inventories to historically high levels
of more than 1.2 million metric tons. Demand for copper remained sluggish in
2002, increasing a modest 1.8 percent from 2001 levels as copper consumption in
many regions, particularly the United States, Europe and Japan, remained weak
as the result of depressed global economic conditions. Expectations of
improvement in global manufacturing diminished as technology,
telecommunications and electronics sectors stagnated. Chinese copper demand,
however, continued to outpace the rest of the world as government
infrastructure projects, an expanding industrial complex and increasing
domestic prosperity led to the third year of double digit growth in copper
consumption. In 2001, the COMEX copper price averaged 72.6 cents per pound, 11 cents
less than the previous year average price. The decrease in price was the result
of a surplus market as modest growth in refined production outpaced weak global
demand for metal. The market imbalance resulted in approximately 627,000 metric
tons of excess copper being delivered into western world exchange inventories,
increasing warehouse stocks to more than 1 million metric tons. The significant
rise in inventory caused the price to fall below the 70-cent level where it
remained for nearly all of the second half of 2001. Weakness in the U.S. and
Japanese economies reduced world demand for copper, particularly in the
electronics and technology sectors where metal off-take had been expanding.
Output from manufacturing industries in the large copper consuming regions of
the world was slowed by the economic downturn, especially those heavily
dependent on export markets in the United States, Europe and Japan. The lone
bright spot in the copper market was China, whose economy continued to expand
supported by increases in consumer demand, government-funded infrastructure
projects and its acceptance into the World Trade Organization. Primary Molybdenum Segment Molybdenum demand is heavily dependent on the worldwide steel industry,
which uses the metal as a hardening agent. More than 80 percent of molybdenum
is used for this application. The rest is used in specialty chemical
applications such as refinery catalysts, water treatment and lubricants. Molybdenum experienced a price improvement during 2003 for the second
straight year. A production increase occurred in the copper by-product sector
as production started to increase as metal prices improved throughout the year.
Production at western primary mines was essentially unchanged from 2002 levels.
Production levels in China decreased throughout the year based on reports that
production was negatively impacted in several molybdenum producing regions due
to inclement weather, safety concerns and production related issues. Tight
supply of western quality materials continued throughout the year. The overall
market remained in deficit during 2003 due to demand outpacing supply. Annual Metals WeekDealer Oxide mean prices averaged $5.32 per pound in
2003, compared with $3.77 per pound in 2002 and $2.36 per pound in 2001. The
production curtailments, tightness of supply and improved demand caused
molybdenum prices to improve from their previous low levels. Phelps Dodge
received an average realized price of $5.79 per pound in 2003, compared with
$4.57 per pound in 2002 and $3.64 per pound in 2001, reflecting a broad mix of
upgraded molybdenum products as well as technical grade molybdic oxide. For 2004, Phelps Dodge expects both supply and demand to increase. Supply
increases are expected in the by-product copper production sector and demand
increases are expected in the stainless steel, specialty steel and specialty
chemical sectors. The




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19 overall supply-demand outlook for 2004 is for a near balanced market, compared with a deficit in 2003. 
 Costs Worldwide Copper Mining Operations Implied unit cost of copper production measures the all-in cost of
each pound of copper produced by PDMC. As the title indicates, this measure is
the cost implied by the market price of copper (i.e., LME average spot) for a
given period versus PDMCs operating income (loss) excluding special items for
the same period. There is no established common standard for calculating unit production
costs in the copper industry. PDMCs implied unit production costs indicator
(which is based on readily accessible, publicly disclosed data) acts as a proxy
to enable investors to follow and interpret cost trends over historical
periods. PDMC calculates its implied full unit cost of copper production by
dividing its operating income (loss) excluding special items by the total
pounds of copper sold from its own mines for its own account. This results in
an all-in operating margin (i.e., inclusive of cost of products sold;
depreciation, depletion, amortization and copper mines closure
accretion/accrual; selling and general administrative expense; and exploration
and research expense for the segments operations) that is compared with the
market price of copper to render an implied cost of copper production. Cash
implied unit cost of copper production excludes PDMCs segment depreciation,
depletion, amortization and copper mines closure accretion/accrual. In 2003, the full and cash implied unit cost of copper production of 68
cents and 52 cents per pound, respectively, remained flat compared with costs
in 2002. In 2002, the full and cash implied unit cost of copper production each
decreased 7 cents per pound compared with 2001. In 2002, approximately 3 cents
of the cost improvement was due to lower energy costs, and the remainder was
primarily due to operational improvements associated with the Companys Quest
for Zeroprogram. Energy, including electricity, diesel fuel and natural gas, represents a
significant portion of the production costs for our operations. During the
first quarter of 2001, our Arizona and New Mexico operations were affected
adversely by significantly higher costs for all three. In response, the Company implemented a power cost stabilization plan in
March 2001 that consisted of an additional negotiated firm power contract; the
construction of a power co-generation plant in New Mexico; short-term,
alternating production curtailments at the Companys Tyrone, Sierrita, Bagdad
and Henderson operations; and a partial production curtailment at Chino. Additionally, to mitigate the Companys exposure to increases in diesel
fuel and natural gas prices, we implemented several price protection programs
in late 2000 and early 2001 designed to protect the Company against a
significant upward movement in energy prices. The Companys diesel fuel price
protection program consisted of a combination of purchased out-of-the-money
(OTM) diesel fuel call options and fixed-price diesel fuel swaps for our North
and South American operations. The OTM call options give the holder the right,
but not the obligation, to purchase a specific commodity at a predetermined
dollar cost, or strike price. OTM call options are options with a strike
price above the prevailing market price for that commodity when purchased. The OTM diesel fuel call options mitigated a portion of our exposure to
volatile markets by capping the cost of the commodity if prices were to rise
above the strike price. If the price of diesel fuel is lower than the strike
price, the Company has the flexibility to purchase diesel fuel at prices lower
than the strike price and the options expire with no value. The swaps allow us
to establish a fixed price for a specific commodity product for delivery during
a specific future period. Our natural gas price protection program consisted of purchasing OTM call
options or OTM collars for our North American operations. OTM call options cap
the commodity purchase cost at the strike price while allowing the Company the
ability to purchase natural gas at a lower cost when market prices were lower
than the strike price. The purchase of collars (the simultaneous purchase of an
OTM call option and the sale of an OTM put option) allows us to establish both
a price ceiling and a price floor for natural gas costs. As a result of the above-mentioned plans and programs, in 2003, 2002 and
2001, Phelps Dodge was able to reduce and partially mitigate the impacts of
volatile electricity markets and rising diesel fuel and natural gas prices. 
 Environmental and Other Regulatory Matters U.S. Mining Operations Significant Federal Environmental Programs Our operations in the United States are subject to stringent federal,
state and local laws and regulations relating to improving or maintaining
environmental quality. Our global operations are also subject to many
environmental protection laws in the jurisdictions where we operate. We pursue
environmental performance at all of our operations with the same diligence that
we pursue financial, health and safety performance. We are committed to
pollution prevention and responsible environmental stewardship worldwide. Environmental regulatory programs create potential liability for our
domestic operations, which may result in requirements to perform environmental
investigations or corrective actions under federal and state laws, in addition
to federal and state Superfund requirements (refer to the discussion of
Superfund requirements in OTHER ENVIRONMENTAL MATTERS). Major environmental
programs and developments of particular interest are summarized in the
paragraphs that follow. Most air emissions from our domestic operations are subject to regulation
under the federal Clean Air Act (CAA) and related state laws. These laws impose
permitting, performance standards, emission limits, and monitoring and
reporting requirements on sources of regulated air pollutants. Several of our domestic operations have obtained, or are in the process of
obtaining, major source operating permits under Title V of the CAA and related
state laws. Facilities with smelters, rod mills, molybdenum roasters and power
plants are the primary examples of our operations that are subject to this
program. These permits typically do not impose new substantive requirements,
but rather incorporate in one permit all existing requirements. However, they
can




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20 increase compliance costs by imposing new monitoring requirements, such as
more frequent emission testing, to demonstrate compliance with existing
requirements. The process of developing these comprehensive permits also can
bring to light new or previously unknown agency interpretations of existing
regulations, which also may increase compliance costs. At least one of our smelters will be subject to one or more Maximum
Achievable Control Technology (MACT) standards under the CAA. These standards
do not have immediate compliance dates; instead they allow two or three years
after promulgation to provide the opportunity to come into compliance or to
reduce emissions to avoid regulation before the compliance date. For example,
the copper smelter MACT standard was issued in 2002, and the compliance date
for that standard is June 2005. Other potentially applicable MACT standards are
still in development. Therefore, we still are in the process of determining
applicability and compliance strategies. Most discarded materials from our domestic operations are subject to
regulation as solid waste under the federal Resource Conservation and Recovery
Act (RCRA) and related state laws. These laws impose design, operating, closure
and post-closure care requirements on facilities used to store, treat or
dispose of solid waste. Mineral extraction (mining) and beneficiation (the concentration of
economic minerals) occurs at our mining operations. The solid wastes uniquely
associated with these activities are exempt from hazardous waste regulation.
Mineral processing (the alteration of a mineral from one mineralogic state to
another) occurs at our smelter, refinery and molybdenum roasting operations.
Except for a list of 20 exempt processing wastes (three of which include wastes
from copper mineral processing operations), all mineral processing wastes
generated at our U.S. Mining Operations are subject to hazardous waste
regulation if they exhibit a hazardous waste characteristic or if the U.S.
Environmental Protection Agency (EPA) specifically designates them as a listed
hazardous waste. In 1998, EPA finalized its supplemental Land Disposal
Restriction Phase IV (LDR) rules that imposed regulation on certain hazardous
mineral processing wastes. This final LDR rule also subjects certain mineral
processing wastes that exhibit a hazardous waste characteristic to stringent
treatment standards if the materials are disposed on land. A portion of the LDR
rule was judicially vacated on appeal in 2000. While EPAs final LDR rule
likely will require us to continue to make expenditures to manage hazardous
mineral processing wastes, it is not possible to determine the full impact on
us of the new LDR requirements until the requirements are fully adopted and
implemented. The federal Emergency Planning and Community Right-to-Know Act was
expanded in 1997 to cover mining operations. This law, which has applied to
other Phelps Dodge businesses for more than a decade, requires companies to
report to EPA the amount of certain materials managed in or released from their
operations each year. Annually, we report the volume of naturally occurring
minerals and other substances that we managed during the previous year once the
usable metals were extracted. These materials are very high in volume and how
they are managed is covered by existing regulations and permit requirements. The federal National Pollutant Discharge Elimination System (NPDES)
program requires a permit for the point source discharge of pollutants to
surface waters that qualify as waters of the United States. Although most
states, including Arizona and Colorado, have received authorization to
implement this program in lieu of EPA, New Mexico has not received such
authorization and therefore the NPDES permit program in New Mexico continues to
be implemented primarily by EPA. The NPDES permit program also regulates the
discharge of storm water runoff from active and inactive mines and construction
activities. EPA and authorized states have issued general permits that cover
discharges from active and inactive mines. We likely will continue to have to
make expenditures to comply with the NPDES permit program, especially as the
program continues to expand as applied to storm water discharges. Significant Arizona Environmental and Reclamation Programs The Arizona Department of Environmental Quality (ADEQ) has adopted
regulations for its aquifer protection permit (APP) program that replaced the
previous Arizona groundwater quality protection permit regulations. Several of
our properties continue to operate pursuant to the transition provisions for
existing facilities under the APP regulations. The APP regulations require
permits for certain facilities, activities and structures for mining,
concentrating and smelting. The APP requires compliance with aquifer water
quality standards at an applicable point of compliance well or location. The
APP also may require mitigation and discharge reduction or elimination of some
discharges. Existing facilities operating under the APP transition provisions
are not required to modify operations until requested by the state of Arizona,
or unless a major modification at the facility alters the existing discharge
characteristics. We have received an APP for our Morenci operations, for
portions of our Bagdad and Miami mines, for the sewage treatment facility at
Ajo, and for a closed tailing pile in Clarkdale, Arizona. We have also
conducted groundwater studies and submitted APP applications for several of our
other properties and facilities, including the Bagdad, Sierrita and Miami
mines, our Safford development property and Ajo, Copper Queen and United Verde
branches. We will continue to submit all required APP applications for our
remaining properties and facilities, as well as for any new properties or
facilities. We do not know what the APP requirements are going to be for all
existing and new facilities and, therefore, it is not possible for us to
estimate costs associated with those requirements. We are likely to continue to
have to make expenditures to comply with the APP program. An application for an APP requires a description of a closure strategy to
meet applicable groundwater protection requirements following cessation of
operations and a cost estimate to implement the closure strategy. An APP may
specify closure requirements, which may include post-closure monitoring and
maintenance requirements. A more detailed closure plan must be submitted within
90 days after a permittee notifies ADEQ of its intent to cease operations. A
permit applicant must demonstrate its financial capability to meet the costs
required under the APP, including closure costs. Portions of the Companys Arizona mining operations that operated after
January 1, 1986, also are subject to the Arizona Mined Land Reclamation Act
(AMLRA). AMLRA requires reclamation to achieve stability and safety consistent
with post-mining land use objectives specified in a reclamation plan.
Reclamation plans require approval by the State Mine Inspector and must include
a cost estimate to perform the reclamation measures specified in the plan.




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21 Financial assurance must be provided under AMLRA covering the estimated
cost of performing the reclamation plan. Both under APP regulations and AMLRA, a publicly traded company may
satisfy the financial assurance requirements by showing that its unsecured debt
rating is investment grade and that it meets certain requirements regarding
assets in relation to the estimated closure and post-closure cost and
reclamation cost estimates. An investment-grade bond rating is one of the
financial strength tests under the Arizona Act. Phelps Dodges senior unsecured
debt currently carries an investment-grade rating, albeit at the lowest level
in the category. Additionally, the Company currently meets another financial
strength test in Arizona that is not ratings dependent. At December 31, 2003 and 2002, we had accrued closure costs of
approximately $43 million for our Arizona operations. The amount of financial
assurance currently demonstrated for closure and reclamation activities is
approximately $105 million. If the Companys bond rating falls below
investment-grade, the Arizona mining operations would be required to supply
financial assurance in another form. Cyprus Tohono Corporation (Cyprus Tohono), a wholly owned subsidiary of
Cyprus Amax, leases lands on the Tohono Oodham Indian Nation (the Nation). The
leased lands include the site of a mining operation, currently on
care-and-maintenance status, comprising an open pit, underground mine workings,
leach and non-leach rock stockpiles, tailing and evaporation ponds, SX/EW
operations, and ancillary facilities. Many of these facilities are covered by
Mine Plans of Operations (MPOs) that were issued by the federal Bureau of Land
Management (BLM). The leases and MPOs impose certain environmental compliance,
closure and reclamation requirements upon Cyprus Tohono. The closure and
reclamation requirements under the leases require action to be taken upon
termination of the leases, which currently expire between 2012 and 2017, unless
terminated earlier in accordance with the terms of the leases. Preliminary
studies indicate that closure and reclamation requirements, excluding any
potential Superfund environmental response costs, are estimated to cost $5.0
million. The Nation, along with several federal agencies, have notified Cyprus
Tohono of groundwater quality concerns and concerns with other environmental
impacts of historical mining operations. In 2003, Cyprus Tohono expanded its
groundwater monitoring well network, and samples from a few of the new wells
show values above primary and secondary drinking water standards. Tests of a
neighboring Native American villages water supply well indicate elevated
concentrations of sulfate. Cyprus Tohono has installed new water wells and
provided an alternative water supply to the village. EPA has completed a Preliminary Assessment and Site Investigation (PA/SI)
of the Tohono mine under the federal Superfund program and has concluded that
the site is eligible for listing on the National Priorities List. We are unable
to project the remedial action measures, if any, that may be required as a
result of the PA/SI; however, based upon our best estimates of remedial actions
that Cyprus Tohono may undertake, the Company reserved $11.1 million for Cyprus
Tohono for this Superfund matter. Cyprus Tohono has submitted to EPA a proposal
for closure of several of the facilities of concern identified in the PA/SI.
Cyprus Tohono is subject to financial assurance for mine reclamation. It has
proposed interim financial assurance in the amount of $5.1 million, of which
$5.0 million would be in the form of a Company performance guarantee. Both the
Nation and the Bureau of Indian Affairs have conditionally accepted this
proposal. The Companys historic United Verde mine has obtained an APP for closure
of a tailing pond located near Clarkdale, Arizona, and is awaiting approval of
an APP for existing mine water discharge containment facilities at the mine
near Jerome, Arizona. The tailing pond has not received tailing discharges
since the early 1950s, but has received discharges of municipal sewage effluent
from the town of Clarkdale since the late 1970s. Closure work under the APP for
the tailing pond has been partially completed, but the remaining work has not
been completed pending the issuance of a storm water discharge permit under the
Clean Water Act for construction of a related development project. Construction
of improvements under the proposed APP for the mine are expected to begin
following issuance of the APP. Implementation of the plan under the proposed
APP is required under the terms of a Consent Decree settling alleged Clean
Water Act violations and entered by the U.S. District Court for the District of
Arizona on November 23, 2003. A voluntary remediation project also is under way
under supervision of ADEQ at the nearby historic Iron King mine to treat
potential discharges of acidic water from an adit. Additional work may be
required at historical mine workings in the district that are owned by the
Company to satisfy requirements under storm water discharge permits. At the
United Verde mine, APP costs are estimated to be $13.5 million; at the
Clarkdale tailing, APP costs are estimated to be $12.1 million; and at the Iron
King mine, voluntary remediation costs are estimated to be $2.1 million. These
amounts, totaling $27.7 million, are included in environmental reserves. Significant New Mexico Environmental and Reclamation Programs Background The Companys New Mexico operations, Chino Mines Company (Chino), Phelps
Dodge Tyrone, Inc. (Tyrone), Cobre Mining Company (Cobre), and Phelps Dodge
Hidalgo, Inc. (Hidalgo) each are subject to regulation under the New Mexico
Water Quality Act and the Water Quality Control Commission (WQCC) regulations
adopted under that Act. Each of these operations holds one or more discharge
permits issued by the New Mexico Environment Department (NMED) under WQCC
regulations. The discharge permits specify operational and monitoring
requirements to protect groundwater quality. Under the discharge permits for
Chino, Tyrone, Cobre and Hidalgo, NMED has required each of these operations to
submit closure plans for approval. The closure plans must describe the measures
to be taken to prevent groundwater quality standards from being exceeded
following closure of the discharging facilities and to abate any groundwater or
surface water contamination. Each discharge permit is issued for a period of no
more than five years and the permit is reviewed each time that it is renewed.
Under certain circumstances, NMED may require submission and approval of
abatement plans to address the exceedance of applicable water quality
standards. In addition, Chino, Tyrone and Cobre are subject to regulation under the
New Mexico Mining Act (the Mining Act), which was enacted in 1993, and the
Mining Act Rules, which were adopted by the New Mexico Mining Commission (the
Mining Commission) in their original




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22 form in 1994. Chino, Tyrone and Cobre hold permits issued by the Mining
and Minerals Division (MMD) of the Energy, Minerals and Natural Resources
Department under the Mining Act. Under the Mining Act, Chino, Tyrone and Cobre
are required to submit and obtain approval of closeout plans describing the
reclamation to be performed following closure of the mines. The reclamation
must be designed to achieve a self-sustaining ecosystem or a post-mining land
use, unless MMD approves a waiver of this requirement because achieving this
requirement is technically or economically infeasible or would be
environmentally unsound. Regardless of whether a waiver is issued, however,
reclamation must be performed to achieve all applicable air, water quality, and
other environmental standards. Financial assurance is required to ensure that funding will be available
to perform both the closure plans and the closeout plans. The amount of the
financial assurance is based upon a cost estimate to complete the closure
and/or closeout plan. The cost estimate is based upon the assumption that the
operator will default at the point in time when closure and reclamation will be
most expensive and that the state will use the financial assurance to hire and
oversee a third-party contractor to perform the closure and/or closeout plan.
The cost estimates are subject to approval by NMED and MMD. When an operation
is subject to both a closure plan and a closeout plan, the plans typically
overlap. In that case, the financial assurance typically is provided jointly to
NMED and to MMD. Both NMED and MMD calculate the required amount of financial
assurance based upon a net present value (NPV) method when the closure plan
and/or closeout plan require performance over a long period of time. Use of the
NPV method requires NMED and/or MMD approval of appropriate discount and
escalation rates. The Companys cost estimates to perform the work itself generally are
substantially lower than the cost estimates used for financial assurance due to
the Companys historical cost advantages, savings from the use of the Companys
own personnel and equipment as opposed to third-party contractor costs,
opportunities to prepare the site for more efficient reclamation and the
omission of agency oversight costs. The process of obtaining approved closure plans and closeout plans has
been long and difficult, particularly for the operations subject to both WQCC
regulations and the Mining Act. The plans must be site-specific. Detailed
scientific studies have been required for each site. The sites are very large
and complex, involving many different types of facilities such as open pits,
mine stockpiles, tailing impoundments and smelter facilities. Many of the
regulatory requirements, as well as closure and reclamation technologies, are
relatively new and have been evolving while the plans have been developed,
including recent rule changes. Some of the closure and reclamation measures are
unproven over long periods of time at these or similar sites; so this
performance is not easily predicted. NMED and MMD have separate procedures for
review of closure and closeout plans, including consideration of waiver
requests, approval of plans, issuance of permits and approval of financial
assurance. These procedures include public notice, comment, and hearing
requirements, opportunities for appeals, and reviews of NMED and MMD actions by
WQCC and the Mining Commission. Chino Mines Company Chino submitted its first proposed site-wide combined closure/closeout
plan (CCP) at the end of 1997, the original deadline for approval of closeout
plans under the Mining Act, and obtained an extension for closeout plan
approval until December 31, 1999. The closure and closeout plans were combined
into one plan due to the overlapping requirements of WQCC regulations and the
Mining Act. In 1999, NMED required Chino to provide interim financial
assurance, pending approval of the closure plan, and Chino complied by
providing a surety bond for approximately $56 million. Also in 1999, the Mining
Commission extended the closeout plan approval deadline until December 31,
2001. Chino submitted a comprehensive CCP incorporating the results of the
scientific studies performed by Chino in March 2001. That CCP requested a
waiver of requirements to reclaim the open pit and steep stockpile slopes and
included a cost estimate for approximately $100 million, which included the
estimated cost of 30 years of water treatment. In July 2001, NMED published a
draft site-wide closure permit and set a public hearing for August 2001. NMEDs
draft closure permit required that all stockpiles be regraded, required thicker
soil covers than proposed by Chino, required 100 years of water treatment and
more stringent water treatment requirements, and proposed additional permit
conditions not proposed by Chino. A two-week public hearing was held in August
2001 concerning NMEDs draft closure permit. Following that hearing, Chino,
NMED and MMD conducted negotiations concerning a possible compromise on the
CCP. Agreement was reached on a compromise closure permit in December 2001. In
December 2001, the Mining Commission again extended the closeout plan approval
deadline until October 1, 2002. Another public hearing was held in February 2002 on the compromise closure
permit supported by both Chino and NMED. The estimated cost of the compromise
CCP was approximately $391 million over 100 years on an undiscounted and
unescalated basis. The conditions of the compromise permit required additional
studies and submission of a revised closure plan reflecting the outcome of
those studies prior to expiration of the five-year period of the closure
permit. As of October 1, 2002, NMED had not finalized its decision on the
compromise permit, and, consequently, MMD was unable to approve the closeout
plan. MMD then issued a Notice of Violation (NOV) to Chino for failing to meet
the October 1, 2002, deadline. The NOV did not impose any penalties, but
ordered Chino to obtain approval by a new deadline and reserved the right to
assess penalties for noncompliance. Chino appealed the NOV to the Mining
Commission, which held a public hearing on the NOV in December 2002. The Mining
Commission upheld the NOV, but modified the deadline for closeout plan approval
until seven months after NMED issued Chinos closure permit, subject to
extension by MMD for good cause. On February 24, 2003, NMED issued Chinos closure permit, consistent with
the compromise permit. Under the closure permit, the amount of financial
assurance was established at approximately $191 million on an NPV basis. In May
2003, Chino and Phelps Dodge reached an agreement with NMED and MMD on a
framework for financial assurance providing for a cash trust fund, collateral
and a third-party guarantee from Phelps Dodge. In June 2003, MMD filed a
petition with the Mining Commission to amend the Mining Act Rules




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23 to allow a trust fund to be used as financial assurance. In July 2003, the
Company announced that a Phelps Dodge subsidiary would acquire Heiseis
one-third partnership interest in Chino. As part of the terms of that
acquisition, Heisei agreed to provide cash funding for one-third of the
financial assurance amount. To reflect the agreement with Heisei, in September 2003 the financial
assurance agreement was modified to provide for one-third of the financial
assurance in the form of a trust fund and the remainder in the form of a
third-party guarantee by Phelps Dodge. The September 2003 agreement also
included a schedule for accelerated reclamation at Chino. MMD extended the
deadline for Chino to obtain approval of its closeout plan pending the
conclusion of the Mining Commission hearings on the proposed rule changes and
to allow time to hold a public hearing on the closeout plan and financial
assurance. The Mining Commission finalized the rule changes at a public hearing
on November 17, 2003. In October 2003, WQCC dismissed an appeal of Chinos closure permit filed
by a third party. WQCCs action has since been appealed to the New Mexico Court
of Appeals. MMD held a public hearing on Chinos closeout plan and financial assurance
proposal on December 13, 2003. Following consideration of the public comments
and finalization of the permit and financial assurance documentation, MMD
approved the closeout plan and financial assurance on December 18, 2003,
meeting the December 19, 2003, deadline for closeout plan approval set by MMD
and satisfying the requirements of the NOV. The closeout plan approved by MMD incorporates the requirements of the
NMED closure permit and includes a waiver from the requirement to achieve a
self-sustaining ecosystem or post-mining land use for the open pit and a
portion of the mine stockpiles, consistent with the terms of the NMED closure
permit. It also incorporates a schedule for reclamation of inactive portions of
the Chino operations and for reclamation following closure of active
operations. Based upon minor adjustments to reflect additional requirements,
the approved third-party cost estimate is approximately $395 million, and the
approved financial assurance requirement is approximately $192 million on an
NPV basis. Heisei provided funding of approximately $64 million on behalf of
Chino for the Chino trust fund. Phelps Dodge issued a third-party guarantee for
approximately $128 million for the balance of the financial assurance.
Following NMEDs and MMDs acceptance of the financial assurance, NMED released
Chinos $56 million interim surety bond as of December 31, 2003. The Company estimates its cost to perform the requirements of the approved
Chino closure permit and closeout plan to be approximately $287 million
(undiscounted and unescalated) over the 100-year period of the CCP. That
estimate is approximately one-third lower than the estimated cost used as the
basis for the financial assurance amount due to the factors discussed above and
reflects our internal cost estimate. Our cost estimate used to determine the
fair value of our reclamation accrual was approximately $389 million
(undiscounted, unescalated and on a third-party cost basis), as required by
SFAS No. 143, and excludes approximately $6 million of environmental costs from
the financial assurance cost estimate, which are recognized in environmental
reserves (they are not within the scope of SFAS No. 143). At December 31, 2003
and 2002, we had accrued approximately $39 million (100 percent basis) and $8
million (two-thirds basis), respectively, for reclamation at Chino. In December 1994, Chino entered into an Administrative Order on Consent
(AOC) with NMED. The AOC requires Chino to perform a Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) quality
investigation of environmental impacts and potential risks to human health and
the environment associated with portions of the Chino property affected by
historical mining operations. The remedial investigations began in 1995 and are
still under way, although substantial portions of the remedial investigations
are near completion. While some remediation is expected to be required, no
feasibility studies have yet been completed, and NMED has not yet issued a
record of decision regarding any remediation that may be required under the
AOC. The Companys estimated cost is $23.6 million. In addition to work under
the AOC, Chino is continuing ongoing projects to control blowing dust at an
estimated cost of $4.8 million and to excavate and remove copper-bearing
sediments from an area known as Lake One for copper recovery in existing
leach stockpiles at the mine. The Companys estimated cost for Lake One is $4.7
million. The Companys aggregate reserve for liability under the Chino AOC and
for the interim work on the tailing ponds and Lake One is $33.1 million. Phelps Dodge Tyrone, Inc. Tyrone submitted its first proposed site-wide combined CCP at the end of
1997, the original deadline for approval of closeout plans under the Mining
Act, and obtained an extension for closeout plan approval until December 31,
1999. The closure and closeout plans were combined into one plan due to the
overlapping requirements of WQCC regulations and the Mining Act. In 1999, NMED
required Tyrone to provide interim financial assurance, pending approval of the
closure plan, and Tyrone complied by providing a surety bond for approximately
$58 million. Also in 1999, the Mining Commission extended the closeout plan
approval deadline until December 31, 2001. Tyrone submitted a comprehensive CCP in May 2001 incorporating the results
of the scientific studies performed by Tyrone. That CCP requested a waiver of
requirements to reclaim the open pit and steep stockpile slopes and included a
cost estimate for approximately $121 million, which included the estimated cost
of 30 years of water treatment. In late 2001, the Mining Commission again
extended the closeout plan approval deadline until October 1, 2002. In April 2002, NMED published a draft site-wide closure permit and set a
public hearing for May 2002. NMEDs draft closure permit required that all
stockpiles be regraded, required thicker soil covers than proposed by Tyrone,
required 100 years of water treatment and more stringent water treatment
requirements, and proposed additional permit conditions opposed by Tyrone. NMED
estimated the cost of its proposed permit at approximately $440 million on an
unescalated and undiscounted basis over a 100-year closure period. Tyrone
submitted a revised plan in response to NMEDs draft permit, including concepts
for regrading and covering the mine stockpiles modeled after the Chino
compromise permit and proposing upgraded water treatment technology. Tyrone
estimated the cost of its proposal at approximately $328 million on the same
basis. A two-week public hearing was held in May 2002.




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24 As of October 1, 2002, NMED had not reached a decision on Tyrones permit,
and, consequently, MMD was unable to approve the closeout plan. MMD then issued
an NOV to Tyrone for failing to meet the October 1, 2002 deadline. The NOV did
not impose any penalties, but ordered Tyrone to obtain closeout plan approval
by a new deadline and reserved the right to impose penalties for noncompliance.
Tyrone appealed the NOV to the Mining Commission, which held a public hearing
on the NOV in December 2002. The Mining Commission upheld the NOV, but modified
the deadline for closeout plan approval until twelve months after NMED issued
Tyrones closure permit, subject to extension by MMD for good cause. NMEDs Hearing Officer issued a decision concerning the contested permit
conditions on March 7, 2003. The Hearing Officer adopted many of Tyrones
proposed changes to NMEDs draft permit, but sided with the NMED staff on
requirements for regrading and covers. NMED issued Tyrones closure permit on
April 8, 2003, in accordance with the Hearing Officers decision. The estimated
third-party cost under the closure permit is approximately $433 million. Tyrone
appealed the closure permit to WQCC, which held a public hearing to take
evidence concluding on November 13, 2003. WQCC has scheduled closing arguments
and deliberation on the appeal at a meeting beginning on April 13, 2004. Based upon the closure permit issued by NMED, the amount of financial
assurance for Tyrone on an NPV basis is approximately $267 million. In May
2003, Tyrone and Phelps Dodge reached an agreement with NMED and MMD on a
framework for financial assurance providing for a cash trust fund, collateral
and a third-party guarantee from Phelps Dodge. The agreement also requires
Chino, Tyrone and Cobre to expend a combined minimum of $30 million on
accelerated reclamation over 10 years. In September 2003, the financial
assurance agreement was modified to include additional details. Tyrone agreed
to establish a trust fund in the initial amount of $17 million, and to
contribute $500,000 per quarter over a five-year period to increase the cash
funding to a total of $27 million. Tyrone also agreed to provide collateral to
NMED and MMD so that at least 30 percent of the financial assurance is in the
form of a trust fund or collateral. Once the trust fund and collateral are in
place, NMED will release the $58 million interim surety bond. NMED and MMD
agreed that the balance, or 70 percent of the financial assurance, may be
provided in the form of a third-party guarantee issued by Phelps Dodge. The
September 2003 agreement also included a schedule for accelerated reclamation
at Tyrone. Financial assurance under this agreement is subject to completion of
the permitting process, including consideration of public comments. On October 15, 2003, Tyrone and NMED finalized a settlement agreement
establishing a detailed schedule for reclamation of the inactive tailing
impoundments at Tyrone over an eight-year period. As reclamation is completed
on portions of the facilities, the closure cost estimate and, accordingly, the
required amount of financial assurance, may be reduced. The deadline for Tyrone to obtain MMDs approval of its closeout plan is
April 8, 2004, subject to extension by MMD for good cause. Tyrone is working
with MMD on permit conditions for approval of the closeout plan and with both
MMD and NMED on financial assurance consistent with the September 2003
agreement. MMD must hold a public hearing and consider public comments before
it approves the closeout plan and financial assurance. Approval of a closeout
plan consistent with the NMED closure permit also will require approval of a
waiver of the requirement to achieve a self-sustaining ecosystem or post-mining
land use for the open pit and a portion of the mine stockpiles where regrading
and cover are not proposed. Managements internal cost estimate for performance of reclamation at
Tyrone is approximately $257 million (undiscounted and unescalated) over the
100-year period of the CCP. That estimate is approximately one-third lower than
the estimated cost used as the basis for the financial assurance amount due to
the factors discussed above and reflects our internal cost estimate. Our cost
estimate used to determine the fair value of our reclamation accrual was
approximately $427 million (undiscounted, unescalated and on a third-party cost
basis), as required by SFAS No. 143, and excludes approximately $6 million of
environmental costs from the financial assurance cost estimate, which are
recognized in environmental reserves (they are not within the scope of SFAS No.
143). At December 31, 2003 and 2002, we had accrued approximately $81 million
and $27 million, respectively, for reclamation at Tyrone. Cobre Mining Company At the time of our acquisition of Cobre in 1998, Cobre had submitted
proposed closure and closeout plans and had posted a surety bond for
approximately $2 million with both MMD and NMED. Cobre submitted a
comprehensive proposed CCP in May 2001 incorporating the results of the
scientific studies completed by Cobre to both NMED and MMD. As of October 1, 2002, NMED had not issued a closure permit to Cobre, and,
consequently, MMD was unable to approve the proposed closeout plan. MMD then
issued an NOV to Cobre for failing to meet the October 1, 2002 deadline. The
NOV did not impose any penalties, but ordered Cobre to obtain closeout plan
approval by a new deadline. Cobre appealed the NOV to the Mining Commission,
which held a public hearing on the NOV in December 2002. The Mining Commission
upheld the NOV, but modified the deadline for closeout plan approval until nine
months after NMED issues Cobres closure discharge plan, subject to extension
by MMD for good cause. Cobre is currently awaiting a draft closure permit from
NMED. In May 2003, Cobre and Phelps Dodge reached an agreement with NMED and MMD
on a framework for financial assurance providing for a cash trust fund,
collateral and a third-party guarantee from Phelps Dodge. The agreement also
requires Chino, Tyrone and Cobre to expend a combined minimum of $30 million on
accelerated reclamation over 10 years. In September 2003, the financial
assurance agreement was modified to include additional details. Cobre agreed to
establish a trust fund in the initial amount of $1 million, and to contribute
$100,000 per quarter over a five-year period to increase the cash funding to a
total of $3 million. Cobre also agreed to provide collateral to NMED and MMD so
that at least 30 percent of the financial assurance is in the form of a trust
fund or collateral. NMED and MMD agreed that the balance, or 70 percent of the
financial assurance, may be provided in the form of a third-party guarantee
issued by Phelps Dodge. The September 2003 agreement also included a schedule
for accelerated reclamation at Cobre. Financial assurance under this agreement
is subject to completion of the permitting process, including consideration of
public comments.




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25 Based upon the proposed CCP for Cobre submitted in 2001, the current cost
estimate for reclamation at Cobre is approximately $9 million. Our cost
estimate used to determine the fair value of our reclamation accrual was
approximately $41 million (undiscounted, unescalated and on a third-party cost
basis), as required by SFAS No. 143. Both of these estimates will be updated
when NMED issues the closure permit. At December 31, 2003 and 2002, we had
accrued closure costs of approximately $7 million and $2 million, respectively,
at Cobre. Phelps Dodge Hidalgo, Inc. Hidalgo obtained approval of a closure plan under a discharge permit
issued by NMED in 2000. In accordance with the permit, Hidalgo provided
financial assurance to NMED in the form of surety bonds for approximately $11
million. Since obtaining approval of the closure plan, Hidalgo has completed
the closure of a former wastewater evaporation pond by construction of a soil
cap approved by NMED. The discharge permit under which the closure plan was
approved also requires corrective action for contaminated groundwater near the
smelters closed former wastewater evaporation pond. Impacted groundwater is
pumped from a series of wells, treated in a neutralization facility, and
discharged to a series of lined impoundments or to an irrigation system. The
discharge permit requires a comprehensive groundwater study to characterize
groundwater at the site. The discharge permit requires updates of the closure
plan, and NMED could require future enhancement of the system based upon the
results of the ongoing study when the permit expires in 2005 or, in certain
circumstances, earlier. Hidalgo is not subject to the Mining Act and,
consequently, does not require a closeout plan. Our cost estimate used to
determine the fair value of our reclamation accrual was approximately $7
million (undiscounted, unescalated and on a third-party cost basis), as
required by SFAS No. 143. At December 31, 2003 and 2002, we had accrued closure
costs of approximately $4 million and $7 million, respectively, at Hidalgo. Significant Colorado Reclamation Program Our Climax and Henderson mines in Colorado are subject to permitting
requirements under the Colorado Mined Land Reclamation Act, which requires
approval of reclamation plans and provisions for financial assurance. These
mines have had approved mined-land reclamation plans for several years and have
provided the required financial assurance to the state of Colorado in the
amount of $52.4 million and $10.1 million, respectively, for Climax and
Henderson. As a result of adjustments to the approved cost estimates for
various reasons, the amount of financial assurance requirements can increase or
decrease over time. At December 31, 2003 and 2002, we had accrued closure costs
of approximately $18 million and $19 million, respectively, for our Colorado
operations. Avian Mortalities and Natural Resources Damage Claims Since the fall of 2000, we have been sharing information and discussing
various approaches with the U.S. Fish and Wildlife Service (FWS) in conjunction
with FWS investigations of avian mortalities at some of the Companys mining
operations, including Tyrone and Morenci. As a result of the FWS
investigations, federal authorities have raised issues related to the avian
mortalities under two federal laws, the Migratory Bird Treaty Act (MBTA) and
the natural resource damages provision of CERCLA. As part of the discussions
regarding the MBTA, the FWS has requested that the mining operations undertake
various measures to reduce the potential for future avian mortalities,
including measures to eliminate or reduce avian access to ponds that contain
acidic water. The FWS interprets the MBTA as strictly prohibiting the
unauthorized taking of any migratory bird, and there are no licensing or
permitting provisions under the MBTA that would authorize the taking of
migratory birds as a result of industrial operations, such as mining. The
Tyrone mine has entered into a settlement agreement with NMED to complete
reclamation of its inactive tailing ponds, which should address many of the
avian concerns related to Tyrone. The Morenci mine also is developing plans for
additional measures to address the FWSs concerns. The Company received a letter, dated August 21, 2003, from the U.S.
Department of Interior as trustee for certain natural resources, and on behalf
of trustees from the states of New Mexico and Arizona, asserting claims for
natural resource damages relating to the avian mortalities and other matters.
The notice cited CERCLA and the Clean Water Act and identified alleged releases
of hazardous substances at the Chino, Tyrone and Continental (Cobre Mining
Company) Mines in New Mexico and the Morenci Mine in Arizona. In addition to
allegations of natural resource damages relating to avian mortalities, the
letter alleges injuries to other natural resources, including other wildlife,
surface water and ground water. The letter was accompanied by a Preassessment
Screen report. The letter expresses the trustees interest in engaging in a
cooperative assessment regarding the claims in which the Company would
participate in the assessment of alleged injuries and potential damages with
the objective of settling the claims. The Company has entered into tolling
agreements with the trustees to toll the statute of limitations pending
discussions with the trustees regarding a cooperative settlement process. Other Mining Some portions of our mining operations located on public lands are subject
to mine plans of operation approved by the federal BLM. BLMs regulations
include financial assurance requirements for reclamation plans required as part
of the approved plans of operation. As a result of recent changes to BLMs
regulations, including more stringent financial assurance requirements,
increases in existing financial assurance amounts held by BLM could be
required. Currently, financial assurance for the Companys operations held by
BLM totals $3.4 million. The Company is investigating available options to provide additional
financial assurance and, in some instances, to replace existing financial
assurance. The cost of surety bonds, the traditional source of financial
assurance, has increased significantly over the past few years, and many surety
companies are now requiring an increased level of collateral supporting the
bonds such that they no longer are economically prudent. Some surety companies
that issued surety bonds to the Company are seeking to exit the market for
reclamation bonds. The terms and conditions presently available from one of our
principal surety bond providers for reclamation and other types of long-lived
surety bonds have made this type of financial assurance economically
impractical in certain instances. We are working with the impacted state and
federal agencies to put in place acceptable alternative forms of financial
assurance in a timely fashion.




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26 Portions of Title 30, Chapter 2, of the United States Code govern access
to federal lands for exploration and mining purposes (the General Mining Law).
In 2002, legislation was introduced in the U.S. House of Representatives to
amend the General Mining Law. Similar legislation has been introduced in
Congress during the 1990s. None of these bills has been enacted into law.
Concepts in the legislation over the years have included the payment of
royalties on minerals extracted from federal lands, payment of fair market
value for patenting federal lands and reversion of patented lands used for
non-mining purposes to the federal government. Several of these same concepts
and others likely will continue to be pursued legislatively in the future. We also are subject to federal and state laws and regulations pertaining
to plant and mine safety and health conditions. These laws include the
Occupational Safety and Health Act of 1970 and the Mine Safety and Health Act
of 1977. Present and proposed regulations govern worker exposure to a number of
substances and conditions present in work environments. These include dust,
mist, fumes, heat and noise. We are making and will continue to make
expenditures to comply with health and safety laws and regulations. We estimate that our share of capital expenditures for programs to comply
with applicable environmental laws and regulations that affect our mining
operations will total approximately $35 million in 2004 and approximately $38
million in 2005; approximately $28 million was spent on such programs in 2003.
We also anticipate making significant capital and other expenditures beyond
2005 for continued compliance with such laws and regulations. In light of the
frequent changes in the laws and regulations and the uncertainty inherent in
this area, we are unable to reasonably estimate the total amount of such
expenditures over the longer term, but it may be material. (Refer to the
discussion of OTHER ENVIRONMENTAL MATTERS.) We do not expect that additional capital and operating costs associated
with achieving compliance with the many environmental, health and safety laws
and regulations will have a material adverse affect on our competitive position
relative to other U.S. copper producers. These domestic copper producers are
subject to comparable requirements. However, because copper is an
internationally traded commodity, these costs could significantly affect us in
our efforts to compete globally with those foreign producers not subject to
such stringent requirements. 
 Ownership of Property U.S. Mining Operations In the United States, most of the land occupied by our copper mines,
concentrators, SX/EW facilities, smelters, refineries, rod mills, and
molybdenum roasters or processing facilities generally is owned by, or is
located on unpatented mining claims owned by, the Company. Certain portions of
our Henderson, Miami, Bagdad, Sierrita, Tyrone, Chino and Cobre operations, and
our Process Technology Center, are located on government-owned land and are
operated under a Mine Plan of Operations. The Sierrita operation leases
property adjacent to its mine upon which its electrowinning tankhouse facility
is located. The current lease agreement expired in the fourth quarter of 2003
and future alternatives, including extension of the lease, are being
considered. Cyprus Tohono Corporation holds leases for land, water and business
purposes on land owned by the Tohono Oodham Indian Nation. Various federal and
state permits or leases on government land are held for purposes incidental to
mine operations. South American Mining At the Candelaria, Ojos del Salado, El Abra and Cerro Verde operations in
South America, mine properties and facilities are controlled through mining
concessions under the general mining laws of the relevant country. The
concessions are owned or controlled by the operating companies in which the
Company or its subsidiaries have an ownership interest. 
 PHELPS DODGE INDUSTRIES PDI is our manufacturing division comprising two business segments that
produce engineered products principally for the global energy,
telecommunications, transportation and specialty chemicals sectors. Its
operations are characterized by products with significant market share,
internationally competitive cost and quality, and specialized engineering
capabilities. The two segments are Specialty Chemicals and Wire and Cable. 
 Specialty Chemicals Segment Columbian Chemicals Company and its subsidiaries (Columbian Chemicals or
Columbian), our Specialty Chemicals segment headquartered in Marietta, Georgia,
is an international producer and marketer of carbon blacks. At Columbian
Chemicals, we produce a full range of rubber and industrial carbon blacks in 12
plants worldwide, with approximately 35 percent of our production in North
America and the remaining 65 percent at facilities in Europe, Asia and South
America. Our El Dorado, Arkansas, plant is temporarily idled. Our rubber carbon
blacks improve the tread wear and durability of tires, and extend the service
life of many rubber products, such as belts and hoses. Our industrial carbon
blacks are used in such diverse applications as pigmentation of coatings, inks
and plastics; ultraviolet stabilization of plastics; and as conductive
insulation for wire and cable. We also maintain sales offices worldwide and use
a network of distributors where appropriate. Extensive research and development is performed at our technology centers
located at Marietta, Georgia, and Avonmouth, United Kingdom. These technology
centers are responsible for studies specific to both industrial and rubber
applications of carbon black. Carbon black product and process development at
these technology centers are supported by development work at Columbians
plants worldwide. Beginning in December 2001, Columbian Chemicals curtailed 54,000 metric
tons of annual North American carbon black production at its El Dorado,
Arkansas, plant due to significant over-capacity in the U.S. market caused by
the economic recession. The facility is expected to reopen when economic
conditions improve. In the second quarter of 2000, we acquired the remaining 40 percent share
in the carbon black manufacturing business of Columbian Tiszai Carbon Ltd. in
Hungary for $19.0 million, bringing our total interest to 100 percent. In the first quarter of 2000, we acquired an additional 18 percent
ownership in Columbian Carbon Japan, a sales and distribution




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27 company serving the Japanese market, bringing our total ownership interest
to 68 percent. In January 1999, we acquired an 85 percent interest in the Korean carbon
black manufacturing business of Korea Kumho Petrochemical Co., Ltd., for $76.1
million. This business includes a 110,000 metric-ton-per-year manufacturing
plant. Competition and Markets The principal competitive factors in the various markets in which our
Specialty Chemicals segment competes are product quality, customer service,
price, dependability of supply, delivery lead time, breadth of product line,
and technical service and innovation. Columbian Chemicals is among the worlds largest producers of carbon
black. Approximately 90 percent of the carbon black it produces is used in
rubber applications, a substantial portion of which is used in the tire
industry. Major tire manufacturers worldwide account for a significant portion
of our carbon black sales. In addition, we have maintained a strong competitive
position in both the mechanical rubber goods market and the industrial carbon
black market based on our commitment to quality, service and technical
innovation. Despite ongoing attempts to substitute carbon black with silica,
reclaimed rubber or other materials, none has been able to match the cost and
performance of carbon black in its principal applications. The closest
successful substitute is a silane-treated silica that has made some in-roads in
the tire market due to its increased wet traction characteristics for specific
applications. Including Columbian Chemicals, there are a total of five major carbon
black producers in the United States, three in Canada, three in western Europe
and three in South America. There also are many producers in Asia. The carbon
black industry is highly competitive, particularly in the rubber black market. Raw Materials and Energy Supplies Carbon black is produced primarily from heavy residual oil, a by-product
of the crude oil refining process. At Columbian Chemicals, we purchase
substantially all of our feedstock at market prices that fluctuate with world
oil prices. Our residual oil feedstock and other raw materials for our
specialty chemicals business are purchased from various suppliers. The cost of
this feedstock is a significant factor in the cost of carbon black. To achieve
satisfactory financial results during periods of high and/or increasing oil
prices, we must be able to pass through these high and/or increasing prices to
our customers. Hence, we have put in place a number of formula based
contracts that allow our selling prices to increase/decrease with feedstock
costs. We do not believe that the loss of any one supplier would have a
material adverse effect on our financial condition or on the results of our
operations. Our specialty chemical operations generally use purchased or internally
generated electricity and natural gas as their principal sources of energy. Ownership of Property Columbian Chemicals owns all property other than the leased land at its
U.K., German and Korean facilities. This leased land is not material to our
overall operations. 
 Wire and Cable Segment The Wire and Cable segment, headquartered in Phoenix, Arizona, consists of
three worldwide product line businesses comprising magnet wire, energy and
telecommunications cables, and specialty conductors. Magnet wire, the insulated conductor used in most electrical motors, is
manufactured in the United States at plants in Fort Wayne, Indiana, and El
Paso, Texas. We also manufacture magnet wire at wholly owned subsidiaries in
Mureck, Austria, and Monterrey, Mexico. In 2003, we began construction of a new
magnet wire production facility in China. The facility, which will be in
Suzhou, is expected to begin production during the second quarter of 2004. It
will serve the fast-growing demand for magnet wire in China. In the 2003 fourth quarter, based upon the continuing reduced market
conditions in North America for magnet wire, we determined that our Laurinburg,
North Carolina, plant would not re-open and its value was written down by $0.5
million to reflect appraised value. At the end of 2002, this facility was
temporarily closed with production being shifted to the El Paso, Texas, and
Fort Wayne, Indiana, facilities, and its value was written down by $15.3
million. In 2000, our Hopkinsville, Kentucky, plant was closed; its value was
written down by $3.3 million in the second quarter of 2001. The productive
assets of our Hopkinsville, Kentucky, plant were moved to other facilities in
the United States and Mexico. In the fourth quarter of 2003, its value was
written down further by $0.4 million to reflect its appraised value. In 2000, a
special, pre-tax charge of $5.8 million was recognized for our wire and cable
operations in Austria as a result of the long-term impact of continuing
extremely competitive pricing conditions in Europe. Phelps Dodge International Corporation manufactures energy and
telecommunication cables for international markets and manufactures products in
factories located in 10 countries. We provide management, marketing assistance,
technical support, and engineering and purchasing services to these companies.
Three of our international wire and cable companies have continuous-cast copper
rod facilities, and three of our international wire and cable companies have
continuous-cast aluminum rod facilities. We have majority interests in
companies with production facilities in seven countries  Brazil, Chile, Costa
Rica, Honduras, Thailand, Venezuela and Zambia. We also have minority interests
in companies located in Hong Kong and Thailand, accounted for on the equity
basis, and in a company located in India, accounted for on the cost basis. We
operate distribution centers in nine countries in addition to the United States
 Guatemala, El Salvador, Honduras, Panama, Puerto Rico, Colombia, Ecuador,
Belgium and South Africa. In December 1997, we acquired a 60 percent interest in the Brazilian
copper and aluminum wire and cable manufacturing business of Alcoa Aluminio,
S.A. (Aluminio) for $72 million. In 2001, Aluminio exercised an optional exit
mechanism whereby the Company acquired Aluminios remaining 40 percent interest
for $44.8 million. During the second quarter of 2000, we ceased production at two wire and
cable plants in Venezuela due to low forecast plant utilization levels as a
result of significantly reduced infrastructure spending in the Latin America
region. These plant closures resulted in a special, pre-tax loss of $26.1
million. We also ceased production at our majority-owned telephone cable
operation in El Salvador in the fourth quarter of 2000 due to low plant
utilization levels as a result of




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28 heightened global competition for telecommunication cable. The plant
closure resulted in a special, pre-tax loss of $5.5 million. A charge of $7.2
million to miscellaneous income and expense was recognized to reflect the
impairment of our 40 percent equity interest in a wire and cable operation in
the Philippines. The impairment was based upon an analysis of future cash flows
of the operation, continuing economic uncertainty in the Philippines and the
erosion of our strategic and operating influence. We manufacture and market highly engineered conductors of copper and
copper alloy wire electroplated with silver, tin or nickel for sophisticated,
specialty product niches in the aerospace, automotive, biomedical, computer and
consumer electronics markets. Those products are manufactured in plants located
in Inman, South Carolina; Trenton, Georgia; and Elizabeth, New Jersey. As part
of the manufacturing rationalization program initiated in 1999, leased plants
in Fairfield and Montville, New Jersey, were closed in 2000, and the West
Caldwell, New Jersey, plant was temporarily closed in 2002 and its value was
written down by $1.6 million. In the 2003 fourth quarter, based upon the
continuing reduced market conditions in North America for high performance
conductors, we determined that our West Caldwell plant would not re-open and
its value was written down by $0.8 million to reflect appraised value. Their
productive capacities were transferred to the remaining facilities. In the 2002 third quarter, actions were taken to improve efficiencies and
consolidate certain wire and cable operations. In addition to the
above-mentioned closures of our Laurinburg and West Caldwell facilities, we
streamlined operational and production support at other high performance
conductors facilities in order to reduce costs and increase operating
efficiencies, and restructured and consolidated certain administrative
functions. The restructuring plan included the reduction of approximately 300
positions and charges associated with employee severance and relocation ($3.9
million) and pension and other postretirement obligations ($2.8 million). In the 2003 fourth quarter, we performed an annual impairment test on
goodwill at our magnet wire and high performance conductors facilities through
a comparison of carrying values to respective fair values (using an estimate of
discounted cash flows) and determined that a $0.9 million charge was required
to write-off Magnet Wires entire goodwill. Competition and Markets Phelps Dodge is one of the worlds largest manufacturers of magnet wire.
Our plants draw, roll and insulate copper and aluminum wire that is sold as
magnet wire and bare conductors to original equipment manufacturers for use in
electric motors, generators, transformers, televisions, automobiles and a
variety of small electrical appliances. Magnet wire also is sold to electrical
equipment repair shops and smaller original equipment manufacturers through a
network of distributors. We principally compete with two international and two
U.S. magnet wire producers. Our international energy and telecommunication cable companies primarily
sell products to contractors, distributors, and public and private utilities.
Our products are used in lighting, power distribution, telecommunications and
other electrical applications. Our competitors range from worldwide wire and
cable manufacturers to small local producers. Our specialty conductors are sold primarily to intermediaries (insulators,
assemblers, subcontractors and distributors). Approximately 40 percent of these
products ultimately are sold to commercial and military aerospace companies for
use in airframes, avionics, space electronics, radar systems and ground control
electronics. Specialty conductors also are used in appliances, instrumentation,
computers, telecommunications, military electronics, medical equipment and
other products. We have two primary U.S. competitors and compete with three
importers in the specialty conductor market; however, in those few markets
where we compete for high volume products, we face competition from several
U.S. fabricators. Raw Materials and Energy Supplies The principal raw materials used by our magnet wire manufacturing
operations are copper, aluminum and various chemicals and resins used in the
manufacture of electrical insulating materials. Most of the copper purchased
for our magnet wire operations is from our PDMC division. The principal raw materials used by our international energy and
telecommunication cable companies are copper, copper alloy, aluminum, aluminum
alloy, copper-clad steel and various electrical insulating materials. The specialty conductor product line usually is plated with silver, nickel
or tin. With the exception of copper needed in specialty conductors, a majority
of the materials used by these companies is purchased from others. We do not
believe that the loss of any one supplier would have a material adverse effect
on our financial condition or on the results of our operations. Most of our wire and cable operations generally use purchased electricity
and natural gas as their principal sources of energy. Our magnet wire companys
principal manufacturing equipment uses natural gas; however, it is also
equipped to burn alternative fuels. Ownership of Property We own most of the plants and land on which our wire and cable operations
are located. The exceptions are the leased land and buildings of our magnet
wire facilities in Austria and closed specialty conductor facility in
Montville, New Jersey. This land is not material to our overall operations. 
 Environmental Matters Federal and state environmental laws and regulations affect many aspects
of our domestic industrial operations. We estimate that capital expenditures
for programs to comply with applicable environmental laws and regulations
within our PDI division will total approximately $22 million in 2004 and
approximately $12 million in 2005; approximately $5 million was spent on such
programs in 2003. We anticipate making significant capital and other
expenditures beyond 2005 for continued compliance with environmental laws and
regulations. It is expected that most, and perhaps all, of our domestic carbon black
plants and magnet wire plants are or will become subject to one or more MACT
standards under the federal CAA. These standards do not have immediate
compliance dates; instead they allow two or three years after promulgation to
provide the opportunity to come into compliance or to reduce emissions to avoid
regulation before the compliance date. For example, the carbon black MACT




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29 standard was issued in 2002, with a compliance date of July 2005; and the
MACT standard for magnet wire plants was issued in 2003 with a compliance date
of 2007. Other potentially applicable MACT standards are still in development.
We are in the process of determining applicability and compliance strategies. The European Union (EU) has commenced work on the development of Best
Available Technology (BAT) for the carbon black industry. The current BAT
Reference Document (BREF Note) proposes to control sulfur dioxide emissions by
limiting the annual sulfur content in feedstocks to 0.5 percent. This limit, if
adopted, could negatively impact the carbon black industry, including
Columbian. Columbian, through the carbon black industry trade association, is
actively involved in this process. It is expected that any final action will be
taken in 2005. Because of the frequent changes in environmental laws and regulations and
the uncertainty these changes create for us, we are unable to estimate
reasonably the total amount of such expenditures over the longer term, but it
may be material to our results of operations. (Refer to the discussion of OTHER
ENVIRONMENTAL MATTERS.) 
 LABOR MATTERS Employees at PDMCs Arizona operations, El Paso refinery and rod mill,
Tyrone, Hidalgo smelter, the Norwich and Chicago rod mills, the Henderson mine
in Colorado, the Fort Madison, Iowa, molybdenum processing facility, and some
employees at Chino are not represented by any unions. Our El Abra mine in Chile has two labor agreements covering approximately
391 and 91 employees that expire on October 31, 2004, and November 5, 2004,
respectively. Candelaria has two labor agreements covering approximately 665
employees that expire in April 2006. Cerro Verde has one labor agreement
covering approximately 429 employees that expires December 31, 2008. Our Chino
mine in Hurley, New Mexico, has two agreements covering approximately 447
employees that expired on November 18, 2002; negotiations are ongoing in regard
to this agreement. Our molybdenum operation in Rotterdam has an agreement
covering approximately 45 employees that expires on March 31, 2004. Our
molybdenum operation in Stowmarket has an agreement covering approximately 38
employees that expires on May 31, 2004. Our Braithwaite plant near New Orleans,
Louisiana, is a discontinued operation on care-and-maintenance status. We had
an agreement there covering four employees that expired on January 31, 2004. In addition, we currently have labor agreements covering most of our U.S.
and international manufacturing division plants. Our specialty chemicals plant
in Trecate, Italy, had one agreement covering 89 employees that expired on
December 31, 2003; negotiations are expected to begin in the first quarter of
2004 in regard to this agreement. Trecate also has an agreement covering nine
managers that expires on December 31, 2005. Our specialty chemicals plant in
Hamilton, Ontario, Canada, has an agreement covering 65 employees that expires
on November 15, 2006. Our specialty chemicals facilities in Cubatao and Sao
Paulo, Brazil, have agreements covering 215 and 26 employees, respectively,
that expire on October 31, 2004. Our specialty chemicals plant in Bristol,
United Kingdom, has an agreement covering 104 employees that expired on May 8,
2003. There are three trade unions involved in the labor agreement. One of the
trade unions agreed to a two-year agreement that expires on May 31, 2005;
negotiations are ongoing with the remaining trade unions. Our specialty
chemicals plant in Hannover, Germany, has an agreement covering 74 employees
that expires on August 31, 2004. Our specialty chemicals plant in Yosu, South
Korea, has a wage agreement covering 48 employees that expires February 28,
2004; negotiations are expected to begin in mid-2004. Our specialty chemicals
plant in Santander, Spain, has an agreement covering 49 employees that expires
on December 31, 2005. Our specialty chemicals plant in Marshall, West Virginia,
has two agreements covering 60 employees that expire on June 13, 2005. Our
specialty chemicals North Bend plant in Franklin, Louisiana, has an agreement
covering 113 employees that expires on February 28, 2006. Our wire plant in Elizabeth, New Jersey, has an agreement covering 45
employees that expired on July 31, 2000; negotiations are ongoing in regard to
that agreement. Our plant in Zambia has an agreement covering approximately 89
employees that expires in July 2005. Our magnet wire plant in Monterrey,
Mexico, has an agreement covering approximately 154 employees that expires in
March 2004. Our magnet wire plant in Fort Wayne, Indiana, has an agreement
covering approximately 210 employees that expires in May 2005. Our magnet wire
plant in Austria has an agreement covering approximately 70 employees that
expires in October 2004. Our wire and cable facilities in Brazil have
agreements covering approximately 265 and 24 employees that expire in September
and November 2004, respectively. Our wire and cable facilities in Venezuela
have agreements covering approximately 75 and 80 employees that expire in
October 2006 and January 2007, respectively. Our wire and cable plant in Chile
has an agreement covering approximately 170 employees that expires in May 2007. 
 RESEARCH AND DEVELOPMENT We conduct research and development programs relating to technology for
exploration for minerals, mining and recovery of metals from ores, concentrates
and solutions, smelting and refining of copper, metal processing and product
development. We also conduct research and development programs related to our
carbon products through Columbian Chemicals, and our wire insulating processes
and materials and conductor materials and processes through our Wire and Cable
segment. Expenditures for all of these research and development programs,
together with contributions to industry and government-supported programs,
totaled $30.2 million in 2003, compared with $26.0 million in 2002 and $27.1
million in 2001. 
 OTHER ENVIRONMENTAL MATTERS Phelps Dodge is subject to various federal, state and local environmental
laws and regulations that govern emissions of air pollutants; discharges of
water pollutants; and generation, handling, storage and disposal of hazardous
substances, hazardous wastes and other toxic materials. The Company is also
subject to potential liabilities arising under CERCLA or similar state laws
that impose responsibility on persons who arranged for the disposal of
hazardous substances, and on current and previous owners and operators of a
facility for the cleanup of hazardous substances released from the facility
into the environment. In addition, the Company is subject to potential
liabilities under the Resource Conservation and Recovery




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30 Act (RCRA) and analogous state laws that require responsible parties to
remediate releases of hazardous or solid waste constituents into the
environment associated with past or present activities. Phelps Dodge or its subsidiaries have been advised by EPA, the U.S. Forest
Service and several state agencies that they may be liable under CERCLA or
similar state laws and regulations for costs of responding to environmental and
natural resource conditions at a number of sites that have been or are being
investigated by EPA, the U.S. Forest Service or states to determine whether
releases of hazardous substances have occurred and, if so, to develop and
implement remedial actions to address environmental and natural resource
concerns. Phelps Dodge has provided reserves for potential environmental obligations
that management considers probable and for which reasonable estimates can be
made. For closed facilities and closed portions of operating facilities with
closure obligations, an environmental liability is considered probable and is
accrued when a closure determination is made and approved by management.
Environmental liabilities attributed to CERCLA or analogous state programs are
considered probable when a claim is asserted, or is probable of assertion, and
we have been associated with the site. Other environmental remediation
liabilities are considered probable based upon specific facts and
circumstances. Liability estimates are based on an evaluation of, among other
factors, currently available facts, existing technology, presently enacted laws
and regulations, Phelps Dodges experience in remediation, other companies
remediation experience, Phelps Dodges status as a potentially responsible
party (PRP), and the ability of other PRPs to pay their allocated portions.
Accordingly, total environmental reserves of $317.2 million and $305.9 million
were recorded as of December 31, 2003 and 2002, respectively. The long-term
portion of these reserves is included in other liabilities and deferred credits
on the Consolidated Balance Sheet and amounted to $271.3 million and $261.7
million at December 31, 2003 and 2002, respectively. The site currently considered to be the most significant is the Pinal
Creek site near Miami, Arizona. Pinal Creek Site The Pinal Creek site was listed under the ADEQ Water Quality Assurance
Revolving Fund program in 1989 for contamination in the shallow alluvial
aquifers within the Pinal Creek drainage near Miami, Arizona. Since that time,
environmental remediation has been performed by the members of the Pinal Creek
Group (PCG), comprising Phelps Dodge Miami, Inc. (a wholly owned subsidiary of
the Company) and two other companies. In 1998, the District Court approved a
Consent Decree between the PCG members and the state of Arizona resolving all
matters related to an enforcement action contemplated by the state of Arizona
against the PCG members with respect to the groundwater matter. The Consent
Decree committed Phelps Dodge Miami, Inc. and the other PCG members to complete
the remediation work outlined in the Consent Decree. That work continues at
this time pursuant to the Consent Decree and consistent with the National
Contingency Plan prepared by EPA under CERCLA. Phelps Dodge Miami, Inc. and the other members of the PCG are pursuing
contribution litigation against three other parties involved with the site. At
least two of the three defendants now have admitted direct liability as
responsible parties. The first phase of the case has been assigned a trial date
in August 2004. Phelps Dodge Miami, Inc. also asserted claims against certain
past insurance carriers. As of November 2002, all of the carriers have settled
or had their liability adjudicated. One carrier has appealed the judgment
against it. In addition, a dispute between one dissenting PCG member and Phelps Dodge
Miami, Inc. and the other PCG member was filed in Superior Court in 2002. The
litigation seeks a declaratory judgment on the dissenting members contract
liability under the PCG agreement. Trial for this matter is scheduled for
mid-2004. While significant recoveries may be achieved in the contribution
litigation, the Company cannot reasonably estimate the amount and, therefore,
has not taken potential recoveries into consideration in the recorded reserve. Phelps Dodge Miami, Inc.s share of the planned remediation work has a
cost range for reasonably expected outcomes estimated to be from $110 million
to $216 million. Approximately $113 million remained in the Companys Pinal
Creek remediation reserve at December 31, 2003. The sites that had the largest adjustments to their reserves were the
Yonkers and American Zinc and Chemical sites. Yonkers Site In 1984, the Company sold a cable manufacturing facility located in
Yonkers, New York. In 2000, the owner of the property entered into a consent
order with the New York State Department of Environmental Conservation (NYSDEC)
under which the owner committed to complete a remedial investigation and
feasibility study. In December 2001, the Company entered into an Interim
Agreement with the owner of the property regarding the owners claim for
indemnification from the Company for certain environmental liabilities at the
facility. The owner submitted its feasibility study to NYSDEC in December 2003.
The feasibility study recommends excavation of PCB-contaminated soil, either
removal of PCB and lead contamination from, or demolition of PCB- and
lead-contaminated buildings, and monitored natural recovery of PCB-contaminated
sediments in the Hudson River. Based on the feasibility study, and taking into
consideration the reasonably possible allocation percentages that could apply
to the Company and the property owner, the Companys remedial costs may range
from $20 million to $37 million, with a most likely point in the range of $20
million. American Zinc and Chemical Site In June 1999, Cyprus Amax, now a subsidiary of Phelps Dodge, received an
information request from the Pennsylvania Department of Environmental
Protection (PADEP) regarding the former American Zinc and Chemical (AZC) site
in Langeloth, Pennsylvania. The AZC site consists primarily of a former zinc
smelter facility operated until 1947 by the former American Zinc and Chemical
Company and includes some or all of a contiguous, currently operating
molybdenum refinery formerly owned by the Climax Molybdenum Company, which is
indirectly owned by Cyprus Amax. The American Zinc and Chemical Company, which
was dissolved in 1951, also was a subsidiary of a corporate predecessor to
Cyprus Amax. In discussions with Cyprus Amax in 2001 and early 2002, PADEP informally
indicated that it expects Cyprus Amax to investigate and remediate negative
environmental conditions at the AZC site, which




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31 predominate at and about the former zinc smelter facility. The Companys
Form 10-K for the year ended December 31, 2002, indicated preliminary
evaluations of the nature and extent of conditions at the site may range in
cost from $18 million to $52 million. The Company reserved $20 million for
possible remediation work at this site. Recently, an engineering evaluation and
reasonable-cost analysis was performed to estimate the cost and feasibility of
implementing the most likely remedial action that PADEP would accept based on
effectiveness and implementability. To check the validity of the analysis,
estimated site remedial costs were compared with costs from other environmental
sites that have implemented similar remedial actions. In addition, a
reasonable-cost analysis was performed on other possible remedial alternatives
so a range of costs could be established for consideration. This analysis
indicated that remediation of the site may range from $9 million to $43
million, with a most likely point in the range of $9 million. The most likely
remedial action would include an additional site investigation study,
implementation of storm water controls, constructing an engineered cap over 60
acres of slag and process waste, and long-term monitoring and operation and
maintenance of the site. While the Company has reduced its reserve to $9
million for possible remediation work at the site, Cyprus Amax continues to
believe and will continue to indicate to PADEP that the Company is not liable
for the actions of its former subsidiary, American Zinc and Chemical Company,
under existing federal and state environmental laws. To date, PADEP has not
responded to Cyprus Amaxs assertion that it is not liable. Other In 2003, the Company recognized charges of $28.4 million for environmental
remediation. The two sites with significant changes were the Yonkers site (an
increase of $16.7 million) and the AZC site (a decrease of $10.4 million). The
remainder of environmental remediation charges was primarily at closed sites,
none of which increased or decreased individually more than approximately $7
million. At December 31, 2003, the cost range for reasonably possible outcomes for
all reservable environmental remediation sites other than Pinal Creek, Yonkers
and AZC was estimated to be from $133 million to $329 million, of which $175
million has been reserved. Work on these sites is expected to be substantially
completed in the next several years, subject to inherent delays involved in the
remediation process. Phelps Dodge believes certain insurance policies partially cover the
foregoing environmental liabilities; however, some of the insurance carriers
have denied coverage. We presently are negotiating with the carriers over some
of these disputes. Further, Phelps Dodge believes it has other potential claims
for recovery from other third parties, including the United States Government
and other PRPs. Neither insurance recoveries nor other claims or offsets are
recognized unless such offsets are considered probable of realization. In 2003
and 2002, the Company recognized proceeds from settlements reached with several
insurance companies on historic environmental liability claims of $0.5 million
and $34.3 million, net of fees and expenses, respectively. Phelps Dodge has a number of sites that are not the subject of an
environmental reserve because it is not probable that a successful claim will
be made against the Company for those sites, but for which there is a
reasonably possible likelihood of an environmental remediation liability. At
December 31, 2003, the cost range for reasonably possible outcomes for all such
sites was estimated to be from $3 million to $17 million. The liabilities
arising from potential environmental obligations that have not been reserved at
this time may be material to the results of any single quarter or year in the
future. Management, however, believes the liability arising from potential
environmental obligations is not likely to have a material adverse effect on
the Companys liquidity or financial position as such obligations could be
satisfied over a period of years. Our operations are subject to many environmental laws and regulations in
jurisdictions both in the United States and in other countries in which we do
business. For further discussion of these laws and regulations, refer to PDMC -
Environmental and Other Regulatory Matters and PDI - Environmental Matters. The
estimates given in those discussions of the capital expenditures to comply with
environmental laws and regulations in 2004 and 2005, and the expenditures in
2003, are separate from the reserves and estimates described above. The Environmental, Health and Safety Committee of the Board of Directors
comprises five non-employee directors. The Committee met five times in 2003 to
review, among other things, the Company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.  We are a member of several trade associations that, from time to time,
initiate legal proceedings challenging administrative regulations or court
decisions that the membership considers to be improper and potentially adverse
to their business interests. These legal proceedings are conducted in the name
of the trade associations, and the members of the trade association are not
parties, named or otherwise. II. Arizona water regulations, water rights adjudications and other
related water cases. A.General Background Arizona surface water law is based on the doctrine of prior appropriation
(first in time, first in right). Surface water rights in Arizona are
usufructuary rights, and as such the water right holder is granted only the
right to use public waters for a statutorily defined beneficial use, at a
designated location. Groundwater in Arizona is governed by the doctrine of
reasonable use. Arizona has initiated two water rights adjudications in order
to quantify and prioritize all of the surface water rights and water right
claims to two of the states river systems and sources. Groundwater is not
subject to the adjudication; however, wells may be adjudicated to the extent
that they are found to produce or impact appropriable surface water. The two
adjudication cases that could potentially impact Phelps Dodges surface water
rights and claims (including some wells) are entitled In Re The General
Adjudication of All Rights to Use Water in the Little Colorado Water System and
Source, Superior Court Case No. 6417 (Superior Court of Arizona, Apache County;
petition filed on or about February 17, 1978), and In Re The General
Adjudication of All Rights to Use Water in the Gila River System and Source,
Superior Court, Case




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32 Nos. W-1 (Salt), W-2 (Verde), W-3 (Upper Gila); W-4 (San Pedro);
Consolidated (Superior Court of Arizona, Maricopa County; petition filed on
February 17, 1978). The major parties in addition to Phelps Dodge in the Gila
River Adjudication are: 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 behalf of
those Tribes, on its own behalf and on the behalf of the White Mountain Apache
Tribe, Ft. McDowell Mohave-Apache Indian Community, Salt River Pima-Maricopa
Indian Community and the Payson Community of Yavapai Apache Indians. The major
parties in addition to Phelps Dodge in the Little Colorado Adjudication are:
the state of Arizona, the Salt River Project, Arizona Public Service Company,
the Navajo Nation, the Hopi Indian Tribe, the San Juan Southern Paiute Tribe
and the United States on behalf of those Indian Tribes, on its own behalf and
on behalf of the White Mountain Apache Tribe. Phelps Dodge has four active operations in the state of Arizona: Morenci,
Miami, Sierrita and Bagdad. Each operation requires water for mining and all
related support facilities. With the exception of Bagdad, each operation is
located in a watershed within an ongoing surface water adjudication. Each
operation has sufficient water claims to cover its operational demands. In many
instances, the water supply may come from a variety of possible sources. The
potential impact of the surface water adjudications on each active operation is
discussed below. B.Operations Morenci  The Morenci operation is located in eastern Arizona. Morenci water
is supplied by a combination of sources, including decreed surface water rights
in the San Francisco River, Chase Creek and Eagle Creek drainages, groundwater
from the Upper Eagle Creek wellfield, and Central Arizona Project (CAP) water
leased from the San Carlos Apache Tribe and delivered to Morenci via exchange
through the Black River Pump Station. Phelps Dodge has filed Statements of
Claimants in the adjudication for each of its water sources for Morenci except
the CAP water. Phelps Dodges decreed water rights are subject to the Gila River
Adjudication and potentially could be impacted. Although the purpose of the
adjudication is to determine only surface water rights, wells such as those in
the Eagle Creek wellfield may be subject to the Gila River Adjudication, but
only to the extent those wells may be determined to capture or impact
appropriable surface water. The CAP water provided via exchange is not subject
to any state adjudication process. The CAP lease became effective as of January
1, 1999, and has a 50-year term. Miami  The Miami operation obtains water from a number of sources in the
Salt River watershed. Statements of Claimants have been filed in connection
with these water sources, each of which is subject to the adjudication and
could be potentially impacted. Miami currently holds a CAP subcontract,
although CAP water is not currently used at the operation. CAP water is not
subject to adjudication; however, an exchange agreement will need to be
negotiated in order to deliver this water to Miami. Sierrita  The Sierrita operation is located in the Santa Cruz River
watershed. The water for the operation is groundwater. The wells that supply
the water may be subject to the Gila River Adjudication only to the extent that
such wells are determined to be pumping or impacting appropriable surface
water. Phelps Dodge has filed Statements of Claimants in the adjudication for
these water sources in case any are later determined to produce or impact
appropriable surface water. In 1980, the Arizona legislature enacted the
Arizona Groundwater Code (Code). The Code established Active Management Areas (AMAs)
in several groundwater basins, including the Santa Cruz Groundwater Basin. The
groundwater at this operation is subject to regulation under the Tucson AMA. Bagdad  The Bagdad operation is located in the Bill Williams River
watershed. The water supply includes claims to both surface water and
groundwater. There is not an active adjudication proceeding in this watershed;
however, the legal precedent set in the active adjudications regarding the
determination of whether water pumped from wells is treated as surface water or
groundwater may impact the use of water from some wells. C.Other Arizona Mining Properties The potential impact of the ongoing adjudication on other mining
properties is discussed below. Safford  Water for the planned future operation at Safford may come from a
combination of sources. Wells that supply groundwater may be used and those
wells will be subject to the adjudication only to the extent that such wells
are determined to be pumping or impacting appropriable surface water. CAP water
may also be considered for use at the operation some time in the future. CAP
water is not subject to adjudication; however, an exchange agreement will need
to be negotiated in order to deliver the water. The implementation of such an
exchange will require approval of the Globe Equity Court as well as
environmental reviews and related agency approvals. Ajo  The potential water supply for Ajo is groundwater. The wells that
supply the water may be subject to the Gila River Adjudication to the extent
that such wells are determined to be pumping or impacting appropriable surface
water. Phelps Dodge has filed a Statement of Claimant in the adjudication for
these water sources in case any are later determined to produce or impact
appropriable surface water. Bisbee  The potential water supply for Bisbee is groundwater. The wells
that supply the water may be subject to the Gila River Adjudication to the
extent that such wells are determined to be pumping or impacting appropriable
surface water. Phelps Dodge has filed a Statement of Claimant in the
adjudication for these water sources in case any are later determined to
produce or impact appropriable surface water. D.Water Settlements 1.Gila River Indian Community Water Settlement On May 4, 1998, Phelps Dodge executed a settlement agreement with the Gila
River Indian Community (the Community) that resolves the issues between Phelps
Dodge and the Community pertinent to the Gila River Adjudication. Since that
time, comprehensive settlement negotiations with users all along the Gila River
have been initiated. Phelps Dodges settlement with the Community is now
included in the comprehensive settlement. This settlement is subject to the
approval of the Secretary of the Interior and the passage of federal
legislation.




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33 2.San Carlos Apache Tribe In 1997, issues of dispute arose between Phelps Dodge and the San Carlos
Apache Tribe (the Tribe) regarding Phelps Dodges use and occupancy of the
Black River Pump Station, which delivers water to the Morenci operation. In May
1997, Phelps Dodge reached an agreement with the Tribe, and subsequently
federal legislation (Pub. L. No. 105-18, 5003, 111 stat. 158, 181-87) was
adopted. The legislation prescribes arrangements intended to ensure a future
supply of water for the Morenci mining complex in exchange for certain payments
by Phelps Dodge. The legislation does not address any potential claims by the
Tribe relating to Phelps Dodges historical occupancy and operation of Phelps
Dodge facilities on the Tribes Reservation, but does require that any such
claims be brought, if at all, exclusively in federal district court. As of this
writing, no such claims have been filed. The 1997 legislation required that the Company and the Tribe enter a lease
for the delivery of CAP water through the Black River Pump Station to Morenci
on or before December 31, 1998. In the event a lease was not signed, the
legislation expressly provided that the legislation would become the lease. On
January 24, 2002, a lease between the San Carlos Apache Tribe, Phelps Dodge and
the United States was executed (effective as of January 1, 1999) in accordance
with that legislation. On the same date, and in accordance with the
legislation, an Exchange Agreement between the San Carlos Apache Tribe, the
United States and the Salt River Project Water Users Association was executed
and subsequently approved by Phelps Dodge. Since that date, CAP water has been
delivered to Morenci. Phelps Dodge has not reached a settlement with the Tribe
on general water issues and Phelps Dodge water claims within the Gila River
Adjudication are still subject to litigation with the Tribe and other parties. 3.Salt River Pima-Maricopa Indian Community 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 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 Phelps Dodge) in Arizona. 4.Fort McDowell Mohave-Apache Indian Community 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 Phelps Dodge) in Arizona. E.Other Related Cases The following proceedings involving water rights adjudications are pending
in the U.S. District Court 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., and Globe Equity No. 59 (D. Ariz.). The underlying action was initiated
by the United States in 1925 to determine conflicting claims to water rights in
certain portions of the Gila River watershed. Although Phelps Dodge was named
and served as a defendant in that action, Phelps Dodge was dismissed without
prejudice as a defendant in March 1935. In June 1935, the Court entered a
decree setting forth the water rights of numerous parties, but not Phelps
Dodges. The Court retained, and still has, jurisdiction of the case. The
complaint-in-intervention does not name Phelps Dodge 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 Phelps Dodge has the right to divert annually from Eagle Creek,
Chase Creek or the San Francisco River pursuant to Phelps Dodges decreed
rights and an agreement between Phelps Dodge and the Gila Valley Irrigation
District. During 1998, Phelps Dodge purchased farmlands with associated water rights
that are the subject of this litigation. As a result, Phelps Dodge has been
named and served as a party in this case. The lands and associated water rights
are not currently used in connection with any Phelps Dodge mining operation. Phelps Dodges Miami operation (formerly named Cyprus Miami Mining
Corporation) was named and served as a defendant in this action in 1989. These
proceedings may affect water rights associated with former Cyprus Miami lands
in the Gila River watershed. 2.Prior to January 1, 1983, 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 at present are being used by many water
users, including Phelps Dodge, and claiming damages for prior use in derogation
of their allegedly paramount rights. These federal proceedings have been stayed
pending state court adjudication. 3.Cyprus Sierrita Corporations predecessor in interest was a defendant
in United States, et al. v. City of Tucson, et al., No. CIV 75-39 (D. Ariz.).
This is a consolidation of several actions seeking a declaration of the rights
of the United States, the Papago Indian Tribe (now known as the Tohono Oodham
Nation), and individual allottees of the Tohono Oodham Nation, to surface
water and groundwater in the Santa Cruz River watershed; damages from the
defendants use of surface water and groundwater from the watershed in
derogation of those rights; and injunctive relief. Congress in 1982 enacted the
Southern Arizona Water Rights Settlement Act, which was intended to resolve the
water right claims of the Tohono Oodham Nation and its member allottees
relating to the San Xavier Reservation and the Schuk Toak District of the Sells
Papago Reservation. The allottees contested the validity of the Act and
contended that the Court could not dismiss the litigation without their
consent. This prompted additional litigation, and eventually culminated in
settlement negotiations. The Court suspended most aspects of the litigation to
enable the parties to negotiate a settlement with the allottees. The Courts
recent attention has been devoted to the composition of appropriate classes of
allottees and identification of class representatives, so that any settlement
that is reached would bind the allottees. It is anticipated that a settlement
and authorizing legislation would conclude all litigation on behalf of the
Tohono Oodham Nation, its allottee members, and the United States as Trustee
for the nation and its allottee members, relating to water rights. As of this
writing, however, a settlement has not been reached. The outcome of this
dispute could




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34 impact water right claims associated with the acquired Cyprus operations
at Sierrita, and miscellaneous former Cyprus land holdings in the Santa Cruz
River watershed. III.   The Company entered into a Consent Decree in December 2000 with the
Connecticut Department of Environmental Protection (CDEP) regarding purported
violations of state air emissions limitations associated with the Phelps Dodge
Norwich rod mill in Norwich, Connecticut. Under the terms of the Consent
Decree, the Company agreed to pay a penalty of $0.5 million, fund a
supplemental environmental project to be administered by CDEP, test the rod
mills newly installed state-of-the-art air pollution control equipment, and
perform a study on environmental impacts near the rod mill and whether they may
require remediation. CDEP has accepted the completion of the first three
requirements identified above. The Company submitted the required environmental
study to CDEP on July 2, 2002. IV.    On
October 1, 1997, the U.S. Environmental Protection Agency (EPA) issued a
Notice of Violation (NOV) to Cyprus Amaxs (now the Companys) Sierrita
operations in southeastern Arizona. The NOV alleged certain emission standards
and permitting violations associated with the molybdenum roasting facility at
Sierrita. On September 6, 2000, EPA also issued an NOV to Phelps Dodge Sierrita
for alleged violations of Prevention of Significant Deterioration permitting
requirements, and New Source Performance Standards under the federal Clean Air
Act. No action has been filed at this time, and the Company has asserted
defenses to the NOVs in its response to EPA. EPA and the Company have entered
into a series of agreements tolling the running of the statute of limitations
on certain of the alleged violations while the parties attempt to negotiate a
settlement of the issues raised in the NOVs. V.      
The Pinal Creek site was listed under the Arizona Department of
Environmental Qualitys Water Quality Assurance Revolving Fund program in 1989
for contamination in the shallow alluvial aquifers within the Pinal Creek
drainage near Miami, Arizona. Since that time, environmental remediation has
been performed by members of the Pinal Creek Group (PCG), comprising Phelps
Dodge Miami, Inc. (a wholly owned subsidiary of the Company) and two other
companies. In 1998, the District Court approved a Consent Decree between the
PCG members and the state of Arizona resolving all matters related to an
enforcement action contemplated by the state of Arizona against the PCG members
with respect to the groundwater matter. The Consent Decree committed Phelps
Dodge Miami, Inc. and the other PCG members to complete the remediation work
outlined in the Consent Decree. That work continues at this time pursuant to
the Consent Decree and consistent with the National Contingency Plan prepared
by EPA under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA). Phelps Dodge Miami, Inc. and the other members of the PCG are pursuing
contribution litigation against three other parties involved with the site. At
least two of the three defendants now have admitted direct liability as
responsible parties. The first phase of the case has been assigned a trial date
in August 2004. Phelps Dodge Miami, Inc. also asserted claims against certain
past insurance carriers. As of November 2002, all of the carriers have settled
or had their liability adjudicated. One carrier has appealed the judgment
against it. In addition, a dispute between one dissenting PCG member and Phelps Dodge
Miami, Inc. and the other PCG member was filed in Superior Court in 2002. The
litigation seeks a declaratory judgment on the dissenting members contract
liability under the PCG agreement. Trial for this matter is scheduled for
mid-2004. Approximately $113 million remained in the Companys Pinal Creek
remediation reserve at December 31, 2003. While significant recoveries may be
achieved in the contribution litigation, the Company cannot reasonably estimate
the amount and, therefore, has not taken potential recoveries into
consideration in the recorded reserve. VI.    
The Companys wholly owned subsidiary, Cyprus Amax Minerals Company
(Cyprus), is the plaintiff in an action entitled Cyprus Amax Minerals Company
v. Asarco Incorporated, 99 Civ. 11198 (LMM), which was filed on November 9,
1999, in the U.S. District Court for the Southern District of New York. The
action arises out of the merger agreement between Cyprus and Asarco dated as of
July 15, 1999 (the merger agreement). The complaint alleges, among other
things, that Asarco breached the merger agreement and a subsequent agreement by
soliciting an alternative takeover proposal for Asarco from another company.
Cyprus seeks, among other things, compensatory damages of not less than $90
million. Asarco filed an answer to the complaint on November 30, 1999. On April
10, 2001, Asarco filed an amended answer and counterclaims against Cyprus and
the Company for recovery of a $30 million termination fee paid to the Company
in October 1999 and for other unspecified damages related to the bidding
process for Asarco. Discovery in this action concluded in July 2003. On September 12, 2003, in
accordance with an Order of the Court, Cyprus served Asarco with a First
Amended Complaint that, among other things, incorporates additional factual
allegations based on information learned during discovery and asserts new
causes of action against Asarco. On September 26, 2003, Asarco served Cyprus
with an answer to the First Amended Complaint that, among other things, omits
all of the counterclaims previously asserted by Asarco against Cyprus and the
Company. On October 10, 2003, the parties entered into a Stipulation in which
Asarco formally dismissed with prejudice all counterclaims previously asserted
against Cyprus and the Company, and on October 17, 2003, that Stipulation was
so ordered by the Court. Asarco moved for summary judgment with respect to the
First Amended Complaint on November 10, 2003, and that motion is currently
pending. The Court has not yet set a date for the trial of this action. VII.  On May 30, 2001, the U.S. Department of Justice (DOJ) notified the Company
of alleged violations of the Clean Water Act at the United Verde Mine. A
Consent Decree was entered in the U.S. District Court for the District of
Arizona on November 20, 2003, resolving these allegations. The Consent Decree
specifies the terms for settlement of the Clean Water Act claims, under which
the Company will undertake certain improvement and reclamation projects. The
Company also paid a civil penalty of $220,142. VIII. On October 18, 2002, the Mining and Minerals Division (MMD) of the New
Mexico Energy, Minerals and Natural Resources Department issued NOVs under the
New Mexico Mining Act Rules (NMMAR) to Chino Mines Company (Chino), Phelps
Dodge Tyrone, Inc. (Tyrone) and Cobre Mining Company (Cobre). The NOVs allege
that Chino, Tyrone and Cobre failed to obtain approval of closeout plans as
required by NMMAR by October 1, 2002. A closeout plan




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35 under NMMAR consists of a plan for reclamation of a mining operation following
cessation of operations and financial assurance sufficient for MMD to complete
the closeout plan if the operator defaults. The NOVs would have established
schedules requiring that the alleged violations be abated by April 20, 2003,
for Chino, June 30, 2003, for Cobre and September 30, 2003, for Tyrone. The
NOVs did not assess civil penalties, but reserved the right to assess penalties
in the future in accordance with the penalty assessment procedures in NMMAR.
The NOVs further stated that if the alleged violations were not abated by the
dates set in the NOVs, MMD would issue cessation orders in accordance with
NMMAR requiring that mining operations cease until the alleged violation is
abated. On November 1, 2002, Chino, Tyrone and Cobre each filed Petitions for
Review (Petitions) of the NOVs with the New Mexico Mining Commission (Commission). The
Petitions contended that closeout plan approval was not possible by October 1,
2002, because of delays by the New Mexico Environment Department (NMED) in
issuing discharge permits for closure and issuing determinations that the
closeout plans for Chino, Tyrone and Cobre are expected to achieve compliance
with environmental standards, including compliance with water quality
standards. The Petitions requested that the NOVs be vacated or, in the
alternative, that different dates be set for abatement of the alleged
violations which allow a reasonable period of time after NMED issues its
discharge permits to obtain approval of the closeout plans. The Commission held
a public hearing on December 13-14, 2002, on the Petitions. The
Commission upheld the NOVs but modified the period for
abatement for each mine to run from the dates when NMED issues the discharge
permits for closure for the mines. Under the modified NOVs, Chino, Cobre and
Tyrone will have seven, nine and 12 months, respectively, after NMED issues
their closure permits to obtain approval of their closeout plans. NMED issued Chinos closure permit on February 24, 2003. Since the closure
permit was issued, Chino has engaged in discussions to resolve the amount and
form of financial assurance required by NMED and MMD and the details of the
closeout plan approval by MMD. To allow additional time to finalize applicable
documentation and to hold a public hearing as required under the Mining Act,
MMD issued orders extending the deadline for Chinos closeout plan approval to
December 19, 2003. MMD approved Chinos closeout plan on December 18, 2003.
Chinos closure permit has been appealed by third parties to the Water Quality
Control Commission (WQCC). Chino filed a motion to dismiss the appeal due to
the failure to follow required procedures, which was granted by the WQCC. The
WQCCs decision has been appealed to the New Mexico Court of Appeals. NMED issued Tyrones closure permit on April 8, 2003, and Tyrones
deadline for closeout plan approval is April 8, 2004. As a result of agreements
on financial assurance announced in May and October 2003, a framework for
financial assurance for Tyrone has been established. This arrangement is
subject to public comment. Tyrone and one other party have appealed certain
portions of the closure permit and a hearing before the WQCC on those appeals
was completed on November 13, 2003. A decision by the WQCC is not expected
until mid-April 2004. Tyrone is working with MMD to meet the deadline for its
closeout plan approval. Cobre has not yet received its NMED closure permit. Its deadline for
closeout plan approval will be nine months from the date the NMED permit is
issued. IX.    
Since approximately 1990, Phelps Dodge or its subsidiaries have been named
as a defendant in a number of product liability or premises lawsuits brought by
electricians and other skilled tradesmen or contractors claiming injury from
exposure to asbestos found in limited lines of electrical wire products
produced or marketed many years ago, or from asbestos at certain Phelps Dodge
properties. Phelps Dodge presently believes its liability, if any, in these
matters will not have a material adverse effect, either individually or in the
aggregate, upon its business, financial condition, liquidity, results of
operations or cash flow. There can be no assurance, however, that future
developments will not alter this conclusion. X.      
On September 30, 2002, Columbian Chemicals Company, a subsidiary of the
Company, received an administrative complaint from EPA for alleged violations
of the Clean Air Act at its El Dorado, Arkansas, carbon black plant. Columbian
Chemicals Company and EPA are conducting settlement discussions in an effort to
resolve the matter informally. XI.     
On November 7, 2002, the United Kingdom Environment Agency (Agency) issued
an enforcement notice to Columbian Chemicals Companys Sevalco plant in the
United Kingdom. This notice followed Sevalcos disclosure to the Agency in
October 2002 that Sevalco had discovered irregularities in its effluent
discharge reports, and requires the plant to implement procedures to ensure
that discharges satisfy permit limits and are properly reported. Columbian
Chemicals Company is cooperating with the Agency while the Agency continues its
investigation of this matter. XII.    
In November 2002, Columbian Chemicals Company was contacted by U.S. and
European antitrust authorities regarding a joint investigation they initiated
into alleged price fixing in the carbon black industry. European antitrust
authorities reviewed documents at three of Columbian Chemicals facilities in
Europe, and U.S. authorities contacted Columbian Chemicals headquarters in
Marietta, Georgia. XIII.  
The Company and Columbian Chemicals Company, together with several other
companies, were named as defendants in an action entitled Technical Industries,
Inc. v. Cabot Corporation, et al., filed on January 30, 2003, in the U.S.
District Court in Boston, Massachusetts, and 14 other actions filed in four
U.S. district courts, on behalf of a purported class of all individuals or
entities who purchased carbon black directly from the defendants since January
1999. The Judicial Panel on Multidistrict Litigation, consolidated all of these
actions in the U.S. District Court for the District of Massachusetts under the
caption In re Carbon Black Antitrust Litigation. The consolidated complaint
filed in these actions by the plaintiffs has dropped the Company as a
defendant. The consolidated complaint, which alleges that the defendants fixed
the prices of carbon black and engaged in other unlawful activities in
violation of the U.S. antitrust laws, seeks treble damages in an unspecified
amount and attorneys fees. The Company and Columbian Chemicals Company,
together with several other companies, have also been named as defendants in an
action entitled Level Construction, Inc. v. Cabot Corporation, et
al., filed in
Superior Court of the state of California for the County of San Francisco and
eight other actions filed in California Superior Courts on behalf of a
purported class of indirect purchasers of carbon black in the state of
California from as early as November 1998 to the present. The complaints allege
similar claims by indirect purchasers under California state law and seek
treble damages in an




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36 unspecified amount and attorneys fees. These complaints have been consolidated
in the Superior Court of the State of California for the County of San
Francisco under the caption Carbon Black Cases. The consolidated complaint
filed in three actions by the plaintiffs has dropped the Company as a
defendant. Similar class actions have been filed in state courts in North
Carolina, Florida, Kansas, New Jersey, South Dakota and Tennessee on behalf of
indirect purchases of carbon black in those and six other states alleging
violations of state antitrust and deceptive trade practices laws. Columbian has
also received a demand for relief on behalf of indirect purchasers in
Massachusetts, but no lawsuit has been filed. The Company believes the claims
are without merit and intends to defend the lawsuits vigorously. XIV.  In November 2002, EPA issued a unilateral administrative order (UAO) under
CERCLA to the Companys wholly owned subsidiary, Western Nuclear, Inc., and two
other companies, Kerr McGee Corporation and Fremont Lumber Company
(collectively, the PRPs) requiring the companies to perform certain remedial
design (RD) and remedial action (RA) work at the White King/Lucky Lass Uranium
Mines site near Lakeview, Oregon. The PRPs do not believe the UAO was lawfully
issued because EPA failed to recognize the joint responsibility of the U.S.
government under applicable laws and to perform non-discretionary duties to
ensure federal government responsibility for remediating the site prior to
issuance of the UAO. The PRPs notified the EPA of their intent to sue and
obtain, among other things, a judicial determination of the illegality of the
UAO. The PRPs voluntarily commenced and undertook the RD work (but not RA work)
required by the UAO, and advised the EPA of their position and progress. From
January 2003 through July 2003, the PRPs and EPA exchanged letters expressing
their respective positions concerning the validity of the UAO. On July 31,
2003, the EPA rejected the PRPs position, notifying them that penalties are
accruing for the alleged violations of the UAO and that the purported penalties
through the end of July 2003 total approximately $5.2 million. On September 19, 2003, the PRPs served a complaint on the Acting
Administrator of the EPA, which seeks to have the federal district court of
Oregon declare the UAO unlawful for failure to comply with the requirement
under CERCLA to ensure federal government participation in remedying the site.
Fremont Lumber Company, et al. v. Horinko,No. 03-CV-1073-AS (D. Ore). On
December 15, 2003, EPA answered the complaint and denied the PRPs allegations
of non-compliance with CERCLA. On January 12, 2004, EPA filed a complaint
against the PRPs seeking to enforce the PRPs compliance with the UAO and to
recover administrative penalties and response costs incurred at the site. The
PRPs and EPA have commenced discussions in an effort to settle all outstanding
issues.  
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the fourth quarter of 2003 to a
vote of security holders, through 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, 2004, the executive
officers of Phelps Dodge Corporation were as follows:  Name
    
    Age at
3/1/04
    
    Position
    
    Officer of the
Corporation
SinceJ. Steven Whisler
    
    
    49
    
    
    Chairman of the Board
and Chief Executive Officer
    
    
    1987Timothy R. Snider
    
    
    53
    
    
    President and Chief Operating
Officer; President, Phelps Dodge
Mining Company
    
    
    1997Ramiro G. Peru
    
    
    48
    
    
    Senior Vice President and Chief Financial Officer
    
    
    1995Arthur R. Miele
    
    
    62
    
    
    Senior Vice President, Marketing;
President, Phelps Dodge
Sales Company
    
    
    1987Kalidas V. Madhavpeddi
    
    
    48
    
    
    Senior Vice President,
Business Development;
President, Phelps Dodge
Wire and Cable Group
    
    
    1999S. David Colton
    
    
    48
    
    
    Senior Vice President,
General Counsel
    
    
    1998David L. Pulatie
    
    
    62
    
    
    Senior Vice President,
Human Resources
    
    
    1999James P. Berresse
    
    
    43
    
    
    President and Chief Executive
Officer, Columbian Chemicals
Company
  Except as stated below, all of the above have been officers of Phelps
Dodge Corporation for the past five years. Mr. Snider was elected President and Chief Operating Officer in November
2003. Prior to that time, Mr. Snider was Senior Vice President of the
Corporation, a position he held since 1998. Mr. Colton was elected Senior Vice President in November 1999. He was
elected Vice President and General Counsel in April 1998. Prior to that time,
Mr. Colton was Vice President and Counsel for Phelps Dodge Exploration, a
position he held since 1995. Mr. Madhavpeddi was elected Senior Vice President, Business Development in
November 2000. He was elected Vice President, Business Development in November
1999 and President, Phelps Dodge Wire and Cable Group in May 2002. Prior to
that time, Mr. Madhavpeddi was Vice President, Business Development of Phelps
Dodge Mining Company, a position he held since 1995. Mr. Pulatie was elected Senior Vice President, Human Resources in March
1999. Mr. Pulatie joined Phelps Dodge in March 1999 after a 34-year career with
Motorola Inc. Mr. Berresse was appointed to the Corporations Senior Management Team in
November 2003. He was elected President and Chief Executive Officer of
Columbian Chemicals Company in April 2002. He was elected Executive Vice
President, Columbian Chemicals Company, in October 2001. Prior to that time,
Mr. Berresse was Senior Vice President, Finance and Business Development, and
Chief Financial Officer, Columbian Chemicals Company, positions he held since
August 1998.




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37 
 PART II   
 Item 5. Market for the Registrants Common Equity and Related Stockholder Matters The information called for in Item 5 appears on pages 84 through
85 and page 114 of this report.  
 Item 6. Selected Financial Data The following financial and operating data should be read in
conjunction with the information set forth in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operation and the Consolidated Financial Statements and
related notes thereto appearing in this Annual Report.   Year Ended December 31,2003 (a)
    
    2002 (b)
    
    2001 (c)
    
    2000 (d)
    
    1999 (e)Statement of Operations DataSales and other operating revenues
    
    $
    4,142.7
    
    
    
    3,722.0
    
    
    
    4,002.4
    
    
    
    4,525.1
    
    
    
    3,114.4Operating income (loss)
    
    
    197.6
    
    
    
    (209.3
    )
    
    
    (28.8
    )
    
    
    268.2
    
    
    
    (361.6
    )Income (loss) before extraordinary item and cumulative effect of accounting changes
    
    
    18.1
    
    
    
    (315.2
    )
    
    
    (329.5
    )
    
    
    56.3
    
    
    
    (278.3
    )Net income (loss)
    
    
    94.8
    
    
    
    (338.1
    )
    
    
    (331.5
    )
    
    
    56.3
    
    
    
    (281.8
    )Basic earnings (loss) per common share before extraordinary item
and cumulative effect of accounting changes
    
    
    0.06
    
    
    
    (3.86
    )
    
    
    (4.19
    )
    
    
    0.72
    
    
    
    (4.51
    )Diluted earnings (loss) per common share before extraordinary item
and cumulative effect of accounting changes
    
    
    0.06
    
    
    
    (3.86
    )
    
    
    (4.19
    )
    
    
    0.72
    
    
    
    (4.51
    )Basic earnings (loss) per common share
    
    
    0.92
    
    
    
    (4.13
    )
    
    
    (4.22
    )
    
    
    0.72
    
    
    
    (4.57
    )Diluted earnings (loss) per common share
    
    
    0.91
    
    
    
    (4.13
    )
    
    
    (4.22
    )
    
    
    0.72
    
    
    
    (4.57
    )Balance Sheet Data(at period end)Current assets
    
    $
    1,790.0
    
    
    
    1,428.2
    
    
    
    1,531.2
    
    
    
    1,542.7
    
    
    
    1,735.7Total assets
    
    
    7,272.9
    
    
    
    7,029.0
    
    
    
    7,584.3
    
    
    
    7,841.2
    
    
    
    8,212.1Total debt
    
    
    1,959.0
    
    
    
    2,110.6
    
    
    
    2,871.6
    
    
    
    2,687.7
    
    
    
    2,755.0Long-term debt
    
    
    1,703.9
    
    
    
    1,948.4
    
    
    
    2,538.3
    
    
    
    1,963.0
    
    
    
    2,172.5Shareholders equity
    
    
    3,063.8
    
    
    
    2,813.6
    
    
    
    2,730.1
    
    
    
    3,184.4
    
    
    
    3,328.9Cash dividends declared per common share
    
    
    
    
    
    
    
    
    
    
    0.75
    
    
    
    2.00
    
    
    
    2.00Other DataNet cash provided by operating activities
    
    $
    470.5
    
    
    
    348.0
    
    
    
    302.7
    
    
    
    511.2
    
    
    
    204.5Capital expenditures and investments
    
    
    102.4
    
    
    
    133.2
    
    
    
    311.0
    
    
    
    422.3
    
    
    
    240.4Net cash provided by (used in) investing activities
    
    
    (87.7
    )
    
    
    (140.3
    )
    
    
    (266.8
    )
    
    
    (274.2
    )
    
    
    6.0Net cash provided by (used in) financing activities
    
    
    (48.8
    )
    
    
    (244.8
    )
    
    
    101.0
    
    
    
    (221.2
    )
    
    
    (198.0
    )Division ResultsPhelps Dodge Mining Company operating income (loss)
    
    $
    265.2
    
    
    
    (65.0
    )
    
    
    (83.6
    )
    
    
    276.0
    
    
    
    (346.6
    )Phelps Dodge Industries operating income
    
    
    68.5
    
    
    
    30.6
    
    
    
    74.0
    
    
    
    70.3
    
    
    
    49.7Corporate and Other operating loss
    
    
    (136.1
    )
    
    
    (174.9
    )
    
    
    (19.2
    )
    
    
    (78.1
    )
    
    
    (64.7
    )$
    197.6
    
    
    
    (209.3
    )
    
    
    (28.8
    )
    
    
    268.2
    
    
    
    (361.6
    )CopperCopper production (own production  thousand tons)
    
    
    1,059.3
    
    
    
    1,028.8
    
    
    
    1,160.1
    
    
    
    1,200.3
    
    
    
    890.1Copper sales (own production  thousand tons)
    
    
    1,069.3
    
    
    
    1,051.1
    
    
    
    1,170.8
    
    
    
    1,200.6
    
    
    
    891.9COMEX copper price (per pound) (f)
    
    $
    0.81
    
    
    
    0.72
    
    
    
    0.73
    
    
    
    0.84
    
    
    
    0.72LME copper price (per pound) (g)
    
    $
    0.81
    
    
    
    0.71
    
    
    
    0.72
    
    
    
    0.82
    
    
    
    0.71Implied full unit cost of copper production (per pound) (h)
    
    $
    0.68
    
    
    
    0.68
    
    
    
    0.75
    
    
    
    0.71
    
    
    
    0.69Commercially recoverable copper (million tons)Ore reserves
    
    
    19.5
    
    
    
    19.6
    
    
    
    22.1
    
    
    
    23.1
    
    
    
    23.7Stockpiles and in-process inventories
    
    
    1.6
    
    
    
    1.4
    
    
    
    0.9
    
    
    
    1.0
    
    
    
    0.721.1
    
    
    
    21.0
    
    
    
    23.0
    
    
    
    24.1
    
    
    
    24.4




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##### Table of Contents



38  All references to per share earnings or loss are based on diluted earnings
(loss) per share.(a)
    
    Reported amounts include after-tax, special gains of $68.3 million, or 76
cents per common share, recognized for our acquisition of Heiseis
one-third interest in Chino Mines Company; $8.4 million, or 9 cents per
common share, for cumulative effect of an accounting change due to the
adoption of SFAS No. 143; $6.4 million, or 7 cents per common share, for
the sale of a wire and cable cost investment; $2.4 million, or 3 cents per
common share, for the termination of a foreign postretirement benefit
plan; $1.0 million, or 1 cent per common share, for the tax benefit
relating to the net operating loss carryback prior to 2002; and $0.5
million, or 1 cent per common share, for environmental insurance
recoveries. These were partially offset by special provisions of $27.0
million, or 30 cents per common share, for environmental provisions; $8.0
million, or 9 cents per common share, for a probable Texas franchise tax
matter; $2.9 million, or 3 cents per common share, for historic Cyprus
Amax Minerals Company legal matters; $1.7 million, or 2 cents per common
share, for asset impairment charges at our Wire and Cable segment; and
$0.9 million, or 1 cent per common share, for goodwill impairment at our
Wire and Cable segment.(b)
    
    Reported amounts included after-tax, special charges of $146.5 million,
or $1.74 per common share, for asset impairment charges at Cobre of $115.5
million, Hidalgo of $12.9 million and Ajo of $18.1 million; $53.0 million, or
63 cents per common share, for settlement of lawsuits related to Cyprus Amax
Minerals Company; $45.0 million, or 54 cents per common share, for a binding
arbitration award for Plateau Mining Corporation (a subsidiary of Cyprus Amax
Minerals Company); $26.6 million, or 32 cents per common share, for early debt
extinguishment costs; $23.0 million, or 27 cents per common share, for
restructuring activities; $22.9 million, or 27 cents per common share, for
cumulative effect of an accounting change due to the adoption of SFAS No. 142;
$14.0 million, or 17 cents per common share, for environmental provisions;
$7.0 million, or 8 cents per common share, for estimated remaining closure
cost obligation at Hidalgo; and $1.2 million, or 1 cent per common share, for
the write-off of two cost basis investments and $1.0 million, or 1 cent per
common share, for the settlement of legal matters. These were partially offset
by $29.1 million, or 35 cents per common share, for environmental insurance
recoveries; $22.6 million, or 27 cents per common share, for the sale of
non-core parcel of real estate in New Mexico; $13.0 million, or 15 cents per
common share, for the release of deferred taxes for Plateau Mining
Corporation; and $66.6 million, or 79 cents per common share, for the tax
benefit relating to the net operating loss carryback prior to 2002.(c)
    
    Reported amounts included after-tax, special gains of $61.8 million, or
79 cents per common share, for environmental insurance recoveries; $39.9
million, or 51 cents per common share, for the gain on the sale of
Sossego; and $9.0 million, or 11 cents per common share, for an insurance
settlement associated with legal matters. These were partially offset by
special provisions of $57.9 million, or 74 cents per share, to increase
the deferred tax valuation allowance; $31.1 million, or 40 cents per
common share, reflecting provisions for environmental costs; $29.8
million, or 38 cents per common share, for restructuring activities; $12.9
million, or 16 cents per common share, for investment impairments; $2.0
million, or 3 cents per common share, for the cumulative effect of an
accounting change due to the adoption of SFAS Nos. 133 and 138; and $3.4
million, or 4 cents per common share, for other items, net.(d)
    
    Reported amounts included after-tax, special provisions of $56.4 million,
or 72 cents per common share, for restructuring activities; offset by
an income tax refund and related interest of $10.1 million, or 13 cents per
common share; and an insurance settlement refund of $3.0 million, or 4
cents per common share.(e)
    
    Reported amounts included after-tax, special provisions of $222.5
million, or $3.61 per common share, for asset impairments; $17.8 million,
or 29 cents per common share, reflecting provisions for environmental
costs; $65.7 million, or $1.07 per common share, for costs associated with
restructuring activities; and $3.5 million, or 6 cents per common share,
for the cumulative effect of an accounting change. These were partially
offset by a special gain of $30.0 million, or 49 cents per common share,
for an adjustment of prior years taxes. PD acquired Cyprus Amax Minerals
Company on October 16, 1999.(f)
    
    New York Commodity
Exchange annual average spot price per pound 
cathodes.(g)
    
    London Metal Exchange annual average spot price per pound  cathodes.(h)
    
    Based on PDMCs all-in operating margin per pound of copper sold (i.e.,
PDMC operating income (loss) excluding special items, divided by pounds of
copper sold from PDMC mines for its own account, plus or minus the LME
copper price). 
 Item 7.
Managements Discussion and Analysis of Financial Condition and
Results of Operation   
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk   
 Item 8. Financial Statements and Supplementary Data   
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   
 Item 9A. Controls and Procedures  An evaluation of the effectiveness of this system of disclosure controls
and procedures was performed under the supervision and with the participation
of the Companys management, including the Companys chief executive officer
and chief financial officer, as of the end of the period covered by this
report. Based upon this evaluation, the Companys management, including the
Companys chief executive officer and chief financial officer, concluded that
the current system of controls and procedures is effective. The Company maintains a system of internal control over financial
reporting. There has been no change in the Companys internal control over
financial reporting that occurred during the Companys fourth fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.




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##### Table of Contents



39 
 MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION   The following provides information that management believes is relevant to
an assessment and understanding of the consolidated results of operations and
financial condition of Phelps Dodge Corporation (the Company, which also may be
referred to as Phelps Dodge, PD, we, us or our). It should be read in
conjunction with the Consolidated Financial Statements and accompanying Notes.
Our business consists of two major divisions, Phelps Dodge Mining Company
(PDMC) and Phelps Dodge Industries (PDI). The United States securities laws provide a safe harbor for certain
forward-looking statements. This annual report contains forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those projected in such forward-looking statements.
Statements regarding the expected commencement dates of operations, projected
quantities of commercially recoverable copper and molybdenum from ore reserves
and stockpiles, projected quantities of future production, capital costs,
production rates, cash flow and other operating and financial data are based on
expectations that the Company believes are reasonable, but we can give no
assurance that such expectations will prove to have been correct. Factors that could cause actual results to differ materially include,
among others: risks and uncertainties relating to general U.S. and
international economic and political conditions; the cyclical and volatile
price of copper and other commodities; political and economic risks associated
with foreign operations; unanticipated ground and water conditions; geological
problems; metallurgical and other processing problems; availability of
materials and equipment; delays in the receipt of or failure to receive
necessary government permits; appeals of agency decisions or other litigation;
volatility in the price or availability of oil (the main feedstock for our
carbon black operations), diesel fuel, electricity and natural gas; currency
fluctuations; changes in laws or regulations or the interpretation and
enforcement thereof (including changes in treaties or laws governing
international trade or tariffs); the occurrence of unusual weather or operating
conditions; force majeure events; lower than expected ore grades; the failure
of equipment or processes to operate in accordance with specifications or
expectations; unanticipated difficulties consolidating acquired operations and
obtaining expected synergies; labor relations; accidents; delays in anticipated
start-up dates; environmental risks; the ability to obtain anticipated cost
savings and efficiencies; the ability to obtain satisfactory insurance
coverages; the ability to obtain surety bonds or other financial assurance for
reclamation obligations; and the results of financing efforts and financial
market conditions. These and other risk factors are discussed in more detail herein. Many
such factors are beyond our ability to control or predict. Readers are
cautioned not to put undue reliance on forward-looking statements. We disclaim
any intent or obligation to update these forward-looking statements, whether as
a result of new information, future events or otherwise. 
 Overview of Phelps Dodge Corporations Businesses and Managements Assessment of Key Factors and Indicators that Could Impact Our Business, Operating Results and Cash Flows Phelps Dodge is the worlds second-largest producer of copper, a world
leader in the production of molybdenum, the largest producer of
molybdenum-based chemicals and continuous-cast copper rod, and among the
leading producers of magnet wire and carbon black. PDMC is our international
business division comprising our vertically integrated copper operations from
mining through rod production, primary molybdenum operations through
conversion, marketing and sales, and worldwide exploration. Our copper mines
comprise Morenci, Bagdad, Sierrita, Miami, Chino, Cobre and Tyrone in the
United States and Candelaria, Cerro Verde, El Abra and Ojos del Salado in South
America. The Primary Molybdenum segment includes our Henderson and Climax
molybdenum mines. PDI is our manufacturing division comprising two business segments that
produce engineered products principally for the global energy,
telecommunications, transportation and specialty chemicals sectors. PDI
broadens our company and provides alternative streams of earnings and cash
flows. Its operations are characterized by products with significant market
share, internationally competitive costs and quality, and specialized
engineering capabilities. Columbian Chemicals Company, our Specialty Chemicals
segment, is one of the worlds largest producers of engineered carbon blacks,
with facilities in North America, Europe, South America and Asia. Phelps Dodge
Wire and Cable, our Wire and Cable segment, consists of three worldwide
product-line businesses comprising magnet wire, energy and telecommunications
cables, and specialty conductors. From an overall Phelps Dodge perspective, some of the most significant
risks associated with our businesses, or factors that could impact our
businesses, operating results and cash flows, are the volatility of copper and
molybdenum prices, increased energy costs, unit cost structure, environmental
and regulatory compliance, and mine closure regulations. Additionally, our
ability to replenish our copper and molybdenum ore reserves, which are depleted
as we mine, is important to our long-term viability. Markets. Copper is a fundamental material used in residential and commercial
construction, electrical and electronics equipment, transportation, industrial
machinery and consumer durable goods. Copper is an internationally traded
commodity and it is traded on the London Metal Exchange (LME), the New York
Commodity Exchange (COMEX) and the Shanghai Futures Exchange (SHFE). The prices
on these exchanges generally reflect the worldwide balance of copper demand and
supply and various U.S. and international macroeconomic and political
conditions. The copper market is volatile and cyclical. During the past 15
years, prices per pound have ranged from a high of $1.60 to a low of 60 cents.
Any material change in the price we receive for copper has a significant effect
on our results. Based upon our share of the expected 2004 annual production of
approximately 2.35 billion pounds of copper, each 1 cent per pound change in
our average annual realized copper price (or our average annual unit cost of
production) causes a variation in annual operating income before taxes of
approximately $23 million. Consequently, a sustained and uninterrupted period
of unusually low copper prices has a dramatic impact on our profits and cash
flow.




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##### Table of Contents



40 During most of the 1990s, copper enjoyed annual demand growth of 3 percent
and a corresponding expansion in production. This was followed by a period of
global contraction that began in the early part of 2000 and continued until
mid-2003. The contraction was partially offset by double-digit growth rates in
Chinese industrial production and copper consumption. In 2003, positive economic indicators in the United States had a major
impact on the prospects for a global recovery. Growth in China allowed some
East Asian nations to enjoy export-led economic recoveries. China overtook the
United States as the No. 1 consumer of refined copper in the world. World
exchange inventories fell from their mid-2002 peak of more than 1.5 million
metric tons to almost half, or approximately 800 thousand metric tons.
Increasing demand and disruptions at major copper-producing mines produced a
tight market. This market, combined with record speculative positions, a
weakening U.S. dollar and low U.S. interest rates, resulted in copper prices
averaging 81 cents per pound in 2003, almost 10 cents above the average for
2002. Prices climbed to more than $1.04 per pound at the end of the year. Phelps Dodge expects expanding growth in copper demand, led by the United
States and China, and limited growth in supply because of publicly reported
shortfalls, will be supportive of copper prices in 2004. Molybdenum also is characterized by volatile, cyclical prices. Prices are
influenced by worldwide economic conditions, world supply/demand balances,
inventory levels, currency exchange rates, production costs of U.S. and foreign
competitors, and other factors. Molybdenum demand depends heavily on the global
steel industry, which uses the metal as a hardening agent. More than 80 percent
of molybdenum is used in this application. The remainder is used in specialty
chemical applications such as catalysts, water treatment agents and
lubrication. A substantial portion of world molybdenum production is a
by-product of copper mining, which is relatively insensitive to molybdenum
prices. During the past 15 years, Metals WeekDealer Oxide prices per pound
have ranged from a high of $17.50 to a low of $1.82. Molybdenum experienced a price improvement during 2003 for the second
straight year. The average Metals WeekDealer Oxide price increased 41 percent
from 2002s mean price of $3.77 per pound to $5.32 in 2003. Production levels
increased in 2003 as a result of improving metal prices. Most of this
production increase came from by-product mines. Demand increased in 2003 and
outpaced production increases, resulting in a deficit market balance estimated
between 5,000 metric tons and 8,000 metric tons for the year. For 2004, Phelps Dodge expects both supply and demand to increase. We
anticipate that supply increases will come from by-product production. Demand
increases are expected in the stainless steel, specialty steel and specialty
chemical sectors. The overall supply-demand outlook for 2004 is for a balanced
market. Wire and cable products serve a variety of different markets, including
energy, construction, consumer and industrial products, aerospace, medical
devices, transportation, natural resources and telecommunications. Products
include magnet wire, energy and telecommunications cables, and specialty
conductors. These products advance technology and support infrastructure
development in growing regions of the world. During 2003, wire and cable sales suffered for much of the year because of
lowered demand attributable to global economic uncertainty. Excess industry
capacity kept prices at disappointing levels. Toward the end of the year, however, demand began to increase in South
America, Central America and Africa as these regions resumed investments in
infrastructure. Revenue increased in North America because of higher copper
prices and higher aluminum sales. Markets for these products appear to be
improving in early 2004. However, overall demand in our served markets has not
yet resulted in a significant improvement in our sales volumes or operating
margins. Wire and cable products are expected to enjoy increased sales and
profitability as the U.S. and world economies recover. Phelps Dodge continues
to focus on improving the profitability of this business. Carbon black is a key raw material used in the manufacture of tires,
rubber and plastics products, inks, paints and coatings, and a variety of other
applications. Carbon black demand is primarily driven by the needs of the tire
industry, which consumes nearly 70 percent of world production. In 2003, world
demand for carbon black exceeded 7.3 million metric tons. During the past decade, global demand for carbon black has grown at
slightly more than 3 percent per year, and this growth rate is projected to
continue. Increased worldwide vehicle demand and growth in demand for larger
tire sizes and high performance tires have been contributing factors to this
sustained growth rate for carbon black. Market dynamics continued to have an adverse effect on the performance of
Phelps Dodges carbon black subsidiary, Columbian Chemicals Company, in 2003.
Sluggish economic conditions, excess carbon black capacity, and high energy and
raw material prices affected prices and margins. The improving U.S. economy and
the reduction of some of the excess carbon black manufacturing capacity in
Europe and North America will be positive factors in the outlook for 2004.
However, significant competitive pressures are expected to continue to affect
margin improvement. Energy Costs. Energy, including electricity, diesel fuel and natural gas,
represents a significant portion of the production costs for our operations.
The principal sources of energy for our mining operations are purchased
petroleum products, natural gas and electricity. The principal sources of
energy in our wire and cable and specialty chemicals operations are purchased
electricity and natural gas. In addition, the price of residual oil feedstock
is a significant factor in the cost of our specialty chemicals products because
the carbon black we produce is made primarily from heavy residual oil. In
response to volatile energy markets in 2000 and 2001, we implemented a power
cost stabilization plan that has reduced the electricity-related costs at our
U.S. mining operations. Additionally, we entered into price protection programs
for our diesel fuel and natural gas purchases to protect us against significant
upward movements in energy prices while maintaining the flexibility to
participate in any favorable price movements. However, because energy is a
significant portion of our pro-




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##### Table of Contents



41 duction costs, we could be negatively impacted by
future energy availability issues or increases in energy prices. Unit Cost Structure. Our unit cost structure for copper production is higher
than those of some major producers, whose principal mines are located outside
the United States, due to lower ore grades, higher labor costs and, in some
cases, stricter regulatory requirements. Our competitive cost position receives
much attention from senior management and in 2001 we implemented a
company-wide, comprehensive lean-production program, called Quest for Zero,
that we believe has narrowed these cost disadvantages with respect to a number
of our international competitors. We achieved $330 million of operating
improvements during 2003, with an annualized run-rate of approximately $365
million. We recently experienced a leveling off of the rate of improvement due
to increased challenges that come with multi-year improvement projects as we
have begun to tackle more difficult initiatives, incur unforeseen costs, and
make decisions to emphasize growth-oriented projects. Should we be unable to
maintain this level of annualized improvements, our earnings may be affected. Environmental and Mine Closure Regulatory Compliance. Our operations in the
United States are subject to stringent federal, state and local laws and
regulations relating to improving or maintaining environmental quality. Our
global operations also are subject to many environmental protection laws.
Environmental laws often require parties to pay for remedial action or to pay
damages regardless of fault. Environmental laws also often impose liability
with respect to divested or terminated operations, even if the operations were
terminated or divested many years ago. The federal Clean Air Act has had a
significant impact, particularly on our smelters and power plants. The amended
federal Bureau of Land Management (BLM) regulations governing mined-land
reclamation for mining on federal lands will likely increase our regulatory
obligations and compliance costs over time with respect to mine closure
reclamation. We are subject to state laws and regulations that establish
requirements for mined-land reclamation and financial assurance. We also have
potential liability for certain sites we currently operate or formerly operated
and for certain third-party sites under the federal superfund law and similar
state laws. Our mining operations and exploration activities, both inside and outside
the United States, are subject to extensive laws and regulations governing
prospecting, development, production, exports, taxes, labor standards,
occupational health, waste disposal, protection and remediation of the
environment, protection of endangered and protected species, mine safety, toxic
substances and other matters. Mining is also subject to risks and liabilities
associated with pollution of the environment and disposal of waste products
occurring as a result of mineral exploration and production. Compliance with
these laws and regulations imposes substantial costs on us and subjects us to
significant potential liabilities. Ore Reserves. We use several strategies to replenish and grow our copper and
molybdenum ore reserves. Our first consideration is to invest in mining and
exploration properties near our existing operations. These additions allow us
to develop adjacent properties with relatively small, incremental investments
in operations. Our technology innovations not only improve productivity, but also open
new growth opportunities for us. When we develop and apply new technologies,
for example our success with solution extraction/electrowinning beginning in
the early 1980s, we create the ability to process ore types we previously
considered uneconomic. Another strategy has been to focus our exploration programs to seek new
mining opportunities in Latin America, Asia, Australia and other regions. In
several cases, we pursue these opportunities with joint-venture partners. By
working with others, we plan to maximize the potential benefits of our
exploration expenditures and spread costs and risks among several parties. Acquisitions also may contribute to our growth strategy. If acquisition
opportunities present themselves, we will consider them, but we will pursue
them only if they pass our rigorous screens for adding economic value to the
Company. Other Considerations. The mining business is subject to many risks and factors
that could impact our business, operating results and cash flows. Phelps Dodge
actively manages the factors that are controllable such as implementing the
Quest for Zeroprogram to improve our unit cost structure, implementing a power
cost stabilization plan that has reduced the electricity-related costs at our
U.S. Mining Operations, and establishing price protection programs for our
diesel fuel and natural gas price that have protected us against significant
upward movements in energy prices while maintaining the flexibility to
participate in any favorable price movements. As discussed above, there are
various factors outside of our control such as the volatility of copper and
molybdenum prices, increasing market energy costs and changes to environmental,
closure and other regulatory laws that could significantly impact our business. 
 Critical Accounting Policies and Estimates Phelps Dodges discussion and analysis of its financial condition and
results of operations are based upon its Consolidated Financial Statements,
which have been prepared in accordance with generally accepted accounting
principles in the United States (GAAP). The preparation of these financial
statements requires our management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the related
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The more significant areas requiring the use of management
estimates and assumptions relate to mineral reserves that are the basis for
future cash flow estimates and units-of-production depreciation and
amortization calculations; environmental, reclamation and closure obligations;
estimates of recoverable copper in mill and leach stockpiles; asset impairments
(including estimates of future cash flows); postemployment, postretirement and
other employee benefit liabilities; bad debts; restructuring reserves;
realization of deferred tax assets; reserves for contingencies and litigation;
and fair value of financial instruments. Phelps Dodge bases its estimates on
the Companys historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. Phelps Dodge believes the following significant assumptions and estimates
affect its more critical practices and accounting policies used in the
preparation of its Consolidated Financial Statements.




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##### Table of Contents



42 Phelps Dodge, at least annually, estimates its ore reserves at active
properties and properties currently on care-and-maintenance status. There are a
number of uncertainties inherent in estimating quantities of reserves,
including many factors beyond the control of the Company. Ore reserve estimates
are based upon engineering evaluations of assay values derived from samplings
of drill holes and other openings. Additionally, declines in the market price
of a particular metal may render certain reserves containing relatively lower
grades of mineralization uneconomic to mine. Further, availability of permits,
changes in operating and capital costs, and other factors could materially and
adversely affect our ore reserve estimates. Phelps Dodge uses its ore reserve
estimates in determining the unit basis for units-of-production depreciation
and amortization rates, as well as in evaluating mine asset impairments.
Changes in ore reserve estimates could significantly affect these items. For
example, a 10 percent increase in ore reserves at each mine would decrease
total depreciation expense by approximately $20 million in 2004; a 10 percent
decrease in ore reserves at each mine would increase total depreciation expense
by approximately $24 million in 2004. Phelps Dodges reported ore reserves are economic at the most-recent
three-year historical average COMEX copper price of 75 cents per pound and the
most-recent three-year historical average molybdenum price of $3.82 per pound
(Metals WeekDealer Oxide mean price). Phelps Dodge evaluates its long-term assets (to be held and used) for
impairment when events or changes in economic circumstances indicate the
carrying amount of such assets may not be recoverable. Goodwill and our
identifiable intangible assets are evaluated at least annually for impairment.
Our evaluations are based on business plans that are developed using a time
horizon that is reflective of the historical, moving average for the full price
cycle. We currently use a long-term average COMEX price of 90 cents per pound
of copper and an average molybdenum price of $3.40 per pound (Metals Week
Dealer Oxide mean price), along with near-term price forecasts reflective of
the current price environment to develop mine plans and production schedules.
We use an estimate of the future undiscounted net cash flows of the related
asset or asset grouping over the remaining life to measure whether the assets
are recoverable and measure any impairment by reference to fair value. Fair
value is generally estimated using the Companys expectation of discounted net
cash flows. The per pound COMEX copper price during the past 10 years, 15 years and 20
years averaged 91 cents, 96 cents and 91 cents, respectively. The per pound
Metals WeekDealer Oxide mean molybdenum price over the same periods averaged
$4.08, $3.59 and $3.51, respectively. Should estimates of future copper and
molybdenum prices decrease impairments may result. Phelps Dodge maintains allowances for doubtful accounts for estimated
losses resulting from the assessed inability of its customers to make required
payments. If the financial condition of Phelps Dodges customers were to
deteriorate unexpectedly, impacting their ability to make payments, additional
allowances may be required. Phelps Dodge routinely reviews the financial
condition of its customers and makes assessments of collectibility. The total of these allowances for doubtful
accounts at December 31, 2003 and 2002, was $10.1 million and $14.1 million,
respectively. Additionally, no single customer accounts for 10 percent or more
of our annual revenue. Phelps Dodge capitalizes applicable costs for copper contained in mill and
leach stockpiles that are expected to be processed in the future. The mill and
leach stockpiles are evaluated periodically to ensure that they are stated at
the lower of cost or market. Because the determination of copper contained in
mill and leach stockpiles by physical count is impracticable, we employ
reasonable estimation methods. The quantity of material delivered to mill stockpiles is based on surveyed
volumes of mined material and daily production records. Sampling and assaying
of blast-hole cuttings determine the estimated amount of copper contained in
the material delivered to the mill stockpiles. Expected copper recovery rates
are determined by metallurgical testing. The recoverable copper in mill
stockpiles can be extracted into copper concentrate almost immediately upon
processing. Estimates of copper contained in mill stockpiles are reduced as
material is removed and fed to the mill. At December 31, 2003 and 2002, the
estimated amount of recoverable copper contained in mill stockpiles was 0.2
million tons (PDs share) and had a carrying value of $40.6 million and $31.9
million, respectively. The quantity of material in leach stockpiles is based on surveyed volumes
of mined material and daily production records. Sampling and assaying of
blast-hole cuttings determine the estimated amount of copper contained in
material delivered to the leach stockpiles. Expected copper recovery rates are
determined using small-scale laboratory tests, medium-scale column testing
(which simulates the production-scale process), historical trends and other
factors, including mineralogy of the ore and rock type. Estimated amounts of
copper contained in the leach stockpiles are reduced as stockpiles are leached,
the leach solution is fed to the electrowinning process, and copper cathodes
are produced. Ultimate recovery of copper contained in leach stockpiles can
vary from a very low percentage to over 90 percent depending on several
variables, including type of processing, mineralogy and particle size of the
rock. Although as much as 70 percent of the copper ultimately recoverable may
be extracted during the first year of processing, recovery of the remaining
copper may take several years. At December 31, 2003 and 2002, the estimated
amount of recoverable copper contained in leach stockpiles was 1.4 million tons
(PD share) and 1.2 million tons (PD share), respectively, and had a carrying
value of $71.0 million and $81.3 million, respectively. In preparing our Consolidated Financial Statements, we recognize income
taxes in each of the jurisdictions in which we operate. For each jurisdiction,
we estimate the actual amount of taxes currently payable or receivable as well
as deferred tax assets and liabilities attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided for those deferred tax assets for which
it is more likely than not that the related benefits will not be




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##### Table of Contents



43 realized. In
determining the amount of the valuation allowance, we consider estimated future
taxable income as well as feasible tax planning strategies in each
jurisdiction. If we determine that we will not realize all or a portion of our
deferred tax assets, we will increase our valuation allowance with a charge to
income tax expense. Conversely, if we determine that we will ultimately be able
to realize all or a portion of the related benefits for which a valuation
allowance has been provided, all or a portion of the related valuation
allowance will be reduced with a credit to income tax expense. The valuation allowance relating to our deferred tax assets totaled
$461.3 million and $508.4 million, respectively, at December 31, 2003 and 2002,
including $56.5 million and $82.2 million related to foreign jurisdictions. If
recent favorable copper prices continue for an extended period, it is likely
that we will determine that we will be able to realize certain deferred tax
assets in excess of the net amount currently recorded. Accordingly, a reduction
of our valuation allowance for those deferred tax assets that we expect to
recover will result in a credit to income tax expense in the period such
determination is made. Phelps Dodge has trusteed, non-contributory pension plans covering
substantially all its U.S. employees and some employees of international
subsidiaries. The applicable plan design determines the manner in which the
benefits are calculated for any particular group of employees. Under current financial accounting standards, any significant year-to-year
movement in the rate of interest on long-term, high-quality corporate bonds
necessitates a change in the discount rate used to calculate the actuarial
present value of our accumulated pension and other postretirement benefit
obligations. The discount rate was 6.25 percent at December 31, 2003, compared
with 6.75 percent at December 31, 2002, and 7.25 percent at December 31, 2001.
For our U.S. pension plans, the discount rate assumption is designed to reflect
yields on high-quality, fixed-income investments for a given duration. We
utilized a nationally recognized, third-party actuary to construct a bond
portfolio comprising non-callable bonds from the S&P bond listing rated AA- or
higher. The portfolio was constructed such that cash flow generated by the
portfolio matched projected future cash flow from the pension plan. The model
portfolio constructed used 33 bonds resulting in a discount rate of
approximately 6.25 percent for our pension plans. Changes in this assumption
are reflected in our benefit obligation and, therefore, in our liabilities and
income or expense we record. Changes in the discount rate affects several
components of pension expense/income, one of which is the amount of the
cumulative gain or loss that will be recognized. Because gains or losses are
only recognized when they fall outside of a calculated corridor, the effect of
changes in the discount rate on pension expense may not be linear. For example,
the first 25-basis-point increase in our assumed discount rate assumption as of
the beginning of 2004 would decrease our pension expense by approximately $1
million per year during the next three years. Each of the next six
25-basis-point increases would decrease our pension expense by approximately
$0.5 million per year. Any additional 25-basis-point increase would decrease
our pension expense by approximately $2 million per year during the next three
years. Each 25-basis-point decrease in our assumed discount rate
assumption would increase our pension expense by approximately $2 million per
year during the next three years. The change would not affect the minimum
required contribution. Our pension plans were valued between December 1, 2001, and January 1,
2002, and between December 1, 2002, and January 1, 2003. Obligations were
projected to and assets were valued as of the end of 2002 and 2003. The
majority of plan assets are invested in a diversified portfolio of stocks,
bonds and cash or cash equivalents. A small portion of the plan assets is
invested in pooled real estate and other private investment funds. The Phelps Dodge Corporation Defined Benefit Master Trust (Master Trust),
which holds plan assets for the Phelps Dodge Retirement Plan and U.S. pension
plans for bargained employees, constituted 95 percent of total plan assets as
of year-end 2003. These plans accounted for approximately 90 percent of benefit
obligations. The investment portfolio for this trust as of year-end 2003 had an
asset mix that included 57 percent equities (36 percent U.S. equities, 13
percent international equities and 8 percent emerging market equities), 33
percent fixed income (17 percent U.S. fixed income, 5 percent international
fixed income, 3 percent emerging market fixed income, 5 percent U.S. high
yield, and 3 percent treasury inflation-protected securities), 7 percent real
estate and real estate investment trusts, and 3 percent other. Our policy for determining asset-mix targets for the Master Trust includes
the periodic development of asset/liability studies by a nationally recognized,
third-party investment consultant (to determine our expected long-term rate of
return and expected risk for various investment portfolios). Management
considers these studies in the formal establishment of asset-mix targets that
are presented to the Finance Committee of the board of directors. Our expected long-term rate of return on plan assets is updated at least
annually, taking into consideration our asset allocation, historical returns on
the types of assets held in the Master Trust, and the current economic
environment. Based on these factors, we expect our pension assets will earn an
average of 8.5 percent per annum over the 20 years beginning December 1, 2003,
with a standard deviation of 10.7 percent. The 8.5 percent estimation was based
on a passive return on a compound basis of 8.0 percent and a premium for active
management of 0.5 percent. On an arithmetic average basis, the passive return
would have been 8.5 percent with a premium for active management of 0.5
percent. The expected return as of December 1, 2002, was 8.75 percent with a
standard deviation of 10.6 percent. For estimation purposes, we assume our long-term asset mix generally will
be consistent with the current mix. Changes in our asset mix could impact the
amount of recorded pension income or expense, the funded status of the plan and
the need for future cash contributions. A lower-than-expected return on assets
also would decrease plan assets and decrease the amount of recorded pension
income (or increase recorded pension expense) in future years. When calculating
the expected return on plan assets, the Company uses a market-related value of
assets that spreads asset gains and losses over five years. As a result,
changes in the fair value of assets prior to January 1, 2004, will be reflected
in the results of operations by January 1, 2009. A 25-basis-point
increase/decrease in our expected long-term rate of return assumption as of the
beginning of 2004 would decrease/increase our pension expense by approxi-




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##### Table of Contents



44 mately
$2 million per year during the next three years. In addition, a
25-basis-point
decrease in the long-term rate of return assumption would increase the minimum
required contribution to our pension plan by approximately $1 million per year
during the same three-year period. The minimum 2004 cash contribution for the
Phelps Dodge Retirement Plan and U.S. pension plans for bargained employees is
approximately $4 million. The Company expects to contribute approximately $87
million in the 2004 third quarter based on its current assessment of the
economic environment. However, a final determination will be made prior to the
required contribution date. Phelps Dodge has postretirement medical and life insurance benefit plans
covering most of its U.S. employees and, in some cases, employees of
international subsidiaries. Postretirement benefits vary among plans and many plans require contributions from
employees. We account for these benefits on an accrual basis. Our funding
policy provides that payments shall be at least equal to our cash basis
obligation, plus additional amounts that may be approved by us from time to
time. A 1 percentage-point increase in the assumed health care cost trend rate
would increase net periodic benefit cost by approximately $1.4 million and
increase our postretirement benefit obligation by approximately $18.4 million;
a 1 percentage-point decrease in the assumed health care cost trend rate would
decrease net periodic benefit cost by approximately $1.3 million and decrease
our postretirement benefit obligation by approximately $16.7 million. The
long-term expected rate of return on plan assets for our postretirement medical
and life insurance benefit plans and the discount rate were determined on the
same basis as our pension plan. Based on our asset allocation, historical
returns on the types of assets held in the trust, and the current economic
environment, we expect our postretirement medical and life insurance benefit
assets will earn an average of 6.5 percent per annum over the long-term
beginning December 1, 2003. The cash flow generated by the constructed bond
portfolio comprising non-callable bonds from the S&P bond listing rated AA- or
higher that was matched to projected future cash flow from the postretirement
medical and life insurance benefit plans resulted in a discount rate of
approximately 6.25 percent. Changes in this assumption are reflected in our
benefit obligation and, therefore, in our liabilities and income or expense we
record. For example, the first 25-basis-point increase and each of the next six
25-basis-point increases in our assumed discount rate assumption as of the
beginning of 2004 would decrease our periodic benefit cost by approximately
$0.1 million per year during the next three years. Any additional
25-basis-point increase would decrease our periodic benefit cost by
approximately $1 million per year during the next three years. Each
25-basis-point decrease in our assumed discount rate assumption would increase
our periodic benefit cost by approximately $1 million per year during the next
three years. Phelps Dodge develops natural resources and creates products that
contribute to an enhanced standard of living for people throughout the world.
Our mining, exploration, production and historic operating activities are
subject to various laws and regulations governing the protection of the
environment which require, from time to time, significant expenditures. These
environmental expenditures for closed facilities and closed
portions of operating facilities are expensed or capitalized depending
upon their future economic benefits. The general guidance provided by U.S. GAAP
requires that liabilities for contingencies should be recorded when it is
probable that a liability has been incurred before the date of the balance
sheet and that the amount can be reasonably estimated. Please refer to page 94
for a more extensive discussion on our accounting policy for environmental
expenditures. Significant management judgment and estimates are required to comply with
this guidance. Accordingly, each month senior management reviews with the
Companys environmental remediation management, as well as with its financial
and legal management, changes in facts and circumstances associated with its
environmental obligations. The judgments and estimates are based upon available
facts, existing technology, and current laws and regulations, and they take
into consideration reasonably possible outcomes. The estimates can change
substantially as additional information becomes available regarding the nature
or extent of site contamination, required remediation methods, and other
actions by or against governmental agencies or private parties. At December 31, 2003, environmental reserves totaled $317.2 million. The
cost range for reasonably possible outcomes for all environmental remediation
sites for which a liability was recognized was estimated to be from $269
million to $620 million. In addition, Phelps Dodge has a number of sites that
are not the subject of an environmental remediation liability because it is not
probable that a successful claim will be made, but for which there is a
reasonably possible likelihood of an environmental remediation liability. At
December 31, 2003, the cost range for all such sites was estimated to be from
$3 million to $17 million. Reclamation is an ongoing activity that occurs throughout the life of a
mine. Effective January 1, 2003, we adopted Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. We
recognize asset retirement obligations (AROs) when incurred, with the initial
measurement at fair value. In addition, asset retirement costs (ARCs) are
capitalized as part of the related assets carrying value. AROs are accreted to
full value over time through charges to income, and ARCs are depreciated over
the assets respective useful lives. Reclamation costs for future disturbances
will be recognized as an ARO and as a related ARC in the period incurred.
Please refer to page 94 for a more extensive discussion on our accounting
policy for reclamation and mine closure costs. Generally, reclamation and closure activities are specified by regulation
or in permits issued by the relevant governing authority. Significant
management judgment and estimates are required in estimating the extent and
timing of expenditures based on life-of-mine planning. Accordingly, each
quarter senior management reviews with the Companys environmental and
remediation management, as well as its financial and legal management, changes
in facts and circumstances associated with its mine closure obligations. The
judgments and estimates are based upon available facts, existing technology and
current laws and regulations, and they take into consideration reasonably
possible outcomes. At December 31, 2003, AROs totaled $225.3 million, compared with estimated
total reclamation and closure cost, including anticipated future disturbances,
of approximately $1.2 billion (unescalated, undiscounted and on a third-party
cost basis), leaving approximately $1.0 billion to be accreted over the
remaining reclamation period. The




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##### Table of Contents



45 estimates can change substantially due to
changes in laws and regulations, cost estimates, technology and life-of-mine
plans. For example, the fair value cost estimate for our Chino Mines Company
has increased from an initial estimate (third-party cost basis) of
approximately $100 million in early 2001 to approximately $395 million
resulting from negotiations with the relevant governing authorities. Please
refer to pages 123 through 127 for additional discussion on our New Mexico
closure and reclamation programs. Liabilities for contingencies and litigation are recorded when it is
probable that obligations have been incurred and the costs reasonably can be
estimated. Gains for contingencies and litigation are recorded when realized. Refer to Summary of Significant Accounting Policies, Note 1, to the
Consolidated Financial Statements. Consolidated Financial Results Consolidated financial results were as follows:  ($ in millions except per share data)2003
    
    2002
    
    2001Sales and other operating revenues
    
    $
    4,142.7
    
    
    
    3,722.0
    
    
    
    4,002.4Operating income (loss)
    
    $
    197.6
    
    
    
    (209.3
    )
    
    
    (28.8
    )Income (loss) before extraordinary item and
cumulative effect of accounting changes
    
    $
    18.1
    
    
    
    (315.2
    )
    
    
    (329.5
    )Extraordinary gain on acquisition of partners
interest in Chino
    
    
    68.3
    
    
    
    
    
    
    
    Cumulative effect of accounting changes
    
    
    8.4
    
    
    
    (22.9
    )
    
    
    (2.0
    )Net income (loss)
    
    $
    94.8
    
    
    
    (338.1
    )
    
    
    (331.5
    )Basic earnings (loss) per common share
before extraordinary item and cumulative
effect of accounting changes
    
    $
    0.06
    
    
    
    (3.86
    )
    
    
    (4.19
    )Extraordinary gain on acquisition of partners
interest in Chino
    
    
    0.77
    
    
    
    
    
    
    
    Cumulative effect of accounting changes
    
    
    0.09
    
    
    
    (0.27
    )
    
    
    (0.03
    )Basic and diluted net earnings (loss)
per common share
    
    $
    0.92
    
    
    
    (4.13
    )
    
    
    (4.22
    )Diluted earnings (loss) per common share
before extraordinary item and cumulative
effect of accounting changes
    
    $
    0.06
    
    
    
    (3.86
    )
    
    
    (4.19
    )Extraordinary gain on acquisition of partners
interest in Chino
    
    
    0.76
    
    
    
    
    
    
    
    Cumulative effect of accounting changes
    
    
    0.09
    
    
    
    (0.27
    )
    
    
    (0.03
    )Basic and diluted net earnings (loss)
per common share
    
    $
    0.91
    
    
    
    (4.13
    )
    
    
    (4.22
    )
  In 2003, the Company had consolidated earnings of $94.8 million, or 91
cents per common share, including a special, net gain of $46.7 million, or 52
cents per common share, after taxes. (All references to per share earnings or
losses are based on diluted earnings per share.) In 2002, consolidated losses
were $338.1 million, or $4.13 per common share, including a special, net charge
of $208.9 million, or $2.48 per common share. The $432.9 million increase in
consolidated earnings in 2003, compared with 2002, was primarily due to higher
LME copper prices (approximately $214 million), a higher cumulative effect of
accounting changes ($31.3 million) mostly due to goodwill impairment losses
upon adoption of SFAS No. 142 in 2002, an extraordinary gain on the acquisition
of our partners one-third share in Chino Mines Company ($68.3 million), a
favorable change in pre-tax, special items and provisions ($206.0 million),
lower interest expense ($41.2 million), and early debt extinguishment costs in
2002 ($31.3 million); partially offset by a higher tax provision ($163.2
million), resulting primarily from the absence of the effect of 2002 tax
legislation that permitted a five-year carryback of our 2001 and 2002 net
operating losses. In 2001, consolidated losses were $331.5 million, or $4.22 per common
share, including a special, net charge of $26.4 million, or 34 cents per common
share. The $6.6 million increase in consolidated loss in 2002, compared with
2001, was primarily the result of asset impairment charges and provisions
($153.5 million), historic Cyprus Amax Minerals Company (Cyprus Amax) lawsuit
settlement or awards expense ($101.2 million), lower average copper prices
(approximately $19 million), early debt extinguishment costs in 2002 ($31.3
million), the cumulative effect of adopting SFAS No. 142 ($22.9 million), a
decrease in profits at our Wire and Cable segment due primarily to the
temporary closure of two facilities and restructuring charges ($23.6 million)
and lower net environmental insurance recoveries/provisions ($10.4 million);
partially offset by a lower implied unit cost of copper production, as defined
on page 52 (approximately $145 million including higher molybdenum earnings of
$20 million), the absence of the establishment of El Abras valuation allowance
for deferred tax assets in 2001 ($57.9 million), lower interest expense ($40.5
million), higher tax benefits primarily resulting from new tax legislation
($188.0 million), and the 2002 sale of non-core real estate ($22.6 million). Special Items and Provisions Throughout Managements Discussion and Analysis there is disclosure and
discussion of what management believes to be special items. We view special
items as unpredictable and atypical of our operations in the period. We believe
consistent identification, disclosure and discussion of such items, both
favorable and unfavorable, provide additional information to assess the quality
of our performance and our earnings or losses. This supplemental information is
not a substitute for any U.S. GAAP measure and should be evaluated within the
context of our U.S. GAAP results. Any supplemental information references to
earnings, losses or results excluding special items or before special items is
a non-GAAP measure that may not be comparable to similarly titled measures
reported by other companies. Note: Supplemental Data The following table summarizes the consolidated special items for 2003,
2002 and 2001 and the resultant earnings (losses) excluding these special
items:  ($ in millions)2003
    
    2002
    
    2001Special items, net of taxes
    
    $
    46.7
    
    
    
    (208.9
    )
    
    
    (26.4
    )Earnings (losses) excluding special items
(after taxes)
    
    $
    48.1
    
    
    
    (129.2
    )
    
    
    (305.1
    )




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46 Note: Supplemental Data The following table summarizes the special items and provisions for the year ended December 31, 2003:  ($ in millions except per share data)2003$/SharePre-tax
    
    After-tax
    
    After-taxSpecial items and provisions, net:PDMC (see Business Division disclosure)
    
    $
    (5.5
    )
    
    
    (5.2
    )
    
    
    (0.06
    )PDI (see Business Division disclosure)
    
    
    1.7
    
    
    
    0.9
    
    
    
    0.01Corporate
and Other Environmental provisions, net
    
    
    (23.8
    )
    
    
    (22.7
    )
    
    
    (0.25
    )Environmental insurance recoveries, net
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.01Historic Cyprus Amax legal matter
    
    
    (2.9
    )
    
    
    (2.9
    )
    
    
    (0.03
    )Probable Texas franchise tax matter
    
    
    (8.0
    )
    
    
    (8.0
    )
    
    
    (0.09
    )(34.2
    )
    
    
    (33.1
    )
    
    
    (0.36
    )(38.0
    )
    
    
    (37.4
    )
    
    
    (0.41
    )Miscellaneous income (expense), net:Gain on sale of cost investment
    
    
    6.4
    
    
    
    6.4
    
    
    
    0.07Benefit (provision) for taxes on income:Tax benefit for additional 2001 net
operating loss carryback
    
    
    
    
    
    
    1.0
    
    
    
    0.01Extraordinary gain on acquisition of partners
one-third interest in Chino Mines Company
    
    
    68.3
    
    
    
    68.3
    
    
    
    0.76Cumulative effect of accounting change
    
    
    9.7
    
    
    
    8.4
    
    
    
    0.09$
    46.4
    
    
    
    46.7
    
    
    
    0.52
  A net charge for environmental provisions of $28.4 million ($27.0 million
after-tax) was recognized for closed facilities and closed portions of
operating facilities. (Refer to Note 21, Contingencies, for further discussion
of environmental matters.) In the 2003 fourth quarter, we determined that due to continuing reduced
market conditions in North America for magnet wire and high performance
conductors, the Laurinburg, North Carolina, and West Caldwell, New Jersey,
facilities, both temporarily closed in the 2002 fourth quarter, would not be
re-opened. This action resulted in further impairment charges related to these
assets of $1.3 million. The amount of the additional asset impairment was
determined through an assessment of fair value based on independent appraisals
of the existing assets at these two plants. No additional severance related
charges were required. Additionally, a further write-down of $0.4 million was
recognized to reduce the carrying value of the assets of our Hopkinsville
facility closed in 2000. This adjustment reflected our current view of the fair
value of these assets. We also performed an impairment test on goodwill at our
magnet wire and high performance conductors facilities through a comparison of
the carrying value to the respective fair value (using an estimate of
discounted cash flows) and determined that a $0.9 million charge was required
to write-off magnet wires entire goodwill. Also during the quarter, we
recorded a $0.2 million gain (before and after taxes) for the reassessment of
termination benefits associated with the September 2002 restructuring program. A gain of $3.2 million ($2.4 million after-tax) was recognized from the
termination of a foreign postretirement benefit plan associated with our
Specialty Chemicals segment. Net insurance recoveries of $0.5 million (before and after taxes) were
received from settlements reached with several insurance companies on historic
environmental liability claims. In the 2003 fourth quarter, a charge of $8.0 million (before and after
taxes) was recognized for a probable Texas franchise tax matter.
(Refer to Note 21, Contingencies, for further discussion.) A charge of $2.9 million (before and after taxes) was recognized for
historic Cyprus Amax legal matters. The Company acquired Cyprus Amax in October
1999. A $6.4 million gain (before and after taxes) was recognized for the sale
of a wire and cable cost investment. In the 2003 fourth quarter, we determined that an additional $1.0 million
was required for net operating loss carryback for 2001 resulting from 2002 U.S.
tax legislation. (Refer to Note 6, Income Taxes, for further discussion.) An extraordinary gain of $68.3 million (before and after taxes) was
recognized for our acquisition of Heisei Minerals Corporations (Heisei)
one-third share in Chino Mines Company, located in New Mexico. (Refer to Note
2, Acquisitions and Divestitures, for further discussion.) A $9.7 million gain ($8.4 million after-tax) was recorded for the
cumulative effect of an accounting change due to the adoption of SFAS No. 143.
(Refer to Note 1, Summary of Significant Accounting Policies, under New
Accounting Standards for further discussion.) The following table summarizes the special items and provisions for the
year ended December 31, 2002:  ($ in millions except per share data)2002$/SharePre-tax
    
    After-tax
    
    After-taxSpecial items and provisions, net:PDMC (see Business Division disclosure)
    
    $
    (116.9
    )
    
    
    (119.5
    )
    
    
    (1.42
    )PDI (see Business Division disclosure)
    
    
    (22.0
    )
    
    
    (21.4
    )
    
    
    (0.25
    )Corporate
and Other Environmental provisions, net
    
    
    (12.7
    )
    
    
    (12.7
    )
    
    
    (0.15
    )Environmental insurance recoveries, net
    
    
    17.4
    
    
    
    14.8
    
    
    
    0.18Historic Cyprus Amax lawsuit settlements
    
    
    (54.7
    )
    
    
    (53.0
    )
    
    
    (0.63
    )Historic Cyprus Amax arbitration award
    
    
    (46.5
    )
    
    
    (45.0
    )
    
    
    (0.54
    )Legal loss contingency
    
    
    (1.0
    )
    
    
    (1.0
    )
    
    
    (0.01
    )(97.5
    )
    
    
    (96.9
    )
    
    
    (1.15
    )(236.4
    )
    
    
    (237.8
    )
    
    
    (2.82
    )Early debt extinguishment costs
    
    
    (31.3
    )
    
    
    (26.6
    )
    
    
    (0.32
    )Miscellaneous income and expense, net:Cost investment write-downs
    
    
    (1.2
    )
    
    
    (1.2
    )
    
    
    (0.01
    )Benefit (provision) for taxes on income:Release of taxes provided with
regard to Plateau Mining
    
    
    
    
    
    
    13.0
    
    
    
    0.15Tax benefit for 2001 net operating
loss carryback
    
    
    
    
    
    
    66.6
    
    
    
    0.79
    
    
    
    79.6
    
    
    
    0.94Cumulative effect of accounting change
    
    
    (33.0
    )
    
    
    (22.9
    )
    
    
    (0.27
    )$
    (301.9
    )
    
    
    (208.9
    )
    
    
    (2.48
    )
  In December 2002, PDMC recorded special, pre-tax charges for asset
impairments and closure provisions of $153.5 million (before and after taxes)
at Cobre, Hidalgo and Ajo. The Company recognized




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47 an impairment charge to write
down Cobres assets by $115.5 million (before and after taxes). We took this
action after revising mine plans and assessing recoverability. The revised mine
plans and associated cash flows used a copper price lower than the prior-year
assumption, reflecting moving average historical copper prices representing
full economic and pricing cycles. The amount of Cobres impairment was
determined through an assessment of the discounted cash flows of the remaining
ore reserves. The Hidalgo impairment included a $12.9 million write-down
(before and after taxes) of assets. As a result of the Companys ability to use
acid more efficiently and an updated assessment of PDMCs long-term acid
production and consumption balance, the Company determined that Hidalgo will
probably not be reconfigured to produce acid as originally anticipated and that
the net book value of Hidalgo assets would probably not be recovered. Hidalgos
power facilities will continue to generate electricity when needed, and the
facility will continue to be a backup alternative as a reliable producer of
acid if conditions warrant. The remaining Hidalgo assets were written down to
their estimated fair value. The Company also recognized a $7.0 million charge
(before and after taxes) for the estimated remaining costs of its closure
obligation at Hidalgo. Phelps Dodge has reclassified material previously
characterized as reserves at Ajo to mineralized material and, as a result,
recognized an impairment charge to write down Ajos assets by $18.1 million
(before and after taxes). This action resulted from updating mine plans at this
prospective development property. The amount of Ajos impairment was determined
through an assessment of the fair value of its assets. On September 10, 2002, we announced the temporary closure of two U.S. wire
and cable plants and other actions to improve efficiencies and consolidate
certain wire and cable operations. These temporary closures and internal
changes reduced our costs and aligned our business with current market
conditions. The actions included: (i) the temporary closure of the Laurinburg,
North Carolina, magnet wire plant at the end of 2002, with production being
shifted to the El Paso, Texas, and Fort Wayne, Indiana, facilities; (ii) the
temporary closure of the West Caldwell, New Jersey, high performance conductors
facility pending recovery of markets served by this location, with production
of certain products relocated to our Inman, South Carolina, facility; (iii)
operational and production support at other high performance conductors
facilities being streamlined in order to reduce costs and increase operating
efficiencies; and (iv) the restructuring and consolidation of certain
administrative functions. These actions resulted in special, pre-tax charges of
$23.0 million ($22.2 million after-tax) in the 2002 third quarter and $0.6
million ($0.8 million after-tax) in the 2002 fourth quarter. Of these amounts,
$16.9 million (before and after taxes) was recognized as asset impairments and
$6.7 million ($6.1 million after-tax) was recognized for severance-related and
relocation expenses associated with the restructuring and temporary closures.
The amount of the asset impairment was determined through an assessment of fair
market value, which was based on independent appraisals, of the existing assets
at the wire and cable plants. We also performed an impairment test on the
goodwill at our wire and cable plants through a comparison of the carrying
value to the respective fair value (using an estimate of discounted cash flows)
and determined that an additional impairment loss was not required. The
restructuring plan included the reduction of approximately 300 positions and
charges associated with employee severance and relocation ($3.9 million) and
pension and other postretirement obligations ($2.8 million). A net charge for environmental provisions of $14.0 million (before and
after taxes) was recognized in 2002 for closed facilities and closed portions
of operating facilities. (Refer to Note 21, Contingencies, for further
discussion of environmental matters.) The net effect of the reassessment of prior restructuring programs was
zero (before and after taxes) for 2002. PDMC recorded a $5.1 million gain
(before and after taxes) for the reassessment of the October 2001 restructuring
programs and a $6.4 million charge (before and after taxes) for additional
pension-related benefits for employees at our Chino, Miami, Sierrita and Bagdad
operations since these operations will remain curtailed beyond one year from
their January 2002 curtailment. PDI recorded a $1.3 million gain (before and
after taxes) for the reassessment of prior restructuring programs associated
with its Specialty Chemicals segment ($0.5 million before and after taxes) and
its Wire and Cable segment ($0.8 million before and after taxes). A gain of $22.6 million (before and after taxes) was recognized for the
sale of the Dawson Ranch property in New Mexico in 2002. (Refer to Note 2,
Acquisitions and Divestitures, for further discussion.) Net 2002 insurance recoveries of $34.3 million ($29.1 million after-tax)
were received from settlements reached with several insurance companies on
historic environmental liability claims. A $54.7 million pre-tax charge ($53.0 million after-tax) was recognized in
2002 for settlement of lawsuits related to Cyprus Amax. This included an $11.2
million pre-tax charge ($9.5 million after-tax) for the settlement of a lawsuit
related to Amax Oil & Gas, and a $43.5 million charge (before and after taxes)
for the settlement of a lawsuit with RAG American Coal Company (RAG). In
addition, there was a $46.5 million charge ($45.0 million after-tax) associated
with an award made in a binding arbitration proceeding filed against Cyprus
Amax by Plateau Mining Corporation (a former subsidiary of Cyprus Amax). Other 2002 items included:  
    
    a net $1.0 million charge (before and after taxes) for the settlement of legal matters;
    
    a $1.2 million charge (before and after taxes) for the write-off of two cost basis investments;
    
    a $31.3 million charge ($26.6 million after-tax) for early debt
extinguishment costs (refer to Note 1, Summary of Significant Accounting
Policies, for a discussion of the change in accounting for early debt
extinguishments, and Note 14, Debt and Other Financing, for further
discussion); and
    
    a $33.0 million charge ($22.9 million after-tax) for the cumulative
effect of an accounting change due to the adoption of SFAS No. 142
(refer to Note 1, Summary of Significant Accounting Policies, under New
Accounting Standards for further discussion). In 2002, the tax benefit included the release of deferred taxes previously
provided with regard to Plateau Mining Corporation ($13.0 million) and a tax
benefit of $66.6 million for net operating loss carryback prior to 2002
resulting from 2002 U.S. tax legislation. (Refer to Note 6, Income Taxes, for
further discussion.)




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##### Table of Contents



48 (Refer to Note 3, Special Items and Provisions, for further discussion.) The following table summarizes the special items and provisions for the
year ended December 31, 2001:  ($ in millions except per share data)2001$/SharePre-tax
    
    After-tax
    
    After-taxSpecial items and provisions, net:PDMC (see Business Division disclosure)
    
    $
    (2.1
    )
    
    
    (2.1
    )
    
    
    (0.03
    )PDI (see Business Division disclosure)
    
    
    (4.7
    )
    
    
    (4.7
    )
    
    
    (0.06
    )Corporate
and Other Environmental provisions, net
    
    
    (16.2
    )
    
    
    (16.2
    )
    
    
    (0.21
    )Environmental insurance recoveries, net
    
    
    61.8
    
    
    
    61.8
    
    
    
    0.79Insurance settlement for legal loss
contingency
    
    
    9.0
    
    
    
    9.0
    
    
    
    0.11Restructuring programs
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (0.01
    )Other
    
    
    (5.9
    )
    
    
    (5.9
    )
    
    
    (0.07
    )47.4
    
    
    
    47.4
    
    
    
    0.6140.6
    
    
    
    40.6
    
    
    
    0.52Miscellaneous income and expense, net:Impairment loss on investments
    
    
    (12.9
    )
    
    
    (12.9
    )
    
    
    (0.16
    )Interest on prior years tax refunds
    
    
    4.3
    
    
    
    4.3
    
    
    
    0.05Other
    
    
    1.5
    
    
    
    1.5
    
    
    
    0.02(7.1
    )
    
    
    (7.1
    )
    
    
    (0.09
    )Benefit (provision) for taxes on income:El Abra deferred tax asset valuation allowance
    
    
    
    
    
    
    (57.9
    )
    
    
    (0.74
    )Cumulative effect of accounting change
    
    
    (2.0
    )
    
    
    (2.0
    )
    
    
    (0.03
    )$
    31.5
    
    
    
    (26.4
    )
    
    
    (0.34
    )
  In the fourth quarter of 2001, Phelps Dodge announced a series of actions
to address the then-current economic environment, including changes in copper
operations that led us to curtail approximately 220,000 metric tons of copper
production annually (including our partners share) and to curtail 54,000 metric tons of North American carbon black
production annually in 2002. These actions resulted in the layoff of
approximately 1,600 employees mostly in January 2002. The Chino and Miami mines
were temporarily closed, the Bagdad and Sierrita mines were operated at
approximately one-half capacity, the Chino smelter and the Miami refinery were
temporarily closed (approximately 1,500 positions), and Columbian Chemicals
Company temporarily closed its El Dorado, Arkansas, facility (approximately 100
positions). In the second quarter of 2001, we announced a restructuring of our
professional, administrative and operational support functions, as well as
various other operational improvement initiatives, which led to a reduction of
approximately 500 positions. The restructuring plans for 2001 included charges of $15.0 million for
employee severance and relocation costs, $8.7 million for
mothballing/take-or-pay contracts, $0.6 million for asset disposal and
dismantling charges, and $6.3 million for pension and other postretirement
obligations. In addition, we recognized a net gain of $0.8 million associated
with 2000 employee severance costs. A net charge for environmental provisions of $31.1 million (before and
after taxes) was recognized in 2001 for closed facilities and closed portions
of operating facilities. (Refer to Note 21, Contingencies, for further
discussion of environmental matters.) A gain of $39.9 million (before and after taxes) was recognized in 2001
from the sale of our 50 percent interest in the Sossego project. (Refer to Note
2, Acquisitions and Divestitures, for further discussion.) A $3.3 million charge (before and after taxes) was taken in 2001 to write
down the closed Hopkinsville, Kentucky, magnet wire facility to its net
realizable value due to detrimental market conditions. Net insurance recoveries of $61.8 million (before and after taxes) were
received from settlements reached with several insurance companies on historic
environmental liability claims. In addition, there was a $5.9 million charge
(before and after taxes) related to other net special items recognized in 2001. A $9.0 million gain (before and after taxes) was recognized from the
settlement reached with one of our insurance carriers associated with potential
future legal matters. Special charges in miscellaneous income and expense in 2001 included a
$12.9 million charge (before and after taxes) to recognize the impairment of
our investment in Compañia San Ignacio de Morococha S.A. (SIMSA) ($9.1
million), a Peruvian zinc mine, and Equatorial Mining ($3.8 million) in
Australia. Additionally, a $5.8 million gain (before and after taxes) was
recognized for other net special items, which was primarily $4.3 million
(before and after taxes) of interest income on prior years tax refunds. A $2.0 million charge (before and after taxes) was recorded in 2001 for
the cumulative effect of accounting change arising from the implementation of
SFAS Nos. 133 and 138. (Refer to Note 1, Summary of Significant Accounting
Policies, under New Accounting Standards for further discussion.) In 2001, a deferred tax asset valuation allowance of $57.9 million was
established for our 51 percent interest in the El Abra copper mine in Chile.
(Refer to Note 6, Income Taxes, for further discussion.) (Refer to Note 3, Special Items and Provisions, for further discussion.) Quest for ZeroOperational Improvement Program Phelps Dodge announced in October 2001 that it was commencing Quest for
Zero(QFZ), a comprehensive, lean-production program, designed to, among other
things, improve operating income by a targeted $250 million
annually. QFZ encompasses both the October 2001 program and the $150 million cost
improvement program announced in May 2001. The Companys stretch goal was to
achieve these combined annual operating income improvements of $400 million by
the end of 2003 when compared with the results that were then expected for
2001. In order to achieve the full $400 million target, PDMC chartered business
improvement teams to drive performance improvement projects and best practices.
The elimination of variance and waste, and control of all critical processes
are key factors in this process. QFZ was also designed to foster the
rapid transfer of best practices to all business units. On a quarterly basis,
we document improvement successes, failures and potential projects yet to be
implemented. New project ideas are generated at internal conferences where
statistical analysis tools are utilized on current performance




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##### Table of Contents



49 data to identify
improvement opportunities. Improvement projects are prioritized and implemented
accordingly. Key elements of QFZ going forward included six-sigma
quality programs, technology innovations, global procurement strategies and
improved operating practices. During 2003, we achieved $330 million in improvements, bringing total
improvements since the program was announced in 2001 to $596 million. This
excludes improvements in the reduction of working capital. In the fourth
quarter of 2003, we achieved $91 million in improvements bringing the current
annualized run rate to approximately $365 million, which is approximately 91
percent of the $400 million stretch goal. Following is a reconciliation of improvement dollars:  Inception2003
    
    Through 2003U.S. Mining Operations*
    
    $
    206
    
    
    
    384South American Mines**
    
    
    67
    
    
    
    113Primary Molybdenum
    
    
    14
    
    
    
    26Total PDMC
    
    
    287
    
    
    
    523Specialty Chemicals
    
    
    20
    
    
    
    29Wire and Cable
    
    
    23
    
    
    
    37Total PDI
    
    
    43
    
    
    
    66Corporate
    
    
    
    
    
    
    7Total Quest for Zero
    
    $
    330
    
    
    
    596
   *
    
    U.S. Mining Operations combines the following segments: Morenci,
Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing
and Sales, and Other Mining.**
    
    South American Mines combines the following segments: Candelaria,
Cerro Verde and El Abra. These improvements resulted from a combination of administrative and
operating staff reductions and mining operation refinements and improvements,
including reduced mining rates at Tyrone, increased residual leach production
at Morenci, incremental expansion at Cerro Verde, improved mine planning and
sequencing at Sierrita, and a reduction in acid usage and improvements in leach
recovery. As we begin to tackle more difficult initiatives under our QFZprogram, we
are experiencing challenges typical of multi-year improvement projects. These
challenges result not only from an increasing scarcity of low-hanging fruit,
but also from pressures on our cost structure arising from both anticipated and
unforeseen sources. Such cost pressures include higher energy, pension and
medical costs; higher administrative costs; higher professional fees; and
higher costs associated with our decision to emphasize growth-oriented
projects. Despite such pressures, we remain committed to our long-term, stretch
goal of an implied unit production cost of copper of 60 cents per pound. The success of the business improvement teams we formed to execute our QFZ
program has led us to reorganize our North American mining operations into what
we call North America One Mine. This organizational plan has been designed to
enable us to shift QFZto a process-focused approach, i.e., emphasis will be on
driving optimization through common site processes and sharing of best
practices. As a result of our conversion to a process-focused approach, an increase
in spending for growth and technology, and considering that QFZoperating
improvements were measured against an increasingly distant 2001 base,
management decided early in 2004 that it would no longer continue its rigorous
QFZtracking system. Instead of separately identifying and measuring QFZ
operating income improvements, management will evaluate and measure QFZin
terms of achievement toward its long-term, stretch goal of 60 cents per pound
implied unit cost of copper production (with a near-term goal of 65 cents per
pound). In the end, implied unit cost is the most meaningful indicator of our
success. Business Divisions Results for 2003, 2002 and 2001 can be meaningfully compared by separate
reference to our reporting divisions, PDMC and PDI. PDMC is a business division
that includes our worldwide copper operations from mining through rod
production, marketing and sales; molybdenum operations from mining through
manufacturing, marketing and sales; other mining operations and investments;
and worldwide mineral exploration and development programs. PDI, our
manufacturing division, produces engineered products principally for the global
energy, telecommunications, transportation and specialty chemical sectors. PDI
includes our Specialty Chemicals segment and our Wire and Cable segment.
Significant events and transactions have occurred within each segment 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. (Refer to Note 23, Business Segment Data, to the
Consolidated Financial Statements for further segment information.) 
 RESULTS OF PHELPS DODGE MINING COMPANY PDMC is our international business division that comprises our vertically
integrated copper operations from mining through rod production, primary
molybdenum operations through conversion, marketing and sales, and worldwide
exploration. PDMC comprises 11 reportable segments. Our copper mines comprise five reportable segments in the United States
(Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, and Tyrone) and three
reportable segments in South America (Candelaria/Ojos del Salado, Cerro Verde
and El Abra). These segments include open-pit mining, sulfide ore concentrating
and electrowinning. In addition, they produce gold and silver, and the Bagdad
and Sierrita mines also produce molybdenum as by-products. The Manufacturing and Sales segment consists of conversion facilities
including our smelters, refineries and rod mills, as well as sales and
marketing. The Manufacturing and Sales segment sells copper to others primarily
as rod, cathode or concentrate, and as rod to our Wire and Cable segment. In
addition, at times it smelts and refines copper and produces copper rod for
customers on a toll basis. Toll arrangements require the tolling customer to
deliver appropriate copper-bearing material to our facilities, which we then
process into a product that is returned to the customer. The customer pays PDMC
for processing its material into the specified products. The Primary Molybdenum segment consists of the Henderson and Climax mines
and related conversion facilities. This segment is an integrated producer of
molybdenum, with mining, roasting and proc-




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##### Table of Contents



50 essing facilities producing
high-purity, molybdenum-based chemical and metallurgical products. In addition,
at times it roasts and/or processes material on a toll basis. Toll arrangements
require the tolling customer to deliver appropriate molybdenum-bearing material
to our facilities, which we then process into a product that is returned to the
customer. The customer pays PDMC for processing its material into the specified
products. Other Mining includes our worldwide mineral exploration and development
programs, a process technology center that directs its activities at improving
existing processes and developing new cost-competitive technologies, and other
ancillary operations. Major operating and financial results of PDMC for the years 2003, 2002 and
2001 are illustrated in the following table:  ($ in millions except per pound amounts)2003
    
    2002
    
    2001Sales and other operating revenues
to unaffiliated customers
    
    $
    2,828.6
    
    
    
    2,485.8
    
    
    
    2,649.5Operating income (loss) before special items
and provisions
    
    $
    270.7
    
    
    
    51.9
    
    
    
    (81.5
    )Operating income (loss)
    
    $
    265.2
    
    
    
    (65.0
    )
    
    
    (83.6
    )Copper production (thousand short tons):Total production
    
    
    1,305.6
    
    
    
    1,275.6
    
    
    
    1,410.9Less minority participants shares (A)
    
    
    246.3
    
    
    
    246.8
    
    
    
    250.8Net Phelps Dodge share
    
    
    1,059.3
    
    
    
    1,028.8
    
    
    
    1,160.1Copper sales (thousand short tons):Net Phelps Dodge share from own mines
    
    
    1,069.3
    
    
    
    1,051.1
    
    
    
    1,170.8Purchased copper
    
    
    374.5
    
    
    
    443.0
    
    
    
    461.2Total copper sales
    
    
    1,443.8
    
    
    
    1,494.1
    
    
    
    1,632.0LME average spot copper price
per pound  cathodes
    
    $
    0.807
    
    
    
    0.707
    
    
    
    0.716COMEX average spot copper price
per pound  cathodes
    
    $
    0.811
    
    
    
    0.717
    
    
    
    0.726Implied full unit cost of copper
production per pound
    
    $
    0.680
    
    
    
    0.682
    
    
    
    0.751Implied cash unit cost of copper
production per pound
    
    $
    0.521
    
    
    
    0.516
    
    
    
    0.599Molybdenum production (million pounds)
    
    
    52.0
    
    
    
    45.0
    
    
    
    55.5Molybdenum sales (million pounds):Net Phelps Dodge share from own mines
    
    
    54.2
    
    
    
    46.7
    
    
    
    55.1Purchased molybdenum
    
    
    8.2
    
    
    
    7.4
    
    
    
    1.6Total molybdenum sales
    
    
    62.4
    
    
    
    54.1
    
    
    
    56.7Metals Week:Annual molybdenum Dealer Oxide
mean price per pound
    
    $
    5.32
    
    
    
    3.77
    
    
    
    2.36
   (A)
    
    Minority participant interests include (i) a 15 percent undivided
interest in Morenci, Arizona, copper mining complex held by Sumitomo Metal
Mining Arizona, Inc., (ii) a one-third partnership interest in Chino Mines Company
in New Mexico held by Heisei Minerals Corporation through December 18, 2003,
(iii) a 20 percent partnership interest in Candelaria in Chile held by SMMA
Candelaria, Inc., a jointly owned indirect subsidiary of Sumitomo Metal
Mining Co., Ltd., and Sumitomo Corporation, and (iv) a 49 percent partnership
interest in the El Abra copper mining operation in Chile held by
Corporación Nacional
del Cobre de Chile (CODELCO). (thousand tons)2003
    
    2002
    
    2001Excluded copper production:Morenci  for Sumitomo
    
    
    63.3
    
    
    
    61.9
    
    
    
    58.8Chino  for Heisei
    
    
    13.7
    
    
    
    19.3
    
    
    
    25.9Candelaria  for Sumitomo
    
    
    46.9
    
    
    
    43.9
    
    
    
    48.6El Abra  for CODELCO
    
    
    122.4
    
    
    
    121.7
    
    
    
    117.5246.3
    
    
    
    246.8
    
    
    
    250.8
  Note: Supplemental Data Implied unit cost of copper production measures the all-in cost of
each pound of copper produced by PDMC. As the title indicates, this measure is
the cost implied by the market price of copper (i.e., LME average spot) for a
given period versus PDMCs operating income (loss) excluding special items for
the same period. There is no established common standard for calculating unit production
costs in the copper industry. PDMCs implied unit production costs indicator
(which is based on readily accessible, publicly disclosed data) acts as a proxy
to enable investors to follow and interpret cost trends over historical
periods. PDMC calculates its implied full unit cost of copper production by
dividing its operating income (loss) excluding special items by the total
pounds of copper sold from its own mines for its own account (as disclosed in
the table above). This results in an all-in operating margin (i.e., inclusive
of cost of products sold; depreciation, depletion, amortization and closure
accretion/accrual; selling and general administrative expense; and exploration
and research expense for the divisions operations) that is compared with the
LME market price of copper to render an implied cost of copper production. Cash
implied unit cost of copper production is calculated by deducting PDMCs
segment depreciation, depletion, amortization and closure accretion/accrual
from the implied full unit cost of copper production. Following is the
calculation of implied full unit cost of copper production for the years 2003,
2002 and 2001:  ($ in millions except per pound amounts)2003
    
    2002
    
    2001PDMC implied unit cost of copper productionOperating income (loss)
    
    $
    265.2
    
    
    
    (65.0
    )
    
    
    (83.6
    )Special operating items
    
    
    (5.5
    )
    
    
    (116.9
    )
    
    
    (2.1
    )Operating income (loss)
excluding special items
    
    $
    270.7
    
    
    
    51.9
    
    
    
    (81.5
    )Copper sales from own mines  million pounds
    
    
    2,138.6
    
    
    
    2,102.2
    
    
    
    2,341.7Operating margin  per pound copper sold
    
    $
    0.127
    
    
    
    0.025
    
    
    
    (0.035
    )LME average
spot copper price per pound 
cathodes
    
    $
    0.807
    
    
    
    0.707
    
    
    
    0.716Implied full unit cost of copper production
per pound
    
    $
    0.680
    
    
    
    0.682
    
    
    
    0.751
   Note: Our measure of implied unit cost of copper production may not be
comparable to similarly titled measures reported by other companies.




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##### Table of Contents



51 Total PDMC Division  Sales PDMCs sales and other operating revenues to unaffiliated customers
increased $342.8 million, or 14 percent, in 2003 compared with the
corresponding 2002 period. The increase reflected higher average copper prices
(approximately $267 million), higher average molybdenum prices (approximately
$76 million), higher sales volumes of molybdenum (approximately $38 million)
and slightly higher precious metals sales (approximately $1 million); partially
offset by lower copper sales volumes (approximately $40 million) primarily
reflecting decreased purchases and sales of third-party copper. In 2002, the decrease of $163.7 million, or 6 percent, in sales and other
operating revenues to unaffiliated customers, compared with 2001, was primarily
due to lower sales volumes of copper (approximately $184 million), slightly
lower average copper prices (approximately $42 million), and lower sales
volumes of molybdenum (approximately $10 million); partially offset by higher
molybdenum prices (approximately $50 million). Total PDMC Division  Operating Income (Loss) PDMC reported operating income of $265.2 million in 2003 including a
special, net pre-tax charge of $5.5 million, compared with an operating loss of
$65.0 million in 2002 including $116.9 million of special, net pre-tax charges,
and an operating loss of $83.6 million in 2001 including a special, pre-tax
charge of $2.1 million. The increase in operating income of $330.2 million for the year ended
December 31, 2003, compared with 2002, primarily resulted from higher average
copper prices (approximately $214 million), lower special, pre-tax charges of
$111.4 million and a slightly lower implied unit cost of copper production
(approximately $4 million). The higher average copper prices reflected improved
copper fundamentals and an improved economic environment. The $18.6 million decrease in operating loss for the year ended December
31, 2002, compared with 2001, primarily resulted from a lower implied unit cost
of copper production (approximately $145 million including higher molybdenum
earnings of approximately $20 million) and 240 million pounds of lower produced
copper sales volumes (approximately $8 million). This was partially offset by
lower average copper prices (approximately $19 million) and special, pre-tax
charges of $116.9 million, compared with special, pre-tax charges of $2.1
million in 2001. During the 2002 fourth quarter, PDMC recorded special, pre-tax charges for
asset impairments and closure provisions of $153.5 million at Cobre, Hidalgo
and Ajo. The Company recognized an impairment charge to write down Cobres
assets by $115.5 million. Phelps Dodge took this action after revising mine
plans and assessing recoverability. The revised mine plans and associated cash
flows used a copper price lower than the prior-year assumption, reflecting
moving average historical copper prices representing full economic and pricing
cycles. The amount of Cobres impairment was determined through an assessment
of discounted cash flows of the remaining ore reserves. The Hidalgo impairment included a $12.9 million write-down of assets. As a
result of the Companys ability to use acid more efficiently and an updated
assessment of PDMCs long-term acid production and consumption balance, the
Company determined that Hidalgo would probably not be reconfigured to produce
acid as originally anticipated and that the net book value of the Hidalgo
assets would probably not be recovered. The power facilities will continue to
generate electricity when needed, and the facility will continue to be a backup
alternative as a reliable producer of acid if conditions warrant. The remaining
Hidalgo assets were written down to their estimated fair value in the 2002
fourth quarter. The Company also recognized a $7.0 million charge for the
estimated remaining costs of its closure obligation at Hidalgo. In 2002, PDMC reclassified material previously characterized as reserves
at Ajo to mineralized material and, as a result, recognized an impairment
charge to write down Ajos assets by $18.1 million. This action resulted from
updating mine plans at this prospective development property. The amount of
Ajos impairment was determined through an assessment of the fair value of its
assets. Copper is an internationally traded commodity, and its price is
effectively determined by the major metals exchanges  COMEX, LME and SHFE. The
prices on these exchanges generally reflect the worldwide balance of copper
supply and demand, but also are influenced significantly from time to time by
speculative actions and by currency exchange rates. The price of copper, our principal product, was a significant factor
influencing our results over the three-year period ended December 31, 2003. We
principally base our selling price for U.S. sales on the COMEX spot price per
pound of copper cathode, which averaged 81.1 cents in 2003, 71.7 cents in 2002
and 72.6 cents in 2001. Internationally, our copper selling prices are
generally based on the LME spot price for cathode. The LME spot price per pound
of copper averaged 80.7 cents in 2003, 70.7 cents in 2002 and 71.6 cents in
2001. The COMEX and LME prices averaged $1.17 and $1.16 per pound,
respectively, for the first
54 days of 2004 and both closed at $1.31 on February 23, 2004. At December 31, 2003, we had outstanding provisionally priced sales of
43.3 million pounds. For each 1 cent per pound change in the realized copper
price, revenue and pre-tax earnings would vary (plus or minus) approximately
$0.4 million for provisionally priced pounds at December 31, 2003.




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##### Table of Contents



52 Management monitors the implied unit cost of copper production on a
regular basis. Following is a schedule of significant components of the implied
unit cost of copper production for the years 2003, 2002 and 2001:  2003
    
    2002
    
    2001Reconciliation of Implied Unit Cost (per lb.)*Cash implied
unit cost of copper production  base operations
    
    $
    0.469
    
    
    
    0.473
    
    
    
    0.565Exploration, technology and project
development
    
    
    0.024
    
    
    
    0.016
    
    
    
    0.020Shutdown and curtailment expenses
    
    
    0.028
    
    
    
    0.027
    
    
    
    0.014Implied cash unit cost of copper production
    
    $
    0.521
    
    
    
    0.516
    
    
    
    0.599Non-cash (depreciation, depletion,
amortization and closure accrual)
    
    
    0.159
    
    
    
    0.166
    
    
    
    0.152Implied full unit cost of copper production
    
    $
    0.680
    
    
    
    0.682
    
    
    
    0.751
   *
    
    The implied full unit cost of copper production is based on PDMCs
operating margin per pound of copper sold (i.e., PDMC operating income
(loss) excluding special items, divided by the total pounds of copper sold
from its own mines for its own account, deducted from the LME copper
price). Implied cash unit cost of copper production excludes PDMCs
division depreciation, depletion and amortization and closure
accretion/accrual from its operating margin in the above calculation. Cash
unit cost of copper production-base operations excludes PDMCs segment
exploration, technology and project development, and shutdown and
curtailed expenses. Exploration, technology and project development
include expenses related to exploration, pre-feasibility and feasibility
studies and process technology. Shutdown and curtailment expenses include
costs related to idled facilities at operating properties,
care-and-maintenance properties and discontinued operations. Note that our
measures of implied unit cost of copper may not be comparable to similarly
titled measures reported by other companies. In 2003, the full and cash implied unit cost of copper production remained
flat compared with the costs in 2002. In 2002, the full and cash implied unit cost of copper production each
decreased 7 cents per pound, compared with the corresponding 2001 period. In
2002, approximately 3 cents of the cost improvement was due to lower energy
costs, and the remainder was primarily due to operational improvements
associated with the Companys Quest for Zeroprogram. Energy, including electricity, diesel fuel and natural gas, represents a
significant portion of production costs at our operations and were adversely
affecting New Mexico operations. In response, PDMC implemented a power cost
stabilization plan that consisted of an additional negotiated firm power
contract; the construction of a power co-generation plant in New Mexico;
short-term, alternating production curtailments at the Companys Tyrone,
Sierrita, Bagdad and Henderson operations; and a partial production curtailment
at Chino. Additionally, to mitigate PDMCs exposure to increases in diesel fuel and
natural gas prices, we implemented several price protection programs designed
to protect the Company against a significant upward movement in energy prices.
The Companys diesel fuel price protection program consisted of a combination
of purchased out-of-the-money (OTM) diesel fuel call options and fixed-price
diesel fuel swaps for our North and South American operations. The OTM call
options give the holder the right, but not the obligation, to purchase a
specific commodity at a pre-determined dollar cost, or strike price. OTM call
options are options with a strike price above the prevailing market price for
that commodity when purchased. The OTM diesel fuel call options mitigated a portion of our exposure to
volatile markets by capping the cost of the commodity if prices were to rise
above the strike price. If the price of diesel fuel is lower than the strike
price, the Company has the flexibility to purchase diesel fuel at prices lower
than the strike price and the options expire with no value. The swaps allow us
to establish a fixed price for a specific commodity product for delivery during
a specific future period. Our natural gas price protection program consisted of purchasing OTM call
options for our North American operations. OTM call options capped the
commodity purchase cost at the strike price while allowing the Company the
ability to purchase natural gas at a lower cost when market prices were lower
than the strike price. As a result of the above-mentioned plans and programs, in 2003, 2002 and
2001 Phelps Dodge was able to reduce and partially mitigate the impacts of
volatile electricity markets and rising diesel fuel and natural gas prices. Any material change in the price we receive for copper, or in PDMCs
implied unit cost of copper production, has a significant effect on our
results. Based on expected 2004 annual production of approximately 2.35 billion
pounds of copper, each 1 cent per pound change in the average annual copper
price, or in average annual implied unit cost of copper production, causes a
variation in annual operating income before taxes of approximately $23 million. Due to the market risk arising from the volatility of copper prices, our
objective is to sell copper cathode and rod produced at our U.S. operations at
the COMEX average price in the month of shipment, and copper cathode and
concentrate produced at our international operations at the LME average price
in the month of settlement with our customers. During 2003, PDMC sold
approximately 16 percent, 33 percent and 51 percent of its copper as
concentrates, copper cathode and copper rod, respectively. Additionally in 2003, operations outside the United States provided 26
percent of PDMCs sales (including sales through PDMCs U.S.-based sales
company), compared with 27 percent in 2002 and 22 percent in 2001. During 2003,
operations outside the United States (including international exploration)
contributed 63 percent of the divisions operating income, compared with a
reduction of 94 percent of the divisions operating loss for 2002 and 73
percent for 2001. From time to time, we may purchase or sell copper price protection
contracts for a portion of our expected future sales of our mine production. We
do this to limit the effects of potential decreases in copper selling prices.
We did not have any outstanding copper price protection contracts on December
31, 2003. The 2003 exploration program continued to place emphasis on the search for
and delineation of large-scale copper and copper/gold deposits. Phelps Dodge
expended $25.8 million on worldwide exploration during 2003, compared with
$20.0 million in 2002 and $36.8 million in 2001. Approximately 29 percent of
the 2003 expenditures occurred in the United States and 31 percent was spent
both at our domestic and international mine sites. The balance of exploration
expenditures was spent principally in Central Africa, Chile, Mexico, Europe,
Peru, Australasia, Canada and Brazil.




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##### Table of Contents



53 Note: Supplemental Data The following table summarizes PDMCs special items for
2003, 2002 and 2001 and the resultant earnings (losses) excluding these
special items.  ($ in millions)2003
    
    2002
    
    2001Special, pre-tax items:U.S. Mining Operations*
    
    $
    (5.5
    )
    
    
    (117.9
    )
    
    
    (1.5
    )South American Mines**
    
    
    
    
    
    
    
    
    
    
    Primary Molybdenum
    
    
    
    
    
    
    1.0
    
    
    
    (0.6
    )$
    (5.5
    )
    
    
    (116.9
    )
    
    
    (2.1
    )Segment operating income (loss)
excluding special items:U.S. Mining Operations*
    
    $
    79.5
    
    
    
    (21.1
    )
    
    
    (127.7
    )South American Mines**
    
    
    182.6
    
    
    
    65.4
    
    
    
    57.3Primary Molybdenum
    
    
    8.6
    
    
    
    7.6
    
    
    
    (11.1
    )$
    270.7
    
    
    
    51.9
    
    
    
    (81.5
    )
   *
    
    U.S. Mining Operations combines the following segments: Morenci,
Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and
Sales, and Other Mining.**
    
    South American Mines combines the following segments: Candelaria, Cerro
Verde and El Abra.Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. Note: Supplemental Data Special, pre-tax items and provisions in operating income (loss) were as
follows:  ($ in millions)2003U.S.
    
    South
    
    PrimaryMining
    
    American
    
    Molyb-Operations
    
    Mines
    
    denumEnvironmental provisions, net
    
    $
    (5.5
    )
    
    
    
    
    
    
    
  ($ in millions)2002U.S.
    
    South
    
    PrimaryMining
    
    American
    
    Molyb-Operations
    
    Mines
    
    denumDecember 2002 impairments and provisions:Asset impairment charges
    
    $
    (146.5
    )
    
    
    
    
    
    
    Accrued closure costs
    
    
    (7.0
    )
    
    
    
    
    
    
    Environmental provisions, net
    
    
    (2.6
    )
    
    
    
    
    
    
    1.0October 2001 restructuring:Reassessments of employee activities
and take-or-pay contracts
    
    
    5.1
    
    
    
    
    
    
    
    Additional retirement benefits
    
    
    (6.4
    )
    
    
    
    
    
    
    Environmental insurance recoveries, net
    
    
    16.9
    
    
    
    
    
    
    
    Sale of non-core real estate
    
    
    22.6
    
    
    
    
    
    
    
    Special, pre-tax items
    
    $
    (117.9
    )
    
    
    
    
    
    
    1.0
  ($ in millions)2001U.S.
    
    South
    
    PrimaryMining
    
    American
    
    Molyb-Operations
    
    Mines
    
    denumEnvironmental provisions, net
    
    $
    (14.9
    )
    
    
    
    
    
    
    April 2001 operational improvement plan
    
    
    (9.4
    )
    
    
    
    
    
    
    (0.6
    )October 2001 restructuring:Original programs
    
    
    (17.1
    )
    
    
    
    
    
    
    Gain on sale of Sossego
    
    
    39.9
    
    
    
    
    
    
    
    Special, pre-tax items
    
    $
    (1.5
    )
    
    
    
    
    
    
    (0.6
    )
   Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies.




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##### Table of Contents



54 PDMC Results by Reportable Segments  The following tables summarize, on a segment basis, production and sales statistics, operating income (loss),
and special items and provisions for 2003, 2002 and 2001.  U.S. Mines
    
    South American MinesBagdad/
    
    Miami/
    
    Chino/
    
    
    
    
    
    
    
    
    
    Candelaria/
    
    CerroMorenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    Subtotal
    
    Ojos del Salado
    
    Verde
    
    El Abra
    
    Subtotal2003Copper production (thousand short tons):Total production
    
    
    421.2
    
    
    
    182.6
    
    
    
    17.8
    
    
    
    39.9
    
    
    
    56.9
    
    
    
    718.4
    
    
    
    234.5
    
    
    
    96.3
    
    
    
    249.8
    
    
    
    580.6Less minority participants shares
    
    
    (63.3
    )
    
    
    
    
    
    
    
    
    
    
    (12.5
    )
    
    
    
    
    
    
    (75.8
    )
    
    
    (46.9
    )
    
    
    
    
    
    
    (122.4
    )
    
    
    (169.3
    )Net Phelps Dodge share
    
    
    357.9
    
    
    
    182.6
    
    
    
    17.8
    
    
    
    27.4
    
    
    
    56.9
    
    
    
    642.6
    
    
    
    187.6
    
    
    
    96.3
    
    
    
    127.4
    
    
    
    411.3Copper sales (thousand short tons):Net Phelps Dodge share from own mines
    
    
    357.9
    
    
    
    190.3
    
    
    
    20.0
    
    
    
    27.4
    
    
    
    56.9
    
    
    
    652.5
    
    
    
    187.4
    
    
    
    95.6
    
    
    
    128.4
    
    
    
    411.4Purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22.1
    
    
    
    
    
    
    
    7.3
    
    
    
    29.4Total copper sales
    
    
    357.9
    
    
    
    190.3
    
    
    
    20.0
    
    
    
    27.4
    
    
    
    56.9
    
    
    
    652.5
    
    
    
    209.5
    
    
    
    95.6
    
    
    
    135.7
    
    
    
    440.8($ in millions)Operating income (loss)
    
    $
    77.4
    
    
    
    81.0
    
    
    
    (6.0
    )
    
    
    (5.4
    )
    
    
    (17.2
    )
    
    
    129.8
    
    
    
    100.5
    
    
    
    42.7
    
    
    
    39.4
    
    
    
    182.6Special items and provisions
    
    $
    (1.1
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    (1.3
    )
    
    
    (0.5
    )
    
    
    (3.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002Copper production (thousand short tons):Total production
    
    
    412.7
    
    
    
    160.2
    
    
    
    10.6
    
    
    
    53.8
    
    
    
    69.9
    
    
    
    707.2
    
    
    
    219.5
    
    
    
    95.3
    
    
    
    248.2
    
    
    
    563.0Less minority participants shares
    
    
    (61.9
    )
    
    
    
    
    
    
    
    
    
    
    (17.9
    )
    
    
    
    
    
    
    (79.8
    )
    
    
    (43.9
    )
    
    
    
    
    
    
    (121.7
    )
    
    
    (165.6
    )Net Phelps Dodge share
    
    
    350.8
    
    
    
    160.2
    
    
    
    10.6
    
    
    
    35.9
    
    
    
    69.9
    
    
    
    627.4
    
    
    
    175.6
    
    
    
    95.3
    
    
    
    126.5
    
    
    
    397.4Copper sales (thousand short tons):Net Phelps Dodge share from own mines
    
    
    350.8
    
    
    
    176.1
    
    
    
    15.3
    
    
    
    35.8
    
    
    
    69.9
    
    
    
    647.9
    
    
    
    174.6
    
    
    
    94.9
    
    
    
    129.6
    
    
    
    399.1Purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35.8
    
    
    
    
    
    
    
    56.5
    
    
    
    92.3Total copper sales
    
    
    350.8
    
    
    
    176.1
    
    
    
    15.3
    
    
    
    35.8
    
    
    
    69.9
    
    
    
    647.9
    
    
    
    210.4
    
    
    
    94.9
    
    
    
    186.1
    
    
    
    491.4($ in millions)Operating income (loss)
    
    $
    24.1
    
    
    
    20.2
    
    
    
    (15.6
    )
    
    
    (110.4
    )
    
    
    1.6
    
    
    
    (80.1
    )
    
    
    47.6
    
    
    
    24.8
    
    
    
    (7.0
    )
    
    
    65.4Special items and provisions
    
    $
    (0.5
    )
    
    
    0.3
    
    
    
    (2.3
    )
    
    
    (117.2
    )
    
    
    
    
    
    
    (119.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2001Copper production (thousand short tons):Total production
    
    
    391.6
    
    
    
    249.5
    
    
    
    44.3
    
    
    
    78.2
    
    
    
    76.4
    
    
    
    840.0
    
    
    
    243.2
    
    
    
    84.9
    
    
    
    239.8
    
    
    
    567.9Less minority participants shares
    
    
    (58.8
    )
    
    
    
    
    
    
    
    
    
    
    (26.1
    )
    
    
    
    
    
    
    (84.9
    )
    
    
    (48.6
    )
    
    
    
    
    
    
    (117.5
    )
    
    
    (166.1
    )Net Phelps Dodge share
    
    
    332.8
    
    
    
    249.5
    
    
    
    44.3
    
    
    
    52.1
    
    
    
    76.4
    
    
    
    755.1
    
    
    
    194.6
    
    
    
    84.9
    
    
    
    122.3
    
    
    
    401.8Copper sales (thousand short tons):Net Phelps Dodge share from own mines
    
    
    333.0
    
    
    
    258.0
    
    
    
    46.9
    
    
    
    52.1
    
    
    
    76.4
    
    
    
    766.4
    
    
    
    190.1
    
    
    
    84.7
    
    
    
    126.7
    
    
    
    401.5Purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37.0
    
    
    
    
    
    
    
    5.8
    
    
    
    42.8Total copper sales
    
    
    333.0
    
    
    
    258.0
    
    
    
    46.9
    
    
    
    52.1
    
    
    
    76.4
    
    
    
    766.4
    
    
    
    227.1
    
    
    
    84.7
    
    
    
    132.5
    
    
    
    444.3($ in millions)Operating income (loss)
    
    $
    (61.9
    )
    
    
    11.5
    
    
    
    (5.1
    )
    
    
    (15.5
    )
    
    
    (16.3
    )
    
    
    (87.3
    )
    
    
    50.0
    
    
    
    1.8
    
    
    
    5.5
    
    
    
    57.3Special items and provisions
    
    $
    (1.5
    )
    
    
    (6.9
    )
    
    
    (3.6
    )
    
    
    (3.0
    )
    
    
    (1.9
    )
    
    
    (16.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Refer to segment discussion on pages 57 through 64. Revenues, operating costs and expenses of PDMCs segments include allocations that may not be reflective of market conditions.




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##### Table of Contents



55 PDMC Results By Reportable Segments  Primary
    
    ManufacturingMolybdenum
    
    and Sales
    
    Other Mining
    
    Total PDMC2003Copper production (thousand short tons):Total production
    
    
    
    
    
    
    6.6
    
    
    
    
    
    
    
    1,305.6Less minority participants shares
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    (246.3
    )Net Phelps Dodge share
    
    
    
    
    
    
    5.4
    
    
    
    
    
    
    
    1,059.3Copper sales (thousand short tons):Net Phelps Dodge share from own mines
    
    
    
    
    
    
    5.4
    
    
    
    
    
    
    
    1,069.3Purchased copper
    
    
    
    
    
    
    345.1
    
    
    
    
    
    
    
    374.5Total copper sales
    
    
    
    
    
    
    350.5
    
    
    
    
    
    
    
    1,443.8Molybdenum production (thousand pounds):Primary  Henderson
    
    
    22,247
    
    
    
    
    
    
    
    
    
    
    
    22,247By-product
    
    
    29,747
    
    
    
    
    
    
    
    
    
    
    
    29,747Total production
    
    
    51,994
    
    
    
    
    
    
    
    
    
    
    
    51,994Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    54,158
    
    
    
    
    
    
    
    
    
    
    
    54,158Purchased molybdenum
    
    
    8,199
    
    
    
    
    
    
    
    
    
    
    
    8,199Total molybdenum sales
    
    
    62,357
    
    
    
    
    
    
    
    
    
    
    
    62,357($ in millions)Operating income (loss)
    
    $
    8.6
    
    
    
    31.9
    
    
    
    (87.7
    )
    
    
    265.2Special items and provisions
    
    $
    
    
    
    
    (0.1
    )
    
    
    (2.0
    )
    
    
    (5.5
    )2002Copper production (thousand short tons):Total production
    
    
    
    
    
    
    5.4
    
    
    
    
    
    
    
    1,275.6Less minority participants shares
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    (246.8
    )Net Phelps Dodge share
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    1,028.8Copper sales (thousand short tons):Net Phelps Dodge share from own mines
    
    
    
    
    
    
    4.1
    
    
    
    
    
    
    
    1,051.1Purchased copper
    
    
    
    
    
    
    350.7
    
    
    
    
    
    
    
    443.0Total copper sales
    
    
    
    
    
    
    354.8
    
    
    
    
    
    
    
    1,494.1Molybdenum production (thousand pounds):Primary  Henderson
    
    
    20,517
    
    
    
    
    
    
    
    
    
    
    
    20,517By-product
    
    
    24,448
    
    
    
    
    
    
    
    
    
    
    
    24,448Total production
    
    
    44,965
    
    
    
    
    
    
    
    
    
    
    
    44,965Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    46,665
    
    
    
    
    
    
    
    
    
    
    
    46,665Purchased molybdenum
    
    
    7,393
    
    
    
    
    
    
    
    
    
    
    
    7,393Total molybdenum sales
    
    
    54,058
    
    
    
    
    
    
    
    
    
    
    
    54,058($ in millions)Operating income (loss)
    
    $
    8.6
    
    
    
    5.1
    
    
    
    (64.0
    )
    
    
    (65.0
    )Special items and provisions
    
    $
    1.0
    
    
    
    0.2
    
    
    
    1.6
    
    
    
    (116.9
    )
  Refer to segment discussion on pages 57 through 64. Revenues, operating costs and expenses of PDMCs segments include allocations that may not be reflective of market conditions.




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56 PDMC Results By Reportable Segments (continued)  Primary
    
    ManufacturingMolybdenum
    
    and Sales
    
    Other Mining
    
    Total PDMC2001Copper production (thousand short tons):Total production
    
    
    
    
    
    
    3.0
    
    
    
    
    
    
    
    1,410.9Less minority participants shares
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    (250.8
    )Net Phelps Dodge share
    
    
    
    
    
    
    3.2
    
    
    
    
    
    
    
    1,160.1Copper sales (thousand short tons):Net Phelps Dodge share from own mines
    
    
    
    
    
    
    2.9
    
    
    
    
    
    
    
    1,170.8Purchased copper
    
    
    
    
    
    
    418.4
    
    
    
    
    
    
    
    461.2Total copper sales
    
    
    
    
    
    
    421.3
    
    
    
    
    
    
    
    1,632.0Molybdenum production (thousand pounds):Primary  Henderson
    
    
    18,603
    
    
    
    
    
    
    
    
    
    
    
    18,603By-product
    
    
    36,912
    
    
    
    
    
    
    
    
    
    
    
    36,912Total production
    
    
    55,515
    
    
    
    
    
    
    
    
    
    
    
    55,515Less minority participants shares
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    (50
    )Net Phelps Dodge share from own mines
    
    
    55,465
    
    
    
    
    
    
    
    
    
    
    
    55,465Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    55,105
    
    
    
    
    
    
    
    
    
    
    
    55,105Purchased molybdenum
    
    
    1,609
    
    
    
    
    
    
    
    
    
    
    
    1,609Total molybdenum sales
    
    
    56,714
    
    
    
    
    
    
    
    
    
    
    
    56,714($ in millions)Operating income (loss)
    
    $
    (11.7
    )
    
    
    14.2
    
    
    
    (56.1
    )
    
    
    (83.6
    )Special items and provisions
    
    $
    (0.6
    )
    
    
    (6.9
    )
    
    
    22.3
    
    
    
    (2.1
    )
  Refer to segment discussion on pages 57 through 64. Revenues, operating costs and
expenses of PDMCs segments include allocations that may not be
reflective of market conditions.
Additionally, certain costs are not allocated to the reportable segments. (Refer to page 57 for further discussion.)




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57 Sales of Copper (U.S. and South America) and Molybdenum The Manufacturing and Sales segment is responsible for selling all copper
produced at the U.S. mines. Intersegment revenues of the individual U.S. mines
represent an internal allocation based on PDMCs sales to unaffiliated
customers. Therefore, the following discussion and analysis combines the U.S.
Mines and Other Mining segments with the Manufacturing and Sales segment.
Additionally, the South American Mines sold approximately 44 percent of their
copper to the Manufacturing and Sales segment in 2003 and 2002, and
approximately 40 percent in 2001. Intersegment sales by the South American
Mines are based upon arms-length prices at the time of the sale. Intersegment
sales of any individual mine may not be reflective of the actual prices PDMC
ultimately receives due to a variety of factors including additional
processing, timing of sales to unaffiliated customers, and transportation
premiums. These sales are reflected in the Manufacturing and Sales segment.  ($ in millions)2003
    
    2002
    
    2001U.S. Mining Operations*Unaffiliated customers
    
    $
    2,048.9
    
    
    
    1,844.3
    
    
    
    2,070.0Intersegment elimination
    
    
    (309.9
    )
    
    
    (289.8
    )
    
    
    (233.7
    )1,739.0
    
    
    
    1,554.5
    
    
    
    1,836.3South American Mines**Unaffiliated customers
    
    
    396.1
    
    
    
    372.8
    
    
    
    353.2Intersegment
    
    
    309.9
    
    
    
    289.8
    
    
    
    233.7706.0
    
    
    
    662.6
    
    
    
    586.9Primary MolybdenumUnaffiliated customers
    
    
    383.6
    
    
    
    268.7
    
    
    
    226.3Intersegment
    
    
    
    
    
    
    
    
    
    
    383.6
    
    
    
    268.7
    
    
    
    226.3Total PDMCUnaffiliated customers
    
    $
    2,828.6
    
    
    
    2,485.8
    
    
    
    2,649.5
   *
    
    U.S. Mining Operations combines the following segments: Morenci,
Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and
Sales, and Other Mining.**
    
    South American Mines combines the following segments: Candelaria/Ojos del
Salado, Cerro Verde and El Abra. U.S. Mines, Other Mines and Manufacturing and Sales Segments  Sales Sales and other operating revenues to unaffiliated customers by U.S.
Mines, Other Mining and Manufacturing and Sales increased $204.6 million, or 11
percent, in 2003, compared with 2002. This increase was primarily due to higher
average copper prices (approximately $196 million) and higher copper sales
volumes (approximately $9 million). In 2002, the decrease of $225.7 million, or 11 percent, in sales and other
operating revenues to unaffiliated customers compared with 2001 was primarily
due to lower sales volumes of copper (approximately $220 million) that
primarily resulted from our production curtailments. South American Mines Segments  Sales South American Mines sales and other operating revenues to unaffiliated
customers increased $23.3 million, or 6 percent, in 2003, compared with 2002.
This increase primarily was due to higher realized copper prices (approximately
$71 million); partially offset by lower sales volumes of copper (approximately
$48 million). The decrease in sales volumes to unaffiliated customers was more
than offset by increased intersegment sales to the Manufacturing and Sales
segment. In 2002, the increase of $19.6 million, or 6 percent, in sales and other
operating revenues to unaffiliated customers, compared with 2001, was primarily
due to higher sales volumes of copper (approximately $36 million) and higher
precious metal sales (approximately $5 million), partially offset by lower
realized copper prices (approximately $22 million). Primary Molybdenum Segment  Sales Primary Molybdenum sales and other operating revenues to unaffiliated
customers increased $114.9 million, or 43 percent, in 2003, compared with 2002.
This increase primarily was due to higher average molybdenum prices
(approximately $76 million) and higher sales volumes of molybdenum
(approximately $38 million). In 2002, the increase of $42.4 million, or 19 percent, in sales and other
operating revenues to unaffiliated customers, compared with 2001, was primarily
due to higher average molybdenum prices (approximately $50 million), partially
offset by lower sales volumes of molybdenum (approximately $10 million). Operating Income (Loss) for Copper (U.S. and South America) and Molybdenum In addition to the allocation of revenues, management allocates certain
operating costs, expenses and capital of PDMCs segments that may not be
reflective of market conditions. We also do not allocate all costs and expenses
applicable to a mine or operation from the division or corporate offices.
Accordingly, the segment information reflects management determinations that
may not be indicative of actual financial performance of each segment as if it
was an independent entity.  ($ in millions)2003
    
    2002
    
    2001U.S. Mining Operations*
    
    $
    74.0
    
    
    
    (139.0
    )
    
    
    (129.2
    )South American Mines**
    
    
    182.6
    
    
    
    65.4
    
    
    
    57.3Primary Molybdenum
    
    
    8.6
    
    
    
    8.6
    
    
    
    (11.7
    )Total PDMC
    
    $
    265.2
    
    
    
    (65.0
    )
    
    
    (83.6
    )
   *
    
    U.S. Mining Operations combines the following segments: Morenci,
Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and
Sales, and Other Mining.**
    
    South American Mines combines the following segments: Candelaria/Ojos del
Salado, Cerro Verde and El Abra.




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58 U.S. Mining Operations  Operating Income (Loss) U.S. Mining Operations reported operating income of $74.0 million
including a special, net pre-tax charge of $5.5 million in 2003, compared with
an operating loss of $139.0 million in 2002 including $117.9 million of
special, net pre-tax charges, and operating loss of $129.2 million, including a
special, pre-tax charge of $1.5 million in 2001. (Refer to the separate
discussion of PDMCs segments below for further discussion.) Note: Supplemental Data The following table summarizes U.S. Mining Operations special items for
2003, 2002 and 2001 and the resultant earnings (losses) excluding these special
items:  ($ in millions)2003
    
    2002
    
    2001Special, pre-tax items
    
    $
    (5.5
    )
    
    
    (117.9
    )
    
    
    (1.5
    )Segment operating earnings (losses)
excluding special items
    
    $
    79.5
    
    
    
    (21.1
    )
    
    
    (127.7
    )
   Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. In 2003, the special, net pre-tax charge was associated with environmental
provisions. In 2002, the special, net pre-tax charge was as follows: (i) a $115.5
million charge associated with an asset impairment at Cobre; (ii) a $19.9
million charge associated with an asset impairment at Hidalgo ($12.9 million)
and an associated accrual for closure costs ($7.0 million); (iii) an $18.1
million charge associated with an asset impairment at Ajo; (iv) a $2.6 million
charge for environmental provisions; (v) a $6.4 million charge for additional
pension-related benefits for employees at our Chino, Miami, Sierrita and Bagdad
operations because these operations were expected to remain curtailed beyond
one year from their January 2002 curtailment; partially offset by (vi) a $5.1
million pre-tax gain for the reassessment of the October 2001 restructuring
programs; (vii) a $16.9 million gain, net of fees and expenses, from recoveries
associated with insurance settlements on historic environmental claims; and
(viii) a $22.6 million gain on the sale of a non-core parcel of real estate in
New Mexico. As a result of the copper price, copper market and economic environment in
2001, we announced a series of actions in the 2001 fourth quarter that included
changes in our copper operations that led to partial curtailment of certain
facilities. This ultimately led to the reduction of approximately 220,000
metric tons of copper production annually (including our partners share),
approximately 14 million pounds of by-product molybdenum annually, and the
reduction of approximately 1,500 positions mostly in January 2002. These
actions resulted in a special, pre-tax charge of $17.1 million. Additionally in 2001, Phelps Dodge announced in the second quarter a
restructuring of our professional, administrative and operations support
functions, as well as various other operational improvements that resulted in a
net charge of $9.4 million. In the fourth quarter, a $14.9 million charge was
recognized for environmental provisions for closed facilities and closed
portions of operating facilities and a $39.9 million gain from the sale of our
50 percent interest in a copper project in Brazil. Curtailed Properties, Rationale and Turn-up Capacity as of December 31, 2003 Based upon the above-mentioned curtailment decisions in the 2001 fourth
quarter, the following operations or portions of these operations were
temporarily curtailed and remained curtailed or partially curtailed in 2002 and
2003.  
    
    The Chino mining operation and smelter were temporarily curtailed in
January 2002. These actions followed temporary suspension of the
concentrator operation in the second quarter of 2001. All of these actions
were taken due to continuing depressed copper market conditions and the
need to balance smelter feed and sulfuric acid production and consumption.As planned, Chinos SX/EW operations continued producing copper through
leaching of existing stockpiles. The production from these stockpiles declined
steadily during 2002 and 2003. Mining for leach material on a limited basis
was renewed in April 2003. In September 2003, a full mine-for-leach operation
was resumed.
    
    The Miami mine and refinery were temporarily curtailed in January
2002. These actions were taken due to continuing depressed copper
market conditions, to balance sulfuric acid consumption, and to
balance refinery feed within PDMC. All of these facilities remained
temporarily suspended throughout 2002 and 2003. The Miami SX/EW
operations continued producing copper in 2002 and 2003.
    
    The Bagdad concentrator operation was reduced to one-half its capacity
in January 2002. The Bagdad mining operation was also reduced to a
level that provided adequate ore to the reduced concentrator
operation. Bagdads SX/EW operations continued normally. In January
2003, the Bagdad concentrator operation was increased from one-half
capacity to 80 percent capacity. The Bagdad mining operation also was
increased to a level that provided adequate ore for the concentrator
operation.These temporary curtailments continued through 2002 and 2003. Concentrator
throughput was adjusted periodically during the year to balance concentrate
requirements at our Miami smelting operation, which continued to produce
normally.
    
    The Sierrita concentrator operation was temporarily reduced to one-half
capacity in January 2002. The Sierrita mining operation also was
temporarily reduced to a level that provided adequate ore to the reduced
concentrator operation. Sierritas SX/EW operations continued normally.
These curtailments continued through 2002 and 2003.




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59 The following table provides the rationale and other details for temporary
curtailments taken in 2001 at our U.S. copper mines that continued through 2002
and 2003:  Annual Production Curtailments(million lbs.)Affected Facility
        Date ofAnnouncedCurtailment
        Announcedin 2001
        Actual/Reductionsin 2002/2003
        Reason for Temporary ReductionChino, New Mexico  Mine (restarted on a limited basis April 2003; resumed full mine-for-leach operations September 2003)
          Smelter
        October 23, 2001
        150 prior to the restarting of mine
        45/70
          High worldwide copper inventory
          Balance smelter feed and sulfuric acid supplyMiami, Arizona  Mine
          Refinery
        October 23, 2001
        100
        61/64
          High worldwide copper inventory
          Balance sulfuric acid production and consumption
          Balance anode production and consumptionBagdad, Arizona  Mine
          Concentrator (80%; 50% prior to 2003)
        October 23, 2001
        140 (plus 7 million lbs. molybdenum)
        89/55(plus 4/2 million lbs. molybdenum)
          High worldwide copper inventory
          Molybdenum market conditions, including the overall molybdenum market supply-demand fundamentals, inventory levels and published pricesSierrita, Arizona  Mine
          Concentrator (50%)
        October 23, 2001
        100 (plus 7 million lbs. molybdenum)
        88/71(plus 8/2 million lbs. molybdenum)
          High worldwide copper inventory
          Molybdenum market conditions, including the overall molybdenum market supply-demand fundamentals, inventory levels and published pricesChino, New Mexico  Concentrator
        March 26, 2001
        136
        150/150
          Economic outlook, copper price and power availabilityTyrone, New Mexico  Mine (partially curtailed production September 2003)
        March 26, 2001
        Short-term sequential production curtailments
        Short-term sequential production curtailments
          Allocation of economic electrical energy across enterpriseBagdad, Arizona  Mine
          Concentrator
        March 26, 2001
        Short-term sequential production curtailments
        Short-term sequential production curtailments
          Allocation of economic electrical energy across enterpriseSierrita, Arizona  Mine
          Concentrator
        March 26, 2001
        Short-term sequential production curtailments
        Short-term sequential production curtailments
          Allocation of economic electrical energy across enterprise At December 31, 2003, we had approximately 680 million pounds of curtailed
annual copper production capacity (100 percent basis), depending on near-term
mine plans, that could be brought to market. This curtailed capacity is located
at eight of our mine sites, all with existing infrastructures. Approximately
635 million pounds relate to capacity in the United States and 45 million
pounds relate to capacity at our international locations. The following table summarizes the approximate temporarily curtailed
annual production as of December 31, 2003, by property:  Approximate Curtailed Copper Production Capacity (in million pounds)Property (100% basis)
    
    At December 31, 2003U.S. Mines:Morenci
    
    
    150Tyrone
    
    
    40Sierrita
    
    
    40Bagdad
    
    
    55Chino
    
    
    190Miami
    
    
    110Cobre
    
    
    50Total U.S. Mines
    
    
    635South American Mines:Ojos del Salado
    
    
    45Total PDMC
    
    
    680
  We have additional sources of copper that could be developed; however,
such additional sources would require the development of greenfield projects or
major brownfield expansions that would involve much greater capital
expenditures and far longer lead-times than would be the case for facilities on
care-and-maintenance status. The




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60 capital expenditures required to develop such
additional production
capacity include the costs of necessary infrastructure and would be
substantial. In addition, significant lead-time would be required for
permitting and construction. The Company bases its decisions to temporarily curtail production on a
variety of factors. We may temporarily curtail production in response to
external, macro-level factors such as prevailing and projected global copper
production and demand, and the magnitude and trend of changes in world copper
inventories. We may simply prefer to avoid depleting valuable, finite ore
reserves unnecessarily during periods of potentially low margins despite the
fact that cash flow and/or earnings may be positive at the time. The lead times
involved in temporarily curtailing and restarting open-pit copper mines are
such that careful consideration must be given to long-term planning rather than
immediate reaction to price fluctuations. Our decisions concerning temporary curtailment of certain mining
operations also take into account molybdenum market conditions. This includes
overall molybdenum market supply-demand fundamentals, inventory levels and
published prices. We also may adjust production at various properties in response to
internal, micro-level factors such as the need to balance smelter feed or an
internal shortage of sulfuric acid for our leaching operations. In other cases,
facilities may be temporarily curtailed as a result of changes in technology
that may make one technology, at a given copper price, more attractive than
another technology. Unique regional issues, such as the energy crisis in the
southwestern United States in 2000 and 2001, also may result in temporary
curtailments. Any decision to recommence full operations depends on several factors
including prevailing copper prices, managements assessment of copper market
fundamentals and its estimates of future copper price trends and the extent to
which any such new production is necessary for the efficient integration of the
Companys other copper-producing operations at that time. Managements
assessment of copper market fundamentals will reflect its judgment about future
global economic activity and demand, and its estimates of the likelihood and
timing of new projects of competitors being brought back into production. While
there is no single copper price threshold that would necessarily trigger the
recommencement of full operations, management does not expect to recommence
operations until warranted. Other steps necessary to recommence operations include such actions as
assembling an appropriate labor force, preparation and set-up of idle
equipment, restocking consumables and similar activities. We believe each of
our temporarily curtailed facilities, excluding Morenci, could be brought into
production within a few months to a year depending on the status of applicable
environmental permitting. Morenci would not be available until at least 2007
due to mine plan limitations. Projected Recommencement in 2004 of Curtailed Production Based upon the above-mentioned factors regarding recommencement of full
operations at our curtailed mines, Phelps Dodge decided in January 2004 to
resume production over the first nine months of 2004 at selected properties.
This decision has been based on the rapid increase in copper prices, the
apparent fundamental change in the market, our internal concentrate and
sulfuric acid balance, and molybdenum market fundamentals. The planned
production ramp-ups and timing are as follows:  
    
    Our Sierrita and Bagdad mines in Arizona began increasing production
in January 2004 with an expectation that Bagdad will be producing at
full capacity in the 2004 second quarter and Sierrita in the 2004
fourth quarter.
    
    Our Chino mine in New Mexico began increasing production in the 2003
fourth quarter as it resumes full mine-for-leach operation. In
addition, the milling operations are expected to commence in the 2004
third quarter at one-half capacity.
    
    Our Cobre mine in New Mexico has been curtailed since early 1999, and
it is expected to resume open-pit mining and milling operations by the
2004 third quarter.
    
    Our Ojos del Salado mine in Chile, which has been curtailed since
1998, is expected to resume underground mining and milling operations
by the 2004 second quarter.
    
    Our Miami smelter in Arizona should resume operating at full capacity
by the 2004 third quarter. The recommencement of our curtailed mines, in conjunction with the
one-third share of Chino acquired in December 2003, will increase our copper
production by approximately 240 million pounds in 2004 and approximately 370
million pounds in 2005, as compared with 2003 production, when we achieve full
run rate. This will bring production in 2004 and 2005 to approximately 2.35
billion pounds (2.8 billion pounds on a 100 percent basis) and 2.5 billion
pounds (3.0 billion pounds on a 100 percent basis), respectively. As a result
of the increased production at Sierrita and Bagdad, our molybdenum by-product
production will increase by approximately 3 million pounds to a total of 33
million pounds in 2004. Additionally, capital expenditures will increase by
approximately $15 million as a result of the ramp-up in production. Annual
copper capacity, excluding Morenci, that will remain curtailed after these
recommencements is approximately 250 million pounds (both our share and 100
percent basis). Even though we remain very optimistic about the copper upturn, we will
remain disciplined about our production profile. We will continue to configure
our operations so that we can quickly respond to both positive and negative
market swings. Morenci Segment  Operating Income (Loss) The Morenci open-pit mine, located in southeastern Arizona, primarily
produces electrowon copper cathodes. We own an 85 percent undivided interest in
Morenci and apply the proportional consolidation method of accounting. Our
share of copper sales in 2003 totaled 357,900 tons, compared with 350,800 and
333,000 tons in 2002 and 2001, respectively. Phelps Dodges share of copper
production increased in 2003 to 357,900 tons, compared with 350,800 and 332,800
tons in 2002 and 2001, respectively. Operating income of $77.4 million for 2003 increased $53.3 million
compared with 2002, primarily due to higher average copper prices
(approximately $57 million); partially offset by higher cost of copper
production (approximately $5 million). Higher cost of copper is primarily due
to higher energy costs (approximately $14 million) and an unfavorable change in
heap-leach and work-in-process inventories (approximately $2 million);
partially offset by higher flow rates (ap-




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61 proximately $6 million) and lower
depreciation expense (approximately $5 million). Operating income of $24.1
million in 2002 increased $86.0 million compared with 2001, primarily due to lower cost of
copper production (approximately $87 million); partially offset by lower
average copper prices (approximately $6 million). Bagdad/Sierrita Segment  Operating Income Our wholly owned Bagdad and Sierrita open-pit mines, located in northwest
Arizona and near Green Valley, Arizona, respectively, mine copper sulfide and
oxide ores. They produce copper and molybdenum concentrates. Copper sales in
2003 totaled 190,300 tons, compared with 176,100 and 258,000 in 2002 and 2001,
respectively. Copper production in 2003 totaled 182,600 tons, compared with
160,200 and 249,500 tons in 2002 and 2001, respectively. The Sierrita operation leases property adjacent to its mine upon which its
electrowinning tankhouse is located. The current lease agreement expired in
2003. Future alternatives, including extension of the lease, are being
considered. As a result, Sierritas electrowon copper cathode production has
been curtailed since the 2003 fourth quarter. Operating income of $81.0 million for 2003 increased $60.8 million
compared with 2002, primarily due to lower cost of copper production
(approximately $29 million) and higher average copper prices (approximately $30
million). The lower cost of copper production primarily was due to higher
molybdenum by-product credits resulting from higher prices and volumes
(approximately $56 million); partially offset by higher energy costs
(approximately $13 million), higher mining and milling costs (approximately $10
million) and an unfavorable change in heap-leach and work-in-process
inventories (approximately $5 million). Operating income of $20.2 million in
2002 increased $8.7 million compared with 2001, primarily due to lower pre-tax
special charges of $7.2 million. On April 28, 2003, the Company announced its copper concentrate-leaching
demonstration plant at Bagdad, Arizona, had been commissioned ahead of
schedule. It is now operating at design capacity. We believe the Bagdad plant
is the first commercial facility in the world to use high-temperature pressure
leaching to treat chalcopyrite concentrates. The new technology should make it
more economical to recover copper from chalcopyrite ores in some circumstances,
which accounts for approximately 70 percent of the worlds known copper
reserves. Our immediate plans are to continue in the present mode of operation
until the economic viability of the process is proven. Once we have completed
this demonstration, we will be ready for larger scale commercial application
where appropriate. Miami/Bisbee Segment  Operating Loss Our wholly owned Miami open-pit mine, located in Miami, Arizona, produces
electrowon copper cathode. Since January 2002, the Miami mine and refinery have
been closed temporarily due to the economic environment. The small Bisbee
precipitation operation is located in Arizona. Copper sales in 2003 totaled
20,000 tons, compared with 15,300 and 46,900 tons in 2002 and 2001,
respectively. Copper production in 2003 totaled 17,800 tons, compared with
10,600 and 44,300 tons in 2002 and 2001, respectively. An operating loss of $6.0 million for 2003 decreased $9.6 million compared
with 2002, primarily due to lower cost of copper production (approximately $5
million), higher average copper prices (approximately $3 million), and lower
pre-tax special losses of $1.8 million. Lower cost of copper production was
attributable to higher production (approximately $2 million) and lower
depreciation expense (approximately $4 million); partially offset by higher
energy costs (approximately $1 million). The 2002 operating loss of $15.6
million increased $10.5 million compared with 2001, primarily due to higher
shutdown costs (approximately $12 million). Chino/Cobre Segment  Operating Loss The Chino open-pit mine, located near Silver City, New Mexico, primarily
mines copper sulfide and oxide ores. On December 19, 2003, we completed the
acquisition of Heiseis one-third partnership interest in Chino Mines Company,
which is now wholly owned by subsidiaries of Phelps Dodge. Prior to the
acquisition, we owned a two-thirds partnership interest in Chino and applied
the proportional consolidation method of accounting. Beginning on January 1,
2002, the Chino mine and smelter were closed temporarily; however, mining for
leach material was restarted on a limited basis at Chino in April 2003. In
September 2003 a full mine-for-leach operation was resumed. Our wholly owned
Cobre mine, which is adjacent to the Chino mine, has been curtailed since early
1999. Copper sales in 2003 totaled 27,400 tons, compared with 35,800 and 52,100
tons in 2002 and 2001, respectively. Phelps Dodges share of copper production
decreased in 2003 to 27,400 tons, compared with 35,900 and 52,100 tons in 2002
and 2001, respectively. An operating loss of $5.4 million for 2003 decreased $105.0 million
compared with 2002, primarily due to lower pre-tax special charges of $115.9
for impairment of Cobre and higher average copper prices (approximately $4
million); partially offset by higher cost of copper production (approximately
$12 million) and lower copper sales volumes (approximately $3 million). Higher
cost of copper production primarily was due to decreased production from lower
leach solution grades and flow rates (approximately $7 million), higher energy
costs (approximately $5 million) and higher operating costs (approximately $6
million); partially offset by a favorable change in heap-leach and
work-in-process inventories (approximately $5 million). The 2002 operating loss
of $110.4 million increased $94.9 million compared with 2001, primarily due to
the net pre-tax charge of $115.5 million associated with the previously
mentioned asset impairment at Cobre; partially offset by improved cost of
copper production (approximately $22 million). Tyrone Segment  Operating Income (Loss) Our wholly owned Tyrone open-pit mine, located near Tyrone, New Mexico,
primarily mines copper oxide ore. It produces electrowon copper cathode. In
September 2003, we partially curtailed production at Tyrone. Copper sales in
2003 totaled 56,900 tons, compared with 69,900 and 76,400 tons in 2002 and
2001, respectively. Copper production decreased in 2003 to 56,900 tons,
compared with 69,900 and 76,400 tons in 2002 and 2001, respectively. An operating loss of $17.2 million for 2003 increased $18.8 million
compared with 2002, primarily due to higher cost of copper production
(approximately $27 million); partially offset by higher average copper prices
(approximately $9 million). The higher cost of copper production included an
unfavorable change in heap-leach and work-in-process inventories (approximately
$41 million) and lower produc-




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62 tion due to lower grade and recovery
(approximately $13 million); partially offset by lower costs associated with
mine plan changes and lower production (approximately $17 million), lower
closure expense from the adoption of SFAS No. 143 (approximately $8 million)
and lower energy costs (approximately $2 million). The 2002 operating income
of $1.6 million increased $17.9 million compared with 2001, due to lower cost
of copper production (approximately $15 million). South American Mines  Operating Income South American Mines reported operating income in 2003 of $182.6 million,
compared with operating income of $65.4 million in 2002 and $57.3 million in
2001. See U.S. Mining Operations  Operating Income (Loss) for a discussion of
curtailed production, factors influencing the decision to recommence full
operations and the principal steps necessary to recommence such operations.
(Refer to the separate discussion of PDMCs segments below for further
discussion). Candelaria/Ojos del Salado Segment  Operating Income The Candelaria open-pit mine is located near Copiapó in northern Chile and
produces copper concentrates. It also includes the nearby Ojos del Salado
underground mine that produces concentrates. We own an 80 percent partnership
interest in Candelaria, a Chilean contractual mining company, and we apply the
proportional consolidation method of accounting. Copper sales in 2003 totaled
209,500 tons, compared with 210,400 and 227,100 tons in 2002 and 2001,
respectively. Phelps Dodges share of copper production in 2003 totaled 187,600
tons, compared with 175,600 and 194,600 tons in 2002 and 2001, respectively. Operating income of $100.5 million for 2003 increased $52.9 million
compared with 2002, primarily due to higher average copper prices
(approximately $33 million), lower cost of copper production (approximately $18
million) and higher copper sales volumes (approximately $3 million). The
decrease in unit cost of copper production was primarily due to higher copper
ore grade (approximately $8 million), higher precious metal credits
(approximately $6 million), lower downstream charges (approximately $11
million) and a favorable change in work-in-process inventory (approximately $9
million); partially offset by higher operating costs (approximately $14
million) and higher depreciation expense (approximately $1 million). Operating
income of $47.6 million in 2002 decreased $2.4 million compared with 2001,
primarily due to lower copper sales volumes (approximately $4 million) and
higher cost of copper production (approximately $5 million); partially offset
by higher net concentrate selling prices (approximately $8 million). Cerro Verde Segment  Operating Income The Cerro Verde open-pit mine, located near Arequipa, Peru, produces
electrowon copper cathodes. We own approximately 82 percent of the common stock
of Cerro Verde, which we fully consolidate and show the minority interest.
Copper sales in 2003 totaled 95,600 tons, compared with 94,900 and 84,700 tons
in 2002 and 2001, respectively. Copper production increased in 2003 to 96,300
tons from 95,300 and 84,900 tons in 2002 and 2001, respectively. Operating income of $42.7 million for 2003 increased $17.9 million from
2002 primarily due to higher average copper prices (approximately $22 million);
partially offset by higher cost of copper production (approximately $3
million). Higher cost of copper production primarily was due to higher
operating expenses (approximately $5 million) and higher energy costs
(approximately $3 million); partially offset by a favorable change in
heap-leach and work-in-process inventories (approximately $2 million) and lower
depreciation expense (approximately $3 million). Operating income of $24.8
million in 2002 increased $23.0 million from 2001 primarily due to lower cost
of copper production (approximately $21 million). El Abra Segment  Operating Income (Loss) The El Abra open-pit mine is located in northern Chile and produces
electrowon copper cathodes. We own a 51 percent partnership interest in El
Abra, a Chilean contractual mining company, and we apply the proportional
consolidation method of accounting. The remaining 49 percent interest is owned
by Corporación Nacional del Cobre de Chile (CODELCO), a Chilean state-owned
company. El Abra completed its $70 million project (including our partners
share) to leach uncrushed run-of-mine (ROM) material in December 2001, and
started ROM production in January 2002. ROM allows El Abra to maintain
tank-house design capacity. During 2003, El Abra produced approximately 16
percent of its total production from ROM, compared with 14 percent during 2002.
Copper sales in 2003 totaled 135,700 tons, compared with 186,100 and 132,500
tons in 2002 and 2001, respectively. Phelps Dodges share of copper production
slightly increased in 2003 to 127,400 tons, compared with 126,500 and 122,300
tons in 2002 and 2001, respectively. Operating income of $39.4 million for 2003 increased $46.4 million from
2002 primarily due to higher average copper prices (approximately $39 million)
and lower cost of copper production (approximately $5 million). Lower cost of
copper production reflected a favorable change in heap-leach and
work-in-process inventories (approximately $10 million), and lower energy costs
(approximately $2 million); partially offset by higher depreciation expense
(approximately $4 million) and higher operating expenses (approximately $2
million). The 2002 operating loss of $7.0 million increased $12.5 million from
2001, primarily due to higher cost of copper production (approximately $8
million). In 2001 and 2002, El Abras financial performance was hampered by low
copper prices and a high debt service burden resulting in cash shortfalls of
approximately $70 million in 2001 and $60 million in 2002. Subordinated loans
in 2001 were provided pro-rata (Phelps Dodge: 51 percent, CODELCO: 49 percent,
at LIBOR plus 1.0 percent), while the subordinated loans in 2002 were provided
by Phelps Dodge only (at LIBOR plus 5.5 percent) and will be paid after the
senior loans are paid in full (in May 2007). Payments of scheduled senior
long-term debt, on a 100 percent basis, for 2003 totaled approximately $105
million (divided into semi-annual payments due in May and November). Primary Molybdenum  Operating Income (Loss) Primary Molybdenum includes our wholly owned Henderson and Climax
molybdenum mines in Colorado and conversion facilities in the United States and
Europe. Henderson produces high-purity, chemical-grade molybdenum concentrates
that are further processed into value-added molybdenum chemical products.
Climax is currently on care-and-maintenance status. We expect to bring Climax
into




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63 production concurrent with the exhaustion of the Henderson molybdenum mine
reserves for continued long-term primary molybdenum supply for the chemicals
business. Primary Molybdenum operations reported operating income in 2003 of $8.6
million, compared with operating income of $8.6 million in 2002 including a
special, net pre-tax gain of $1.0 million, and an
operating loss of $11.7 million in 2001 including $0.6 million of special,
net pre-tax charges. Excluding special items, 2003 operating income increased $1.0 million
compared with 2002, primarily due to higher average molybdenum prices
(approximately $76 million) and higher sales volumes (approximately $38
million); partially offset by higher purchased costs of third-party molybdenum
as well as by-product molybdenum purchased from certain of our U.S. copper
operations (approximately $77 million), higher production costs (approximately
$31 million), higher shutdown expenses (approximately $3 million) and higher
marketing costs (approximately $2 million). The higher production costs
primarily resulted from higher mining costs (approximately $10 million),
conversion costs (approximately $11 million), energy costs (approximately $5
million) and higher maintenance costs (approximately $3 million). The 2002
increase in operating income of $20.3 million compared with 2001, primarily was
due to higher average molybdenum prices (approximately $50 million) and lower
primary molybdenum costs ($12 million); partially offset by higher costs of
purchased molybdenum ($32 million) and lower sales volumes of molybdenum
(approximately $10 million). Note: Supplemental Data The following table summarizes Primary Molybdenums special items for
2003, 2002 and 2001 and the resultant earnings (losses) excluding these special
items:  ($ in millions)2003
    
    2002
    
    2001Special, pre-tax items
    
    $
    
    
    
    
    1.0
    
    
    
    (0.6
    )Segment operating earnings
(losses) excluding special items
    
    $
    8.6
    
    
    
    7.6
    
    
    
    (11.1
    )
   Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. The following table provides the rationale and other details for temporary
curtailments taken in 2000 at our primary molybdenum operations (see U.S.
Mining Operations  Operating Income (Loss) for a discussion of by-product
molybdenum production curtailments):  Affected Facility
    
    Henderson, Colorado MineDate of Announced
Temporary Curtailment
    
    May 8, 2000Approximate Annual Molybdenum
Production Reduction (million lbs.)
    
    5Approximate Production Reduction
in 2002 (million lbs.)
    
    3Reason for Temporary Reduction
    
    Molybdenum market conditions, including
the overall molybdenum market supply-demand fundamentals, inventory levels
and published prices.
  The molybdenum market is generally characterized by cyclical and volatile
prices, little product differentiation and strong competition. The annual
Metals WeekDealer Oxide mean price of $5.32 per pound in 2003, compared with
$3.77 and $2.36 per pound in 2002 and 2001, respectively. Prices for chemical
products are generally less directly based on the previously noted reference
prices. Prices are influenced by production costs of domestic and foreign
competitors, worldwide economic conditions, world supply/demand balances,
inventory levels, the U.S. dollar exchange rate and other factors. Molybdenum
prices also are affected by the demand for end-use products in, for example,
the construction, transportation and durable goods markets. A substantial
portion of world molybdenum production is a by-product of copper mining, which
is relatively insensitive to molybdenum price levels. By-product production
accounts for between 50 percent and 60 percent of global production. Our expected 2004 molybdenum production is approximately 57 million pounds
(approximately 24 million pounds from our primary mine and 33 million pounds
from by-product mines). Approximately 70 percent of our molybdenum contracts
are priced based on the average of the previous 30 days of published prices
(i.e., Platts Metals Week, Ryans Notes or Metal Bulletin), plus premiums.
Accordingly, each $1.00 per pound change in our average annual realized
molybdenum price causes a variation in annual operating income before taxes of
approximately $40 million (subject to any negotiated limitations in outstanding
customer agreements). Manufacturing and Sales Segment  Operating Income Manufacturing and Sales reported operating income of $31.9 million
including a special, net pre-tax charge of $0.1 million in 2003, compared with
operating income of $5.1 million in 2002 including a special, net pre-tax gain
of $0.2 million, and operating income of $14.2 million in 2001 including a
special, net pre-tax charge of $6.9 million. Excluding special items, 2003 operating income increased $27.1 million
compared with 2002, primarily due to changes in intercompany acid credits
(approximately $9 million) and downstream charges (approximately $6 million),
and lower depreciation and amortization expense (approximately $8 million).
Excluding special items, 2002 operating income decreased $16.2 million compared
with 2001, primarily due to lower copper concentrate prices. Note: Supplemental Data The following table summarizes Manufacturing and Sales segments special
items for 2003, 2002 and 2001 and the resultant earnings excluding these
special items:  ($ in millions)2003
    
    2002
    
    2001Special, pre-tax items
    
    $
    (0.1
    )
    
    
    0.2
    
    
    
    (6.9
    )Segment operating earnings
excluding special items
    
    $
    32.0
    
    
    
    4.9
    
    
    
    21.1
   Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. Other Mining Segment  Operating Loss Other Mining reported an operating loss of $87.7 million including a
special, net pre-tax charge of $2.0 million in 2003, compared with an operating
loss of $64.0 million in 2002 including a special, net pre-tax gain of $1.6
million, and an operating loss of $56.1 million in 2001 including a special,
net pre-tax gain of $22.3 million. Excluding special items, 2003 operating loss increased $20.1 million
compared with 2002, primarily due to higher exploration ex-




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64 penses (approximately
$6 million), process technology expenses (approximately $5 million), profit
sharing costs (approximately $4 million) and the absence of a gain on asset
disposals in 2002 (approximately $7 million). Excluding special items, 2002
operating loss decreased by $12.8 million compared with 2001, primarily due to
lower exploration expenses (approximately $17 million). Note: Supplemental Data The following table summarizes Other Mining segments special items for
2003, 2002 and 2001 and the resultant losses excluding these special items:  ($ in millions)2003
    
    2002
    
    2001Special, pre-tax items
    
    $
    (2.0
    )
    
    
    1.6
    
    
    
    22.3Segment operating losses
excluding special items
    
    $
    (85.7
    )
    
    
    (65.6
    )
    
    
    (78.4
    )
   Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. PDMC  Other Matters  New Mexico Reclamation (Refer to pages 78 through 82 for more extensive discussion of Significant
New Mexico Environmental and Reclamation Programs.) 
 RESULTS OF PHELPS DODGE INDUSTRIES PDI, our manufacturing division, produces engineered products principally
for the global energy, telecommunications, transportation and specialty
chemicals sectors. Its operations are characterized by products with
significant market share, internationally competitive cost and quality, and
specialized engineering capabilities. The manufacturing division includes our
Specialty Chemicals segment and our Wire and Cable segment. Our Specialty
Chemicals segment includes Columbian Chemicals Company and its subsidiaries
(Columbian Chemicals or Columbian). Our Wire and Cable segment consists of
three worldwide product line businesses including magnet wire, energy and
telecommunication cables, and specialty conductors.  ($ in millions)2003
    
    2002
    
    2001Sales and
other operating revenues to unaffiliated customers:Specialty Chemicals
    
    $
    644.2
    
    
    
    548.8
    
    
    
    582.0Wire and Cable
    
    
    669.9
    
    
    
    687.4
    
    
    
    770.9$
    1,314.1
    
    
    
    1,236.2
    
    
    
    1,352.9Operating income (loss):Specialty Chemicals
    
    $
    54.8
    
    
    
    48.1
    
    
    
    61.8Wire and Cable
    
    
    13.7
    
    
    
    (17.5
    )
    
    
    12.2$
    68.5
    
    
    
    30.6
    
    
    
    74.0
  PDI  Sales PDI reported sales to unaffiliated customers of $1,314.1 million in 2003,
compared with $1,236.2 million in 2002 and $1,352.9 million in 2001. The increase of $77.9 million in 2003 compared with 2002 was primarily due
to higher specialty chemicals sales of $95.4 million resulting from higher
average unit selling prices (approximately $53 million) principally in Europe
and South America due to general market and higher feedstock-related increases,
higher foreign currency translation gains primarily in Europe (approximately
$34 million) and higher sales volumes (approximately $9 million); offset by
lower wire and cable sales of $17.5 million primarily due to lower sales in
North America ($23 million) due to a sluggish manufacturing sector; partially
offset by higher sales volumes in international markets (approximately $5
million). The decrease of $116.7 million in 2002 compared with 2001 was primarily
due to (i) lower specialty chemicals sales volumes in the United States
(approximately $38 million) and (ii) lower wire and cable sales resulting
primarily from lower sales volumes due to continued economic weakness in the
United States (approximately $67 million) and reduced sales in Central and
South America due to lower demand (approximately $27 million); partially offset
by higher sales volumes in Thailand (approximately $10 million). PDI  Operating Income PDI reported operating income of $68.5 million in 2003 including a
special, net pre-tax gain of $1.7 million, compared with operating income of
$30.6 million in 2002 including a special, net pre-tax loss of $22.0 million,
and $74.0 million in 2001 including a special, net pre-tax loss of $4.7
million. (Refer to the separate discussion of PDIs Specialty Chemicals and
Wire and Cable segments below for further detail). In 2003, operations outside the United States provided 62 percent of PDIs
sales, compared with 60 percent in 2002 and 64 percent in 2001. During the
year, operations outside the United States contributed 105 percent of PDIs
operating income, compared with 183 percent in 2002 and 67 percent in 2001. Note: Supplemental Data The following table summarizes PDIs special items for 2003, 2002 and
2001 and the resultant earnings (losses) excluding these special items:  ($ in millions)2003
    
    2002
    
    2001Operating income
    
    $
    68.5
    
    
    
    30.6
    
    
    
    74.0Special, pre-tax items
    
    
    1.7
    
    
    
    (22.0
    )
    
    
    (4.7
    )Operating income before
special items
    
    $
    66.8
    
    
    
    52.6
    
    
    
    78.7
   Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies.




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65 Note: Supplemental Data Special items and provisions in operating income were as follows:  ($ in millions)2003
    
    2002
    
    2001Termination of a foreign postretirement benefit
plan
    
    $
    3.2
    
    
    
    
    
    
    
    Asset impairment
    
    
    (1.7
    )
    
    
    
    
    
    
    (3.3
    )Goodwill impairment
    
    
    (0.9
    )
    
    
    
    
    
    
    September 2002 restructuring:Original programs
    
    
    
    
    
    
    (23.6
    )
    
    
    Reassessment of employee severance
    
    
    0.2
    
    
    
    
    
    
    
    Environmental provisions, net
    
    
    0.9
    
    
    
    0.3
    
    
    
    October 2001 restructuring:Original programs
    
    
    
    
    
    
    
    
    
    
    (1.4
    )Reassessment of employee activities and
disposal and dismantling
    
    
    
    
    
    
    0.4
    
    
    
    Reassessment of 2000 closure
    
    
    
    
    
    
    0.5
    
    
    
    June 1999 restructuring:Reassessment of disposal and dismantling
    
    
    
    
    
    
    0.4
    
    
    
    Special, pre-tax items
    
    $
    1.7
    
    
    
    (22.0
    )
    
    
    (4.7
    )
  Specialty Chemicals  Operating Income Specialty Chemicals reported operating income of $54.8 million including a
special, net pre-tax gain of $3.7 million in 2003, compared with operating
income of $48.1 million in 2002, including a special, pre-tax gain of $1.1
million, and operating income of $61.8 million in 2001, including a special,
pre-tax charge of $1.4 million. Excluding special items, 2003 operating income increased $4.1 million
compared with 2002 primarily due to greater Quest for Zeroimprovements of
approximately $11 million and improved variable margins primarily in Europe
(approximately $21 million driven by favorable exchange rates and pricing
improvements); partially offset by higher manufacturing expense (approximately
$30 million) primarily associated with increased turnaround activity, higher
utility costs, benefits expense and depreciation expense. Excluding special items, the 2002 decrease in operating income of $16.2
million compared with 2001 was primarily due to lower sales volumes in North
America (approximately $18 million) as a result of reduced demand; partially
offset by the absence of goodwill amortization (approximately $4 million). Note: Supplemental Data The following table summarizes Specialty Chemicals special items for
2003, 2002 and 2001 and the resultant earnings (losses) excluding these special
items:  ($ in millions)2003
    
    2002
    
    2001Special, pre-tax items
    
    $
    3.7
    
    
    
    1.1
    
    
    
    (1.4
    )Segment operating earnings
excluding special items
    
    $
    51.1
    
    
    
    47.0
    
    
    
    63.2
   Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. In 2003, the special, net pre-tax gain of $3.7 million was due to a $3.2
million pre-tax gain associated with the termination of a foreign
postretirement benefit plan and a $0.5 million pre-tax adjustment for
environmental provisions. In 2002, the special, net pre-tax gain of $1.1 million was due to a $0.5
million pre-tax reassessment of prior restructuring programs and a $0.6 million
pre-tax adjustment for environmental provisions. In the fourth quarter of 2001, Phelps Dodge announced a series of actions
to address the then-current economic environment. This resulted in the
temporary closure of Columbians El Dorado, Arkansas, facility and a special,
pre-tax loss of $1.4 million. The restructuring plan included the reduction of
approximately 100 positions and charges associated with employee
severance-related costs of $0.8 million and disposal and dismantling charges of
$0.6 million. Wire and Cable  Operating Income (Loss) Wire and Cable reported operating income of $13.7 million including a
special, net pre-tax charge of $2.0 million in 2003, compared with an operating
loss of $17.5 million in 2002 including a special, pre-tax charge of $23.1
million, and operating income of $12.2 million in 2001 including a special,
pre-tax charge of $3.3 million. Excluding special items, 2003 operating income increased $10.1 million due
to greater Quest for Zeroimprovements of approximately $9 million, lower
operating expenses primarily generated by cost saving initiatives in prior
years (approximately $16 million) and lower depreciation expense (approximately
$5 million); partially offset by lower sales volumes and prices due to reduced
global demand (approximately $20 million). Excluding special items, the 2002 decrease in operating income of $9.9
million compared with 2001 was primarily due to lower sales volumes in North
America resulting from continued softness in key markets such as aerospace,
consumer durables and industrial goods (approximately $22 million) and lower
sales volumes in Central and South America (approximately $8 million);
partially offset by higher sales volumes in Thailand (approximately $4
million), lower operating expenses generated by Quest for Zeroand other
operating improvements (approximately $14 million) and the cessation of
goodwill amortization (approximately $3 million) resulting from the adoption of
SFAS No. 142 on January 1, 2002. In 2003, we began construction of a new magnet wire production facility in
China. The total cost of the project is estimated at approximately $14 million,
with expenditures of approximately $4 million through December 31, 2003. The
facility, which will be in Suzhou, is expected to begin production during the
second quarter of 2004. It will serve the fast-growing demand for magnet wire
in China. In January 2001, Alcoa Aluminio, S.A. exercised a put option that required
Phelps Dodge or a designee company to acquire the 40 percent minority interest
in Phelps Dodge and Alcoa Fios e Cabos Electricos, S.A., a Phelps Dodge wire
and cable facility in Brazil, in which we had a 60 percent interest (prior to
acquiring the 40 percent minority interest). The transaction closed in March
2001 for $44.8 million in cash.




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66 Note: Supplemental Data The following table summarizes Wire and Cables special items for 2003,
2002 and 2001 and the resultant earnings excluding these special items:  ($ in millions)2003
    
    2002
    
    2001Special, pre-tax items
    
    $
    (2.0
    )
    
    
    (23.1
    )
    
    
    (3.3
    )Segment operating earnings excluding
special items
    
    $
    15.7
    
    
    
    5.6
    
    
    
    15.5
   Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. In the 2003 fourth quarter, we determined that due to continuing reduced
market conditions in North America for magnet wire and high performance
conductors, the Laurinburg, North Carolina, and West Caldwell, New Jersey,
facilities, both temporarily closed in the 2002 fourth quarter, would not be
re-opened. This action resulted in further impairment charges related to these
assets of $1.3 million. The amount of the additional asset impairment was
determined through an assessment of fair value based on independent appraisals
of the existing assets at these two plants. No additional severance related
charges were required. Additionally, a further write-down of $0.4 million was
recognized to reduce the carrying value of the assets of our Hopkinsville
facility closed in 2000. This adjustment reflected our current view of the fair
value of these assets. We also performed an impairment test on goodwill at our
magnet wire and high performance conductors facilities through a comparison of
the carrying value to the respective fair value (using an estimate of
discounted cash flows) and determined that a $0.9 million charge was required
to write-off magnet wires entire goodwill. Also during 2003, a special net pre-tax gain of $0.6 million was
recognized reflecting a $0.2 million pre-tax reassessment of prior
restructuring programs and a $0.4 million pre-tax adjustment for environmental
provisions. On September 10, 2002, we announced the temporary closure of the two
previously mentioned U.S. wire and cable plants and other actions to improve
efficiencies and consolidate certain wire and cable operations. These temporary
closures and internal changes reduced our costs and aligned our business with
current market conditions. The actions included: (i) the temporary closure of
the Laurinburg, North Carolina, magnet wire plant at the end of 2002, with
production being shifted to the El Paso, Texas, and Fort Wayne, Indiana,
facilities; (ii) the temporary closure of the West Caldwell, New Jersey, high
performance conductors facility pending recovery of markets served by this
location, with production of certain products relocated to our Inman, South
Carolina, facility; (iii) operational and production support at other high
performance conductors facilities being streamlined in order to reduce costs
and increase operating efficiencies; and (iv) the restructuring and
consolidation of certain administrative functions. These actions resulted in
special, pre-tax charges of $23.0 million ($22.2 million after-tax) in the 2002
third quarter and $0.6 million ($0.8 million after-tax) in the 2002 fourth
quarter. Of these amounts, $16.9 million (before and after taxes) was
recognized as asset impairments and $6.7 million ($6.1 million after-tax) was
recognized for severance-related and relocation expenses associated with the
restructuring and temporary closures. The amount of the asset impairment was
determined through an assessment of fair market value, which was based on
independent appraisals, of the existing assets at the wire and cable plants. We
also performed an impairment test on the goodwill at our wire and cable plants
through a comparison of carrying values to the respective fair values (using an
estimate of discounted cash flows) and determined that an additional impairment
loss was not required. The restructuring plan included the reduction of
approximately 300 positions and charges associated with employee severance and
relocation ($3.9 million) and pension and other postretirement obligations
($2.8 million). Also during 2002, a special, net pre-tax gain of $0.5 million was
recognized reflecting a $0.8 million pre-tax gain for the reassessment of prior
restructuring programs, partially offset by a $0.3 million charge for
environmental provisions. In 2001, a $3.3 million pre-tax charge was taken to write down the closed
Hopkinsville, Kentucky, magnet wire facility to its net realized value. 
 OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS Depreciation, Depletion and Amortization Expense Depreciation, depletion and amortization expense was $422.6 million in
2003, compared with $410.2 million in 2002 and $439.9 million in 2001. The 2003
increase of $12.4 million primarily was due to a net production increase at
PDMC (approximately $7 million) and higher depreciation on asset retirement
costs associated with SFAS No. 143 that was implemented effective January 1,
2003 (approximately $5 million). The 2002 decrease of $29.7 million primarily
was due to temporary shutdowns, net production curtailments, a net depreciation
rate decrease at PDMC (approximately $24 million) and the reduction of goodwill
amortization expense at PDI resulting from the adoption of SFAS No. 142
(approximately $7 million). Selling and General Administrative Expense Selling and general administrative expense was $148.7 million in 2003,
compared with $123.9 million in 2002 and $116.5 million in 2001. The $24.8
million increase in 2003 was primarily due to employee benefits mostly
associated with mark-to-market adjustments for stock unit plans (approximately
$17 million), higher directors and officers liability insurance premiums
(approximately $2 million), higher legal costs (approximately $2 million), and
higher expenses associated with sub-leases at vacated offices (approximately $2
million). The $7.4 million increase in 2002 primarily related to higher
accruals for a Company-wide annual incentive compensation plan in comparison
with 2001 when the incentive compensation program was cancelled due to economic
conditions at that time. Exploration and Research Expense Our net exploration and research expense was $50.7 million in 2003,
compared with $40.3 million in 2002 and $56.3 million in 2001. The $10.4
million increase in 2003 primarily resulted from higher U.S. exploration
spending (approximately $1 million) primarily for increased project work at
Morenci and Safford, higher international exploration (approximately $5
million) primarily in South America (approximately $3 million), Canada
(approximately $1 million) and Africa (approximately $1 million) and higher
research expense for




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67 PDMC (approximately $4 million) due to expenditures for
concentrate leach and alternative anode reaction technology. The $16 million
decrease in 2002 primarily resulted from lower exploration spending at
most of our mining locations (approximately $9 million) and the absence of
exploration expenditures at the Sossego joint venture in Brazil (approximately
$8 million spent in 2001), which was sold in October 2001; partially offset by
slightly higher research expense for PDMC and PDI (approximately $1 million). Interest Expense We reported interest expense, net of capitalized interest, in 2003 of
$145.2 million, compared with $187.0 million in 2002 and $225.9 million in
2001. The 2003 decrease of $41.8 million was primarily attributable to
reductions related to the payoff of long-term debt (approximately $25 million)
and project financing in 2002 (approximately $18 million). The 2002 decrease of
$38.9 million was attributable to reductions related to the payoff in 2002 of
approximately $773 million of long-term debt and project financing, and low
interest cost from our fixed-to-floating interest rate swap programs. Third-party interest paid by the Company in 2003 was $154.2 million,
compared with $198.9 million in 2002 and $225.6 million in 2001. Miscellaneous Income and Expense, Net Miscellaneous income and expense, net was $19.0 million in 2003, compared
with $2.6 million in 2002 and $8.1 million in 2001. The 2003 increase of $16.4
million primarily was from the gain on sale of a cost-basis wire and cable
investment ($6.4 million), mark-to-market benefits on non-qualified pension
plan assets ($7.3 million), lower foreign currency exchange losses ($2.9
million), higher dividend income from Southern Peru Copper Corporation ($2.3
million) and the absence of 2002 cost-basis investment write-downs ($1.2
million); partially offset by higher shutdown expenses ($6.2 million). The 2002 decrease of $5.5 million primarily was due to lower interest
income ($7.5 million), higher foreign currency exchange losses ($1.8 million),
higher non-operating expenses ($4.1 million), lower royalty and rental income
($1.6 million) and the absence of interest on tax refunds ($4.3 million);
partially offset by lower investment impairments ($11.7 million). Benefit (Provision) for Taxes on Income The effective tax rate changed from a 31.5 percent expense in 2001 to a
28.0 percent benefit in 2002 and to a 67.6 percent expense in 2003. The tax
benefit in 2002 resulted principally from the passage of the Job Creation and
Worker Assistance Act of 2002, which extended the loss carryback period from
two years to five years for net operating losses originating in 2001 and 2002.
This resulted in a benefit to the Company of $129.8 million that was partially
offset by taxes on earnings at international operations. The effective tax
rates in 2001 and 2003 resulted principally from the recognition of a $57.9
million valuation allowance for deferred tax assets at El Abra (2001 only) as
well as from taxes on earnings at international operations that could not be
offset by losses at domestic operations. In March 2001, we reached agreement with the Internal Revenue Service for
the Phelps Dodge tax years 1995 through 1997 and paid the final assessments
applicable to those years. The pre-acquisition Cyprus Amax federal income tax returns for the years
1997 through October 15, 1999, was closed in December 2003 without material
adjustment to the tax liability as filed. The Phelps Dodge federal income tax
returns for the years 1998 through 2002 are currently under examination by the
Internal Revenue Service. Management believes it has made adequate provision so
that resolution of any issues raised, including application of those
determinations to subsequent open years, will not have an adverse effect on our
consolidated financial condition or results of operations. Cumulative Effect of Accounting Changes Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations. With the adoption of this Statement, asset
retirement obligations are recognized when incurred and displayed as
liabilities, with the initial measurement at fair value. These liabilities are
accreted to full value over time through charges to income. In addition, asset
retirement costs are capitalized as part of the related assets carrying value
and are depreciated on a units-of-production basis over the assets respective
useful life. Upon adoption, we recorded an increase to our closure and
reclamation reserve of approximately $2.5 million, net, an increase in our
mining properties assets and intangibles of approximately $12.2 million and a
cumulative effect gain of $8.4 million, net of deferred income taxes. For the
year ended December 31, 2003, the effect of adopting SFAS No. 143 increased
income before extraordinary item and cumulative effect of accounting changes by
approximately $15.9 million, or 18 cents per basic and diluted common share.
(Refer to Note 1, Summary of Significant Accounting Policies, for further
discussion.) Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets
that have indefinite useful lives are not amortized but rather tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. As of December 31, 2001, the
Company had goodwill of $115.2 million less accumulated amortization of $26.7
million associated with the Specialty Chemicals segment and goodwill of $70.8
million less accumulated amortization of $16.2 million associated with the Wire
and Cable segment, for a total of $143.1 million, net. There have been no
changes in the carrying amount of goodwill, except for the transitional
impairment charge in 2002 and the impairment charge in the fourth quarter of
2003, and the impact of changes in foreign currency exchange on goodwill
denominated in currencies other than U.S. dollars. Under the transitional provisions of SFAS No. 142, we identified and
evaluated our reporting units for goodwill impairment using a present value
technique with industry average multiples and third-party valuations used as a
benchmark. Upon completion of the transitional impairment tests, the net book
value of three of the Companys international wire and cable reporting units
was determined to be less than the related carrying amount. The resulting
impairment loss recognized upon adoption of SFAS No. 142 was $33.0 million,
pre-tax ($22.9 million, after-tax), and has been recognized as a cumulative
effect of a change in accounting principle. The pro forma effect of not
amortizing goodwill in 2001 would have reduced goodwill amortization expense by
$7.3 million, reduced net loss by $6.1 million, and reduced loss per common
share by 8 cents.




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68 Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, (as amended by SFAS No.
137) and SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities. These Statements require recognition of all
derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at
fair value. Changes in the fair value of derivatives are recorded each period
in current earnings (loss) or other comprehensive income (loss) (OCI).
Appropriate accounting for changes in the fair value of derivatives held is
dependent on whether the derivative transaction qualifies as an accounting
hedge and on the classification of the hedge transaction. The implementation
resulted in a cumulative effect charge of $2.0 million (before and after
taxes), or 3 cents per common share, and a cumulative reduction to OCI of $7.1
million (before and after taxes). Pensions and Other Postretirement Benefits Our pension expense in 2003 was $15.2 million, compared with $14.3 million
in 2002 and a credit of $8.5 million in 2001. The 2003 increase in pension
expense primarily was due to lower expected return on plan assets ($6.3
million), the effect of a 50-basis-point reduction in the discount rate ($1.0
million), and an increase in recognized actuarial gain ($3.2 million);
partially offset by a decrease in special retirement benefits including
recognition of prior service cost ($10.1 million). The 2002 increase in pension
expense primarily was due to lower expected return on plan assets ($6.3
million), the effect of a 50-basis-point reduction in the discount rate ($1.5
million), a decrease in recognized actuarial gain ($5.6 million) and an
increase in special retirement benefits including recognition of prior service
cost ($8.2 million). Our postretirement benefit expense in 2003 was $40.6 million, compared
with $29.6 million in 2002 and $26.4 million in 2001. The 2003 increase in
postretirement expense was primarily due to an increase in special retirement
benefits and curtailments ($9.1 million) and changes in the discount rate and
medical trend assumptions (approximately $2 million). The 2002 increase in
postretirement expense was primarily due to an increase in special retirement
benefits ($2.9 million). See Critical Accounting Policies for a discussion on the assumptions and
factors affecting pension and postretirement costs. 
 CHANGES IN FINANCIAL CONDITION; CAPITALIZATION Cash and Cash Equivalents Cash and cash equivalents at the end of 2003 were $683.8 million, compared
with $349.8 million at the beginning of the year. Operating activities provided
$470.5 million of cash during the year. Cash provided by operating activities
was more than sufficient to fund capital outlays ($151.4 million), a net
decrease in debt ($147.3 million) and dividend payments on preferred shares
($13.5 million).  ($ in millions)2003
    
    2002
    
    2001Cash provided by:Operating activities
    
    $
    470.5
    
    
    
    348.0
    
    
    
    302.7Investing activities:Capital expenditures
    
    
    (151.4
    )
    
    
    (130.4
    )
    
    
    (262.9
    )Investments in subsidiaries*
    
    
    49.0
    
    
    
    (2.8
    )
    
    
    (48.1
    )Proceeds:Dawson Ranch sale
    
    
    
    
    
    
    22.6
    
    
    
    Sossego project sale
    
    
    
    
    
    
    
    
    
    
    42.5Viohalco sale
    
    
    12.9
    
    
    
    
    
    
    
    Other investing activities**
    
    
    1.8
    
    
    
    (29.7
    )
    
    
    1.7Financing activities
    
    
    (48.8
    )
    
    
    (244.8
    )
    
    
    101.0Net increase (decrease) in cash and cash
equivalents
    
    $
    334.0
    
    
    
    (37.1
    )
    
    
    136.9
   *
    
    2003 included $50 million of cash received and $0.9 million of cash
acquired from Heisei in connection with our acquisition of its one-third
partnership interest in Chino.**
    
    Included $29.4 million in 2002 from funding CODELCOs share of
subordinated loans provided to El Abra. Chino Mines Company Acquisition On December 19, 2003, we acquired, through a wholly owned subsidiary, the
one-third partnership interest in Chino Mines Company held by Heisei. Heisei
informed the Company that it decided to exit the partnership because Chino was
no longer a strategic fit for its business. Under the terms of the agreement,
Heisei paid $114 million in cash, including approximately $64 million placed
into a trust to fund one-third of Chinos financial assurance obligations under
New Mexico mining reclamation laws. Under the terms of the agreement, the
Company assumed most ongoing liabilities; however, Heisei retained
responsibility for its one-third share of any natural resource damage claims
for matters occurring prior to the date of the agreement and, in certain
circumstances, adverse changes in the laws and regulations relating to
reclamation. This acquisition was accounted for as a purchase transaction and recorded
in accordance with the guidance of SFAS No. 141, Business Combinations.
Therefore, the purchase price was allocated to the assets acquired and
liabilities assumed based on estimated fair values. The estimated fair value of
the assets received (including $50 million of cash received and $0.9 million of
cash acquired from Heisei, and $64 million placed into trust) exceeded the fair
value of liabilities assumed resulting in negative goodwill, which was
allocated to the fair value of the long-lived assets. In accordance with SFAS
No. 141, the remaining excess of $68.3 million was recognized as an
extraordinary gain. The extraordinary gain principally resulted from
negotiating the trust payment based on certain closure assumptions, such as
timing of cash flow estimates, discount rates and escalation




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69 rates used by the
state of New Mexico in early 2002, which differ
from assumptions Phelps Dodge must use on a viable mine basis utilizing
cash flows negotiated with the state in December 2003, with the applicable
discount rate and escalation rate used to fair value our current asset
retirement obligations under SFAS No. 143. Additionally, the cash payment
negotiated to cover Heiseis one-third share of Chinos other liabilities at
the time of the agreement, was negotiated on a shut-down basis and included
liabilities that would only be incurred if the Chino operations were to cease.
The results of operations for Chino Mines Company have been included in the
consolidated financial results for the period December 19 to December 31, 2003.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at December 19, 2003:  ($ in millions)Cash and cash equivalents
    
    $
    50.9Other current assets
    
    
    7.8Trust assets
    
    
    64.0Total assets acquired
    
    
    122.7Current liabilities
    
    
    10.6Other liabilities and deferred credits
    
    
    43.8Total liabilities assumed
    
    
    54.4Extraordinary gain
    
    $
    68.3
  The following pro forma information summarizes the results of consolidated
Phelps Dodge operations as if the acquisition had been completed as of the
beginning of the periods presented:  ($ in millions except per share data)2003
    
    2002
    
    2001Sales and other operating revenues
    
    $
    4,168.1
    
    
    
    3,751.7
    
    
    
    4,045.1Income (loss) before extraordinary item and
cumulative effect of accounting changes
    
    $
    13.8
    
    
    
    (317.2
    )
    
    
    (342.2
    )Net income (loss)*
    
    $
    20.7
    
    
    
    (340.0
    )
    
    
    (344.3
    )Earnings (loss) per common share before
extraordinary item and cumulative effect
of accounting changesBasic and diluted  as reported
    
    $
    0.06
    
    
    
    (3.86
    )
    
    
    (4.19
    )Basic and diluted  pro forma
    
    $
    0.00
    
    
    
    (3.88
    )
    
    
    (4.36
    )Earnings (loss) per common shareBasic  as reported
    
    $
    0.92
    
    
    
    (4.13
    )
    
    
    (4.22
    )Basic  pro forma*
    
    $
    0.08
    
    
    
    (4.15
    )
    
    
    (4.39
    )Diluted  as reported
    
    $
    0.91
    
    
    
    (4.13
    )
    
    
    (4.22
    )Diluted  pro forma*
    
    $
    0.08
    
    
    
    (4.15
    )
    
    
    (4.39
    )
   *
    
    The 2003 pro formanet income and earnings per common share amounts
exclude the extraordinary gain of $68.3 million. Working Capital During 2003, net working capital balances (excluding cash and cash
equivalents and debt) decreased by $110.5 million. This net decrease resulted
primarily from:  
    
    a $91.6 million increase in accounts payable and accrued expenses
primarily due to the recording of a short-term liability associated
with the potential funding of $87 million to our U.S. pension plan;
    
    a $46.7 million increase in accrued income taxes due to higher foreign
taxes (approximately $61 million) and a reclassification from
long-term deferred income taxes (approximately $11 million); partially
offset by approximately $26 million of payments net of refunds;
    
    a $26.5 million decrease in current mill and leach stockpiles
primarily due to lower-priced layers at Morenci and Tyrone; and
    
    an $18.8 million decrease in inventories due to higher copper sales
(approximately $31 million) and higher molybdenum sales (approximately
$7 million); partially offset by increases in Columbian Chemicals
inventory primarily due to foreign currency exchange impacts and
higher production volumes (approximately $10 million), and an increase
in Wire and Cables inventory (approximately $8 million) primarily
reflecting seasonally low inventories at year-end 2002; partially
offset by
    
    a $70.2 million increase in accounts receivable primarily due to
higher copper and molybdenum sales volumes and realizations
(approximately $114 million), higher wire and cable sales and timing
of cash collections (approximately $14 million) and stronger foreign
exchange impact (approximately $11 million); partially offset by a net
decrease in income taxes receivable primarily associated with refunds
received (approximately $62 million). Investing Activities Capital expenditures and investments in subsidiaries for 2003 totaled
$102.4 million, which included a reduction of $50.0 million for cash received
and $0.9 million of cash acquired from Heisei in connection with our
acquisition of Heiseis one-third share of Chino Mines Company. The total
comprised $33.3 million for PDMC, $41.0 million for PDI and $28.1 million for
other corporate-related activities. Capital expenditures and investments for 2002 totaled $133.2 million
including $93.7 million for PDMC, $33.4 million for PDI and $6.1 million for
other corporate-related activities. Capital expenditures and investments for 2004 are expected to be
approximately $275 million including $195 million for PDMC, approximately $65
million for PDI and $15 million for other corporate-related activities. Capital
expenditures and investments are expected to increase due to higher projected
overall sustaining capital, restarting certain mining operations and the
absence of the cash received in 2003 from Heisei ($50.9 million). These capital
expenditures and investments are expected to be funded primarily from operating
cash flow and cash reserves. Financing Activities and Liquidity The Companys total debt at December 31, 2003, was $1,959.0 million,
compared with $2,110.6 million at year-end 2002. The $151.6 million decrease
was attributable to a combination of regular amortization payments and
prepayments on the principal balances of our South American mine project
financings totaling $124.8 million. The Companys ratio of debt to total
capitalization was 38.5 percent at December 31, 2003, compared with 42.3
percent at December 31, 2002. As a result of recent increases in copper and
molybdenum prices, we may prepay debt from associated cash flows. Our Cerro Verde mine had project financing that required semi-annual
installments of varying amounts though April 1, 2005. In April 2003, Cerro
Verde made a $6.0 million installment payment. During July and August of 2003,
Cerro Verde prepaid the remaining $24.0 million of its outstanding project
financing and terminated an interest




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70 rate swap contract that converted a
portion of that floating-rate debt into fixed-rate debt. In May 2003, we unwound $375 million (notional value) of interest rate
swaps that converted fixed-rate notes into floating-rate debt. The
notes bear interest at 6.625 percent and 7.375 percent and mature in 2005
and 2007, respectively. The termination of the swaps resulted in capitalized
gains of $34.6 million that will be amortized against interest over the
remaining lives of the underlying debt. Amortization of these gains in 2003
reduced interest expense by $6.3 million. In July 2002, we repurchased $480.7 million of our long-term debt on the
open market, using funds that were made available through the issuance of
equity instruments. In June 2002, we issued 10 million common shares and 2 million mandatory
convertible preferred shares in a block trade with J.P. Morgan. Net proceeds
from this trade were approximately $592 million. The mandatory convertible
preferred shares have an annual dividend of $6.75 per share, a 20 percent
conversion premium (for an equivalent conversion price of $48 per common
share), and will mandatorily convert into Phelps Dodge common shares on August
15, 2005. The common and mandatory convertible preferred shares were issued
under the Companys $750 million universal shelf registration statement filed
with the SEC in August 2001. On July 15, 2003, the Companys universal shelf
registration filed with the SEC on July 11, 2003, became effective. Under the
Registration Statement, up to $750 million (which included the remaining $150
million of availability under the previous shelf registration) of debt and
equity securities may be sold from time to time in one or more offerings on
terms and conditions to be determined in light of the circumstances. Authorized
securities include common and preferred equity, senior debt and junior
subordinated debt, share purchase contracts, share purchase units and warrants.
The registration statement also provides for the issuance of trust preferred
securities guaranteed by the Company. The Company expects, at appropriate times
and as circumstances warrant, to use proceeds from any new shelf offerings to
reduce and/or restructure its existing debt portfolio and to better coordinate
debt maturities with potential growth opportunities. In July 2002, we used $511.2 million of proceeds from the June equity
issuance to repurchase $480.7 million of our long-term debt. This resulted in a
charge of $31.3 million ($26.6 million after-tax) for early debt extinguishment
costs that included issuance costs and other book adjustments ($0.8 million).
We estimate the debt repurchases will reduce our annual interest expense by
approximately $40 million before taxes. The face value of debt repurchased and
estimated annual interest savings comprised the following:  ($ in millions)Estimated AnnualFace Value
    
    Interest Savings6.375% Notes due 2004
    
    $
    15.0
    
    
    
    0.96.625% Notes due 2005
    
    
    32.0
    
    
    
    2.17.375% Notes due 2007
    
    
    74.5
    
    
    
    5.58.75% Notes due 2011
    
    
    240.7
    
    
    
    21.18.375% Debentures due 2023
    
    
    2.2
    
    
    
    0.27.125% Debentures due 2027
    
    
    35.0
    
    
    
    2.59.50% Notes due 2031
    
    
    81.3
    
    
    
    7.7$
    480.7
    
    
    
    40.0
  At December 31, 2003, the Company had no borrowings under its revolving
credit facility. This facility, which became effective in May 2000, permits
borrowings for general corporate purposes of up to $1 billion from time to time
until its scheduled maturity on May 10, 2005. The agreement requires the
Company to maintain minimum consolidated tangible net worth of $1.5 billion and
limits indebtedness to 60 percent of total consolidated capitalization. The Company established a commercial paper program on August 15, 1997,
under a private placement agency agreement between the Company and two
placement agents. The agreement permits us to issue up to $1 billion of
short-term promissory notes (generally known as commercial paper) at any time.
Commercial paper may bear interest or be sold at a discount, as mutually agreed
upon by the placement agents and us at the time of each issuance. Our
commercial paper program requires that issuances of commercial paper be
supported by an undrawn line of credit; the revolving credit agreement
described above provides such support. At our current short-term credit ratings
(A-3 by Standard and Poors and P-3 by Moodys), market demand for our
commercial paper is extremely limited. There were no borrowings under our
commercial paper program at either December 31, 2003, or December 31, 2002. Short-term debt was $50.5 million, all by our international operations, at
December 31, 2003, compared with $35.2 million at December 31, 2002. The $15.3
million increase primarily was due to a net increase in short-term borrowings
for South and Central American wire and cable operations. The current portion of our long-term debt at year-end 2003 (i.e.,
long-term debt scheduled for payment in 2004) was $204.6 million, including
$92.6 million for project financing at our international mining operations,
$14.8 million for our international manufacturing operations and $97.2 million
for corporate debt repayments. Due to economic conditions and continuing unsatisfactory copper prices,
the Company reduced the quarterly dividend on its common shares by 75 percent
beginning in the second quarter of 2001 and eliminated the dividend in the
fourth quarter of 2001. Accordingly, there were no dividends declared or paid
on common shares in 2003 and 2002, compared with dividend payments of $59.1
million in 2001. In 2003, the Company declared dividends of $6.75 per mandatory convertible
preferred share, or $13.5 million, compared with $4.5563 per share, or $9.1
million, in 2002.




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##### Table of Contents



71 Contractual Obligations, Commercial Commitments and Other Items that May Affect Liquidity The following tables summarize Phelps Dodges contractual obligations and
commercial commitments at December 31, 2003, and the effect such obligations
are expected to have on its liquidity and cash flow in future periods. For a
discussion of environmental and closure obligations, refer to Environmental
Matters in Managements Discussion and Analysis.  Contractual Obligations:($ in millions)
    
    
    
    
    
    Less ThanTotal
    
    1 Year
    
    1-3 YearsShort-term debt
    
    $
    50.5
    
    
    
    50.5
    
    
    
    Long-term debt
    
    
    1,908.5
    
    
    
    204.6
    
    
    
    415.5Take-or-pay contracts
    
    
    584.9
    
    
    
    200.1
    
    
    
    185.9Operating lease obligations
    
    
    107.9
    
    
    
    18.3
    
    
    
    32.0Mineral royalty obligations
    
    
    22.6
    
    
    
    1.3
    
    
    
    2.6Total contractual cash obligation
    
    $
    2,674.4
    
    
    
    474.8
    
    
    
    636.0After4-5 Years
    
    5 YearsShort-term debt
    
    $
    
    
    
    
    Long-term debt
    
    
    246.4
    
    
    
    1,042.0Take-or-pay contracts
    
    
    112.6
    
    
    
    86.3Operating lease obligations
    
    
    24.7
    
    
    
    32.9Mineral royalty obligations
    
    
    2.6
    
    
    
    16.1Total contractual cash obligation
    
    $
    386.3
    
    
    
    1,177.3
  Our take-or-pay contracts primarily include contracts for electricity
($228 million), contracts for petroleum-based feedstock for conversion into
carbon black ($141 million), contracts for copper anode for deliveries of
specified volumes at market-based prices to our El Paso Refinery ($82 million),
contracts for natural gas ($32 million), contracts for sulfuric acid for
deliveries of specified volumes based primarily on negotiated rates to El Abra
and Cerro Verde ($23 million), transportation and port fee commitments ($30
million) and oxygen obligations for deliveries of specified volumes at fixed
prices to Bagdad ($16 million). Approximately 85 percent of our take-or-pay
electricity obligations are through PD Energy Services, the legal entity used
to manage power for PDMC at generally fixed-priced arrangements. PD Energy
Services has the right and the ability to resell the electricity as
circumstances warrant. Obligations for petroleum-based feedstock for conversion
into carbon black are for specific quantities, and ultimately will be purchased
based upon prevailing market prices at the time. These petroleum-based products
may be re-sold to others if circumstances warrant. Obligations for natural gas
provide for deliveries of specified volumes, at market-based prices, primarily
due to our carbon black operations in Brazil. Transportation obligations total
$19 million primarily for importing sulfuric acid to El Abra. Our carbon black
facility in the United Kingdom has port fee commitments of $11 million over 45
years. Office leases comprise approximately 70 percent of our operating lease
commitments (excluding sublease receipts). The Company has subleased certain
office space for which it expects to receive sublease payments of approximately
$4 million over nine years. The balance of our operating lease commitments is
for vehicles, equipment and other facilities.  Commercial Commitments:($ in millions)
    
    
    
    
    
    Less ThanTotal
    
    1 Year
    
    1-3 YearsStandby letters of credit
    
    $
    103.6
    
    
    
    102.9
    
    
    
    0.7Corporate guarantees
    
    
    166.3
    
    
    
    10.3
    
    
    
    20.6Sales performance guarantees
    
    
    28.1
    
    
    
    13.6
    
    
    
    13.3Surety bonds
    
    
    173.1
    
    
    
    85.7
    
    
    
    Asset pledges
    
    
    23.5
    
    
    
    0.1
    
    
    
    23.4Total commercial commitments
    
    $
    494.6
    
    
    
    212.6
    
    
    
    58.0After4-5 Years
    
    5 YearsStandby letters of credit
    
    $
    
    
    
    
    Parent guarantees
    
    
    5.2
    
    
    
    130.2Sales performance guarantees
    
    
    0.5
    
    
    
    0.7Surety bonds
    
    
    
    
    
    
    87.4Asset pledges
    
    
    
    
    
    
    Total commercial commitments
    
    $
    5.7
    
    
    
    218.3
  Standby letters of credit primarily were issued in support of commitments
or obligations. Approximately 45 percent related to collateral for reclamation
surety bonds, 36 percent related to insurance programs, 7 percent were issued
in support of the Candelaria project and 12 percent related to environmental
remediation obligations. Essentially all standby letters of credit outstanding
at December 31, 2003, will expire within one year and are expected to be
renewed as necessary. Our wholly owned subsidiary, Cyprus Amax, guaranteed El Abras Tranche B
debt, including CODELCOs 49 percent share totaling $36.1 million at year-end
2003. We also have corporate guarantees in place for financial assurance
requirements related to closure/reclamation costs associated with our Chino
Mines Company mining operation and our Amax Metals Recovery, Inc. solid waste
facility. The corporate guarantee for Chino Mines Company is approximately
$128.1 million. We also have $2.1 million for Amax Metals Recovery, Inc. At December 31, 2003, Phelps Dodge had sales performance guarantees of
$28.1 million primarily associated with our Wire and Cable segments sales
contracts. Phelps Dodge had surety bonds of $173.1 million at December 31, 2003,
primarily related to reclamation performance bonds ($152.6 million) and
self-insurance bonds for workers compensation ($19.9 million). Also, we
pledged land to support a $23.4 million mortgage (expires December 1, 2006) for
our 50 percent-owned joint venture, Port Carteret, which is accounted for on an
equity basis. Generally, Phelps Dodge does not have any debt rating triggers that would
accelerate the maturity dates of its debt. In the event of a rating decline
occurring within 90 days (subject to extension under limited circumstances) of
certain designated events (which, to the extent beyond our control, generally
involve a change of or contest for control), each holder of a note for our
6.625 percent Notes due in 2005 and our 8.375 percent Debentures due in 2023
may require the




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72 Company to redeem the holders notes, in whole or in part, at
100 percent of the principal plus accrued interest to the date of redemption.
Ratings declines that occur at any other time do not trigger an obligation to
redeem any such notes. Phelps Dodges credit rating could adversely affect its ability to renew
existing or obtain access to new credit facilities in the future and could
increase the cost of such facilities. The Companys ability to utilize
third-party guarantees for reclamation financial assurance may be adversely
impacted if its credit ratings were downgraded below investment grade. The
Company has the ability, provided it continues to be in compliance with the
covenant requirements, to draw upon its $1.0 billion revolving credit facility
prior to its commitment termination on May 10, 2005. Changes in credit ratings
may affect the revolving credit facility fee and the costs of borrowings under
that facility, but credit ratings do not impact the availability of the
facility. Other Items that May Affect Liquidity New Mexico and Colorados mined-land reclamation laws require financial
assurance covering the future cost of reclamation. In contrast, Arizonas Mine
Land Reclamation Act permits a company to satisfy financial assurance
requirements by demonstrating it has financial strength to fund future
reclamation costs identified in an approved reclamation plan. An
investment-grade bond rating is one of the financial strength tests under the
Arizona Act. Phelps Dodges senior unsecured debt currently carries an
investment-grade rating, albeit at the lowest level in that category.
Additionally, the Company currently meets another financial strength test in
Arizona that is not ratings dependent. The cost of surety bonds (the traditional source of financial assurance)
has increased significantly in recent years. Also, many surety companies are
now requiring an increased level of collateral supporting the bonds. If surety
bonds are unavailable at commercially reasonable terms, the Company could be
required to place other collateral or possibly cash or cash equivalents
directly in support of financial assurance obligations. It is possible that Phelps Dodge Corporation and certain of its
subsidiaries may be considered to conduct business in Texas where they do not
directly operate due to the processing of copper by affiliates in that state. If they
were considered to conduct business in Texas, they would be obligated to pay
franchise taxes they have not previously paid. We are analyzing whether any
taxes, interest or penalties should be paid, and have applied to resolve the
matter through a voluntary compliance program. Based upon our review, we have
estimated a range of reasonably possible loss of $8 million to $25 million, and, as no point within that
range is more likely than any other, the lower end of the range has been
recorded. Health-care costs continue to escalate at 10 to 15 percent annually. This
is a burden that companies like Phelps Dodge cannot sustain over the long-term.
Phelps Dodge has continued to implement management tools to mitigate the impact
of the increasing medical trend rate; nonetheless, these medical cost trends
may have an adverse impact on the Company. Our earnings and cash flows primarily are determined by the results of our
copper mining business. Based on expected 2004 annual production of
approximately 2.35 billion pounds of copper, each 1 cent per pound change in
the average annual copper price, or in the average annual implied unit cost of
copper production, causes a variation in annual operating income before taxes
of approximately $23 million. The effect of such changes in copper prices or
costs similarly affects our pre-tax cash flows. Through our Quest for Zero
program and other actions, we have taken steps intended to improve our costs
and improve operating income. Higher copper prices are generally expected to be
sustained when there is a worldwide balance of copper supply and demand, and
copper warehouse stocks are reasonable in relation to consumption. Consumption of copper is dependent on general economic conditions and
expectations. Although copper consumption has improved, it is not assured that
underlying drivers of consumption will be sustained in 2004. Should copper
prices and costs approximate 2003 realizations, the Company would project
modest earnings in 2004 of a similar magnitude to those realized in 2003. In
this circumstance, 2004 cash flow from operations, existing cash balances and
other sources of cash would be expected to generally meet current projected
2004 capital expenditures and investments, and debt payment obligations. (Refer
to risk factors in Managements Discussion and Analysis on page 39.) We own a 14.0 percent interest in Southern Peru Copper Corporation (SPCC),
which operates two open-pit copper mines, two concentrators, an SX/EW
operation, a smelter and a refinery in Peru. SPCCs other principal
shareholders are a subsidiary of Grupo Mexico, S.A. de C.V., with a 54.2
percent interest, and Cerro Trading Company, Inc., with a 14.2 percent
interest. A total of 17.6 percent interest is publicly held. Currently, we are considering alternative strategies for our investment in
SPCC, and may, from time to time, sell shares of SPCC under Rule 144 depending
on market conditions and other factors. On February 4, 2004, SPCC filed a Form 8-K with the Securities and
Exchange Commission stating that its largest stockholder, Grupo Mexico, had
made a proposal to sell to SPCC all of its shares of Grupo Mexicos subsidiary,
Minera Mexico, S.A. de C.V., in return for the issuance of additional shares of
SPCC. Hedging Programs We do not purchase, hold or sell derivative financial contracts unless we
have an existing asset or obligation or we anticipate a future activity that is
likely to occur and will result in exposing us to market risk. Derivative
financial instruments are used to manage well-defined commodity price, energy,
foreign exchange and interest rate risks from our primary business activities.
The market sensitivity analyses shown in our derivative programs are calculated
based on either valuations provided by third parties or on market closing
prices at year end. Effective January 1, 2001, we adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, (as amended by
SFAS Nos. 137 and 149) and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. These Statements require
recognition of all derivatives as either assets or liabilities on the balance
sheet and measurement of those instruments at fair value. Changes in the fair
value of derivatives are




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73 recorded each period in current earnings or other
comprehensive income (loss). Copper Fixed-Price Hedging. From time to time, Phelps Dodge may enter into
copper derivative contracts to hedge its price exposure on
fixed-price customer copper sales contracts. Our copper hedging program
consists primarily of copper swaps and futures contracts. This program is
designed to hedge our exposure on fixed-price sales contracts in a manner that
will allow us to realize the COMEX average price in the month of shipment or
receipt while our customers receive the fixed price they requested. We
accomplish this by liquidating the copper futures contracts and settling the
copper swap contracts during the month of shipment or receipt, which generally
results in the realization of the COMEX average price. During 2003, 2002 and
2001, we had hedge programs in place for approximately 339 million, 369 million
and 487 million pounds of copper sales, respectively. All realized gains or
losses from hedge transactions were substantially offset by a similar amount of
loss or gain on the related customer sales contracts at maturity. At December
31, 2003, we had copper futures and swaps contracts outstanding for
approximately 53 million pounds of copper sales maturing through March 2005. At December 31, 2003, we prepared an analysis to determine the sensitivity
of our copper futures contracts to changes in copper prices. If copper prices
had dropped a hypothetical 10 percent at the end of 2003, we would have had a
net loss from our copper futures contracts of approximately $5.5 million. All
realized losses would be substantially offset by a similar amount of gain on
the related customer sales contracts. Copper Price Protection Program. From time to time, we may purchase or sell
copper options to hedge a portion of our expected future sales in order to
limit the effects of potential decreases in copper selling prices. We did not
enter into any copper price protection contracts during 2003, 2002 or 2001. Metal Purchase Hedging. Our South American wire and cable operations may enter
into metal (aluminum or copper) swap contracts to hedge our raw material
purchase price exposure on fixed-price sales contracts to allow us to lock in
the cost of the raw material used in fixed-price cable sold to customers. These
swap contracts generally are settled during the month of shipment or receipt of
metal, which results in a net LME price consistent with that agreed to with our
customers. During 2003, 2002 and 2001, we had metal hedge programs in place for
approximately 26 million, 16 million and 17 million pounds of metal sales,
respectively. At December 31, 2003, we had outstanding swaps on 10 million
pounds of metal purchases maturing through April 2005. At December 31, 2003, we prepared an analysis to determine the sensitivity
of our metal swap contracts to changes in market prices. If market prices had
dropped a hypothetical 10 percent at the end of 2003, we would have had a net
loss from our swap contracts of approximately $0.8 million. All losses on these
hedge transactions would have been substantially offset by a similar amount of
gain on the underlying metal purchases. Gold Price Protection Program. Our 80 percent owned joint venture interest in
Candelaria mining operation in Chile produces and sells a substantial amount of
copper concentrate. The copper concentrate contains small amounts of precious
metals, including gold. In 2003, we entered into zero-cost gold collars. The
program protects our exposure to reduced London gold selling prices while
retaining the ability to participate in some price increases. The zero-cost
gold collars allow for the simultaneous purchase of a put option and sale of a
call option (collar) provides downside price protection against substantial
declines in gold selling prices while retaining the ability to participate in
some price increases. During 2003, we had gold hedges in place for 38 thousand ounces of gold
included in copper concentrate sales. Gains and losses on these hedge
transactions were substantially offset by a similar amount of loss or gain on
the underlying concentrate sales. At December 31, 2003, we had additional
outstanding gold collar contracts in place to hedge approximately 86 thousand
ounces of gold related to copper concentrate sales maturing through December
2004. At December 31, 2003, we prepared an analysis to determine the sensitivity
of our zero-cost gold collars to changes in gold prices. If gold prices had
dropped a hypothetical 10 percent at the end of 2003, we would have had a net
loss from our gold collars of approximately $3.6 million. All realized losses
would be substantially offset by a similar amount of gain on the related
customer sales contracts. Copper Quotational Period Swap Program. Candelarias copper concentrate is
sold at the average LME copper price in the month of shipment. If copper
shipments have a price settlement basis other than the month of shipment,
copper swap transactions may be used to realign the shipment and pricing month
in order that Phelps Dodge receives the month of shipment average LME copper
price. Our copper quotational period swap program began in 2003. For the year
2003, we hedged approximately 14 million pounds of copper sales that remained
outstanding at year-end under our copper quotational period swap program. The
hedges of our copper sales matured in January 2004. At December 31, 2003, we prepared an analysis to determine the sensitivity
of our copper quotational period swap contracts to changes in copper prices. If
copper prices had dropped a hypothetical 10 percent at the end of 2003, we
would have had a net loss from our copper swap contracts of approximately $2.6
million. All realized losses would substantially be offset by a similar amount
of gain on the copper sales contracts. Diesel Fuel/Natural Gas Price Protection Program. We purchase significant
quantities of diesel fuel and natural gas to operate our mine sites as an input
to the manufacturing process and as an input to electricity generation and
copper refining. To reduce our exposure to price increases in these energy
products, the Company enters into energy price protection programs for our
North and South American operations. Our diesel fuel and natural gas price
protection programs consist of purchasing a combination of out-of-the-money
(OTM) diesel fuel and/or natural gas call option contracts and fixed-price
swaps. The OTM call option contracts give the holder the right, but not the
obligation, to purchase a specific commodity at a pre-determined price, or
strike price. OTM call options are options that have a strike price above
the current market price for that commodity. Call options allow the Company to
cap the commodity purchase cost at the strike price of the option while
allowing the Company the ability to purchase the commodity at a lower cost when
market prices are lower than the strike price. Fixed-price swaps allow us to
estab-




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74 lish a fixed commodity purchase price for delivery during a specific
future period. Our diesel fuel price protection program began in North America in 2000
and expanded to our South American mining operations in 2003. During 2003, 2002
and 2001, we had 31 million, 36 million and 37 million gallons of diesel fuel
purchases hedged, respectively. Gains and losses on these hedge transactions
were substantially offset by a similar amount of loss or gain on the underlying energy
purchases. At December 31, 2003, we had outstanding diesel fuel option
contracts in place to hedge approximately 50 million gallons of diesel fuel
consumption maturing through December 2004. At December 31, 2003, we prepared an analysis to determine the sensitivity
of our diesel fuel swap contracts to changes in diesel fuel prices. If diesel
fuel prices had dropped a hypothetical 10 percent at the end of 2003, we would
have had a net loss from our diesel fuel swap contracts of approximately $0.2
million. All realized losses would be substantially offset by a similar amount
of gain on the related diesel fuel purchases. Our natural gas price protection program, which started in 2001, had
approximately 6.0 million, 5.2 million and 7.0 million decatherms of natural
gas purchases hedged in 2003, 2002 and 2001, respectively. Gains on these hedge
transactions were substantially offset by a similar amount of loss on the
underlying energy purchases. At December 31, 2003, we had outstanding natural
gas option contracts in place to hedge approximately 7.5 million decatherms of
natural gas purchases maturing through December 2004. Feedstock Oil Price Protection Program. We purchase significant quantities of
feedstock oil (a derivative of petroleum), which is the primary raw material
used in the manufacture of carbon black. Feedstock oil typically exceeds 50
percent of the total manufacturing costs for our Specialty Chemicals segment.
The objective of the feedstock oil price protection program, which began in
2002, is to protect against a significant upward movement in feedstock oil
prices while retaining the flexibility to participate in downward price
movements. To reduce our exposure to feedstock oil price risk, we purchase OTM
call options that allow Phelps Dodge to cap the commodity purchase cost at the
strike price of the option while allowing the Company the ability to purchase
the commodity at a lower cost when market prices are lower than the strike
price. During 2003 and 2002, we had feedstock oil hedges in place for
approximately 0.9 million and 1.1 million barrels of feedstock oil purchases,
respectively. Gains on these hedge transactions were substantially offset by a
similar amount of loss on the underlying feedstock purchases. At December 31,
2003, we had outstanding feedstock oil option contracts in place to hedge
approximately 0.1 million barrels of feedstock oil consumption maturing through
February 2004. Interest Rate Hedging. Our interest rate hedge programs consisted of both
floating-to-fixed and fixed-to-floating interest rate swaps. The purpose of
these hedges is to both reduce the variability in interest payments as well as
protect against significant fluctuations in the fair value of our debt. At
December 31, 2003, we had hedge programs in place to convert $121 million of
our floating-rate project debt to fixed-rates; we did not have any interest
rate swaps in place for swapping our fixed-rate corporate debt to floating
rate. Our interest rate swaps were considered to be fully effective with any
resulting gains or losses on the derivative offset by a similar loss or gain
amount on the underlying interest payments or fair value of the debt. Our
floating-to-fixed interest rate swaps have maturity dates through December
2008. In May 2003, the Company terminated $375 million of fixed-to-floating
interest rate swaps associated with corporate debt. We received cash proceeds
of $35.9 million from the terminated swaps; $34.6 million was reflected as a
deferred gain on the balance sheet and will be amortized over the remaining
life of the underlying debt using the effective interest method. Also, as a
result of the repurchase of debt in the third quarter of 2002, we terminated a
like portion of the fixed-to-floating interest rate swaps ($25 million),
which resulted in the recognition of a gain of $1.3 million. Additionally,
during August 2001, we unwound interest rate swaps against $900 million in
fixed-rate debt. This resulted in positive cash flows of $23.2 million of which
$4.7 million related to reduced interest expense. The remaining $18.5 million
is being amortized into earnings over the remaining life of the respective
debt. At December 31, 2003, we prepared an analysis to determine the sensitivity
of our floating-to-fixed interest rate swap contracts to changes in interest
rates. A hypothetical increase in interest rates of 1 percent (or 100 basis
points) would have resulted in a potential loss of approximately $2.5 million
for the swap term. The loss would have been offset by a gain on the related
underlying debt. Foreign Currency Hedging. As a global company, we transact business in many
countries and in many currencies. Foreign currency transactions of our
international subsidiaries increase our risks because exchange rates can change
between the time agreements are made and the time foreign currency transactions
are settled. We manage these exposures by entering into forward exchange
contracts in the same currency as the transaction to lock in or minimize the
effects of changes in exchange rates. With regard to foreign currency
transactions, we may hedge or protect the functional currencies of our
international subsidiaries transactions for which we have a firm legal
obligation or when anticipated transactions are likely to occur. Our foreign
currency hedges consist of forward exchange contracts to protect the functional
currencies of our international subsidiaries, which included exposures to the
British pound, Euro and U.S. dollar. At year-end 2003, we had outstanding
forward exchange contracts in place for $19 million maturing through March
2004. At December 31, 2003, we prepared an analysis to determine the sensitivity
of our forward foreign exchange contracts to changes in exchange rates. A
hypothetical negative exchange rate movement of 10 percent would have resulted
in a potential loss of approximately $2.2 million. The loss would have been
virtually offset by a gain on the related underlying transactions. Environmental Matters Phelps Dodge is subject to various federal, state and local environmental
laws and regulations that govern emissions of air pollutants; discharges of
water pollutants; and generation, handling, storage and disposal of hazardous
substances, hazardous wastes and other toxic materials. The Company is also
subject to potential liabilities arising under the Comprehensive Environmental
Response,




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75 Compensation, and Liability Act (CERCLA) or similar state laws that
impose responsibility on persons who arranged for the disposal of hazardous
substances, and on current and previous owners and operators of a facility for
the cleanup of hazardous substances released from the facility into the
environment. In addition, the Company is subject to potential liabilities under
the Resource Conservation and Recovery Act (RCRA) and analogous state laws that
require responsible parties to remediate releases of hazardous or solid waste
constituents into the environment associated with past or present
activities. Phelps Dodge or its subsidiaries have been advised by EPA, the U.S. Forest
Service and several state agencies that they may be liable under CERCLA or
similar state laws and regulations for costs of responding to environmental and
natural resource conditions at a number of sites that have been or are being
investigated by EPA, the U.S. Forest Service or states to determine whether
releases of hazardous substances have occurred and, if so, to develop and
implement remedial actions to address environmental and natural resource
concerns. Phelps Dodge has provided reserves for potential environmental obligations
that management considers probable and for which reasonable estimates can be
made. For closed facilities and closed portions of operating facilities with
closure obligations, an environmental liability is considered probable and is
accrued when a closure determination is made and approved by management.
Environmental liabilities attributed to CERCLA or analogous state programs are
considered probable when a claim is asserted, or is probable of assertion, and
we have been associated with the site. Other environmental remediation
liabilities are considered probable based upon specific facts and
circumstances. Liability estimates are based on an evaluation of, among other
factors, currently available facts, existing technology, presently enacted laws
and regulations, Phelps Dodges experience in remediation, other companies
remediation experience, Phelps Dodges status as a potentially responsible
party (PRP), and the ability of other PRPs to pay their allocated portions.
Accordingly, total environmental reserves of $317.2 million and $305.9 million
were recorded as of December 31, 2003 and 2002, respectively. The long-term
portion of these reserves is included in other liabilities and deferred credits
on the Consolidated Balance Sheet and amounted to $271.3 million and $261.7
million at December 31, 2003 and 2002, respectively. The site currently considered to be the most significant is the Pinal
Creek site near Miami, Arizona. Pinal Creek Site The Pinal Creek site was listed under the Arizona Department of
Environmental Quality (ADEQ) Water Quality Assurance Revolving Fund program in
1989 for contamination in the shallow alluvial aquifers within the Pinal Creek
drainage near Miami, Arizona. Since that time, environmental remediation has
been performed by the members of the Pinal Creek Group (PCG), comprising Phelps
Dodge Miami, Inc. (a wholly owned subsidiary of the Company) and two other
companies. In 1998, the District Court approved a Consent Decree between the
PCG members and the state of Arizona resolving all matters related to an
enforcement action contemplated by the state of Arizona against the PCG members
with respect to the groundwater matter. The Consent Decree committed Phelps
Dodge Miami, Inc. and the other PCG members to complete the remediation work
outlined in the Consent Decree. That work continues at this time pursuant to
the Consent Decree and consistent with the National Contingency Plan prepared
by EPA under CERCLA. Phelps Dodge Miami, Inc. and the other members of the PCG are pursuing
contribution litigation against three other parties involved with the site. At
least two of the three defendants now have admitted direct liability as
responsible parties. The first phase of the case has been assigned a trial date
in August 2004. Phelps Dodge Miami, Inc. also asserted claims against certain
past insurance carriers. As of November 2002, all of the carriers have settled
or had their liability adjudicated. One carrier has appealed the judgment
against it. In addition, a dispute between one dissenting PCG member and Phelps Dodge
Miami, Inc. and the other PCG member was filed in Superior Court in 2002. The
litigation seeks a declaratory judgment on the dissenting members contract
liability under the PCG agreement. Trial for this matter is scheduled for
mid-2004. While significant recoveries may be achieved in the contribution
litigation, the Company cannot reasonably estimate the amount and, therefore,
has not taken potential recoveries into consideration in the recorded reserve. Phelps Dodge Miami, Inc.s share of the planned remediation work has a
cost range for reasonably expected outcomes estimated to be from $110 million
to $216 million. Approximately $113 million remained in the Companys Pinal
Creek remediation reserve at December 31, 2003. The sites that had the largest adjustments to their reserves were the
Yonkers and American Zinc and Chemical sites. Yonkers Site In 1984, the Company sold a cable manufacturing facility located in
Yonkers, New York. In 2000, the owner of the property entered into a consent
order with the New York State Department of Environmental Conservation (NYSDEC)
under which the owner committed to complete a remedial investigation and
feasibility study. In December 2001, the Company entered into an Interim
Agreement with the owner of the property regarding the owners claim for
indemnification from the Company for certain environmental liabilities at the
facility. The owner submitted its feasibility study to NYSDEC in December 2003.
The feasibility study recommends excavation of PCB-contaminated soil, either
removal of PCB and lead contamination from, or demolition of PCB- and
lead-contaminated buildings, and monitored natural recovery of PCB-contaminated
sediments in the Hudson River. Based on the feasibility study, and taking into
consideration the reasonably possible allocation percentages that could apply
to the Company and the property owner, the Companys remedial costs may range
from $20 million to $37 million, with a most likely point in the range of $20
million. American Zinc and Chemical Site In June 1999, Cyprus Amax, now a subsidiary of Phelps Dodge, received an
information request from the Pennsylvania Department of Environmental
Protection (PADEP) regarding the former American Zinc and Chemical (AZC) site
in Langeloth, Pennsylvania. The AZC site consists primarily of a former zinc
smelter facility operated until




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76 1947 by the former American Zinc and Chemical
Company and includes some or all of a contiguous, currently operating
molybdenum refinery formerly owned by the Climax Molybdenum Company, which is
indirectly owned by Cyprus Amax. The American Zinc and Chemical Company, which
was dissolved in 1951, also was a subsidiary of a corporate predecessor to
Cyprus Amax. In discussions with Cyprus Amax in 2001 and early 2002, PADEP informally
indicated that it expects Cyprus Amax to investigate and remediate negative
environmental conditions at the AZC site, which predominate at and about the
former zinc smelter facility. The Companys Form 10-K for the year ended December 31, 2002, indicated
preliminary evaluations of the nature and extent of conditions at the site may
range in cost from $18 million to $52 million. The Company reserved $20 million
for possible remediation work at this site. Recently, an engineering evaluation
and reasonable-cost analysis was performed to estimate the cost and feasibility
of implementing the most likely remedial action that PADEP would accept based
on effectiveness and implementability. To check the validity of the analysis,
estimated site remedial costs were compared with costs from other environmental
sites that have implemented similar remedial actions. In addition, a
reasonable-cost analysis was performed on other possible remedial alternatives
so a range of costs could be established for consideration. This analysis
indicated that remediation of the site may range from $9 million to $43
million, with a most likely point in the range of $9 million. The most likely
remedial action would include an additional site investigation study,
implementation of storm water controls, constructing an engineered cap over 60
acres of slag and process waste, and long-term monitoring and operation and
maintenance of the site. While the Company has reduced its reserve to $9
million for possible remediation work at the site, Cyprus Amax continues to
believe and will continue to indicate to PADEP that the Company is not liable
for the actions of its former subsidiary, American Zinc and Chemical Company,
under existing federal and state environmental laws. To date, PADEP has not
responded to Cyprus Amaxs assertion that it is not liable. Other In 2003, the Company recognized charges of $28.4 million for environmental
remediation. The two sites with significant changes were the Yonkers site (an
increase of $16.7 million) and the AZC site (a decrease of $10.4 million). The
remainder of environmental remediation charges was primarily at closed sites,
none of which increased or decreased individually more than approximately $7
million. At December 31, 2003, the cost range for reasonably possible outcomes for
all reservable environmental remediation sites other than Pinal Creek, Yonkers
and AZC was estimated to be from $133 million to $329 million, of which $175
million has been reserved. Work on these sites is expected to be substantially
completed in the next several years, subject to inherent delays involved in the
remediation process. Phelps Dodge believes certain insurance policies partially cover the
foregoing environmental liabilities; however, some of the insurance carriers
have denied coverage. We presently are negotiating with the carriers over some
of these disputes. Further, Phelps Dodge believes it has other potential claims
for recovery from other third parties, including the United States Government
and other PRPs. Neither insurance recoveries nor other claims or offsets are
recognized unless such offsets are considered probable of realization. In 2003
and 2002, the Company recognized proceeds from settlements reached with several
insurance companies on historic environmental liability claims of $0.5 million
and $34.3 million, net of fees and expenses, respectively. Phelps Dodge has a number of sites that are not the subject of an
environmental reserve because it is not probable that a successful claim will
be made against the Company for those sites, but for which there is a
reasonably possible likelihood of an environmental remediation liability. At
December 31, 2003, the cost range for reasonably possible outcomes for all such
sites was estimated to be from $3 million to $17 million. The liabilities
arising from potential environmental obligations that have not been reserved at
this time may be material to the results of any single quarter or year in the
future. Management, however, believes the liability arising from potential
environmental obligations is not likely to have a material adverse effect on
the Companys liquidity or financial position as such obligations could be
satisfied over a period of years. The following table summarizes environmental reserve activities for the
years ended December 31:  2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    305.9
    
    
    
    311.2
    
    
    
    307.1Additions to reserves*
    
    
    54.6
    
    
    
    18.3
    
    
    
    37.1Reductions in reserve estimate
    
    
    (12.7
    )
    
    
    (4.3
    )
    
    
    (6.0
    )Spending against reserves
    
    
    (24.1
    )
    
    
    (19.3
    )
    
    
    (27.0
    )Reclassification to asset retirement obligation**
    
    
    (6.5
    )
    
    
    
    
    
    
    Balance, end of year
    
    $
    317.2
    
    
    
    305.9
    
    
    
    311.2
   *
    
    2003 included $13.5 million for our acquisition of Heiseis one-third
interest in Chino Mines Company.**
    
    Upon adoption of SFAS No. 143, reserves for certain matters ($6.5
million) required by reclamation rules or laws were reclassified to asset
retirement obligations (previously classified as environmental reserves). Closure and Reclamation Since adopting SFAS No. 143, effective January 1, 2003, we recognize asset
retirement obligations (AROs) as liabilities when incurred, with initial
measurement at fair value. These liabilities are accreted to full value over
time through charges to income. In addition, asset retirement costs (ARCs) are
capitalized as part of the related assets carrying value and are depreciated
on a units-of-production basis over the assets respective useful life.
Reclamation costs for future disturbances are recognized as an ARO and as a
related ARC in the period incurred. Prior to the adoption of SFAS No. 143, the
Company recognized estimated final reclamation costs over the life of active
mining properties on a units-of-production basis. For non-operating sites on
care-and-maintenance status, we suspended accrual of mine closure costs until
the site resumed production. When management determined a mine should be
permanently closed, any unrecognized closure obligation was recognized. The
Companys cost estimates for reclamation and closure consider mining and
operating plans, use of Company resources, and other factors necessary to
achieve compliance with laws and regulations. These cost estimates may differ
from financial assurance cost estimate requirements due to a variety of factors
including historical cost advantages, savings from use of the Companys own
personnel and




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77 equipment versus third-party contractor costs, and opportunities
to prepare each site for more efficient reclamation through careful development
of the site over time. The following tables summarize the asset retirement obligation/closure and
reclamation accrual and asset retirement cost activities for the years ended
December 31:  Asset retirement obligations2003*
    
    2002**
    
    2001**Balance, beginning of year
    
    $
    138.6
    
    
    
    100.6
    
    
    
    98.6Liability recorded upon adoption of
SFAS No. 143***
    
    
    10.4
    
    
    
    
    
    
    
    New liabilities during period
    
    
    16.8
    
    
    
    33.1
    
    
    
    10.1Accretion expense
    
    
    14.7
    
    
    
    6.7
    
    
    
    6.4Payments
    
    
    (1.8
    )
    
    
    (1.8
    )
    
    
    (9.6
    )Revisions in estimated cash flows
    
    
    46.4
    
    
    
    
    
    
    
    Foreign currency translation adjustments
    
    
    0.2
    
    
    
    
    
    
    
    Deductions
    
    
    
    
    
    
    
    
    
    
    (4.9
    )Balance, end of year
    
    $
    225.3
    
    
    
    138.6
    
    
    
    100.6
   *
    
    Reflected accrual balances under SFAS No. 143.**
    
    Reflected accrual balances on a units-of-production basis.***
    
    Amount includes $7.9 million of reclassifications from environmental
reserves ($6.5 million) and other liabilities ($1.4 million). Refer to
Note 1, Summary of Significant Accounting Policies for further discussion.   Asset retirement costs*2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    
    
    
    
    
    
    
    
    Net asset recorded upon adoption of
SFAS No. 143**
    
    
    36.3
    
    
    
    
    
    
    
    New assets during the period
    
    
    1.0
    
    
    
    
    
    
    
    Depreciation expense
    
    
    (5.5
    )
    
    
    
    
    
    
    Revisions in estimated cash flows
    
    
    46.4
    
    
    
    
    
    
    
    Balance, end of year
    
    $
    78.2
    
    
    
    
    
    
    
    
   *
    
    Only required under SFAS No. 143.**
    
    Refer to Note 1, Summary of Significant Accounting Policies for further
discussion. During 2003, we revised our cash flow estimates ($43.9 million discounted)
for the Chino and Tyrone mines based on an agreement reached in May 2003 with
the New Mexico Environment Department (NMED) and the Mining and Minerals
Division (MMD) of the New Mexico Energy, Minerals and Natural
Resources Department for the financial assurance requirements as part of the closure plans related
to the operations at Chino, Cobre and Tyrone. In September 2003, this agreement
was finalized with NMED and MMD. In December 2003, MMD approved Chinos
closeout plan and Phelps Dodge tentatively finalized the closure project
listing and cash flow estimates for the accelerated reclamation as described in
the September 2003 finalized agreement (refer to discussion below).
Additionally, we revised our cash flow estimates at Twin Buttes ($2.2 million
discounted) resulting from a change in probabilities due to the propertys
lease agreement expiring in the 2003 fourth quarter (although lease renewal
negotiations are ongoing) and at Hidalgo ($0.3 million discounted) associated
with the Brockman Silica mine. The impact of these changes in estimates
resulted in an increase to accretion and depreciation expense of approximately
$4 million for the year ended December 31, 2003. Additionally, we recognized reclamation costs of $1.0 million for new
disturbances and $15.8 million associated with our acquisition of Heiseis
one-third interest in Chino Mines Company. In connection with the transaction,
we received $64 million placed in a trust that is legally restricted to fund
Chinos financial assurance obligations. (Refer to Note 2, Acquisitions and
Divestitures, for further discussion.) We have estimated that our share of the total cost of asset retirement
obligations, including anticipated future disturbances, for the year ended
December 31, 2003, aggregated approximately $1.2 billion (unescalated,
undiscounted and on a third-party cost basis), leaving approximately $1.0
billion remaining to be accreted over time. These aggregate costs may increase
or decrease materially in the future as a result of changes in regulations,
technology, mine plans or other factors. Asset retirement obligation activities
and expenditures generally are made over an extended period of time commencing
near the end of the mine life. Significant Arizona Environmental and Reclamation Programs ADEQ has adopted regulations for its aquifer protection permit (APP)
program that replaced the previous Arizona groundwater quality protection
permit regulations. Several of our properties continue to operate pursuant to
the transition provisions for existing facilities under the APP regulations.
The APP regulations require permits for certain facilities, activities and
structures for mining, concentrating and smelting. The APP requires compliance
with aquifer water quality standards at an applicable point of compliance well
or location. The APP also may require mitigation and discharge reduction or
elimination of some discharges. Existing facilities operating under the APP
transition provisions are not required to modify operations until requested by
the state of Arizona, or unless a major modification at the facility alters the
existing discharge characteristics. We have received an APP for our Morenci
operations, for portions of our Bagdad and Miami mines, for the sewage
treatment facility at Ajo, and for a closed tailing pile in Clarkdale, Arizona.
We have also conducted groundwater studies and submitted APP applications for
several of our other properties and facilities, including the Bagdad, Sierrita
and Miami mines, our Safford development property and Ajo, Copper Queen and
United Verde branches. We will continue to submit all required APP applications
for our remaining properties and facilities, as well as for any new properties
or facilities. We do not know what the APP requirements are going to be for all
existing and new facilities and, therefore, it is not possible for us to
estimate costs associated with those requirements. We are likely to continue to
have to make expenditures to comply with the APP program. An application for an APP requires a description of a closure strategy to
meet applicable groundwater protection requirements following cessation of
operations and a cost estimate to implement the closure strategy. An APP may
specify closure requirements, which may include post-closure monitoring and
maintenance requirements. A more detailed closure plan must be submitted within
90 days after a permittee notifies ADEQ of its intent to cease operations. A
permit applicant must demonstrate its financial capability to meet the costs
required under the APP, including closure costs.




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78 Portions of the Companys Arizona mining operations that operated after
January 1, 1986, also are subject to the Arizona Mined Land Reclamation Act
(AMLRA). AMLRA requires reclamation to achieve stability and safety consistent
with post-mining land use objectives specified in a reclamation plan.
Reclamation plans require approval by the State Mine Inspector and must include
a cost estimate to perform the reclamation measures specified in the plan.
Financial assurance must be provided under AMLRA covering the estimated cost of
performing the reclamation plan. Both under APP regulations and AMLRA, a publicly traded company may
satisfy the financial assurance requirements by showing that its unsecured debt
rating is investment grade and that it meets certain requirements regarding
assets in relation to the estimated closure and post-closure cost and
reclamation cost estimates. An investment-grade bond rating is one of the
financial strength tests under the Arizona Act. Phelps Dodges senior unsecured
debt currently carries an investment-grade rating, albeit at the lowest level
in the category. Additionally, the Company currently meets another financial
strength test in Arizona that is not ratings dependent. At December 31, 2003 and 2002, we had accrued closure costs of
approximately $43 million for our Arizona operations. The amount of financial
assurance currently demonstrated for closure and reclamation activities is
approximately $105 million. If the Companys bond rating falls below
investment-grade, the Arizona mining operations would be required to supply
financial assurance in another form. Cyprus Tohono Corporation (Cyprus Tohono), a wholly owned subsidiary of
Cyprus Amax, leases lands on the Tohono Oodham Indian Nation (the Nation). The
leased lands include the site of a mining operation, currently on
care-and-maintenance status, comprising an open pit, underground mine workings,
leach and non-leach rock stockpiles, tailing and evaporation ponds, SX/EW
operations and ancillary facilities. Many of these facilities are covered by
Mine Plans of Operations (MPOs) that were issued by the federal BLM. The leases
and MPOs impose certain environmental compliance, closure and reclamation
requirements upon Cyprus Tohono. The closure and reclamation requirements under
the leases require action to be taken upon termination of the leases, which
currently expire between 2012 and 2017, unless terminated earlier in accordance
with the terms of the leases. Preliminary studies indicate that closure and
reclamation requirements, excluding any potential Superfund environmental
response costs, are estimated to cost $5.0 million. The Nation, along with several federal agencies, have notified Cyprus
Tohono of groundwater quality concerns and concerns with other environmental
impacts of historical mining operations. In 2003, Cyprus Tohono expanded its
groundwater monitoring well network, and samples from a few of the new wells
show values above primary and secondary drinking water standards. Tests of a
neighboring Native American villages water supply well indicate elevated
concentrations of sulfate. Cyprus Tohono has installed new water wells and
provided an alternative water supply to the village. EPA has completed a Preliminary Assessment and Site Investigation (PA/SI)
of the Tohono mine under the federal Superfund program and has concluded that
the site is eligible for listing on the National Priorities List. We are unable
to project the remedial action measures, if any, that may be required as a
result of the PA/SI; however, based upon our best estimates of remedial actions
that Cyprus Tohono may undertake, the Company reserved $11.1 million for Cyprus
Tohono for the Superfund matter. Cyprus Tohono has submitted to EPA a proposal
for closure of several of the facilities of concern identified in the PA/SI.
Cyprus Tohono is subject to financial assurance for mine reclamation. It has
proposed interim financial assurance in the amount of $5.1 million, of which
$5.0 million would be in the form of a Company performance guarantee. Both the
Nation and the Bureau of Indian Affairs have conditionally accepted this
proposal. The Companys historic United Verde mine has obtained an APP for closure
of a tailing pond located near Clarkdale, Arizona, and is awaiting approval of
an APP for existing mine water discharge containment facilities at the mine
near Jerome, Arizona. The tailing pond has not received tailing discharges
since the early 1950s, but has received discharges of municipal sewage effluent
from the town of Clarkdale since the late 1970s. Closure work under the APP for
the tailing pond has been partially completed, but the remaining work has not
been completed pending the issuance of a storm water discharge permit under the
Clean Water Act for construction of a related development project. Construction
of improvements under the proposed APP for the mine are expected to begin
following issuance of the APP. Implementation of the plan under the proposed
APP is required under the terms of a Consent Decree settling alleged Clean
Water Act violations and entered by the U.S. District Court for the District of
Arizona on November 23, 2003. A voluntary remediation project also is under way
under supervision of ADEQ at the nearby historic Iron King mine to treat
potential discharges of acidic water from an adit. Additional work may be
required at historical mine workings in the district that are owned by the
Company to satisfy requirements under storm water discharge permits. At the
United Verde mine, APP costs are estimated to be $13.5 million; at the
Clarkdale tailing, APP costs are estimated to be $12.1 million; and at the Iron
King mine, voluntary remediation costs are estimated to be $2.1 million. These
amounts, totaling $27.7 million, are included in environmental reserves. Significant New Mexico Environmental and Reclamation Programs Background The Companys New Mexico operations, Chino Mines Company (Chino), Phelps
Dodge Tyrone, Inc. (Tyrone), Cobre Mining Company (Cobre) and Phelps Dodge
Hidalgo, Inc. (Hidalgo), each are subject to regulation under the New Mexico
Water Quality Act and the Water Quality Control Commission (WQCC) regulations
adopted under that Act. Each of these operations holds one or more discharge
permits issued by NMED under WQCC regulations. The discharge permits specify
operational and monitoring requirements to protect groundwater quality. Under
the discharge permits for Chino, Tyrone, Cobre and Hidalgo, NMED has required
each of these operations to submit closure plans for approval. The closure
plans must describe the measures to be taken to prevent groundwater quality
standards from being exceeded following closure of the discharging facilities
and to abate any groundwater or surface water contamination. Each discharge
permit is issued for a period of no more than five years and the permit is
reviewed each time that it is renewed. Under certain circumstances, NMED may
require submission and approval




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79 of abatement plans to address the exceedance of
applicable water quality standards. In addition, Chino, Tyrone and Cobre are subject to regulation under the
New Mexico Mining Act (the Mining Act), which was enacted in 1993, and the
Mining Act Rules, which were adopted by the New Mexico Mining Commission (the
Mining Commission) in their original form in 1994. Chino, Tyrone and Cobre hold
permits issued by MMD of the Energy, Minerals and Natural Resources Department
under the Mining Act. Under the Mining Act, Chino, Tyrone and Cobre are
required to submit and obtain approval of closeout plans describing the
reclamation to be performed following closure of the mines. The reclamation
must be designed to achieve a self-sustaining ecosystem or a post-mining land
use, unless MMD approves a waiver of this requirement because achieving this
requirement is technically or economically infeasible or would be
environmentally unsound. Regardless of whether a waiver is issued, however,
reclamation must be performed to achieve all applicable air, water quality, and
other environmental standards. Financial assurance is required to ensure that funding will be available
to perform both the closure plans and the closeout plans. The amount of the
financial assurance is based upon a cost estimate to complete the closure
and/or closeout plan. The cost estimate is based upon the assumption that the
operator will default at the point in time when closure and reclamation will be
most expensive and that the state will use the financial assurance to hire and
oversee a third-party contractor to perform the closure and/or closeout plan.
The cost estimates are subject to approval by NMED and MMD. When an operation
is subject to both a closure plan and a closeout plan, the plans typically
overlap. In that case, the financial assurance typically is provided jointly to
NMED and to MMD. Both NMED and MMD calculate the required amount of financial
assurance based upon a net present value (NPV) method when the closure plan
and/or closeout plan require performance over a long period of time. Use of the
NPV method requires NMED and/or MMD approval of appropriate discount and
escalation rates. The Companys cost estimates to perform the work itself generally are
substantially lower than the cost estimates used for financial assurance due to
the Companys historical cost advantages, savings from the use of the Companys
own personnel and equipment as opposed to third-party contractor costs,
opportunities to prepare the site for more efficient reclamation and the
omission of agency oversight costs. The process of obtaining approved closure plans and closeout plans has
been long and difficult, particularly for the operations subject to both WQCC
regulations and the Mining Act. The plans must be site-specific. Detailed
scientific studies have been required for each site. The sites are very large
and complex, involving many different types of facilities such as open pits,
mine stockpiles, tailing impoundments and smelter facilities. Many of the
regulatory requirements, as well as closure and reclamation technologies, are
relatively new and have been evolving while the plans have been developed,
including recent rule changes. Some of the closure and reclamation measures are
unproven over long periods of time at these or similar sites; so this
performance is not easily predicted. NMED and MMD have separate procedures for
review of closure and closeout plans, including consideration of waiver
requests, approval of plans, issuance of permits and approval of financial
assurance. These procedures include public notice, comment, and hearing
requirements, opportunities for appeals, and reviews of NMED and MMD actions by
WQCC and the Mining Commission. Chino Mines Company Chino submitted its first proposed site-wide combined closure/closeout
plan (CCP) at the end of 1997, the original deadline for approval of closeout
plans under the Mining Act, and obtained an extension for closeout plan
approval until December 31, 1999. The closure and closeout plans were combined
into one plan due to the overlapping requirements of WQCC regulations and the
Mining Act. In 1999, NMED required Chino to provide interim financial
assurance, pending approval of the closure plan, and Chino complied by
providing a surety bond for approximately $56 million. Also in 1999, the Mining
Commission extended the closeout plan approval deadline until December 31,
2001. Chino submitted a comprehensive CCP incorporating the results of the
scientific studies performed by Chino in March 2001. That CCP requested a
waiver of requirements to reclaim the open pit and steep stockpile slopes and
included a cost estimate for approximately $100 million, which included the
estimated cost of 30 years of water treatment. In July 2001, NMED published a
draft site-wide closure permit and set a public hearing for August 2001. NMEDs
draft closure permit required that all stockpiles be regraded, required thicker
soil covers than proposed by Chino, required 100 years of water treatment and
more stringent water treatment requirements, and proposed additional permit
conditions not proposed by Chino. A two-week public hearing was held in August
2001 concerning NMEDs draft closure permit. Following that hearing, Chino,
NMED and MMD conducted negotiations concerning a possible compromise on the
CCP. Agreement was reached on a compromise closure permit in December 2001. In
December 2001, the Mining Commission again extended the closeout plan approval
deadline until October 1, 2002. Another public hearing was held in February 2002 on the compromise closure
permit supported by both Chino and NMED. The estimated cost of the compromise
CCP was approximately $391 million over 100 years on an undiscounted and
unescalated basis. The conditions of the compromise permit required additional
studies and submission of a revised closure plan reflecting the outcome of
those studies prior to expiration of the five-year period of the closure
permit. As of October 1, 2002, NMED had not finalized its decision on the
compromise permit, and, consequently, MMD was unable to approve the closeout
plan. MMD then issued a Notice of Violation (NOV) to Chino for failing to meet
the October 1, 2002 deadline. The NOV did not impose any penalties, but ordered
Chino to obtain approval by a new deadline and reserved the right to assess
penalties for noncompliance. Chino appealed the NOV to the Mining Commission,
which held a public hearing on the NOV in December 2002. The Mining Commission
upheld the NOV, but modified the deadline for closeout plan approval until
seven months after NMED issued Chinos closure permit, subject to extension by
MMD for good cause. On February 24, 2003, NMED issued Chinos closure permit consistent with
the compromise permit. Under the closure permit, the amount of financial
assurance was established at approximately




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##### Table of Contents



80 $191 million on an NPV basis. In May
2003, Chino and Phelps Dodge reached an agreement with NMED and MMD on a
framework for financial assurance providing for a cash trust fund, collateral
and a third-party guarantee from Phelps Dodge. In June 2003, MMD filed a
petition with the Mining Commission to amend the Mining Act Rules to allow a
trust fund to be used as financial assurance. In July 2003, the Company
announced that a Phelps Dodge subsidiary would acquire Heiseis one-third
partnership interest in Chino. As part of the terms of that acquisition, Heisei
agreed to provide cash funding for one-third of the financial assurance amount. To reflect the agreement with Heisei, in September 2003 the financial
assurance agreement was modified to provide for one-third of the financial
assurance in the form of a trust fund and the remainder in the form of a
third-party guarantee by Phelps Dodge. The September 2003 agreement also
included a schedule for accelerated reclamation at Chino. MMD extended the
deadline for Chino to obtain approval of its closeout plan pending the
conclusion of the Mining Commission hearings on the proposed rule changes and
to allow time to hold a public hearing on the closeout plan and financial
assurance. The Mining Commission finalized the rule changes at a public hearing
on November 17, 2003. In October 2003, WQCC dismissed an appeal of Chinos closure permit filed
by a third party. WQCCs action has since been appealed to the New Mexico Court
of Appeals. MMD held a public hearing on Chinos closeout plan and financial assurance
proposal on December 13, 2003. Following consideration of the public comments
and finalization of the permit and financial assurance documentation, MMD
approved the closeout plan and financial assurance on December 18, 2003,
meeting the December 19, 2003, deadline for closeout plan approval set by MMD
and satisfying the requirements of the NOV. The closeout plan approved by MMD incorporates the requirements of the
NMED closure permit and includes a waiver from the requirement to achieve a
self-sustaining ecosystem or post-mining land use for the open pit and a
portion of the mine stockpiles, consistent with the terms of the NMED closure
permit. It also incorporates a schedule for reclamation of inactive portions of
the Chino operations and for reclamation following closure of active
operations. Based upon minor adjustments to reflect additional requirements,
the approved third-party cost estimate is approximately $395 million, and the
approved financial assurance requirement is approximately $192 million on an
NPV basis. Heisei provided funding of approximately $64 million on behalf of
Chino for the Chino trust fund. Phelps Dodge issued a third-party guarantee for
approximately $128 million for the balance of the financial assurance.
Following NMEDs and MMDs acceptance of the financial assurance, NMED released
Chinos $56 million interim surety bond as of December 31, 2003. The Company estimates its cost to perform the requirements of the approved
Chino closure permit and closeout plan to be approximately $287 million
(undiscounted and unescalated) over the 100-year period of the CCP. That
estimate is approximately one-third lower than the estimated cost used as the
basis for the financial assurance amount due to the factors discussed above and
reflects our internal cost estimate. Our cost estimate used to determine the
fair value of our reclamation accrual was approximately $389 million
(undiscounted, unescalated and on a third-party cost basis), as required by
SFAS No. 143, and excludes approximately $6 million of environmental costs from
the financial assurance cost estimate, which are recognized in environmental
reserves (they are not within the scope of SFAS No. 143). At December 31, 2003
and 2002, we had accrued approximately $39 million (100 percent basis) and $8
million (two-thirds basis), respectively, for reclamation at Chino. In December 1994, Chino entered into an Administrative Order on Consent
(AOC) with NMED. The AOC requires Chino to perform a CERCLA quality
investigation of environmental impacts and potential risks to human health and
the environment associated with portions of the Chino property affected by
historical mining operations. The remedial investigations began in 1995 and are
still under way, although substantial portions of the remedial investigations
are near completion. While some remediation is expected to be required, no
feasibility studies have yet been completed, and NMED has not yet issued a
record of decision regarding any remediation that may be required under the
AOC. The Companys estimated cost is $23.6 million. In addition to work under
the AOC, Chino is continuing ongoing projects to control blowing dust at an
estimated cost of $4.8 million and to excavate and remove copper-bearing
sediments from an area known as Lake One for copper recovery in existing
leach stockpiles at the mine. The Companys estimated cost for Lake One is $4.7
million. The Companys aggregate reserve for liability under the Chino AOC and
for the interim work on the tailing ponds and Lake One is $33.1 million. Phelps Dodge Tyrone, Inc. Tyrone submitted its first proposed site-wide combined CCP at the end of
1997, the original deadline for approval of closeout plans under the Mining
Act, and obtained an extension for closeout plan approval until December 31,
1999. The closure and closeout plans were combined into one plan due to the
overlapping requirements of WQCC regulations and the Mining Act. In 1999, NMED
required Tyrone to provide interim financial assurance, pending approval of the
closure plan, and Tyrone complied by providing a surety bond for approximately
$58 million. Also in 1999, the Mining Commission extended the closeout plan
approval deadline until December 31, 2001. Tyrone submitted a comprehensive CCP in May 2001 incorporating the results
of the scientific studies performed by Tyrone. That CCP requested a waiver of
requirements to reclaim the open pit and steep stockpile slopes and included a
cost estimate for approximately $121 million, which included the estimated cost
of 30 years of water treatment. In late 2001, the Mining Commission again
extended the closeout plan approval deadline until October 1, 2002. In April 2002, NMED published a draft site-wide closure permit and set a
public hearing for May 2002. NMEDs draft closure permit required that all
stockpiles be regraded, required thicker soil covers than proposed by Tyrone,
required 100 years of water treatment and more stringent water treatment
requirements, and proposed additional permit conditions opposed by Tyrone. NMED
estimated the cost of its proposed permit at approximately $440 million on an
unescalated and undiscounted basis over a 100-year closure period. Tyrone
submitted a revised plan in response to NMEDs draft permit, including concepts
for regrading and covering the mine stockpiles modeled after the Chino
compromise permit and proposing upgraded water treatment technology. Tyrone
estimated the cost of its proposal




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##### Table of Contents



81 at approximately $328 million on the same
basis. A two-week public hearing was held in May 2002. As of October 1, 2002, NMED had not reached a decision on Tyrones permit,
and, consequently, MMD was unable to approve the closeout plan. MMD then issued
an NOV to Tyrone for failing to meet the October 1, 2002 deadline. The NOV did
not impose any penalties, but ordered Tyrone to obtain closeout plan approval
by a new deadline and reserved the right to impose penalties for noncompliance.
Tyrone appealed the NOV to the Mining Commission, which held a public hearing
on the NOV in December 2002. The Mining Commission upheld the NOV, but modified
the deadline for closeout plan approval until 12 months after NMED issued
Tyrones closure permit, subject to extension by MMD for good cause. NMEDs Hearing Officer issued a decision concerning the contested permit
conditions on March 7, 2003. The Hearing Officer adopted many of Tyrones
proposed changes to NMEDs draft permit, but sided with the NMED staff on
requirements for regrading and covers. NMED issued Tyrones closure permit on
April 8, 2003, in accordance with the Hearing Officers decision. The estimated
third-party cost under the closure permit is approximately $433 million. Tyrone
appealed the closure permit to WQCC, which held a public hearing to take
evidence concluding on November 13, 2003. WQCC has scheduled closing arguments and deliberation on the appeal at a
meeting beginning on April 13, 2004. Based upon the closure permit issued by NMED, the amount of financial
assurance for Tyrone on an NPV basis is approximately $267 million. In May
2003, Tyrone and Phelps Dodge reached an agreement with NMED and MMD on a
framework for financial assurance providing for a cash trust fund, collateral
and a third-party guarantee from Phelps Dodge. The agreement also requires
Chino, Tyrone and Cobre to expend a combined minimum of $30 million on
accelerated reclamation over 10 years. In September 2003, the financial
assurance agreement was modified to include additional details. Tyrone agreed
to establish a trust fund in the initial amount of $17 million, and to
contribute $500,000 per quarter over a five-year period to increase the cash
funding to a total of $27 million. Tyrone also agreed to provide collateral to
NMED and MMD so that at least 30 percent of the financial assurance is in the
form of a trust fund or collateral. Once the trust fund and collateral are in
place, NMED will release the $58 million interim surety bond. NMED and MMD
agreed that the balance, or 70 percent of the financial assurance, may be
provided in the form of a third-party guarantee issued by Phelps Dodge. The
September 2003 agreement also included a schedule for accelerated reclamation
at Tyrone. Financial assurance under this agreement is subject to completion of
the permitting process, including consideration of public comments. On October 15, 2003, Tyrone and NMED finalized a settlement agreement
establishing a detailed schedule for reclamation of the inactive tailing
impoundments at Tyrone over an eight-year period. As reclamation is completed
on portions of the facilities, the closure cost estimate and, accordingly, the
required amount of financial assurance, may be reduced. The deadline for Tyrone to obtain MMDs approval of its closeout plan is
April 8, 2004, subject to extension by MMD for good cause. Tyrone is working
with MMD on permit conditions for approval of the closeout plan and with both
MMD and NMED on financial assurance consistent with the September 2003
agreement. MMD must hold a public hearing and consider public comments before
it approves the closeout plan and financial assurance. Approval of a closeout
plan consistent with the NMED closure permit also will require approval of a
waiver of the requirement to achieve a self-sustaining ecosystem or post-mining
land use for the open pit and a portion of the mine stockpiles where regrading
and cover are not proposed. Managements internal cost estimate for performance of reclamation at
Tyrone is approximately $257 million (undiscounted and unescalated) over the
100-year period of the CCP. That estimate is approximately one-third lower than
the estimated cost used as the basis for the financial assurance amount due to
the factors discussed above and reflects our internal cost estimate. Our cost
estimate used to determine the fair value of our reclamation accrual was
approximately $427 million (undiscounted, unescalated and on a third-party cost
basis), as required by SFAS No. 143, and excludes approximately $6 million of
environmental costs from the financial assurance cost estimate, which are
recognized in environmental reserves (they are not within the scope of SFAS No.
143). At December 31, 2003 and 2002, we had accrued approximately $81 million
and $27 million, respectively, for reclamation at Tyrone. Cobre Mining Company At the time of our acquisition of Cobre in 1998, Cobre had submitted
proposed closure and closeout plans and had posted a surety bond for
approximately $2 million with both MMD and NMED. Cobre submitted a
comprehensive proposed CCP in May 2001 incorporating the results of the
scientific studies completed by Cobre to both NMED and MMD. As of October 1, 2002, NMED had not issued a closure permit to Cobre, and,
consequently, MMD was unable to approve the proposed closeout plan. MMD then
issued an NOV to Cobre for failing to meet the October 1, 2002 deadline. The
NOV did not impose any penalties, but ordered Cobre to obtain closeout plan
approval by a new deadline. Cobre appealed the NOV to the Mining Commission,
which held a public hearing on the NOV in December 2002. The Mining Commission
upheld the NOV, but modified the deadline for closeout plan approval until nine
months after NMED issues Cobres closure discharge plan, subject to extension
by MMD for good cause. Cobre is currently awaiting a draft closure permit from
NMED. In May 2003, Cobre and Phelps Dodge reached an agreement with NMED and MMD
on a framework for financial assurance providing for a cash trust fund,
collateral and a third-party guarantee from Phelps Dodge. The agreement also
requires Chino, Tyrone and Cobre to expend a combined minimum of $30 million on
accelerated reclamation over 10 years. In September 2003, the financial
assurance agreement was modified to include additional details. Cobre agreed to
establish a trust fund in the initial amount of $1 million, and to contribute
$100,000 per quarter over a five-year period to increase the cash funding to a
total of $3 million. Cobre also agreed to provide collateral to NMED and MMD so
that at least 30 percent of the financial assurance is in the form of a trust
fund or collateral. NMED and MMD agreed that the balance, or 70 percent of the
financial assurance, may be provided in the form of a third-party guarantee
issued by Phelps Dodge. The September 2003 agreement also included a schedule
for accelerated reclamation at Cobre. Financial assurance




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82 under this agreement
is subject to completion of the permitting process, including consideration of
public comments. Based upon the proposed CCP for Cobre submitted in 2001, the current cost
estimate for reclamation at Cobre is approximately $9 million. Our cost
estimate used to determine the fair value of our reclamation accrual was
approximately $41 million (undiscounted, unescalated and on a third-party cost
basis), as required by SFAS No. 143. Both of these estimates will be updated
when NMED issues the closure permit. At December 31, 2003 and 2002, we had
accrued closure costs of approximately $7 million and $2 million, respectively,
at Cobre. Phelps Dodge Hidalgo, Inc. Hidalgo obtained approval of a closure plan under a discharge permit
issued by NMED in 2000. In accordance with the permit, Hidalgo provided
financial assurance to NMED in the form of surety bonds for approximately $11
million. Since obtaining approval of the closure plan, Hidalgo has completed
the closure of a former wastewater evaporation pond by construction of a soil
cap approved by NMED. The discharge permit under which the closure plan was
approved also requires corrective action for contaminated groundwater near the
smelters closed former wastewater evaporation pond. Impacted groundwater is
pumped from a series of wells, treated in a neutralization facility, and
discharged to a series of lined impoundments or to an irrigation system. The discharge permit requires a
comprehensive groundwater study to characterize groundwater at the site. The
discharge permit requires updates of the closure plan, and NMED could require
future enhancement of the system based upon the results of the ongoing study
when the permit expires in 2005 or, in certain circumstances, earlier. Hidalgo
is not subject to the Mining Act and, consequently, does not require a closeout
plan. Our cost estimate used to determine the fair value of our reclamation
accrual was approximately $7 million (undiscounted, unescalated and on a
third-party cost basis), as required by SFAS No. 143. At December 31, 2003 and
2002, we had accrued closure costs of approximately $4 million and $7 million,
respectively, at Hidalgo. Significant Colorado Reclamation Program Our Climax and Henderson mines in Colorado are subject to permitting
requirements under the Colorado Mined Land Reclamation Act, which requires
approval of reclamation plans and provisions for financial assurance. These
mines have had approved mined-land reclamation plans for several years and have
provided the required financial assurance to the state of Colorado in the
amount of $52.4 million and $10.1 million, respectively, for Climax and
Henderson. As a result of adjustments to the approved cost estimates for
various reasons, the amount of financial assurance requirements can increase or
decrease over time. At December 31, 2003 and 2002, we had accrued closure costs
of approximately $18 million and $19 million, respectively, for our Colorado
operations. Other Some portions of our mining operations located on public lands are subject
to mine plans of operation approved by the federal BLM. BLMs regulations
include financial assurance requirements for reclamation plans required as part
of the approved plans of operation. As a result of recent changes to BLMs
regulations, including more stringent financial assurance requirements,
increases in existing financial assurance amounts held by BLM could be
required. Currently, financial assurance for the Companys operations held by
BLM totals $3.4 million. The Company is investigating available options to provide additional
financial assurance and, in some instances, to replace existing financial
assurance. The cost of surety bonds, the traditional source of financial
assurance, has increased significantly over the past few years, and many surety
companies are now requiring an increased level of collateral supporting the
bonds such that they no longer are economically prudent. Some surety companies
that issued surety bonds to the Company are seeking to exit the market for
reclamation bonds. The terms and conditions presently available from one of our
principal surety bond providers for reclamation and other types of long-lived
surety bonds have made this type of financial assurance economically
impracticable in certain instances. We are working with the impacted state and
federal agencies to put in place acceptable alternative forms of financial
assurance in a timely fashion. Portions of Title 30, Chapter 2, of the United States Code govern access
to federal lands for exploration and mining purposes (the General Mining Law).
In 2002, legislation was introduced in the U.S. House of Representatives to
amend the General Mining Law. Similar legislation has been introduced in
Congress during the 1990s. None of these bills has been enacted into law.
Concepts in the legislation over the years have included the payment of
royalties on minerals extracted from federal lands, payment of fair market
value for patenting federal lands and reversion of patented lands used for
non-mining purposes to the federal government. Several of these same concepts
and others likely will continue to be pursued legislatively in the future. (Refer to discussion of Contractual Obligations, Commercial Commitments
and Other Items that May Affect Liquidity for related financial assurance
issues.) We also are subject to federal and state laws and regulations pertaining
to plant and mine safety and health conditions. These laws include the
Occupational Safety and Health Act of 1970 and the Mine Safety and Health Act
of 1977. Present and proposed regulations govern worker exposure to a number of
substances and conditions present in work environments. These include dust,
mist, fumes, heat and noise. We are making and will continue to make
expenditures to comply with health and safety laws and regulations. We estimate that our share of capital expenditures for programs to comply
with applicable environmental laws and regulations that affect our operations
will total approximately $57 million in 2004 and approximately $50 million in
2005; approximately $33 million was spent on such programs in 2003. We also
anticipate making significant capital and other expenditures beyond 2005 for
continued compliance with such laws and regulations. In light of the frequent
changes in the laws and regulations and the uncertainty inherent in this area,
we are unable to reasonably estimate the total amount of such expenditures over
the longer term, but it may be material. We do not expect that additional capital and operating costs associated
with achieving compliance with the many environmental, health and safety laws
and regulations will have a material adverse affect on our competitive position
relative to other U.S. copper producers. These domestic copper producers are
subject to comparable requirements. However, because copper is an
internationally traded




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83 commodity, these costs could significantly affect us in
our efforts to compete globally with those foreign producers not subject to
such stringent requirements. Other Matters New Accounting Pronouncements In January 2003, FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46
clarifies when a company should consolidate in its financial statements the
assets, liabilities and activities of a variable interest entity. FIN 46
provides general guidance as to the definition of a variable interest entity
and requires a variable interest entity to be consolidated if a company absorbs
the majority of the variable interest entitys expected losses, or is entitled
to receive a majority of the variable interest entitys residual returns, or
both. In December 2003, FASB issued a revised interpretation of FIN 46 (FIN
46-R), which supercedes FIN 46 and clarifies and expands current accounting
guidance for variable interest entities. FIN 46 and FIN 46-R are effective
immediately for all variable interest entities created after January 31, 2003,
and for variable interest entities created prior to February 1, 2003, no later
than the end of the first reporting period after March 15, 2004. We have
performed a review of any entities created subsequent to January 31, 2003, and
determined the adoption of FIN 46 and FIN 46-R did not have a material impact
on the Companys financial reporting and disclosures. For any entities created prior to February 1, 2003, we are currently assessing the impact of
FIN 46 and FIN 46-R and do not believe that the adoption of FIN 46 and FIN 46-R
will have a material impact on our financial reporting and disclosures. In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative and when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. This Statement is generally
effective for contracts entered into or modified after June 30, 2003. The
adoption of SFAS No. 149 did not have a material impact on the Companys
financial reporting and disclosures. In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
changes the accounting for certain financial instruments that, under previous
guidance, could be classified as equity or mezzanine equity by now requiring
those instruments to be classified as liabilities (or assets in some
circumstances) in the statement of financial position. Further, SFAS No. 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. The guidance in SFAS No. 150 generally is effective for all
financial instruments entered into or modified after May 31, 2003, and is
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. We have evaluated SFAS No. 150 and determined that it does
not have an impact on our financial reporting and disclosures. In December 2003, FASB issued SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This Statement revises employers
disclosures about pension plans and other postretirement benefits plans. This
Statement requires additional disclosures about the assets, obligations, cash
flows and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. The required information should be
provided separately for pension plans and for other postretirement benefit
plans. This Statement also requires new disclosures for interim periods
beginning after December 15, 2003. This Statement was effective for fiscal
years ending after December 15, 2003. The Company adopted this Statement for
the year ended December 31, 2003. (Refer to this note under Pension Plans and
Postretirement and Other Employee Benefits Other Than Provisions for further
discussion.) In December 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition,
which supercedes SAB 101, Revenue Recognition in Financial Statements. SAB
104s primary purpose is to rescind accounting guidance contained in SAB 101
related to multiple element revenue arrangements and revises the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
that have been codified in Topic 13. SAB 104 was effective immediately and did
not have a material impact on the Companys financial reporting and
disclosures. In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Under SFAS No. 4, all gains and losses from extinguishment of
debt were required to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. This Statement eliminates
SFAS No. 4 and, thus, the exception to applying Accounting Principles Board
(APB) Opinion No. 30 to all gains and losses related to extinguishments of
debt. As a result, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB No. 30.
Applying the provisions of APB No. 30 will distinguish transactions that are
part of an entitys recurring operations from those that are unusual or
infrequent or that meet the criteria for classification as an extraordinary
item. Under SFAS No. 13, the required accounting treatment of certain lease
modifications that have economic effects similar to sale-leaseback transactions
was inconsistent with the required accounting treatment for sale-leaseback
transactions. This Statement amends SFAS No. 13 to require that those lease
modifications be accounted for in the same manner as sale-leaseback
transactions. This Statement was adopted by the Company in the 2003 first
quarter. As a result of this Statement being adopted, we have reclassified the
2002 third quarter extraordinary item for debt extinguishment costs to a
recurring item. In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). The
principal difference between this Statement and EITF 94-3 relates to its
requirements for




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84 recognition of a liability for a cost associated with an exit
or disposal activity. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF 94-3, a liability was recognized at the date of an
entitys commitment to an exit plan. This Statement is effective for exit or
disposal activities that are initiated after December 31, 2002. In November 2002, FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon
issuance of certain guarantees, a guarantor must recognize a liability for the
fair value of an obligation assumed under the guarantee. FIN 45 also requires
significant new disclosures by guarantors, in both interim and annual financial
statements, about obligations associated with guarantees issued. FIN 45
disclosure requirements were adopted for our year ended December 31, 2002; the
initial recognition and measurement provisions were adopted on a prospective
basis to guarantees issued or modified after December 31, 2002. There were no
guarantees issued or modified in 2003 that required fair value recognition as a
liability that had a material impact on our financial statements. (Refer to
Note 20, Guarantees, for further discussion.) In December 2002, FASB issued SFAS No. 148, Accounting for Stock Based
Compensation  Transition and Disclosure  an Amendment of SFAS No. 123. The
Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, and
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. This
Statement also amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of stock-based employee
compensation and the effect of the method used on reported results. This
Statement was effective for fiscal years ending after December 15, 2002. The
Company adopted this Statement in regards to disclosure provisions for the year
ended December 31, 2002. (Refer to Note 1, Summary of Significant Accounting
Policies, for further discussion.) In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This Statement supersedes SFAS No. 121 and
the accounting and reporting provisions of APB Opinion No. 30, and also amends
Accounting Research Bulletin (ARB) No. 51. This Statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and will broaden the
presentation of discontinued operations to include more disposal transactions.
This Statement was adopted by the Company on January 1, 2002, and was utilized
in the determination of our Wire and Cable segments asset impairment charge in
the 2002 third quarter and 2003 fourth quarter, and PDMCs impairment charge in
the 2002 fourth quarter. During 2001, we adopted SFAS No. 140, Accounting for the Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. The
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
(Refer to Note 1, Summary of Significant Accounting Policies, to the
Consolidated Financial Statements for further discussion.) (Refer to pages 96 through 99 for further discussion of New Accounting
Pronouncements.) 
 CAPITAL OUTLAYS Capital outlays in the following table exclude capitalized interest and
the minority joint-venture interest portions of the expenditures at Morenci,
Chino, El Abra and Candelaria.  ($ in millions)2003
    
    2002
    
    2001PDMC:Copper  United States
    
    $
    58.8
    
    
    
    68.1
    
    
    
    129.6Copper  South American
    
    
    11.1
    
    
    
    15.8
    
    
    
    61.9Primary Molybdenum
    
    
    13.4
    
    
    
    9.8
    
    
    
    8.783.3
    
    
    
    93.7
    
    
    
    200.2PDI:Specialty Chemicals
    
    
    23.9
    
    
    
    24.1
    
    
    
    28.9Wire and Cable
    
    
    17.1
    
    
    
    9.3
    
    
    
    12.841.0
    
    
    
    33.4
    
    
    
    41.7Corporate and other
    
    
    27.1
    
    
    
    3.3
    
    
    
    21.0$
    151.4
    
    
    
    130.4
    
    
    
    262.9
 Capital outlays exclude investments in subsidiaries.  
 INFLATION The principal impact of general inflation upon our financial results has
been on implied unit cost of copper production, especially supply costs, at our
mining and industrial operations. It is important to note, however, that there
is generally no correlation between the selling price of our principal product,
copper, and the rate of inflation or deflation. 
 DIVIDENDS AND MARKET PRICE RANGES The principal market for our common stock is the New York Stock Exchange.
At February 23, 2004, there were 18,502 holders of record of our common
shares. Due to economic conditions and continuing unsatisfactory copper prices,
the Company reduced the quarterly dividend on its common shares by 75 percent
beginning in the second quarter of 2001 and eliminated the dividend on its
common shares in the fourth quarter of 2001. Accordingly, there were no
dividends declared or paid on common shares in 2003 and 2002. The Company declared dividends of $6.75 per mandatory convertible
preferred share in 2003, amounting to $13.5 million. Additional information
required for this item is provided in the Quarterly Financial Data table. On February 4, 2004, the Company declared a dividend of $1.6875 per share
on the mandatory convertible preferred shares, which is payable on May 17,
2004, to mandatory convertible preferred shareholders of record at the close of
business on April 1, 2004.




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##### Table of Contents



85 
 QUARTERLY FINANCIAL DATA  ($ in millions except per common share amounts)Quarter
    
    First
    
    Second
    
    Third
    
    Fourth2003Sales and other operating revenues
    
    $
    978.0
    
    
    
    962.2
    
    
    
    1,031.1
    
    
    
    1,171.4Operating income
    
    
    28.7
    
    
    
    17.2
    
    
    
    46.8
    
    
    
    104.9Income (loss) before extraordinary item and
cumulative effect of accounting change
    
    
    (23.4
    )
    
    
    (15.2
    )
    
    
    (0.3
    )
    
    
    57.0Net income (loss)
    
    
    (15.0
    )
    
    
    (15.2
    )
    
    
    (0.3
    )
    
    
    125.3Basic and diluted earnings (loss) per
common share before extraordinary item
and cumulative effect of accounting
change
    
    
    (0.30
    )
    
    
    (0.21
    )
    
    
    (0.04
    )
    
    
    0.60Basic earnings (loss) per common share
    
    
    (0.21
    )
    
    
    (0.21
    )
    
    
    (0.04
    )
    
    
    1.36Diluted earnings (loss) per share
    
    
    (0.21
    )
    
    
    (0.21
    )
    
    
    (0.04
    )
    
    
    1.32Stock prices*High
    
    
    36.75
    
    
    
    39.77
    
    
    
    50.80
    
    
    
    79.40Low
    
    
    30.11
    
    
    
    30.57
    
    
    
    37.25
    
    
    
    47.03Close
    
    
    32.48
    
    
    
    38.34
    
    
    
    46.80
    
    
    
    76.09Quarter
    
    First
    
    Second
    
    Third
    
    Fourth2002Sales and other operating revenues
    
    $
    918.5
    
    
    
    966.8
    
    
    
    941.2
    
    
    
    895.5Operating income (loss)
    
    
    12.7
    
    
    
    (10.2
    )
    
    
    (12.0
    )
    
    
    (199.8
    )Loss before cumulative effect
of accounting change
    
    
    (1.9
    )
    
    
    (34.3
    )
    
    
    (53.7
    )
    
    
    (225.3
    )Net loss
    
    
    (24.8
    )
    
    
    (34.3
    )
    
    
    (53.7
    )
    
    
    (225.3
    )Basic and diluted loss per common
share before cumulative effect
of accounting change
    
    
    (0.03
    )
    
    
    (0.46
    )
    
    
    (0.64
    )
    
    
    (2.58
    )Basic and diluted loss per common share
    
    
    (0.32
    )
    
    
    (0.46
    )
    
    
    (0.64
    )
    
    
    (2.58
    )Stock prices*High
    
    
    42.51
    
    
    
    42.10
    
    
    
    42.00
    
    
    
    33.85Low
    
    
    30.50
    
    
    
    33.50
    
    
    
    24.67
    
    
    
    22.90Close
    
    
    42.10
    
    
    
    41.20
    
    
    
    25.63
    
    
    
    31.65
   *
    
    As reported in the Wall Street Journal. The 2003 first quarter net loss included after-tax, net special gains of
$9.5 million, or 11 cents per common share, primarily associated with the
cumulative effect of an accounting change associated with the adoption of SFAS
No. 143 and the termination of a foreign postretirement benefit plan. Special
gains were offset by charges related to environmental provisions. The 2003 second quarter net loss included after-tax, net special gains of
$4.5 million, or 5 cents per common share, primarily related to the sale of a
cost-basis wire and cable investment and recoveries associated with insurance
settlements on historic environmental claims. Special gains were offset by
charges related to environmental provisions. The 2003 third quarter net loss included after-tax, net special charges of
$9.0 million, or 10 cents per common share, primarily related to environmental
provisions and historic Cyprus Amax matter. The 2003 fourth quarter net income included after-tax, net special gains
of $41.7 million, or 43 cents per common share, primarily related to an
extraordinary gain on our acquisition of the one-third interest in Chino Mines
Company, partially offset by charges related to historic environmental claims
and a probable Texas franchise tax matter. The 2002 first quarter net loss included after-tax, net special gains of
$16.2 million, or 21 cents per common share, primarily related to the
recognition of tax benefits associated with a net operating loss carryback
prior to 2002, resulting from new U.S. tax legislation. Special gains
recognized for tax benefits were offset by a charge associated with the
cumulative effect of an accounting change associated with the adoption of SFAS
No. 142. The 2002 second quarter net loss included after-tax, net special charges
of $12.7 million, or 16 cents per common share, primarily related to losses
associated with an award made in a binding arbitration proceeding and charges
for the settlement of certain historic Cyprus Amax lawsuits. Special charges
were partially offset by gains associated with the sale of a non-core parcel of
real estate and a tax benefit related to the release of taxes previously
provided for. The 2002 third quarter net loss included after-tax, net special charges
totaling $24.0 million, or 27 cents per common share, primarily related to
losses associated with the temporary closure of two wire and cable facilities
and the restructuring and consolidation of certain Wire and Cable segment
administrative functions that resulted in asset impairments and
severance-related expenses, as well as a charge recognized for early debt
extinguishment costs. Special charges were partially offset by a tax benefit
associated with net operating loss carryback prior to 2002 resulting from new
U.S. tax legislation. The 2002 fourth quarter net loss included after-tax, net special charges
of $188.4 million, or $2.13 per common share, primarily related to asset
impairments recognized at the Cobre, Hidalgo and Ajo mines, as well as charges
recognized for the settlement of certain historic Cyprus Amax lawsuits and
legal matters.




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86 
 PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   The consolidated balance sheet at December 31, 2003 and 2002, and the
related consolidated statements of operations, of cash flows and of
shareholders equity for each of the three years in the period ended December
31, 2003, and notes thereto, beginning on page 88, together with the report
thereon of PricewaterhouseCoopers LLP dated February 25, 2004, appears on page
87 of this report. The financial statement schedule which appears on page 138
should be read in conjunction with these financial statements. Schedules not
included have been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto. The
individual financial statements of the Company have been omitted because the
Company is primarily an operating company and all subsidiaries included in the
consolidated financial statements, in the aggregate, do not have minority
equity interests and/or indebtedness to any person other than the Company or
its consolidated subsidiaries in amounts which together exceed 5 percent of
total consolidated assets at December 31, 2003. Separate financial statements
of subsidiaries not consolidated and investments accounted for by the equity
method, other than those for which summarized financial information is provided
in Note 4 to the consolidated financial statements, have been omitted because,
if considered in the aggregate, such subsidiaries and investments would not
constitute a significant subsidiary. ADDITIONAL FINANCIAL DATA Financial statement schedule for the years ended December 31, 2003, 2002 and
2001.
II  Valuation and qualifying accounts and reserves on page 138. 
 REPORT OF MANAGEMENT   Our management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements presented in this annual
report. The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and include
amounts that are based on managements best estimates and judgments. Management
also accepts responsibility for the preparation of other financial information
included in this document. Management maintains a system of internal controls to provide reasonable
assurance that assets are safe guarded and that transactions are properly
recorded and executed in accordance with managements authorization. The system
includes formal policies and procedures that are communicated to employees with
significant roles in the financial reporting process and updated as necessary.
The system also includes the careful selection and training of qualified
personnel, an organization that provides a segregation of responsibilities and
a program of internal audits that independently evaluates the effectiveness of
internal controls and recommends possible improvements. The Audit Committee, currently consisting of six non-employee directors,
meets at least once every fiscal quarter to review, among other matters,
internal control conditions and internal and external audit plans and results.
It meets periodically with senior officers, internal auditors and independent
auditors to review the adequacy and reliability of our accounting, financial
reporting and internal controls. PricewaterhouseCoopers LLP, our independent auditors, have audited the
annual financial statements in accordance with auditing standards generally
accepted in the United States. The independent auditors report expresses an
informed judgment as to the fair presentation of our reported operating
results, financial position and cash flows. This judgment is based on the
results of auditing procedures performed and such other tests that they deemed
necessary, including consideration of our internal controls. Our management also recognizes its responsibility for fostering a strong
ethical climate so that our affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in our Code of Business Ethics and Policies, which
is distributed throughout the Company. (You can review our Code of Business
Ethics and Policies at http://www.phelpsdodge.com.) The code of conduct
addresses:  
    
    the necessity of ensuring open communication within the Company;
    
    potential conflicts of interest;
    
    compliance with all applicable laws (including financial disclosure); and
    
    the confidentiality of proprietary information. We maintain a systematic program to assess compliance with these policies.




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##### Table of Contents



87 
 REPORT OF INDEPENDENT AUDITORS   To the Board of Directors and Shareholders
of Phelps Dodge Corporation In our opinion, the consolidated financial statements appearing on pages 88
through 134, present fairly, in all material respects, the financial position of
Phelps Dodge Corporation and its subsidiaries at December 31, 2003 and 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule appearing on page 138, presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of
the Companys management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. As described in Note 1, the Company changed its method of accounting for asset
retirement obligations effective January 1, 2003 and its method of accounting
for goodwill and other intangible assets effective January 1, 2002. /s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
February 25, 2004




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##### Table of Contents



88 Phelps Dodge Corporation 
 Statement of Consolidated Operations
   For the years ended December 31,2003
    
    2002
    
    2001Sales and other operating revenues
    
    $
    4,142.7
    
    
    
    3,722.0
    
    
    
    4,002.4Operating costs and expensesCost of products sold (exclusive of items shown separately below)
    
    
    3,285.1
    
    
    
    3,120.5
    
    
    
    3,459.1Depreciation, depletion and amortization
    
    
    422.6
    
    
    
    410.2
    
    
    
    439.9Selling and general administrative expense
    
    
    148.7
    
    
    
    123.9
    
    
    
    116.5Exploration and research expense
    
    
    50.7
    
    
    
    40.3
    
    
    
    56.3Special items and provisions, net (see Note 3)
    
    
    38.0
    
    
    
    236.4
    
    
    
    (40.6
    )3,945.1
    
    
    
    3,931.3
    
    
    
    4,031.2Operating income (loss)
    
    
    197.6
    
    
    
    (209.3
    )
    
    
    (28.8
    )Interest expense
    
    
    (145.8
    )
    
    
    (187.0
    )
    
    
    (227.5
    )Capitalized interest
    
    
    0.6
    
    
    
    
    
    
    
    1.6Early debt extinguishment costs (see Note 14)
    
    
    
    
    
    
    (31.3
    )
    
    
    Miscellaneous income and expense, net
    
    
    19.0
    
    
    
    2.6
    
    
    
    8.1Income (loss) before taxes, minority interests, equity in net earnings (losses) of affiliated
companies, extraordinary item and cumulative effect of accounting changes
    
    
    71.4
    
    
    
    (425.0
    )
    
    
    (246.6
    )Benefit (provision) for taxes on income
    
    
    (48.3
    )
    
    
    114.9
    
    
    
    (77.8
    )Minority interests in consolidated subsidiaries
    
    
    (7.7
    )
    
    
    (7.8
    )
    
    
    (4.8
    )Equity in net earnings (losses) of affiliated companies
    
    
    2.7
    
    
    
    2.7
    
    
    
    (0.3
    )Income (loss) before extraordinary item and cumulative effect of accounting changes
    
    
    18.1
    
    
    
    (315.2
    )
    
    
    (329.5
    )Extraordinary gain on acquisition of partners interest in Chino, net of taxes of $0 in 2003 (see Note 2)
    
    
    68.3
    
    
    
    
    
    
    
    Cumulative effect of accounting changes (net of tax of $(1.3), $10.1 and $0 in 2003, 2002
and 2001, respectively)
    
    
    8.4
    
    
    
    (22.9
    )
    
    
    (2.0
    )Net income (loss)
    
    
    94.8
    
    
    
    (338.1
    )
    
    
    (331.5
    )Preferred stock dividends
    
    
    (13.5
    )
    
    
    (9.1
    )
    
    
    Net income (loss) applicable to common shares
    
    $
    81.3
    
    
    
    (347.2
    )
    
    
    (331.5
    )Weighted average number of common shares outstanding  basic
    
    
    88.8
    
    
    
    84.1
    
    
    
    78.5Basic earnings (loss) per common share before extraordinary item
and cumulative effect of accounting changes
    
    $
    0.06
    
    
    
    (3.86
    )
    
    
    (4.19
    )Extraordinary item
    
    
    0.77
    
    
    
    
    
    
    
    Cumulative effect of accounting changes
    
    
    0.09
    
    
    
    (0.27
    )
    
    
    (0.03
    )Basic earnings (loss) per common share
    
    $
    0.92
    
    
    
    (4.13
    )
    
    
    (4.22
    )Weighted average number of common shares outstanding  diluted *
    
    
    89.4
    
    
    
    84.1
    
    
    
    78.5Diluted earnings (loss) per common share before extraordinary item
and cumulative effect of accounting changes
    
    $
    0.06
    
    
    
    (3.86
    )
    
    
    (4.19
    )Extraordinary item
    
    
    0.76
    
    
    
    
    
    
    
    Cumulative effect of accounting changes
    
    
    0.09
    
    
    
    (0.27
    )
    
    
    (0.03
    )Diluted earnings (loss) per common share
    
    $
    0.91
    
    
    
    (4.13
    )
    
    
    (4.22
    )
   *
    
    Diluted earnings (loss) per common share would have been anti-dilutive for the years ended December 31, 2003
and 2002, if based on fully
diluted shares adjusted to reflect the conversion of mandatory
convertible preferred shares to common shares.
 Diluted earnings (loss) per common share would have been
anti-dilutive for the years ended December 31, 2002 and 2001, if
based on fully diluted shares adjusted to reflect stock option
exercises. See Notes to Consolidated Financial Statements




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##### Table of Contents



89 Phelps Dodge Corporation 
 Consolidated Balance Sheet
   December 31,
    
    December 31,2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    683.8
    
    
    
    349.8Accounts receivable, less allowance for doubtful accounts (2003 - $10.1; 2002 - $14.1)
    
    
    461.3
    
    
    
    391.1Mill and leach stockpiles
    
    
    22.4
    
    
    
    48.9Inventories
    
    
    379.7
    
    
    
    398.5Supplies
    
    
    150.7
    
    
    
    142.8Prepaid expenses and other current assets
    
    
    31.0
    
    
    
    26.5Deferred income taxes
    
    
    61.1
    
    
    
    70.6Current assets
    
    
    1,790.0
    
    
    
    1,428.2Investments and long-term receivables
    
    
    150.3
    
    
    
    132.3Property, plant and equipment, net
    
    
    4,646.5
    
    
    
    4,813.7Long-term mill and leach stockpiles
    
    
    89.2
    
    
    
    64.3Deferred income taxes
    
    
    7.6
    
    
    
    11.0Goodwill
    
    
    98.4
    
    
    
    90.7Intangible assets, net
    
    
    321.3
    
    
    
    345.9Other assets and deferred charges
    
    
    169.6
    
    
    
    142.9$
    7,272.9
    
    
    
    7,029.0LiabilitiesCurrent liabilities:Short-term debt
    
    $
    50.5
    
    
    
    35.2Current portion of long-term debt
    
    
    204.6
    
    
    
    127.0Accounts payable and accrued expenses
    
    
    700.7
    
    
    
    609.1Dividends payable
    
    
    3.4
    
    
    
    3.4Accrued income taxes
    
    
    56.1
    
    
    
    9.4Current liabilities
    
    
    1,015.3
    
    
    
    784.1Long-term debt
    
    
    1,703.9
    
    
    
    1,948.4Deferred income taxes
    
    
    410.2
    
    
    
    430.8Other liabilities and deferred credits
    
    
    1,009.5
    
    
    
    986.84,138.9
    
    
    
    4,150.1Commitments and contingencies (see Notes 6, 19, 20 and 21)Minority interests in consolidated subsidiaries
    
    
    70.2
    
    
    
    65.3Shareholders equityCommon shares, par value $6.25; 200.0 shares authorized;
91.0 outstanding (2002 - 88.9) after deducting 17.1 shares (2003 and 2002) held in treasury
    
    
    568.5
    
    
    
    555.6Cumulative preferred shares, par value $1.00; 6.0 shares authorized; 2.0 outstanding
    
    
    2.0
    
    
    
    2.0Capital in excess of par value
    
    
    1,642.5
    
    
    
    1,552.1Retained earnings
    
    
    1,254.6
    
    
    
    1,173.3Accumulated other comprehensive loss
    
    
    (393.5
    )
    
    
    (458.5
    )Other
    
    
    (10.3
    )
    
    
    (10.9
    )3,063.8
    
    
    
    2,813.6$
    7,272.9
    
    
    
    7,029.0




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##### Table of Contents



90 Phelps Dodge Corporation 
 Consolidated Statement of Cash Flows
   For the years ended December 31,2003
    
    2002
    
    2001Operating activitiesNet income (loss)
    
    $
    94.8
    
    
    
    (338.1
    )
    
    
    (331.5
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    422.6
    
    
    
    410.2
    
    
    
    439.9Deferred income taxes
    
    
    0.3
    
    
    
    (9.0
    )
    
    
    63.7Equity earnings (losses), net of dividends received
    
    
    (0.2
    )
    
    
    1.6
    
    
    
    1.7Special items and provisions
    
    
    31.6
    
    
    
    237.6
    
    
    
    (33.5
    )Early debt extinguishment costs
    
    
    
    
    
    
    31.3
    
    
    
    Extraordinary gain
    
    
    (68.3
    )
    
    
    
    
    
    
    Cumulative effect of accounting changes
    
    
    (9.7
    )
    
    
    33.0
    
    
    
    2.0Changes in current assets and liabilities:Accounts receivable
    
    
    (76.4
    )
    
    
    17.0
    
    
    
    34.5Proceeds from sale of accounts receivable
    
    
    16.9
    
    
    
    (11.6
    )
    
    
    79.7Mill and leach stockpiles
    
    
    28.3
    
    
    
    2.1
    
    
    
    17.7Inventories
    
    
    29.5
    
    
    
    46.4
    
    
    
    (10.7
    )Supplies
    
    
    (0.9
    )
    
    
    4.6
    
    
    
    Prepaid expenses
    
    
    (10.1
    )
    
    
    6.2
    
    
    
    9.8Interest payable
    
    
    (0.2
    )
    
    
    (12.8
    )
    
    
    Other accounts payable
    
    
    25.7
    
    
    
    (35.1
    )
    
    
    24.5Accrued income taxes
    
    
    37.1
    
    
    
    (1.5
    )
    
    
    (12.0
    )Other accrued expenses
    
    
    (23.7
    )
    
    
    19.0
    
    
    
    (0.9
    )Other, net
    
    
    (26.8
    )
    
    
    (52.9
    )
    
    
    17.8Net cash provided by operating activities
    
    
    470.5
    
    
    
    348.0
    
    
    
    302.7Investing activitiesCapital outlays
    
    
    (151.4
    )
    
    
    (130.4
    )
    
    
    (262.9
    )Capitalized interest
    
    
    (0.6
    )
    
    
    
    
    
    
    (1.6
    )Investment in subsidiaries and other, net of cash received and acquired
    
    
    49.0
    
    
    
    (2.8
    )
    
    
    (48.1
    )Proceeds from asset dispositions
    
    
    17.8
    
    
    
    33.3
    
    
    
    51.5Other, net
    
    
    (2.5
    )
    
    
    (40.4
    )
    
    
    (5.7
    )Net cash used in investing activities
    
    
    (87.7
    )
    
    
    (140.3
    )
    
    
    (266.8
    )Financing activitiesProceeds from issuance of debt
    
    
    10.3
    
    
    
    21.8
    
    
    
    1,203.3Payment of debt
    
    
    (157.6
    )
    
    
    (819.4
    )
    
    
    (1,053.9
    )Common dividends
    
    
    
    
    
    
    
    
    
    
    (59.1
    )Preferred dividends
    
    
    (13.5
    )
    
    
    (5.7
    )
    
    
    Issuance of shares
    
    
    80.4
    
    
    
    593.6
    
    
    
    0.4Debt issue costs
    
    
    
    
    
    
    
    
    
    
    (7.3
    )Other, net
    
    
    31.6
    
    
    
    (35.1
    )
    
    
    17.6Net cash provided by (used in) financing activities
    
    
    (48.8
    )
    
    
    (244.8
    )
    
    
    101.0Increase (decrease) in cash and cash equivalents
    
    
    334.0
    
    
    
    (37.1
    )
    
    
    136.9Cash and cash equivalents at beginning of year
    
    
    349.8
    
    
    
    386.9
    
    
    
    250.0Cash and cash equivalents at end of year
    
    $
    683.8
    
    
    
    349.8
    
    
    
    386.9




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##### Table of Contents



Phelps Dodge Corporation 
 Consolidated Statement of Shareholders Equity
  (in millions)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedOtherCommon Shares
    
    Preferred Shares
    
    Capital in
    
    
    
    
    
    ComprehensiveNumber
    
    At Par
    
    Number
    
    At Par
    
    Excess of
    
    Retained
    
    Income
    
    
    
    
    
    Shareholders'of Shares
    
    Value
    
    of Shares
    
    Value
    
    Par Value
    
    Earnings
    
    (Loss)
    
    Other
    
    EquityBalance at January 1, 2001
    
    
    78.7
    
    
    $
    491.9
    
    
    
    
    
    
    $
    
    
    
    $
    1,017.7
    
    
    $
    1,911.1
    
    
    $
    (226.4
    )
    
    $
    (9.9
    )
    
    $
    3,184.4Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5Restricted shares issued/cancelled, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    
    
    
    
    3.5
    
    
    
    2.1Dividends on common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59.1
    )
    
    
    
    
    
    
    
    
    
    
    (59.1
    )Comprehensive income (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (331.5
    )
    
    
    
    
    
    
    
    
    
    
    (331.5
    )Other comprehensive income (loss),
net of tax:Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42.9
    )
    
    
    
    
    
    
    (42.9
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7.1
    )
    
    
    
    
    
    
    (7.1
    )Net loss on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13.6
    )
    
    
    
    
    
    
    (13.6
    )Unrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.0
    )
    
    
    
    
    
    
    (3.0
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66.3
    )
    
    
    
    
    
    
    (66.3
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (397.8
    )Balance at December 31, 2001
    
    
    78.7
    
    
    
    491.9
    
    
    
    
    
    
    
    
    
    
    
    1,016.8
    
    
    
    1,520.5
    
    
    
    (292.7
    )
    
    
    (6.4
    )
    
    
    2,730.1Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Restricted shares issued/cancelled, net
    
    
    0.2
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    6.1
    
    
    
    
    
    
    
    
    
    
    
    (4.5
    )
    
    
    2.8Issuance of shares
    
    
    10.0
    
    
    
    62.5
    
    
    
    2.0
    
    
    
    2.0
    
    
    
    529.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    593.6Common shares purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Dividends on preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9.1
    )
    
    
    
    
    
    
    
    
    
    
    (9.1
    )Comprehensive income (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (338.1
    )
    
    
    
    
    
    
    
    
    
    
    (338.1
    )Other comprehensive income (loss),
net of tax:Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26.7
    )
    
    
    
    
    
    
    (26.7
    )Net gain on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    1.1Other investment adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    (0.7
    )Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.2
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (139.3
    )
    
    
    
    
    
    
    (139.3
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (165.8
    )
    
    
    
    
    
    
    (165.8
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (503.9
    )Balance at December 31, 2002
    
    
    88.9
    
    
    
    555.6
    
    
    
    2.0
    
    
    
    2.0
    
    
    
    1,552.1
    
    
    
    1,173.3
    
    
    
    (458.5
    )
    
    
    (10.9
    )
    
    
    2,813.6Stock options exercised
    
    
    2.0
    
    
    
    12.2
    
    
    
    
    
    
    
    
    
    
    
    87.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99.8Restricted shares issued/cancelled, net
    
    
    0.1
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    3.2
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    4.5Common shares purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Dividends on preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13.5
    )
    
    
    
    
    
    
    
    
    
    
    (13.5
    )Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94.8
    
    
    
    
    
    
    
    
    
    
    
    94.8Other comprehensive income (loss),
net of tax:Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63.0
    
    
    
    
    
    
    
    63.0Net gain on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.7
    
    
    
    
    
    
    
    10.7Other investment adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )Unrealized gain on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.0
    
    
    
    
    
    
    
    9.0Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17.6
    )
    
    
    
    
    
    
    (17.6
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65.0
    
    
    
    
    
    
    
    65.0Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159.8Balance at December 31, 2003
    
    
    91.0
    
    
    $
    568.5
    
    
    
    2.0
    
    
    $
    2.0
    
    
    $
    1,642.5
    
    
    $
    1,254.6
    
    
    $
    (393.5
    )
    
    $
    (10.3
    )
    
    $
    3,063.8




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##### Table of Contents



92 
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Dollar amounts in tables stated in millions except as noted)  1. Summary of Significant
Accounting Policies Basis of Consolidation. The consolidated financial statements include the
accounts of Phelps Dodge Corporation (the Company, which may be referred to as
Phelps Dodge, PD, we, us or our), and its majority-owned subsidiaries. Our
business consists of two divisions, Phelps Dodge Mining Company (PDMC) and
Phelps Dodge Industries (PDI). Investments in undivided interests and
unincorporated mining joint ventures that are limited to the extraction of
minerals are accounted for using the proportional consolidation method. These
investments include the Morenci mine, located in Arizona, in which we hold an
85 percent undivided interest; the Candelaria and El Abra mines, located in
Chile, in which we hold 80 percent and 51 percent partnership interests,
respectively; and the Chino mine, located in New Mexico, in which we held a
two-thirds partnership interest through December 18, 2003, and a 100 percent
interest from December 19, 2003 to December 31, 2003 (refer to Note 2 for
further discussion). Interests in other majority-owned subsidiaries are
reported using the full consolidation method; the consolidated financial
statements include 100 percent of the assets and liabilities of these
subsidiaries and the ownership interests of minority participants are recorded
as Minority interests in consolidated subsidiaries. All material intercompany
balances and transactions are eliminated. Investments in unconsolidated companies owned 20 percent or more are
recorded on an equity basis. Investments in companies less than 20 percent
owned, and for which we do not exercise significant influence, are carried at
cost. Managements Estimates and Assumptions. The preparation of financial
statements in conformity with generally accepted accounting principles in the
United States (GAAP) requires our management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
more significant areas requiring the use of management estimates and
assumptions relate to mineral reserves that are the basis for future cash flow
estimates and units-of-production depreciation and amortization calculations;
environmental, reclamation and closure obligations; estimates of recoverable
copper and molybdenum in ore reserves and in mill and leach stockpiles; asset
impairments (including estimates of future cash flows); postemployment,
postretirement and other employee benefit liabilities; bad debts; restructuring
reserves; realization of deferred tax assets; reserves for contingencies and
litigation; and fair value of financial instruments. Management bases its
estimates on the Companys historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. Foreign Currency Translation. Except as noted below, the assets and
liabilities of foreign subsidiaries are translated at current exchange rates,
while revenues and expenses are translated at average rates in effect for the
period. The related translation gains and losses are included in accumulated
other comprehensive income (loss) within shareholders equity. For the
translation of the financial statements of certain foreign subsidiaries dealing
predominantly in U.S. dollars, and for those affiliates operating in highly
inflationary economies, assets and liabilities receivable or payable in cash
are translated at current exchange rates, and inventories and other
non-monetary assets and liabilities are translated at historical rates. Gains
and losses resulting from translation of such financial statements are included
in operating results, as are gains and losses incurred on foreign currency
transactions. Statement of Cash Flows. For the purpose of preparing the Consolidated
Statement of Cash Flows, we consider all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. Mill Stockpiles, Leach Stockpiles, Inventories and Supplies. Mill stockpiles,
leach stockpiles, inventories and supplies are stated at the lower of cost or
market. For PDMC mined copper ore and other metal inventories, cost is
determined by the last-in, first-out (LIFO) method and includes all costs
incurred to the applicable stage of processing. Costs include labor and
benefits, supplies, energy, depreciation and amortization, and other necessary
costs associated with the extraction and processing of ore, including,
depending on the process, mining, haulage, milling, concentrating, smelting,
leaching, solution extraction and refining. General and administrative costs
for division and corporate offices are not included in inventory values. For molybdenum inventory, cost also is determined using the LIFO method.
Costs include labor and benefits, supplies, energy, depreciation and
amortization, and other necessary costs associated with the extraction and
processing of ore, including, depending on the process, mining, haulage,
milling, concentrating, roasting and chemical processing. General and
administrative costs for corporate offices are not included in inventory
values. For PDI, we use the LIFO method to value metal inventories. We use the
first-in, first-out (FIFO) or moving average cost methods to determine costs
for substantially all other PDI inventories. Costs include raw materials,
direct and indirect production costs, and depreciation. General and
administrative costs for division and corporate offices are not included in
inventory values. Substantially all supplies are purchased for PDMC and PDI, and cost is
determined using a moving average method. Major classifications for PDMC are described below. Mill stockpiles Mill stockpiles contain low-grade ore that has been extracted from the
mine and is available for processing to recover the contained copper by
milling, concentrating, smelting and refining. Mill stockpiles that are
expected to be processed in the future are valued based on mining and haulage
costs incurred to deliver ore to the stockpiles, including associated
depreciation, amortization and overhead costs. Because the determination of copper contained in mill stockpiles by
physical count is impracticable, reasonable estimation methods are employed.
The quantity of material delivered to the stockpiles is based on surveyed
volumes of mined material and daily production records. Sampling and assaying
of blast-hole cuttings determine the estimated amount of copper contained in
the material delivered to the mill stockpiles.




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##### Table of Contents



93 Expected copper recovery rates are determined by metallurgical testing.
The recoverable copper in mill stockpiles can be extracted into copper
concentrate almost immediately upon processing. Estimates of copper contained
in mill stockpiles are reduced as material is removed and fed to the mill. Leach stockpiles Leach stockpiles contain low-grade ore that has been extracted from the
mine and is available for processing to recover the contained copper through a
leaching process. Leach stockpiles are exposed to acidic solutions that
dissolve contained copper into solution for subsequent extraction processing.
Leach stockpiles that are expected to be processed in the future are valued
based on mining and haulage costs incurred to deliver ore to the stockpiles,
including associated depreciation, amortization and overhead costs. Because the determination of copper contained in leach stockpiles by
physical count is impracticable, reasonable estimation methods are employed.
The quantity of material is based on surveyed volumes of mined material and
daily production records. Sampling and assaying of blast-hole cuttings
determine the estimated amount of copper contained in material delivered to the
leach stockpiles. Expected copper recovery rates are determined using small-scale laboratory
tests, medium-scale column testing (which simulates the production-scale
process), historical trends and other factors, including mineralogy of the ore
and rock type. Ultimate recovery of copper contained in leach stockpiles can vary from a
very low percentage to more than 90 percent depending on several variables,
including type of processing, mineralogy and particle size of the rock.
Although as much as 70 percent of the copper ultimately recoverable may be
extracted during the first year of processing, recovery of the remaining copper
may take several years. Our processes and recovery rates are monitored continuously.
We adjust our recovery rate estimates periodically as we learn more about
the long-term leaching process and as the related technology changes. Estimates
of copper contained in leach stockpiles are reduced as copper is recovered from
the stockpile. Work-in-process Work-in-process inventories at PDMC represent materials that are in the
process of being converted into a salable product. Conversion processes vary
depending on the nature of the copper ore and the specific mining operation.
For sulfide ores, processing includes milling and concentrating and results in
the production of copper and molybdenum concentrates. For oxide ores,
processing includes solution extraction and electrowinning and results in the
production of copper cathodes. In-process material is measured based on assays
of the material included in these processes and projected recoveries.
In-process inventories are valued based on the cost of the source material plus
in-process conversion costs incurred to various points in the process,
including depreciation relating to the associated process facilities.
Molybdenum in-process inventory includes the cost of molybdenum concentrates
and the costs incurred to convert those concentrates into various high-purity
molybdenum chemicals or metallurgical products. Work-in-process inventories at PDI represent wire and cable that is in the
process of being converted into a salable product. In-process inventories are
valued based on the cost of raw materials (copper, aluminum, and coating and
insulating materials) plus in-process conversion costs incurred to various
points in the process, including depreciation relating to the associated
process facilities. Finished goods Finished goods at PDMC include salable products (e.g., copper
concentrates, copper anodes, copper cathodes, copper rod, high-purity
molybdenum chemicals and other metallurgical products). Finished goods are
valued based on the cost of the source material plus applicable conversion
costs, including depreciation relating to the associated process facilities. Finished goods at PDI include salable products, primarily copper and
aluminum wire and cable and carbon black. Carbon black is produced
instantaneously from feedstock oil (a raw material). Finished goods are valued
based on the cost of the source material plus applicable conversion costs,
including depreciation relating to the associated process facilities and
packaging. Raw materials Raw material at PDI includes purchased copper, aluminum, coating and
insulating materials, and feedstock oil. PDMC generally supplies copper to our
U.S. wire and cable business locations on a consignment basis. Property, Plant and Equipment. Property, plant and equipment are carried at
cost. Cost of significant assets includes capitalized interest incurred during
the construction and development period. Expenditures for replacements and
betterments are capitalized; maintenance and repair expenditures are charged to
operations as incurred except for planned major maintenance activities at our
copper smelters and molybdenum roasters as described below. The principal depreciation method used for mining, smelting and refining
operations is the units-of-production method applied on a group basis. Depreciation rates for each mines production are based on the ratio of
depreciable life-of-mine assets over the associated projected life-of-mine of
proven and probable ore reserves. Depreciable life-of-mine assets exclude
non-mining land (which is not depreciated or depleted), mining land (which is
depleted separately), short-lived assets (which are depreciated on a
straight-line basis over their estimated useful lives less estimated salvage
value) and undeveloped ore body values. Depreciation rates for smelter and refinery production are based on the
ratio of total life-of-facility depreciable assets over projected
life-of-facility production. Depreciable facility assets exclude
non-depreciable assets (such as land values) and short-lived assets (which are
depreciated on a straight-line basis over their estimated useful lives less
estimated salvage value). Buildings, machinery and equipment for our other operations are
depreciated using the straight-line method over estimated lives of three to 40
years, or the estimated life of the operation if shorter. Upon disposal of assets depreciated on a group basis, cost less salvage is
charged to accumulated depreciation. Values for mining properties represent mainly acquisition costs.
Depletion of mines is computed on the basis of an overall unit rate
applied to the pounds of principal products sold from mine production.




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##### Table of Contents



94 Mine exploration costs and stripping costs to maintain production of
operating mines are charged to operations as incurred. Mine development
expenditures at new mines, and major development expenditures at operating
mines outside existing pit limits that are expected to benefit future
production beyond a minimum of one year, are capitalized and amortized on the
units-of-production method. Major development expenditures at operating mines
include the cost to remove overburden to prepare unique and identifiable areas
outside the current mining area for such future production. Capitalized major
development is amortized on a units-of-production method over associated proven
and probable ore reserves. Our policy for repair and maintenance costs incurred in connection with
periodic, planned, major maintenance activities that benefit future periods at
our continuously operating copper smelters and molybdenum roasters is to defer
such costs when incurred and charge them to operations equally during the
subsequent periods benefited. These operations require shutdowns of the entire
facility to perform planned, major repair and maintenance activities on
furnaces, acid plants, anode vessels, oxygen plants and other ancillary
facilities. The frequency of such repair and maintenance activities is
predictable and scheduled and typically ranges from 12 to 36 months depending
on the facility and area involved. Environmental Expenditures. Environmental expenditures are expensed or
capitalized depending upon their future economic benefits. Liabilities for such
expenditures are recorded when it is probable that obligations have been
incurred and the costs can be reasonably estimated. For closed facilities and
closed portions of operating facilities with closure obligations, an
environmental liability is accrued when a closure determination is made and
approved by management, and when the environmental liability is considered to
be probable. Environmental liabilities attributed to the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) or analogous
state programs are considered probable when a claim is asserted, or is probable
of assertion, and we have been associated with the site. Other environmental
remediation liabilities are considered probable based on the specific facts and
circumstances. Our estimates of these costs are based upon available facts,
existing technology and current laws and regulations, and are recorded on an
undiscounted basis. 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 possibility of recovery of some of these costs from insurance
companies or other parties exists; however, we do not recognize these
recoveries in our financial statements until they become probable. We recognize
insurance receivables for environmental remediation when a settlement is
reached with the insurance carrier. Mine Closure Costs. Effective January 1, 2003, we adopted Statement of
Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement
Obligations, which established a uniform methodology for accounting for
estimated reclamation costs. We recognize asset retirement obligations (AROs)
as liabilities when incurred, with the initial measurement at fair value. These
liabilities are accreted to full value over time through charges to income. In
addition, asset retirement costs (ARCs) are capitalized as part of the related
assets carrying value and are depreciated on a units-of-production basis over
the assets respective useful life. Reclamation costs for future disturbances
are recognized as an ARO and as a related ARC in the period incurred. Our AROs
consist primarily of costs associated with mine reclamation and closure
activities. These activities, which tend to be site specific, generally include
costs for earthwork, revegetation, water treatment and demolition. We assess
the cash flow estimates and timing associated with our AROs on an annual basis,
and we revise these estimates when facts and circumstances change, as
necessary. Any refinements to our AROs as a result of cash flow estimates and
timing revisions are recorded in the period incurred. Prior to the adoption of
SFAS No. 143, we recognized our estimated mine closure costs over the life of
active mining properties on a units-of-production basis. For non-operating
sites on care-and-maintenance status, we suspended accrual of mine closure
costs until the site resumed production. When management determined a mine
should be permanently closed, any unrecognized closure obligation was
recognized. For acquired mining properties, the portion of the reclamation
obligation that had been incurred as of the acquisition date was recognized as
an obligation in the opening balance sheet on a fair value basis. In subsequent
periods, the acquired closure liability was accreted on a quarterly basis, and
the remaining estimated final reclamation costs for future disturbances at
acquired properties were recognized on a units-of-production basis over the
remaining life of the mining property. (For further discussion on the impact of
the adoption of SFAS No. 143, refer to this note under New Accounting Standards
 SFAS No. 143.) Goodwill. Goodwill has indefinite useful lives and is not amortized but rather
tested at least annually for impairment. Under the transitional provisions of
SFAS No. 142, we identified and evaluated our reporting units for goodwill
impairment using a present value technique with industry average multiples and
third-party valuations used as a benchmark. In 2001, goodwill was amortized on
a straight-line basis over periods of 15 to 30 years. (Refer to further
discussion in this note under New Accounting Standards  SFAS No. 142.) Intangible Assets. Intangible assets include certain mining concessions,
primarily mining concessions containing proven and probable ore reserves and
mineralized material at the Companys South American mines. The principal
amortization method for such intangible assets is the computation of an overall
unit rate that is applied to pounds of principal products sold from mine
production. The remaining intangible assets are amortized on a straight-line
basis over their respective useful lives. Impairments. We evaluate our long-term assets held for use for impairment when
events or changes in economic circumstances indicate the carrying amount of
such assets may not be recoverable. Goodwill and our identifiable intangible
assets are evaluated at least annually for impairment. We use an estimate of
the future undiscounted net cash flows of the related asset or asset grouping
over the remaining life to measure whether the assets are recoverable and
measure any impairment by reference to fair value. Fair value is generally
estimated using the Companys expectation of discounted net cash flows.
Long-term assets to be disposed of are carried at the lower of cost or fair
value less the costs of disposal. (Refer to further discussion in this note
under New Accounting Standards  SFAS Nos. 141, 142 and 144.)




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##### Table of Contents



95 Revenue Recognition. The Company sells its products pursuant to sales
contracts entered into with its customers. Revenue for all our products is
recognized when title and risk of loss pass to the customer and when
collectibility is reasonably assured. The passing of title and risk of loss to
the customer is based on terms of the sales contract, generally upon shipment
of product. Product pricing is based upon quoted commodity prices plus
applicable premiums or prevailing market prices. Certain of our sales agreements provide for provisional pricing based on
either the New York Commodity Exchange (COMEX) or London Metal Exchange (LME)
(as specified in the contract) when shipped. Final settlement is based on the
average applicable price for a specified future period, generally from one to
three months after arrival at the customers facility. The Companys
provisionally priced sales contain an embedded derivative that, because it is
unrelated to the commodity sale, is required to be accounted for separately
from the contract. The contract is the sale of the concentrates at the current
spot LME price. The embedded derivative, which is the final settlement price
based on a future price, does not qualify for hedge accounting and accordingly
is marked to market through earnings each period with reference to the
appropriate commodity and exchange forward curve. At December 31, 2003, we had
outstanding provisionally priced sales of 52.8 million pounds. For each 1 cent
per pound change in the realized copper price, revenue and pre-tax income would
vary (plus or minus) approximately $0.5 million on those sales. Shipping and Handling Fees and Costs. Amounts billed to customers for shipping
and handling are classified as sales and other operating revenues. Amounts
incurred for shipping and handling are included in costs of products sold. Hedging Programs. We do not purchase, hold or sell derivative financial
contracts unless we have an existing asset or obligation or we anticipate a
future activity that is likely to occur that will result in exposing us to
market risk. Derivative financial instruments are used to manage well-defined
commodity price, energy, foreign exchange and interest rate risks from our
primary business activities. For a discussion on why we use derivative
financial contracts, our year-end derivative positions and related financial
results, refer to Note 22, Derivative Financial Instruments and Fair Value of
Financial Instruments. We recognize all derivative financial instruments as assets and
liabilities and measure them at fair value. For derivative instruments that are
designated and qualify as cash flow hedges (specifically, metal swap contracts,
floating-to-fixed interest rate swaps, diesel fuel swaps and call options, and
natural gas and feedstock oil call options), the effective portions of changes
in fair value of the derivative are recorded in other comprehensive income
(loss), and are recognized in the Statement of Consolidated Operations when the
hedged item affects earnings. Ineffective portions of changes in the fair value
of cash flow hedges are recognized currently in earnings. For derivative
instruments that are designated and qualify as fair value hedges (specifically,
fixed-price copper swap and futures contracts, currency forward exchange
contracts, and fixed-to-floating interest rate swaps), gains or losses
resulting from changes in their fair value are recognized currently in
earnings. In addition, the gain or loss resulting from changes in the fair
value of the hedged item attributable to the hedged risk is adjusted and
recognized currently in earnings. Therefore, any ineffectiveness would be
recognized currently in earnings. Effectiveness testing for qualified hedge programs (with the exception of
interest rate swaps) utilizes an intrinsic valuation methodology. This
methodology excludes the time value of money component, which is recognized
immediately in earnings. Our interest rate swaps meet the criteria to assume no
hedge ineffectiveness. Changes in the fair value of derivatives that do not qualify for hedge
treatment (specifically, copper rod swap and futures contracts, copper
quotational period swap contracts, gold collars and certain diesel fuel price
protection programs and currency swaps) are recognized currently in earnings. Stock Compensation. At December 31, 2003, the Company had five stock-based
option plans, which are described more fully in Note 16, Stock Option Plans;
Restricted Stock. We account for our stock option plans by measuring
compensation cost using the intrinsic-value-based method presented by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. No compensation cost is reflected
in consolidated net income (loss), as all options granted under the plans had
an exercise price equal to the market value of the underlying common stock on
the date of the grant. The following table presents the effect on net income
(loss) and earnings
(loss) per share as if we had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation to compensation cost.  2003
    
    2002
    
    2001Net income (loss) as reported
    
    $
    94.8
    
    
    
    (338.1
    )
    
    
    (331.5
    )Deduct:Total compensation cost determined under fair
value based method for all awards, net of tax
    
    
    (11.2
    )
    
    
    (13.8
    )
    
    
    (12.0
    )Pro formanet income (loss)
    
    $
    83.6
    
    
    
    (351.9
    )
    
    
    (343.5
    )Earnings (loss) per shareBasic  as reported
    
    $
    0.92
    
    
    
    (4.13
    )
    
    
    (4.22
    )Basic  pro forma
    
    $
    0.79
    
    
    
    (4.29
    )
    
    
    (4.38
    )Earnings (loss) per shareDiluted  as reported
    
    $
    0.91
    
    
    
    (4.13
    )
    
    
    (4.22
    )Diluted  pro forma
    
    $
    0.79
    
    
    
    (4.29
    )
    
    
    (4.38
    )
  Income Taxes. In addition to charging income for taxes actually paid or
payable, the provision for taxes reflects deferred income taxes resulting from
changes in temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements. A valuation
allowance is provided for any deferred tax assets for which realization is
unlikely. The effect on deferred income taxes of a change in tax rates and laws
is recognized in income in the period that such changes are enacted. Deferred
income taxes have not been provided on the Companys share of undistributed
earnings of certain foreign subsidiaries and unconsolidated affiliates because
we consider those earnings to be reinvested indefinitely. Pension Plans. We have trusteed, non-contributory pension plans covering
substantially all of our U.S. employees and some employees of international
subsidiaries. The applicable plan design determines the manner in which the
benefits are calculated for any particular group of employees. With respect to
certain of these plans, the benefits are calculated based on final average
monthly compensation and years of service. In the case of other plans, the
benefits are




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##### Table of Contents



96 calculated based on a fixed amount for each year of service. Our
funding policy provides that contributions to the pension trusts shall be at
least equal to the minimum funding requirements of the Employee Retirement
Income Security Act of 1974, as amended, for U.S. plans or, in the case of
international subsidiaries, the minimum legal requirements in that particular
country. Additional contributions also may be made from time to time. Postretirement Benefits Other Than Pensions. We have postretirement medical
and life insurance benefit plans covering most of our U.S. employees and, in
some cases, employees of international subsidiaries. Postretirement benefits
vary among plans and many plans require contributions from employees. We
account for these benefits on an accrual basis. Our funding policy provides
that contributions shall be at least equal to our cash basis obligation, plus
additional amounts that may be approved by us from time to time. Postemployment Benefits. We have certain postemployment benefit plans covering
most of our U.S. employees and, in some cases, employees of international
subsidiaries. The benefit plans may provide severance, long-term disability
income, health care, life insurance, continuation of health and life insurance
coverage for disabled employees or other welfare benefits. We account for these
benefits on an accrual basis. Our funding policy provides that contributions
shall be at least equal to our cash basis obligation. Additional amounts may
also be provided from time to time. Earnings (Loss) Per Share. Basic earnings (loss) per share are computed by
dividing income (loss) available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted earnings (loss) per
share are similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the potentially dilutive common shares had been issued, and
the numerator excludes dividends. Restricted stock is unvested; accordingly,
these shares are only included in the computation of diluted earnings per share
as they are only contingent upon vesting.  2003
    
    2002
    
    2001Basic Earnings (Loss) Per Share ComputationNumerator:Net income (loss)
    
    $
    94.8
    
    
    
    (338.1
    )
    
    
    (331.5
    )Preferred stock dividends
    
    
    (13.5
    )
    
    
    (9.1
    )
    
    
    Net income (loss) applicable to common shares
    
    
    81.3
    
    
    
    (347.2
    )
    
    
    (331.5
    )Denominator:Weighted average common shares outstanding
    
    
    88.8
    
    
    
    84.1
    
    
    
    78.5Basic earnings (loss) per common share
    
    $
    0.92
    
    
    
    (4.13
    )
    
    
    (4.22
    )Diluted Earnings (Loss) Per Share ComputationNumerator:Net income (loss)
    
    $
    94.8
    
    
    
    (338.1
    )
    
    
    (331.5
    )Preferred stock dividends
    
    
    (13.5
    )
    
    
    (9.1
    )
    
    
    Net income (loss) applicable to common shares
    
    
    81.3
    
    
    
    (347.2
    )
    
    
    (331.5
    )Denominator:Weighted average common shares outstanding
    
    
    88.8
    
    
    
    84.1
    
    
    
    78.5Weighted average employee stock options*
    
    
    0.4
    
    
    
    
    
    
    
    Weighted average restricted stock issued
to employees
    
    
    0.2
    
    
    
    
    
    
    
    Total weighted average common shares
outstanding
    
    
    89.4
    
    
    
    84.1
    
    
    
    78.5Diluted earnings (loss) per common share**
    
    $
    0.91
    
    
    
    (4.13
    )
    
    
    (4.22
    )
   *
    
    Additional common shares of 0.3 million and 0.2 million in 2002 and 2001,
respectively, were anti-dilutive.**
    
    If the conversion of mandatory convertible preferred shares to common
shares of 4.7 million shares and 2.8 million shares for the years ended
December 31, 2003 and 2002, respectively, were reflected, diluted earnings
(loss) per common share of $1.01 and $(3.88), respectively, would have
been anti-dilutive. Stock options excluded from the computation of diluted earnings per share
because option exercise prices exceeded the per share market value of our
common stock were as follows:  2003
    
    2002
    
    2001Outstanding options
    
    
    6.3
    
    
    
    8.9
    
    
    
    7.7Average option exercise price
    
    $
    61.27
    
    
    
    56.67
    
    
    
    61.91
  New Accounting Standards. In April 2002, the Financial Accounting Standards
Board (FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections. Under SFAS
No. 4, all gains and losses from extinguishment of debt were required to be
aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. This Statement eliminated SFAS No. 4 and, thus, the
exception to applying APB No. 30 to all gains and losses related to
extinguishments of debt. As a result, gains and losses from extinguishment of
debt should be classified as extraordinary items only if they meet the criteria
in APB No. 30. Applying the provisions of APB No. 30 will distinguish
transactions that are part of an entitys recurring operations from those that
are unusual or infrequent or that meet the criteria for classification as an
extraordinary item. Under SFAS No. 13, the required accounting treatment of
certain lease modifications that have economic effects similar to
sale-leaseback transactions was inconsistent with the required accounting
treatment for sale-leaseback transactions. This Statement amended SFAS No. 13
to require that those lease modifications be accounted for in the same manner
as sale-leaseback transactions. The Company adopted this Statement in the 2003
first quarter. As a result, we reclassified the 2002 third quarter
extraordinary item for debt extinguishment costs to a recurring item.




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##### Table of Contents



97 In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). The
principal difference between this Statement and EITF 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. This Statement requires recognition of such liabilities
when incurred. Under EITF 94-3, a liability was recognized at the date of an
entitys commitment to an exit plan. This Statement was effective for exit or
disposal activities initiated after December 31, 2002. In November 2002, FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon
issuance of certain guarantees, a guarantor must recognize a liability for the
fair value of an obligation assumed under the guarantee. FIN 45 also requires
significant new disclosures by guarantors, in both interim and annual financial
statements, about obligations associated with guarantees issued. FIN 45
disclosure requirements were adopted for our year ended December 31, 2002; the
initial recognition and measurement provisions were adopted on a prospective
basis for guarantees issued or modified after December 31, 2002. There were no
guarantees issued or modified in 2003 that required fair value recognition as a
liability that had a material impact on our financial statements. (Refer to
Note 20, Guarantees, for further discussion.) In December 2002, FASB issued SFAS No. 148, Accounting
for Stock Based Compensation  Transition and Disclosure  an Amendment of
SFAS No. 123. This Statement amends SFAS
No. 123, Accounting for Stock-Based Compensation, and provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. This
Statement also amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of stock-based employee compensation and the effect of the method used
on reported results. This Statement was effective for fiscal years ending after
December 15, 2002. The Company adopted this Statement in regards to disclosure
provisions for the year ended December 31, 2002. (Refer to this note under
Stock Compensation for further discussion.) In January 2003, FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46
clarifies when a company should consolidate in its financial statements the
assets, liabilities and activities of a variable interest entity. FIN 46
provides general guidance as to the definition of a variable interest entity
and requires a variable interest entity to be consolidated if a company absorbs
the majority of the variable interest entitys expected losses, or is entitled
to receive a majority of the variable interest entitys residual returns, or
both. In December 2003, FASB issued a revised interpretation of FIN 46 (FIN
46-R), which supercedes FIN 46 and clarifies and expands current accounting
guidance for variable interest entities. FIN 46 and FIN 46-R are effective
immediately for all variable interest entities created after January 31, 2003,
and for variable interest entities created prior to February 1, 2003, no later
than the end of the first reporting period after March 15, 2004. We have
performed a review of any entities created subsequent to January 31, 2003, and
determined the adoption of FIN 46 and FIN 46-R did not have a material impact
on the Companys financial reporting and disclosures. For any entities created
prior to February 1, 2003, we are currently assessing the impact of FIN 46 and
FIN 46-R and do not believe that the adoption of FIN 46 and FIN 46-R will have
a material impact on our financial reporting and disclosures. In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative and when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. This Statement is generally
effective for contracts entered into or modified after June 30, 2003. The
adoption of SFAS No. 149 did not have a material impact on the Companys
financial reporting and disclosures. In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
changes the accounting for certain financial instruments that, under previous
guidance, could be classified as equity or mezzanine equity, by now requiring
those instruments to be classified as liabilities (or assets in some
circumstances) in the statement of financial position. Further, SFAS No. 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. The guidance in SFAS No. 150 generally is effective for all
financial instruments entered into or modified after May 31, 2003, and is
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. We have evaluated SFAS No. 150 and determined that it does
not have an impact on our financial reporting and disclosures. In December 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition,
which supercedes SAB 101, Revenue Recognition in Financial Statements. SAB
104s primary purpose is to rescind accounting guidance contained in SAB 101
related to multiple element revenue arrangements and revises the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
that have been codified in Topic 13. SAB 104 was effective immediately and did
not have a material impact on the Companys financial reporting and
disclosures. Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations. With the adoption of this Statement, asset
retirement obligations are recognized when incurred and displayed as
liabilities, with the initial measurement at fair value. These liabilities are
accreted to full value over time through charges to income. In addition, asset
retirement costs are capitalized as part of the related assets carrying value
and are depreciated on a units-of-production basis over the assets respective
useful life. Upon adoption, we recorded an increase to our closure and
reclamation reserve of approximately $2.5 million, net, an increase in our
mining properties assets and intangibles of approximately $12.2 million and




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98 a cumulative effect gain of $8.4 million, net of deferred income taxes. For the
year ended December 31, 2003, the effect of adopting SFAS No. 143 increased
income before extraordinary item and cumulative effect of accounting changes by
approximately $15.9 million, or 18 cents per basic and diluted common share. The following table summarizes the balance sheet impact
associated with the adoption of SFAS No. 143:  SFAS
    
    January 1,No. 143
    
    2003December 31,
    
    Adoption
    
    After2002
    
    Impact
    
    AdoptionMining properties
    
    $
    907.4
    
    
    
    63.8
    *
    
    
    971.2Mining properties 
accumulated depreciation
    
    
    (197.1
    )
    
    
    (53.2
    )
    
    
    (250.3
    )Net mining properties assets
    
    $
    710.3
    
    
    
    10.6
    
    
    
    720.9Intangibles
    
    $
    439.5
    
    
    
    3.6
    *
    
    
    443.1Intangibles  accumulated amortization
    
    
    (93.6
    )
    
    
    (2.0
    )
    
    
    (95.6
    )Net intangibles
    
    $
    345.9
    
    
    
    1.6
    
    
    
    347.5Asset retirement obligation liability
    
    $
    138.6
    
    
    
    10.4
    **
    
    
    149.0
   *
    
    Amounts include $84.0 million and $7.5 million of additions related to
recording asset retirement costs, offset by $20.2 million and $3.9 million
to reduce amounts recognized as ore reserves in purchase accounting.**
    
    Amount consists of $2.5 million of liabilities recognized at adoption and
$7.9 million of reclassifications related to closure obligations from
other liabilities at adoption. The pro forma effects of the application of SFAS No. 143 as if this
Statement had been adopted on January 1, 2001, are presented below:  2003
    
    2002
    
    2001Income (loss) before extraordinary item and
cumulative effect of accounting changes as
reported
    
    $
    18.1
    
    
    
    (315.2
    )
    
    
    (329.5
    )Reduced (increased) cost of products sold,
net of tax
    
    
    
    
    
    
    25.7
    
    
    
    (0.1
    )Additional depreciation expense, net of tax benefit
    
    
    
    
    
    
    (1.9
    )
    
    
    (2.8
    )Pro formaincome (loss) before extraordinary item
and cumulative effect of accounting changes
    
    $
    18.1
    
    
    
    (291.4
    )
    
    
    (332.4
    )Earnings (loss) per common share before
extraordinary item and cumulative effect of
accounting changes:Basic and diluted  as reported
    
    $
    0.06
    
    
    
    (3.86
    )
    
    
    (4.19
    )Basic and diluted  pro forma
    
    $
    0.06
    
    
    
    (3.57
    )
    
    
    (4.23
    )Net income (loss) as reported
    
    $
    94.8
    
    
    
    (338.1
    )
    
    
    (331.5
    )Pro formanet income (loss)
    
    $
    86.4
    
    
    
    (314.3
    )
    
    
    (334.4
    )Earnings (loss) per common share:Basic  as reported
    
    $
    0.92
    
    
    
    (4.13
    )
    
    
    (4.22
    )Basic  pro forma
    
    $
    0.83
    
    
    
    (3.84
    )
    
    
    (4.26
    )Diluted  as reported
    
    $
    0.91
    
    
    
    (4.13
    )
    
    
    (4.22
    )Diluted  pro forma
    
    $
    0.82
    
    
    
    (3.84
    )
    
    
    (4.26
    )
  The pro forma asset retirement obligation liability balances as if SFAS No. 143 had been adopted on January 1, 2002, are as follows:  Pro formaasset retirement obligation liability 
January 1, 2002
    
    $
    138.1Pro formaasset retirement obligation liability 
December 31, 2002
    
    $
    149.0
  In December 2003, FASB issued SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This Statement revises employers
disclosures about pension plans and other postretirement benefit plans. It
requires additional disclosures to those in the original SFAS No. 132 about the
assets, obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. The
required information should be provided separately for pension plans and for
other postretirement benefit plans. This Statement, which also requires new
disclosures for interim periods beginning after December 15, 2003, is effective
for fiscal years ending after December 15, 2003. The Company adopted this
Statement for the year ended December 31, 2003. In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This Statement supersedes SFAS No. 121 and
the accounting and reporting provisions of APB No. 30, and also amends
Accounting Research Bulletin (ARB) No. 51. This Statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and will broaden the
presentation of discontinued operations to include more disposal transactions.
This Statement was adopted by the Company on January 1, 2002, and was applied
in the determination of our Wire and Cable segments asset impairment charge in
the 2003 fourth quarter and 2002 third quarter, and PDMCs impairment charge in
the 2002 fourth quarter. Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets
that have indefinite useful lives are not amortized but rather tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. As of December 31, 2001, the
Company had goodwill of $115.2 million less accumulated amortization of $26.7
million associated with the Specialty Chemicals segment, and goodwill of $70.8
million less accumulated amortization of $16.2 million associated with the Wire
and Cable segment, for a total of $143.1 million, net. (Refer to Note 9,
Goodwill, for further discussion.) Under the transitional provisions of SFAS No. 142, we identified and
evaluated our reporting units for goodwill impairment using a present value
technique with industry average multiples and third-party valuations used as a
benchmark. Upon completion of the transitional impairment tests, the net book
value of three of the Companys international wire and cable reporting units
was determined to be less than the related carrying amount. The resulting
impairment loss recognized upon adoption of SFAS No. 142 was $33.0 million,
pre-tax ($22.9 million, after-tax), and
has been recognized as a cumulative effect of a change in accounting
principle. The pro forma effect of not amortizing goodwill in 2001 would have
reduced goodwill amortization expense by $7.3 million, reduced net loss by $6.1
million and reduced loss per common share by 8 cents. During 2001, we adopted SFAS No. 140, Accounting for the Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. In November 2001, the Company entered into an agreement (the Receivables
Facility) whereby it sells on a continuous basis an undivided interest in all
eligible trade accounts receivable. Pursuant to the Receivables Facility, the
Company formed PD Receivables LLC (PD




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99 Receivables), a wholly owned, special
purpose, bankruptcy-remote subsidiary. PD Receivables was formed for the sole
purpose of buying and selling receivables generated by the Company and is
consolidated with the operations of the Company. Under the Receivables
Facility, the Company transfers certain of its trade receivables to PD
Receivables. PD Receivables, in turn, has sold and, subject to certain
conditions, may from time to time sell an undivided interest in these
receivables, and is permitted to receive advances of up to $85.0 million for
the sale of such undivided interest. The agreement expired in December 2003 and
was extended for the second of two successive one-year periods, subject to
mutual agreement. The transactions are accounted for as a sale of receivables under the
provisions of SFAS No. 140. At December 31, 2003 and 2002, there was $85.0
million and $68.1 million, respectively, advanced under the Receivables
Facility. Costs associated with the sales of receivables, primarily related to
funding and service costs charged by the finance group, were $1.1 million, $2.3
million and $0.3 million during 2003, 2002 and 2001, respectively, and are
included in cost of products sold in the Statement of Consolidated Operations. Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, (as amended by SFAS No.
137) and SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities. These Statements require recognition of all
derivatives as either assets or liabilities on the balance sheet and
measurement of those instruments at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings (loss) or other
comprehensive income (loss) (OCI). Appropriate accounting for changes in the
fair value of derivatives held is dependent on whether the derivative
transaction qualifies as an accounting hedge and on the classification of the
hedge transaction. The implementation resulted in a cumulative effect charge of
$2.0 million (before and after taxes), or 3 cents per common share, and a
cumulative reduction to OCI of $7.1 million (before and after taxes). Reclassification. For comparative purposes, certain prior year amounts have
been reclassified to conform with the current year presentation. 2. Acquisitions and Divestitures Chino Mines Company Acquisition. On December 19, 2003, we acquired,
through a wholly owned subsidiary, the one-third partnership interest in Chino
Mines Company held by Heisei Minerals Corporation (Heisei). Heisei informed the
Company that it decided to exit the partnership because Chino was no longer a
strategic fit for its business. Under the terms of the agreement, Heisei paid
$114 million in cash, including approximately $64 million placed into a trust
to fund one-third of Chinos financial assurance obligations under New Mexico
mining reclamation laws. Under the terms of the agreement, the Company assumed
most ongoing liabilities; however, Heisei retained responsibility for its
one-third share of any natural resource damage claims for matters occurring
prior to the date of the agreement and, in certain circumstances, adverse
changes in the laws and regulations relating to reclamation. This acquisition was accounted for as a purchase transaction and recorded
in accordance with the guidance of SFAS No. 141, Business Combinations.
Therefore, the purchase price was allocated to the assets acquired and
liabilities assumed based on estimated fair values. The estimated fair value of
the assets received (including $50 million of cash received and $0.9 million of
cash acquired from Heisei, and $64 million placed into trust) exceeded the fair
value of liabilities assumed resulting in negative goodwill, which was
allocated to the fair value of the long-lived assets. In accordance with SFAS
No. 141, the remaining excess of $68.3 million was recognized as an
extraordinary gain. The extraordinary gain principally resulted from
negotiating the trust payment based on certain closure assumptions, such as
timing of cash flow estimates, discount rates and escalation rates used by the
state of New Mexico in early 2002, which differ from assumptions Phelps Dodge
must use on a viable mine basis utilizing cash flows negotiated with the state
in December 2003, with the applicable discount rate and escalation rate used to
fair value our current asset retirement obligations under SFAS No. 143.
Additionally, the cash payment negotiated to cover Heiseis one-third share of
Chinos other liabilities at the time of the agreement, was negotiated on a
shut-down basis and included liabilities that would only be incurred if the
Chino operations were to cease. The results of operations for Chino Mines
Company have been included in the consolidated financial results for the period
December 19 to December 31, 2003. The following table summarizes the estimated
fair values of the assets acquired and liabilities assumed at December 19,
2003:  Cash and cash equivalents
    
    $
    50.9Other current assets
    
    
    7.8Trust assets
    
    
    64.0Total assets acquired
    
    
    122.7Current liabilities
    
    
    10.6Other liabilities and deferred credits
    
    
    43.8Total liabilities assumed
    
    
    54.4Extraordinary gain
    
    $
    68.3
  The following pro forma information summarizes the results of consolidated
Phelps Dodge operations as if the acquisition had been completed as of the
beginning of the periods presented:  2003
    
    2002
    
    2001Sales and other operating revenues
    
    $
    4,168.1
    
    
    
    3,751.7
    
    
    
    4,045.1Income (loss) before extraordinary item and
cumulative effect of accounting changes
    
    $
    13.8
    
    
    
    (317.2
    )
    
    
    (342.2
    )Net income (loss)*
    
    $
    20.7
    
    
    
    (340.0
    )
    
    
    (344.3
    )Earnings (loss) per common share before
extraordinary item and cumulative effect
of accounting changesBasic and diluted  as reported
    
    $
    0.06
    
    
    
    (3.86
    )
    
    
    (4.19
    )Basic and diluted  pro forma
    
    $
    0.00
    
    
    
    (3.88
    )
    
    
    (4.36
    )Earnings (loss) per common shareBasic  as reported
    
    $
    0.92
    
    
    
    (4.13
    )
    
    
    (4.22
    )Basic  pro forma*
    
    $
    0.08
    
    
    
    (4.15
    )
    
    
    (4.39
    )Diluted  as reported
    
    $
    0.91
    
    
    
    (4.13
    )
    
    
    (4.22
    )Diluted  pro forma*
    
    $
    0.08
    
    
    
    (4.15
    )
    
    
    (4.39
    )
   *
    
    The 2003 pro formanet income and earnings per common share amounts
exclude the extraordinary gain of $68.3 million. Dawson Ranch Divestiture. In May 2002, we sold the Dawson Ranch, approximately
50,000 acres, in Colfax County, New Mexico, to Colfax Land & Cattle Company,
LLC. The sale resulted in a pre-tax gain of $22.6 million (before and after
taxes). Under the terms of the sales agreement, we received total proceeds of
$24.0 million less




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##### Table of Contents



100 $1.4 million for sales related expenses for net proceeds of
$22.6 million. Sossego Divestiture. In October 2001, Phelps Dodge and Companhia Vale do Rio
Doce (CVRD) entered into an agreement in which Phelps Dodge sold to CVRD,
through CVRDs subsidiary, Itabira Rio Doce Company Limited (ITACO), its 50
percent stake in the joint-venture company, Mineração Serra do Sossego S.A.,
for $42.5 million in cash. The joint venture had conducted exploration and
feasibility studies for the potential development of the Sossego copper-gold
deposit in the Carajás region of Brazil. In connection with the sale, the
Company recognized a gain of $39.9 million (before and after taxes). Alcoa Fios e Cabos Electricos Acquisition. In December 1997, we acquired a 60
percent interest in the Brazilian copper and aluminum wire and cable
manufacturing business (the Business) of Alcoa Aluminio, S.A. (Aluminio) for
$72 million. At that time, the fair value of the Business was approximately
$120 million. As part of the purchase agreement, Aluminio was given an optional
exit mechanism to sell to the Company all, but not less than all, of its
remaining shares in the Business. The agreement stipulated that Aluminio could
exercise its option between December 31, 2000, and January 1, 2006. Under the
terms of the agreement, the exit price would be the greater of (a) the sum of
(i) the aggregate amount of cash paid in by Aluminio to subscribe to capital
increases, plus (ii) $48 million or (b) the value of shareholders equity
represented by Aluminios shares. In January 2001, Aluminio gave the Company
notice of its intent to exercise the option. As a result of other commitments
by Aluminio under the purchase agreement, the exit price was renegotiated and
the transaction to acquire Aluminios remaining 40 percent interest in the
Business closed in March 2001 for $44.8 million. The final settlement price of
$44.8 million was allocated to goodwill ($13.0 million), fixed assets ($3.2
million), other net assets ($1.3 million) and minority interests in
consolidated subsidiaries ($27.3 million). 3. Special Items and Provisions Special items and provisions are unpredictable and atypical of the
Companys operations in a given period. This supplemental information is not a
substitute for any U.S. GAAP measure and should be evaluated within the context
of our U.S. GAAP results. (All references to per share earnings or losses are
based on diluted earnings per share.) Note: Supplemental Data The following table summarizes special items and provisions for the year
ended December 31, 2003:  Pre-tax
    
    After-tax
    
    $/ShareStatement of Consolidated Operations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:*PDMC Environmental provisions, net
    
    $
    (5.5
    )
    
    
    (5.2
    )
    
    
    (0.06
    )PDI Environmental provisions, net
    
    
    0.9
    
    
    
    0.9
    
    
    
    0.01Goodwill impairment charge
    
    
    (0.9
    )
    
    
    (0.9
    )
    
    
    (0.01
    )Asset impairment charges
    
    
    (1.7
    )
    
    
    (1.7
    )
    
    
    (0.02
    )Reassessment of prior restructuring programs
    
    
    0.2
    
    
    
    0.2
    
    
    
    Termination of foreign postretirement
benefit plan
    
    
    3.2
    
    
    
    2.4
    
    
    
    0.031.7
    
    
    
    0.9
    
    
    
    0.01Corporate
and Other Environmental provisions, net
    
    
    (23.8
    )
    
    
    (22.7
    )
    
    
    (0.25
    )Environmental insurance recoveries, net
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.01Historic Cyprus Amax legal matters
    
    
    (2.9
    )
    
    
    (2.9
    )
    
    
    (0.03
    )Probable Texas franchise tax matter
    
    
    (8.0
    )
    
    
    (8.0
    )
    
    
    (0.09
    )(34.2
    )
    
    
    (33.1
    )
    
    
    (0.36
    )(38.0
    )
    
    
    (37.4
    )
    
    
    (0.41
    )Miscellaneous income and expense, net:Gain on sale of cost investment
    
    
    6.4
    
    
    
    6.4
    
    
    
    0.07Benefit (provision) for taxes on income:Tax benefit for additional 2001 net income
operating loss carryback
    
    
    
    
    
    
    1.0
    
    
    
    0.01Extraordinary gain on acquisition of partners
one-third interest in Chino Mines Company
    
    
    68.3
    
    
    
    68.3
    
    
    
    0.76Cumulative effect of accounting change
    
    
    9.7
    
    
    
    8.4
    
    
    
    0.09$
    46.4
    
    
    
    46.7
    
    
    
    0.52
   *
    
    Refer to Note 23, Business Segment Data, for special items and provisions
by segment. A net charge for environmental provisions of $28.4 million ($27.0 million
after-tax) was recognized for closed facilities and closed portions of
operating facilities. (Refer to Note 21, Contingencies, for further discussion
of environmental matters.) In the 2003 fourth quarter, we determined that due to continuing reduced
market conditions in North America for magnet wire and high performance
conductors, the Laurinburg, North Carolina, and West Caldwell, New Jersey,
facilities, both temporarily closed in the 2002 fourth quarter, would not be
re-opened. This action resulted in further impairment charges related to these
assets of $1.3 million. The amount of the additional asset impairment was
determined through an assessment of fair value based on independent appraisals
of the existing assets at these two plants. No additional severance related
charges were required. Additionally, a write-down of $0.4 million was
recognized to reduce the carrying value of the assets of our Hopkinsville
facility closed in 2000. This adjustment reflected our current view of the fair
value of these assets. We also performed an impairment test on goodwill at our
magnet wire and high performance conductors facilities through a comparison of
the carrying value to the respective fair value (using an estimate of
discounted cash flows) and determined that a $0.9 million charge was required
to write-off magnet wires entire goodwill. Also during the quarter, we
recorded a $0.2




---



##### Table of Contents



101 million gain (before and after taxes) for the reassessment of
termination benefits associated with the September 2002 restructuring program. A gain of $3.2 million ($2.4 million after-tax) was recognized from the
termination of a foreign postretirement benefit plan associated with our
Specialty Chemicals segment. Net insurance recoveries of $0.5 million (before and after taxes) were
received from settlements reached with several insurance companies on historic
environmental liability claims. A charge of $2.9 million (before and after taxes) was recognized for
historic Cyprus Amax Minerals Company (Cyprus Amax) legal matters. The Company
acquired Cyprus Amax in October 1999. In the 2003 fourth quarter, a charge of $8.0 million (before and after
taxes) was recognized for a probable Texas franchise tax matter.
(Refer to Note 21, Contingencies, for further discussion.) A $6.4 million gain (before and after taxes) was recognized for the sale
of a wire and cable cost investment. In the 2003 fourth quarter, we determined that an additional $1.0 million
was required for net operating loss carryback for 2001 resulting from 2002 U.S.
tax legislation. (Refer to Note 6, Income Taxes, for further discussion.) An extraordinary gain of $68.3 million (before and after taxes) was
recognized for our acquisition of Heiseis one-third share in Chino Mines
Company, located in New Mexico. (Refer to Note 2, Acquisitions and
Divestitures, for further discussion.) A $9.7 million gain ($8.4 million after-tax) was recorded for the
cumulative effect of an accounting change due to the adoption of SFAS No. 143.
(Refer to Note 1, Summary of Significant Accounting Policies, under New
Accounting Standards for further discussion.) The following table summarizes special items and provisions for the year
ended December 31, 2002:  Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:*PDMC December 2002 impairments and provisions:Asset impairment charges
    
    $
    (146.5
    )
    
    
    (146.5
    )
    
    
    (1.74
    )Accrued closure costs
    
    
    (7.0
    )
    
    
    (7.0
    )
    
    
    (0.08
    )Environmental provisions, net
    
    
    (1.6
    )
    
    
    (1.6
    )
    
    
    (0.02
    )October 2001 restructuring:Reassessment of employee activities
and take-or-pay contracts
    
    
    5.1
    
    
    
    5.1
    
    
    
    0.06Additional retirement benefits
    
    
    (6.4
    )
    
    
    (6.4
    )
    
    
    (0.08
    )Environmental insurance recoveries, net
    
    
    16.9
    
    
    
    14.3
    
    
    
    0.17Sale of non-core real estate
    
    
    22.6
    
    
    
    22.6
    
    
    
    0.27(116.9
    )
    
    
    (119.5
    )
    
    
    (1.42
    )PDI September 2002 restructuring programs
    
    
    (23.6
    )
    
    
    (23.0
    )
    
    
    (0.27
    )Environmental provisions, net
    
    
    0.3
    
    
    
    0.3
    
    
    
    Reassessment of prior restructuring programs
    
    
    1.3
    
    
    
    1.3
    
    
    
    0.02(22.0
    )
    
    
    (21.4
    )
    
    
    (0.25
    )Corporate
and Other Environmental provisions, net
    
    
    (12.7
    )
    
    
    (12.7
    )
    
    
    (0.15
    )Environmental insurance recoveries, net
    
    
    17.4
    
    
    
    14.8
    
    
    
    0.18Historic Cyprus Amax lawsuit settlements
    
    
    (54.7
    )
    
    
    (53.0
    )
    
    
    (0.63
    )Historic Cyprus Amax arbitration award
    
    
    (46.5
    )
    
    
    (45.0
    )
    
    
    (0.54
    )Legal loss contingency
    
    
    (1.0
    )
    
    
    (1.0
    )
    
    
    (0.01
    )(97.5
    )
    
    
    (96.9
    )
    
    
    (1.15
    )(236.4
    )
    
    
    (237.8
    )
    
    
    (2.82
    )Early debt extinguishment costs
    
    
    (31.3
    )
    
    
    (26.6
    )
    
    
    (0.32
    )Miscellaneous income and expense, net:Cost investment write-downs
    
    
    (1.2
    )
    
    
    (1.2
    )
    
    
    (0.01
    )Benefit (provision) for taxes on income:Release of taxes provided with regard
to Plateau Mining
    
    
    
    
    
    
    13.0
    
    
    
    0.15Tax benefit for 2001 net operating loss carryback
    
    
    
    
    
    
    66.6
    
    
    
    0.79
    
    
    
    79.6
    
    
    
    0.94Cumulative effect of accounting change
    
    
    (33.0
    )
    
    
    (22.9
    )
    
    
    (0.27
    )$
    (301.9
    )
    
    
    (208.9
    )
    
    
    (2.48
    )
   *
    
    Refer to Note 23, Business Segment Data, for special items and provisions
by segment. In December 2002, PDMC recorded special, pre-tax charges for asset
impairments and closure provisions of $153.5 million (before and after taxes)
at Cobre, Hidalgo and Ajo. The Company recognized an impairment charge to write
down Cobres assets by $115.5 million (before and after taxes). We took this
action after revising mine plans and assessing recoverability. The revised mine
plans and associated cash flows used a copper price lower than the prior-year
assumption, reflecting moving average historical copper prices representing
full economic and pricing cycles. The amount of Cobres impairment was
determined through an assessment of the discounted cash flows of the remaining
ore reserves. The Hidalgo impairment included a $12.9 million write-down
(before and after taxes) of assets. As a result of the Companys ability to use
acid more efficiently and an updated assessment of PDMCs long-term acid
production and consumption balance, the Company determined that Hidalgo will
probably not be reconfigured to produce acid as originally anticipated and that
the net




---



##### Table of Contents



102 book value of Hidalgo assets would probably not be recovered. Hidalgos
power facilities will continue to generate electricity when needed, and the
facility will continue to be a backup alternative as a reliable producer of
acid if conditions warrant. The remaining Hidalgo assets were written down to
their estimated fair value. The Company also recognized a $7.0 million charge
(before and after taxes) for the estimated remaining costs of its closure
obligation at Hidalgo. Phelps Dodge has reclassified material previously
characterized as reserves at Ajo to mineralized material and, as a result,
recognized an impairment charge to write down Ajos assets by $18.1 million
(before and after taxes). This action resulted from updating mine plans at this
prospective development property. The amount of Ajos impairment was determined
through an assessment of the fair value of its assets. On September 10, 2002, we announced the temporary closure of two U.S. wire
and cable plants and other actions to improve efficiencies and consolidate
certain wire and cable operations. These temporary closures and internal
changes reduced our costs and aligned our business with current market
conditions. The actions included: (i) the temporary closure of the Laurinburg,
North Carolina, magnet wire plant at the end of 2002, with production being
shifted to the El Paso, Texas, and Fort Wayne, Indiana, facilities; (ii) the
temporary closure of the West Caldwell,
New Jersey, high performance conductors facility pending recovery of
markets served by this location, with production of certain products relocated
to our Inman, South Carolina, facility; (iii) operational and production
support at other high performance conductors facilities being streamlined in
order to reduce costs and increase operating efficiencies; and (iv) the
restructuring and consolidation of certain administrative functions. These
actions resulted in special, pre-tax charges of $23.6 million ($23.0 million
after-tax). Of these amounts, $16.9 million (before and after taxes) was
recognized as asset impairments and $6.7 million ($6.1 million after-tax) was
recognized for severance-related and relocation expenses associated with the
restructuring and temporary closures. The amount of the asset impairment was
determined through an assessment of fair market value, which was based on
independent appraisals, of the existing assets at the wire and cable plants. We
also performed an impairment test on the goodwill at our wire and cable plants
through a comparison of the carrying value to the respective fair value (using
an estimate of discounted cash flows) and determined that an additional
impairment loss was not required. The restructuring plan included the reduction
of approximately 300 positions and charges associated with employee severance
and relocation ($3.9 million) and pension and other postretirement obligations
($2.8 million). A net charge for environmental provisions of $14.0 million (before and
after taxes) was recognized for closed facilities and closed portions of
operating facilities. (Refer to Note 21, Contingencies, for further discussion
of environmental matters.) The net effect of the reassessment of prior restructuring programs was
zero (before and after taxes). PDMC recorded a $5.1 million gain (before and
after taxes) for the reassessment of the October 2001 restructuring programs
and a $6.4 million charge (before and after taxes) for additional
pension-related benefits for employees at our Chino, Miami, Sierrita and Bagdad
operations since these operations will remain curtailed beyond one year from
their January 2002 curtailment. PDI recorded a $1.3 million gain (before and
after taxes) for the reassessment of prior restructuring programs associated
with its Specialty Chemicals segment ($0.5 million before and after taxes) and
its Wire and Cable segment ($0.8 million before and after taxes). A gain of $22.6 million (before and after taxes) was recognized for the
sale of the Dawson Ranch property in New Mexico. (Refer to Note 2, Acquisitions
and Divestitures, for further discussion.) Net insurance recoveries of $34.3 million ($29.1 million after-tax) were
received from settlements reached with several insurance companies on historic
environmental liability claims. A $54.7 million pre-tax charge ($53.0 million after-tax) was recognized
for settlement of lawsuits related to Cyprus Amax. This included an $11.2
million pre-tax charge ($9.5 million after-tax) for the settlement of a lawsuit
related to Amax Oil & Gas, and a $43.5 million charge (before and after taxes)
for the settlement of a lawsuit with RAG American Coal Company (RAG). In
addition, there was a $46.5 million charge ($45.0 million after-tax) associated
with an award made in a binding arbitration proceeding filed against Cyprus
Amax by Plateau Mining Corporation (a former subsidiary of Cyprus Amax). A net $1.0 million charge (before and after taxes) was recognized for the
settlement of legal matters. A $1.2 million charge (before and after taxes) was recognized for the
write-off of two cost basis investments. A $31.3 million charge ($26.6 million after-tax) was recognized for early
debt extinguishment costs. (Refer to Note 1, Summary of Significant Accounting
Policies for a discussion of the accounting change for early debt
extinguishments, and Note 14, Debt and Other Financing, for further
discussion.) A $33.0 million charge ($22.9 million after-tax) was recorded for the
cumulative effect of an accounting change due to the adoption of SFAS No. 142.
(Refer to Note 1, Summary of Significant Accounting Policies, under New
Accounting Standards for further discussion.) In 2002, the tax benefit included the release of deferred taxes previously
provided with regard to Plateau Mining Corporation ($13.0 million) and a tax
benefit of $66.6 million for net operating loss carryback prior to 2002
resulting from 2002 U.S. tax legislation. (Refer to Note 6, Income Taxes, for
further discussion.) The following table presents a roll-forward of the liabilities incurred in
connection with the September 2002 restructuring program, which were reflected
as current liabilities in our Consolidated Balance Sheet:  2002Provision*
    
    Additions
    
    Payments
    
    12/31/02PDI Wire and CableEmployee severance and
relocation**
    
    $
    3.3
    
    
    
    0.6
    
    
    
    (2.6
    )
    
    
    1.3
   *
    
    Provision excluded $2.8 million of pension and other postretirement
charges included in long-term liabilities.**
    
    Relocation costs were charged to expense as incurred.  Reassess-12/31/02
    
    ments
    
    Payments
    
    12/31/03PDI Wire and CableEmployee severance
    
    $
    1.3
    
    
    
    (0.2
    )
    
    
    (1.1
    )
    
    
    




---



##### Table of Contents



103 A reassessment of $0.2 million for employee termination benefits at PDIs
Wire and Cable segment was made because subsequently it was determined that
these termination benefits were not necessary as all the benefits have been
paid. Note: Supplemental Data The following table summarizes special items and provisions for the year
ended December 31, 2001:  Pre-tax
    
    After-tax
    
    $/ShareStatement of Consolidated Operations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:*PDMC Restructuring programs
    
    $
    (27.1
    )
    
    
    (27.1
    )
    
    
    (0.35
    )Environmental provisions
    
    
    (14.9
    )
    
    
    (14.9
    )
    
    
    (0.19
    )Gain on sale of Sossego
    
    
    39.9
    
    
    
    39.9
    
    
    
    0.51(2.1
    )
    
    
    (2.1
    )
    
    
    (0.03
    )PDI Restructuring programs
    
    
    (1.4
    )
    
    
    (1.4
    )
    
    
    (0.02
    )Hopkinsville facility write-down
    
    
    (3.3
    )
    
    
    (3.3
    )
    
    
    (0.04
    )(4.7
    )
    
    
    (4.7
    )
    
    
    (0.06
    )Corporate
and Other Environmental provisions, net
    
    
    (16.2
    )
    
    
    (16.2
    )
    
    
    (0.21
    )Environmental insurance recoveries, net
    
    
    61.8
    
    
    
    61.8
    
    
    
    0.79Insurance settlement for legal loss
contingency
    
    
    9.0
    
    
    
    9.0
    
    
    
    0.11Restructuring programs
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (0.01
    )Other
    
    
    (5.9
    )
    
    
    (5.9
    )
    
    
    (0.07
    )47.4
    
    
    
    47.4
    
    
    
    0.6140.6
    
    
    
    40.6
    
    
    
    0.52Miscellaneous income and expense, net:Impairment loss on investments
    
    
    (12.9
    )
    
    
    (12.9
    )
    
    
    (0.16
    )Interest on prior years tax refunds
    
    
    4.3
    
    
    
    4.3
    
    
    
    0.05Other
    
    
    1.5
    
    
    
    1.5
    
    
    
    0.02(7.1
    )
    
    
    (7.1
    )
    
    
    (0.09
    )Benefit (provision) for taxes on income:El Abra deferred tax asset valuation allowance
    
    
    
    
    
    
    (57.9
    )
    
    
    (0.74
    )Cumulative effect of accounting change
    
    
    (2.0
    )
    
    
    (2.0
    )
    
    
    (0.03
    )$
    31.5
    
    
    
    (26.4
    )
    
    
    (0.34
    )
   *
    
    Refer to Note 23, Business Segment Data, for special items and provisions
by segment. During 2001, we recorded charges of $29.8 million (before and after taxes)
for restructuring programs comprising $27.1 million (before and after taxes) at
PDMC, $1.4 million (before and after taxes) at PDI and $1.3 million (before and
after taxes) at Corporate. In the second quarter of 2001, we announced a
restructuring of our professional, administrative and operational support
functions, as well as various other operational improvement initiatives, which
led to a reduction of approximately 500 positions. This resulted in an $11.3
million charge (before and after taxes) primarily for employee severance and
benefit costs. In the fourth quarter of 2001, we announced a series of actions
to address the then-current economic environment, including changes in copper
operations that led us to curtail approximately 220,000 metric tons of copper
production annually (including our partners share) and to curtail 54,000
metric tons of North American carbon black production annually in 2002. These
actions resulted in the layoff of approximately 1,600 employees mostly in
January 2002. The Chino and Miami mines were temporarily closed, the Bagdad and
Sierrita mines were operating at approximately one-half capacity, the Chino
smelter and the Miami refinery were temporarily closed (approximately 1,500
positions), and Columbian Chemicals Company temporarily closed its El Dorado,
Arkansas, facility (approximately 100 positions). This plan resulted in an
$18.5 million net charge (before and after taxes) for employee reductions and
facility closures associated with the announced production curtailments. A net charge for environmental provisions of $31.1 million (before and
after taxes) was recognized for closed facilities and closed portions of
operating facilities. (Refer to Note 21, Contingencies, for further discussion
of environmental matters.) A gain of $39.9 million (before and after taxes) was recognized from the
sale of our 50 percent interest in the Sossego project. (Refer to Note 2,
Acquisitions and Divestitures, for further discussion.) A $3.3 million charge (before and after taxes) was taken to write down the
closed Hopkinsville, Kentucky, magnet wire facility to its net realizable value
due to depressed market conditions. Net insurance recoveries of $61.8 million (before and after taxes) were
received from settlements reached with several insurance companies on historic
environmental liability claims. In addition, there was a $5.9 million charge
(before and after taxes) related to other net special items recognized in 2001. A $9.0 million gain (before and after taxes) was recognized from the
settlement reached with one of our insurance carriers associated with potential
future legal matters. Special charges in miscellaneous income and expense in 2001 included a
$12.9 million charge (before and after taxes) to recognize the impairment of
our investment in Compañia San Ignacio de Morococha S.A. (SIMSA) ($9.1
million), a Peruvian zinc mine, and Equatorial Mining ($3.8 million) in
Australia. Additionally, a $5.8 million gain (before and after taxes) was
recognized for other net special items, which was primarily $4.3 million
(before and after taxes) of interest income on prior years tax refunds. A $2.0 million charge (before and after taxes) was recorded for the
cumulative effect of accounting change arising from the implementation of SFAS
Nos. 133 and 138. (Refer to Note 1, Summary of Significant Accounting Policies,
under New Accounting Standards for further discussion.) In 2001, a deferred tax asset valuation allowance of $57.9 million was
established for our 51 percent interest in the El Abra copper mine in Chile.
(Refer to Note 6, Income Taxes, for further discussion.)




---



##### Table of Contents



104 The following tables present a roll-forward of the liabilities incurred in
connection with the 2001 restructuring programs, which were reflected as
current liabilities in our Consolidated Balance Sheet:  2001
    
    Reassess-Provision*
    
    ments
    
    Payments
    
    12/31/01PDMC U.S. MinesMorenciEmployee severance and
relocation**
    
    $
    1.7
    
    
    
    
    
    
    
    (1.4
    )
    
    
    0.3Bagdad/SierritaEmployee severance and
relocation**
    
    
    3.6
    
    
    
    
    
    
    
    (0.1
    )
    
    
    3.5Mothballing/take-or-pay contracts
    
    
    3.1
    
    
    
    
    
    
    
    
    
    
    
    3.16.7
    
    
    
    
    
    
    
    (0.1
    )
    
    
    6.6Miami/BisbeeEmployee severance and
relocation**
    
    
    2.0
    
    
    
    
    
    
    
    (0.2
    )
    
    
    1.8Mothballing/take-or-pay contracts
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.03.0
    
    
    
    
    
    
    
    (0.2
    )
    
    
    2.8Chino/CobreEmployee severance and
relocation**
    
    
    1.8
    
    
    
    
    
    
    
    (0.6
    )
    
    
    1.2Mothballing/take-or-pay contracts
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.22.0
    
    
    
    
    
    
    
    (0.6
    )
    
    
    1.4TyroneEmployee severance and
relocation**
    
    
    0.5
    
    
    
    
    
    
    
    (0.3
    )
    
    
    0.213.9
    
    
    
    
    
    
    
    (2.6
    )
    
    
    11.3Manufacturing and SalesEmployee severance and
relocation**
    
    
    1.7
    
    
    
    
    
    
    
    (0.3
    )
    
    
    1.4Mothballing/take-or-pay contracts
    
    
    4.4
    
    
    
    
    
    
    
    (0.3
    )
    
    
    4.16.1
    
    
    
    
    
    
    
    (0.6
    )
    
    
    5.5Primary MolybdenumEmployee severance and
relocation**
    
    
    0.3
    
    
    
    
    
    
    
    (0.2
    )
    
    
    0.1Other MiningEmployee severance and
relocation**
    
    
    1.7
    
    
    
    
    
    
    
    (0.9
    )
    
    
    0.822.0
    
    
    
    
    
    
    
    (4.3
    )
    
    
    17.7PDI Specialty ChemicalsDisposal and dismantling
    
    
    0.6
    
    
    
    
    
    
    
    (0.1
    )
    
    
    0.5Employee severance and
relocation**
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.81.4
    
    
    
    
    
    
    
    (0.1
    )
    
    
    1.3Corporate and Other Employee severance and
relocation**
    
    
    0.9
    
    
    
    
    
    
    
    (0.9
    )
    
    
    $
    24.3
    
    
    
    
    
    
    
    (5.3
    )
    
    
    19.0
   *
    
    Provision excluded $6.3 million of pension and other postretirement
charges for the 2001 second quarter restructuring, included in long-term liabilities.**
    
    Relocation costs were charged to expense as incurred.  Reassess-12/31/01
    
    ments
    
    Payments
    
    12/31/02PDMC U.S. MinesMorenciEmployee severance
    
    $
    0.3
    
    
    
    0.1
    
    
    
    (0.3
    )
    
    
    0.1Bagdad/SierritaEmployee severance
    
    
    3.5
    
    
    
    (1.1
    )
    
    
    (2.4
    )
    
    
    Mothballing/take-or-pay contracts
    
    
    3.1
    
    
    
    (0.8
    )
    
    
    (2.1
    )
    
    
    0.26.6
    
    
    
    (1.9
    )
    
    
    (4.5
    )
    
    
    0.2Miami/BisbeeEmployee severance
    
    
    1.8
    
    
    
    (0.5
    )
    
    
    (1.3
    )
    
    
    Mothballing/take-or-pay contracts
    
    
    1.0
    
    
    
    (0.4
    )
    
    
    (0.5
    )
    
    
    0.12.8
    
    
    
    (0.9
    )
    
    
    (1.8
    )
    
    
    0.1Chino/CobreEmployee severance
    
    
    1.2
    
    
    
    (0.7
    )
    
    
    (0.4
    )
    
    
    0.1Mothballing/take-or-pay contracts
    
    
    0.2
    
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    1.4
    
    
    
    (0.8
    )
    
    
    (0.5
    )
    
    
    0.1TyroneEmployee severance
    
    
    0.2
    
    
    
    
    
    
    
    (0.2
    )
    
    
    11.3
    
    
    
    (3.5
    )
    
    
    (7.3
    )
    
    
    0.5Manufacturing and SalesEmployee severance
    
    
    1.4
    
    
    
    (0.2
    )
    
    
    (1.1
    )
    
    
    0.1Mothballing/take-or-pay contracts
    
    
    4.1
    
    
    
    (1.2
    )
    
    
    (2.9
    )
    
    
    5.5
    
    
    
    (1.4
    )
    
    
    (4.0
    )
    
    
    0.1Primary MolybdenumEmployee severance
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    Other MiningEmployee severance
    
    
    0.8
    
    
    
    (0.2
    )
    
    
    (0.6
    )
    
    
    17.7
    
    
    
    (5.1
    )
    
    
    (12.0
    )
    
    
    0.6PDI Specialty ChemicalsDisposal and dismantling
    
    
    0.5
    
    
    
    (0.4
    )
    
    
    (0.1
    )
    
    
    Employee severance
    
    
    0.8
    
    
    
    (0.1
    )
    
    
    (0.7
    )
    
    
    1.3
    
    
    
    (0.5
    )
    
    
    (0.8
    )
    
    
    $
    19.0
    
    
    
    (5.6
    )
    
    
    (12.8
    )
    
    
    0.6
  A reassessment of $2.6 million for employee termination benefits at PDMCs
segments was made because subsequently, as the plan was being implemented, it
was determined that certain employees identified in the restructuring plan
would be retained to fill open positions or would not be eligible for
supplemental unemployment as originally anticipated. In addition, there was
reassessment of $2.5 million related to savings from renegotiated contracts or
from reduced penalties on demand contracts. Further, a $6.4 million charge was
recognized for additional pension-related benefits, which are included in
long-term liabilities, for employees at our Chino, Miami, Sierrita and Bagdad
operations because these operations were expected to remain curtailed beyond
one year from their January 2002 curtailment.




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##### Table of Contents



105 PDIs Specialty Chemicals segment reassessment related to (i) $0.4 million
for an adjustment to disposal and dismantling charges for the El Dorado plant
facility and (ii) a reclassification of $0.1 million to long-term pension
benefits.  Reassess-12/31/02
    
    ments
    
    Payments
    
    12/31/03PDMC U.S. MinesMorenciEmployee severance
    
    $
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    Bagdad/SierritaMothballing/take-or-pay contracts
    
    
    0.2
    
    
    
    
    
    
    
    (0.2
    )
    
    
    Miami/BisbeeMothballing/take-or-pay contracts
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    Chino/CobreEmployee severance
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    0.5
    
    
    
    
    
    
    
    (0.5
    )
    
    
    Manufacturing and SalesEmployee severance
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    $
    0.6
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
  In the second quarter of 2000, we announced a plan to reduce operating
costs and restructure operations at our Miami/Bisbee, Primary Molybdenum and
Wire and Cable segments by (i) curtailing high-cost copper production at the
Miami copper mine in Arizona and reducing its mining activities; (ii)
curtailing molybdenum production by approximately 20 percent at the Henderson
mine in Colorado; (iii) ceasing production at two wire and cable plants in
Venezuela; and (iv) closing a telephone cable operation in El Salvador. The following tables present a roll-forward of the liabilities incurred in
connection with the 2000 restructuring programs, which were reflected as
current liabilities in our Consolidated Balance Sheet:  Reassess-12/31/00
    
    ments
    
    Payments
    
    12/31/01PDMC U.S. MinesMiami/BisbeeEmployee severance
    
    $
    0.7
    
    
    
    (0.7
    )
    
    
    
    
    
    
    Primary MolybdenumEmployee severance
    
    
    0.9
    
    
    
    (0.6
    )
    
    
    (0.3
    )
    
    
    1.6
    
    
    
    (1.3
    )
    
    
    (0.3
    )
    
    
    PDI Wire and CablePlant removal and dismantling
    
    
    3.0
    
    
    
    
    
    
    
    (1.1
    )
    
    
    1.9$
    4.6
    
    
    
    (1.3
    )
    
    
    (1.4
    )
    
    
    1.9
  A reassessment of $1.3 million for employee termination benefits at PDMCs
segments was made because subsequently, as the plan was being implemented, it
was determined that certain employees identified in the restructuring plan
would be retained after all and moved to positions being filled by contractors.  Reassess-12/31/01
    
    ments
    
    Payments
    
    12/31/02PDI Wire and CablePlant removal and dismantling
    
    $
    1.9
    
    
    
    (1.3
    )
    
    
    (0.1
    )
    
    
    0.5
  PDIs Wire
and Cable segment reassessment related to (i) a $0.5 million adjustment to plant dismantling charges related to the wire
and cable plant closures in Venezuela and (ii) a $0.8 million non-cash
deduction related to the devaluation of Venezuelan currency.  Reassess-12/31/02
    
    ments
    
    Payments
    
    12/31/03PDI Wire and CablePlant removal and dismantling
    
    $
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5
  In the second quarter of 1999, we announced a plan to reduce operating
costs and improve operating performance at our Manufacturing and Sales, Other
Mining, Specialty Chemicals and Wire and Cable segments by (i) curtailing
higher cost copper production by temporarily closing our Hidalgo smelter in New
Mexico and Morencis Metcalf concentrator, as well as curtailing production by
50 percent at our copper refinery in El Paso, Texas; (ii) selling a non-core
South African fluorspar mining unit; (iii) restructuring certain wire and cable
assets to respond to changing market conditions; and (iv) suspending operations
at Columbian Chemicals carbon black plant in the Philippines. The following tables present a roll-forward from December 31, 1999, of the
liabilities incurred in connection with the June 1999 restructuring program,
which were reflected as current liabilities in our Consolidated Balance Sheet:  Reassess-12/31/00
    
    ments
    
    Payments
    
    12/31/01PDMC Other MiningEmployee severance
    
    $
    0.4
    
    
    
    
    
    
    
    (0.2
    )
    
    
    0.2Mothballing/take-or-pay contracts
    
    
    2.5
    
    
    
    
    
    
    
    (1.1
    )
    
    
    1.42.9
    
    
    
    
    
    
    
    (1.3
    )
    
    
    1.6PDI Specialty ChemicalsDisposal and dismantling
    
    
    1.3
    
    
    
    (1.0
    )
    
    
    
    
    
    
    0.3Environmental
    
    
    0.7
    
    
    
    
    
    
    
    (0.1
    )
    
    
    0.62.0
    
    
    
    (1.0
    )
    
    
    (0.1
    )
    
    
    0.9Wire and CableEmployee severance
    
    
    0.4
    
    
    
    
    
    
    
    (0.4
    )
    
    
    Take-or-pay contracts
    
    
    2.0
    
    
    
    
    
    
    
    (0.9
    )
    
    
    1.1Plant removal and dismantling
    
    
    0.8
    
    
    
    
    
    
    
    (0.6
    )
    
    
    0.23.2
    
    
    
    
    
    
    
    (1.9
    )
    
    
    1.35.2
    
    
    
    (1.0
    )
    
    
    (2.0
    )
    
    
    2.2$
    8.1
    
    
    
    (1.0
    )
    
    
    (3.3
    )
    
    
    3.8
  PDIs Specialty Chemicals segment reassessment of $1.0 million related to
the closure of our carbon black manufacturing facility in the Philippines. At
the time of closure, there was some equipment that had been purchased
previously in conjunction with an earlier planned expansion of the Philippine
facility. When the Philippine closure was announced, an accrual was included
for this equipment reflecting our assessment that its disposition would result
in a loss of $0.9 million.
This accrual was reclassified subsequently as a deduction to property,
plant and equipment. The remaining $0.1 million related to a non-cash deduction
resulting from foreign currency devaluation.




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##### Table of Contents



106  Reassess-12/31/01
    
    ments
    
    Payments
    
    12/31/02PDMC Other MiningEmployee severance
    
    $
    0.2
    
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    Mothballing/take-or-pay contracts
    
    
    1.4
    
    
    
    
    
    
    
    (0.8
    )
    
    
    0.61.6
    
    
    
    (0.1
    )
    
    
    (0.9
    )
    
    
    0.6PDI Specialty ChemicalsDisposal and dismantling
    
    
    0.3
    
    
    
    (0.3
    )
    
    
    
    
    
    
    Environmental
    
    
    0.6
    
    
    
    (0.6
    )
    
    
    
    
    
    
    0.9
    
    
    
    (0.9
    )
    
    
    
    
    
    
    Wire and CableTake-or-pay contracts
    
    
    1.1
    
    
    
    (0.1
    )
    
    
    
    
    
    
    1.0Plant removal and dismantling
    
    
    0.2
    
    
    
    (0.2
    )
    
    
    
    
    
    
    1.3
    
    
    
    (0.3
    )
    
    
    
    
    
    
    1.02.2
    
    
    
    (1.2
    )
    
    
    
    
    
    
    1.0$
    3.8
    
    
    
    (1.3
    )
    
    
    (0.9
    )
    
    
    1.6
  PDMCs Other Mining segment reassessment included a $0.1 million
reclassification to long-term liabilities related to pension and other
postretirement benefits. PDIs Specialty Chemicals segment reassessment related to a Philippine
plant for (i) a $0.3 million adjustment to disposal and dismantling charges and
(ii) a $0.6 million for environmental costs that were relieved as the property
was sold during the period. PDIs Wire and Cable segment reassessment related to (i) a
$0.1 million adjustment related to a lease contract and (ii) a $0.2
million adjustment related to dismantling charges at a Venezuelan plant, which
included a $0.1 million non-cash deduction resulting from the devaluation of
Venezuelan currency.  Reassess-12/31/02
    
    ments
    
    Payments
    
    12/31/03PDMC Other MiningMothballing/take-or-pay contracts
    
    $
    0.6
    
    
    
    
    
    
    
    
    
    
    
    0.6PDI Wire and CableTake-or-pay contracts
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0$
    1.6
    
    
    
    
    
    
    
    
    
    
    
    1.6
  4. Investments and Long-Term Receivables Investments and long-term receivables at December 31 were as follows:  2003
    
    2002Equity basis:International wire and cable manufacturers
    
    $
    5.9
    
    
    
    5.2Port Carteret (50%)
    
    
    20.7
    
    
    
    20.9Other
    
    
    6.4
    
    
    
    5.7Cost basis and notes receivable:Southern Peru Copper Corporation (14%)
    
    
    13.2
    
    
    
    13.2Long-term bond investments*
    
    
    33.7
    
    
    
    31.7Other investments
    
    
    27.8
    
    
    
    16.7Notes receivable and other**
    
    
    42.6
    
    
    
    38.9$
    150.3
    
    
    
    132.3
   *
    
    $17.3 million of long-term bond investments has been secured against a
letter of credit.**
    
    Included $29.4 million in 2003 and 2002, due from El Abra for funding
CODELCOs 49 percent share of El Abra subordinated loans. In addition,
2003 included $3.4 million of interest receivable on the El Abra
subordinated loans, which is based on LIBOR plus 5.5 percent per year and
will mature in May 2007 after El Abras senior loans are paid. Equity earnings (losses) were as follows (in millions): 2003  $2.7; 2002
 $2.7; 2001  ($0.3). Dividends from equity basis investments received were as follows (in
millions): 2003  $2.5; 2002  $4.3; 2001  $1.4. Our retained earnings include undistributed earnings of equity basis
investments of (in millions): 2003  $63.8; 2002  $63.6; 2001  $65.2. Condensed financial information for our equity basis investments at
December 31 was as follows:  2003
    
    2002
    
    2001Sales
    
    $
    123.1
    
    
    
    87.0
    
    
    
    109.7Net income (loss)
    
    $
    7.5
    
    
    
    7.1
    
    
    
    3.1
  2003
    
    2002
    
    2001Net current assets
    
    $
    25.6
    
    
    
    10.8
    
    
    
    14.8Property, plant and equipment, net
    
    
    87.6
    
    
    
    73.0
    
    
    
    62.9Long-term debt
    
    
    (29.1
    )
    
    
    (27.6
    )
    
    
    (7.3
    )Other assets and liabilities, net
    
    
    (1.4
    )
    
    
    3.1
    
    
    
    (1.0
    )Net assets
    
    $
    82.7
    
    
    
    59.3
    
    
    
    69.4




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##### Table of Contents



107 5. Miscellaneous Income and Expense, Net Miscellaneous income and expense, net for the years ended
December 31 was as follows:  2003
    
    2002
    
    2001Interest income
    
    $
    16.4
    
    
    
    15.8
    
    
    
    23.3Investment impairments*
    
    
    
    
    
    
    (1.2
    )
    
    
    (12.9
    )Southern Peru Copper Corporation dividend
(14% minority interest)
    
    
    6.3
    
    
    
    4.0
    
    
    
    4.0Gain on sale of Viohalco investment
    
    
    6.4
    
    
    
    
    
    
    
    Interest on IRS refund
    
    
    
    
    
    
    
    
    
    
    4.3Willow Creek insurance settlement
    
    
    
    
    
    
    
    
    
    
    1.5Foreign currency exchange loss
    
    
    (0.1
    )
    
    
    (3.0
    )
    
    
    (1.2
    )Non-qualified trust asset mark-to-market
    
    
    4.6
    
    
    
    (2.7
    )
    
    
    (3.3
    )Miscellaneous non-operating expenses
    
    
    (18.0
    )
    
    
    (11.8
    )
    
    
    (7.7
    )Royalties and rental income
    
    
    1.5
    
    
    
    1.1
    
    
    
    2.7Other
    
    
    1.9
    
    
    
    0.4
    
    
    
    (2.6
    )$
    19.0
    
    
    
    2.6
    
    
    
    8.1
   *
    
    Write-down of cost investments ($1.2 million) during 2002, and impairment
of investment in SIMSA ($9.1 million) and Equatorial Mining ($3.8 million)
during 2001. 6. Income Taxes Geographic sources of income (loss) before taxes, minority interests,
equity in net earnings (losses) of affiliated companies, extraordinary item and
cumulative effect of accounting change for the years ended December 31 were as
follows:  2003
    
    2002
    
    2001United States
    
    $
    (141.4
    )
    
    
    (498.0
    )
    
    
    (320.6
    )Foreign
    
    
    212.8
    
    
    
    73.0
    
    
    
    74.0$
    71.4
    
    
    
    (425.0
    )
    
    
    (246.6
    )
  The (provision) benefit for income taxes for the years ended
December 31 was as follows:  2003
    
    2002
    
    2001Current:Federal
    
    $
    10.7
    
    
    
    133.5
    
    
    
    (6.0
    )State
    
    
    0.5
    
    
    
    1.2
    
    
    
    6.2Foreign
    
    
    (60.6
    )
    
    
    (18.7
    )
    
    
    (14.3
    )(49.4
    )
    
    
    116.0
    
    
    
    (14.1
    )Deferred:Federal
    
    
    (1.6
    )
    
    
    18.4
    
    
    
    13.4State
    
    
    1.0
    
    
    
    (5.7
    )
    
    
    1.2Foreign
    
    
    1.7
    
    
    
    (13.8
    )
    
    
    (78.3
    )1.1
    
    
    
    (1.1
    )
    
    
    (63.7
    )$
    (48.3
    )
    
    
    114.9
    
    
    
    (77.8
    )
  A reconciliation of the U.S. statutory tax rate to our effective tax rate was as follows:  Expense
(benefit)2003
    
    2002
    
    2001Statutory tax rate
    
    
    35.0
    %
    
    
    (35.0
    )
    
    
    (35.0
    )Depletion
    
    
    (27.3
    )
    
    
    (2.7
    )
    
    
    (1.9
    )State and local income taxes
    
    
    (7.3
    )
    
    
    1.2
    
    
    
    (2.8
    )Effective international tax rate
    
    
    (3.2
    )
    
    
    5.8
    
    
    
    4.3Adjustments to prior years
    
    
    
    
    
    
    
    
    
    
    (3.0
    )Valuation allowance
    
    
    65.7
    
    
    
    6.8
    
    
    
    70.7Other items, net
    
    
    4.7
    
    
    
    (4.1
    )
    
    
    (0.8
    )67.6
    %
    
    
    (28.0
    )
    
    
    31.5
  We paid federal, state, local and foreign income taxes of approximately
$28 million in 2003, compared with approximately $25 million in 2002 and
approximately $43 million in 2001. U.S. losses cannot offset income in foreign
jurisdictions, resulting in payment of foreign taxes. We received refunds of
federal, state, local and foreign income taxes of approximately $80 million in
2003, compared with approximately $66 million in 2002 and approximately $36
million in 2001. At December 31, 2003, we had alternative minimum tax credits of
approximately $342 million available for carryforward for U.S. federal income
tax purposes. These credits can be carried forward indefinitely, but may only
be used to the extent the regular tax exceeds the alternative minimum tax in
any given year. The Company has U.S. net operating loss carryforwards for regular tax
purposes of approximately $1,037 million expiring from 2004 to 2023; Hungarian
net operating loss carryforwards of approximately $4 million expiring in 2007;
and Chilean and Brazilian net operating loss carryforwards of approximately
$307 million and $67 million, respectively, that do not expire. The Brazilian
tax loss carryforwards can only be used to offset 30 percent of taxable income
in any one year. The Company also has U.S. alternative minimum tax net
operating loss carryforwards of approximately $550 million expiring from 2019
to 2023. The Company has approximately $87 million of U.S. capital loss
carryforwards for regular tax purposes expiring in 2005 and approximately $160
million of U.S. capital loss carryforwards for alternative minimum tax purposes
expiring from 2004 to 2005. Capital loss carryforwards may only be used to
offset capital gains in the carryforward periods. On the basis of currently available information, we have provided
valuation allowances for certain of our deferred tax assets where we believe it
is likely that the related tax benefits will not be realized. Our valuation
allowances, which totaled $458.5 million and $508.4 million at December 31,
2003 and 2002, respectively, relate to all or a portion of our U.S. net
operating loss, capital loss, and alternative minimum tax credit carryforwards
and our Chilean net operating loss carryforwards. The decrease in our valuation
allowances in 2003 related primarily to expiration of U.S. tax benefits for
capital loss carryforwards and foreign tax credit carryforwards and the
utilization of Chilean net operating loss carryforwards while the decrease in
2002 related primarily to our ability to utilize U.S. net operating loss
carryforwards as a result of the enactment of the Job Creation and Worker
Assistance Act of 2002 that enabled us to obtain a refund of taxes paid in
prior years. The tax benefit recognized in 2002 is primarily attributable to
these refunds and the related reduction in the valuation allowances, as well as
the release of deferred taxes previously provided with regard to an arbitration
award.




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##### Table of Contents



108 Deferred income tax assets (liabilities) comprised the following at
December 31:  2003
    
    2002Tax credits
    
    $
    341.7
    
    
    
    353.4Postretirement and postemployment benefits
    
    
    123.1
    
    
    
    113.4Reserves
    
    
    232.5
    
    
    
    208.7Mining costs
    
    
    34.3
    
    
    
    30.7Net operating loss carryforwards
    
    
    527.1
    
    
    
    480.7Capital loss carryforwards
    
    
    30.5
    
    
    
    41.9Pensions
    
    
    34.6
    
    
    
    33.2Other
    
    
    16.9
    
    
    
    33.4Deferred tax assets
    
    
    1,340.7
    
    
    
    1,295.4Valuation allowances
    
    
    (461.3
    )
    
    
    (508.4
    )Net deferred tax assets
    
    
    879.4
    
    
    
    787.0Goodwill
    
    
    (11.2
    )
    
    
    (13.1
    )Capitalized interest and financing costs
    
    
    (42.0
    )
    
    
    (41.8
    )Depreciation
    
    
    (763.4
    )
    
    
    (723.4
    )Mining properties
    
    
    (259.5
    )
    
    
    (202.4
    )Intangible mining assets
    
    
    (144.8
    )
    
    
    (155.5
    )Deferred tax liabilities
    
    
    (1,220.9
    )
    
    
    (1,136.2
    )$
    (341.5
    )
    
    
    (349.2
    )
  The Internal Revenue Service audit of the pre-acquisition Cyprus Amax
federal income tax returns for the years 1997 through October 15, 1999, was
closed in December 2003 without material adjustment to the tax liability as
filed. The Phelps Dodge federal income tax returns for the years 1998 through
2002 are currently under examination by the Internal Revenue Service. Our
management believes that resolution of any issues raised, including application
of those determinations to subsequent open years, will not have an adverse
effect on our consolidated financial condition or results of operations. Income taxes have not been provided on our share (approximately $818
million) of undistributed earnings of our foreign manufacturing and mining
subsidiaries over which we have sufficient influence to control the
distribution of such earnings and have determined that such earnings have been
reinvested indefinitely. These earnings could become subject to additional tax
if they were remitted as dividends, if foreign earnings were loaned to any of
our U.S. entities, or if we sell our stock in the subsidiaries. It is estimated
that repatriation of these earnings would generate additional foreign tax
withholdings and U.S. tax of approximately $99 million and $15 million,
respectively. 7. Mill and Leach Stockpiles, Inventories and Supplies Mill and leach stockpiles, inventories and supplies at December 31, 2003,
were as follows:  PDMC
    
    PDI
    
    TotalMill and
Leach Stockpiles Current:Leach stockpiles
    
    $
    22.4
    
    
    
    
    
    
    
    22.4Long-term:*Mill stockpiles
    
    $
    40.6
    
    
    
    
    
    
    
    40.6Leach stockpiles
    
    
    48.6
    
    
    
    
    
    
    
    48.6$
    89.2
    
    
    
    
    
    
    
    89.2Inventories Raw materials
    
    $
    0.4
    
    
    
    48.9
    
    
    
    49.3Work-in-process
    
    
    38.7
    
    
    
    12.7
    
    
    
    51.4Finished goods
    
    
    204.7
    
    
    
    74.3
    
    
    
    279.0$
    243.8
    
    
    
    135.9
    
    
    
    379.7Supplies
    
    $
    123.9
    
    
    
    26.8
    
    
    
    150.7
   *
    
    Stockpiles not expected to be processed within the next 12 months are
classified as long-term. Mill and leach stockpiles, inventories and supplies at
December 31, 2002, were as follows:  PDMC
    
    PDI
    
    TotalMill and Leach Stockpiles Current:Leach stockpiles
    
    $
    48.9
    
    
    
    
    
    
    
    48.9Long-term:*Mill stockpiles
    
    $
    31.9
    
    
    
    
    
    
    
    31.9Leach stockpiles
    
    
    32.4
    
    
    
    
    
    
    
    32.4$
    64.3
    
    
    
    
    
    
    
    64.3Inventories Raw materials
    
    $
    0.5
    
    
    
    34.2
    
    
    
    34.7Work-in-process
    
    
    18.8
    
    
    
    13.4
    
    
    
    32.2Finished goods
    
    
    260.4
    
    
    
    71.2
    
    
    
    331.6$
    279.7
    
    
    
    118.8
    
    
    
    398.5Supplies
    
    $
    118.0
    
    
    
    24.8
    
    
    
    142.8
   *
    
    Stockpiles not expected to be processed within the next 12 months are
classified as long-term. Mill and leach stockpiles valued by the last-in, first-out method would
have been greater if valued at current costs by approximately $464 million and
$510 million at December 31, 2003 and 2002, respectively. Current costs for
mill and leach stockpiles for both 2003 and 2002 are significantly higher than
their respective carrying costs primarily due to 0.7 million tons at December
31, 2003, and 0.5 million tons at December 31, 2002, of copper contained in
leach stockpiles that are carried at a zero value. That material was originally
mined as waste, but as a result of changes in our technological capabilities is
now expected to be processed. Inventories valued by the last-in, first-out method would have been
greater if valued at current costs by approximately $137 million and $79
million at December 31, 2003 and 2002, respectively.




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##### Table of Contents



109 Supplies are stated net of a reserve for obsolescence of $31.8 million and
$28.4 million at December 31, 2003 and 2002, respectively. We use valuation
allowances for defective, unusable or obsolete inventories. 8. Property, Plant and Equipment Property, plant and equipment at December 31 comprised the following:  2003
    
    2002Buildings, machinery and equipment
    
    $
    7,110.5
    
    
    
    7,019.6Mining properties
    
    
    1,025.8
    
    
    
    907.4Capitalized mine development
    
    
    188.2
    
    
    
    171.8Land and water rights
    
    
    144.5
    
    
    
    150.38,469.0
    
    
    
    8,249.1Less accumulated depreciation, depletion and amortization
    
    
    3,822.5
    
    
    
    3,435.4$
    4,646.5
    
    
    
    4,813.7
  Refer to Note 21, Contingencies, for property, plant and equipment associated
with properties on care-and-maintenance status.  9. Goodwill Changes in the carrying amount of goodwill for the years ended December
31, 2003 and 2002, were as follows:  Specialty
    
    Wire andChemicals
    
    CableSegment
    
    Segment
    
    TotalBalance as of December 31, 2001
    
    $
    88.5
    
    
    
    54.6
    
    
    
    143.1Goodwill acquired during period
    
    
    
    
    
    
    
    
    
    
    Impairment losses upon adoption of SFAS No. 142
    
    
    
    
    
    
    (33.0
    )
    
    
    (33.0
    )Goodwill included in the disposal of a business unit
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustments
    
    
    (19.4
    )
    
    
    
    
    
    
    (19.4
    )Balance as of December 31, 2002
    
    
    69.1
    
    
    
    21.6
    
    
    
    90.7Impairment losses
    
    
    
    
    
    
    (0.9
    )
    
    
    (0.9
    )Foreign currency translation adjustments
    
    
    8.6
    
    
    
    
    
    
    
    8.6Balance as of December 31, 2003
    
    $
    77.7
    
    
    
    20.7
    
    
    
    98.4
  The Company completed its annual goodwill impairment test as of December
31, 2003. The Wire and Cable segment recorded an impairment charge of $0.9
million in 2003 to write off magnet wires goodwill. The Company will continue
to test its goodwill annually as of December 31, unless events occur or
circumstances change between annual tests that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. 10. Intangible Assets Intangible assets at December 31 comprised the following:  2003
    
    2002Mining land concessions*
    
    $
    426.6
    
    
    
    422.8Water and grazing rights
    
    
    9.9
    
    
    
    9.9Non-mining land
    
    
    5.6
    
    
    
    5.0Easements
    
    
    1.9
    
    
    
    1.8444.0
    
    
    
    439.5Less accumulated amortization
    
    
    122.7
    
    
    
    93.6$
    321.3
    
    
    
    345.9
   *
    
    Included mining concessions containing proven and probable ore reserves
and mineralized material at the Companys South American mines; and
included amounts for recording asset retirement costs associated with the
implementation of SFAS No. 143. (Refer to Note 1, Summary of Significant
Accounting Policies, under New Accounting Standards, for further
discussion.) Amortization expense related to intangible assets was $27.1 million, $26.0
million, and $28.4 million for 2003, 2002, and 2001, respectively. The estimated annual aggregate amortization expense for intangible assets
is $26.8 million, $27.3 million, $27.3 million, $27.4 million, and $27.6
million for 2004, 2005, 2006, 2007, and 2008, respectively. 11. Other Assets and Deferred Charges Other assets and deferred charges at December 31 were as
follows:  2003
    
    2002Employee benefit plans*
    
    $
    45.7
    
    
    
    58.8Debt issue costs
    
    
    11.5
    
    
    
    13.9Interest rate swap contracts**
    
    
    
    
    
    
    32.7Trust assets***
    
    
    106.4
    
    
    
    31.4Other
    
    
    6.0
    
    
    
    6.1$
    169.6
    
    
    
    142.9
   *
    
    Refer to Note 12, Accounts Payable and Accrued Expenses, for short-term
liability; Note 13, Other Liabilities and Deferred Credits, for long-term
liability; Note 17, Pension Plans; and Note 18, Postretirement and Other
Employee Benefits Other Than Pensions, for further discussion.**
    
    Refer to Note 22, Derivative Financial Instruments and Fair Value of
Financial Instruments, for further discussion.***
    
    Trust assets consist of $64.0 million of cash received from Heisei that
is restricted for the use of reclamation activities at Chino. The
remainder of trust assets (approximately $42.4 million) related to assets
to fund non-qualified retirement benefits.




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##### Table of Contents



110 12. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses at December 31 were as follows:  2003
    
    2002Accounts payable
    
    $
    267.1
    
    
    
    246.9Salaries, wages and other compensation
    
    
    55.8
    
    
    
    49.5Pension, postretirement, postemployment
and other employee benefit plans*
    
    
    147.1
    
    
    
    51.5Insurance reserves**
    
    
    15.1
    
    
    
    14.8Environmental reserves**
    
    
    45.9
    
    
    
    44.2Restructuring reserves***
    
    
    2.1
    
    
    
    4.0Smelting, refining and freight
    
    
    8.9
    
    
    
    9.0Other accrued taxes
    
    
    42.5
    
    
    
    28.5Closure reserves**
    
    
    12.6
    
    
    
    1.7Accrued utilities
    
    
    12.0
    
    
    
    15.8Interest****
    
    
    20.5
    
    
    
    20.0Professional fees
    
    
    11.8
    
    
    
    10.3Lawsuit accruals*****
    
    
    0.4
    
    
    
    49.2Maintenance contracts/contractor accruals
    
    
    12.9
    
    
    
    11.0Other
    
    
    46.0
    
    
    
    52.7$
    700.7
    
    
    
    609.1
   *
    
    Refer to Note 13, Other Liabilities and Deferred Credits, for long-term
portion; Note 17, Pension Plans; and Note 18, Postretirement and Other
Employee Benefits Other Than Pensions, for further discussion.**
    
    Short-term portion of these reserves. Refer to Note 13, Other Liabilities
and Deferred Credits, for long-term portion of reserves and Note 21,
Contingencies, for further discussion.***
    
    Refer to Note 3, Special Items and Provisions, for further discussion.****
    
    Third-party interest paid by the Company in 2003 was $154.2 million,
compared with $198.9 million in 2002 and $225.6 million in 2001.*****
    
    Included $43.5 million charge for lawsuit settlement with RAG American
Coal Company in 2002, which was paid in 2003. 13. Other Liabilities and Deferred Credits Other liabilities and deferred credits at December 31 were as
follows:  2003
    
    2002Pension, postretirement, postemployment
and other employee benefit plans*
    
    $
    485.6
    
    
    
    539.2Environmental reserves**
    
    
    271.3
    
    
    
    261.7Insurance reserves**
    
    
    30.7
    
    
    
    37.9Closure reserves**
    
    
    212.7
    
    
    
    136.9Other
    
    
    9.2
    
    
    
    11.1$
    1,009.5
    
    
    
    986.8
   *
    
    Refer to Note 12, Accounts Payable and Other Accrued Expenses, for
short-term portion; Note 17, Pension Plans; and Note 18, Postretirement
and Other Employee Benefits Other Than Pensions, for further discussion.**
    
    Refer to Note 12, Accounts Payable and Other Accrued Expenses, for
short-term portion of reserves and Note 21, Contingencies, for further
discussion. 14. Debt and Other Financing Long-term debt at December 31 is summarized below:  2003
    
    20026.375% Notes due 2004
    
    $
    85.0
    
    
    
    85.06.625% Notes due 2005
    
    
    224.7
    
    
    
    226.07.375% Notes due 2007
    
    
    187.4
    
    
    
    186.88.75% Notes due 2011
    
    
    389.3
    
    
    
    389.8Air Quality Control Obligations:5.45% Notes due 2009
    
    
    81.1
    
    
    
    81.16.50% Installment Sale Obligations due 2013
    
    
    90.0
    
    
    
    90.08.375% Debentures due 2023
    
    
    148.8
    
    
    
    148.87.125% Debentures due 2027
    
    
    115.0
    
    
    
    115.09.50% Notes due 2031
    
    
    197.0
    
    
    
    197.0Candelaria Project Financing
    
    
    144.9
    
    
    
    186.1Capital Lease Obligations
    
    
    7.2
    
    
    
    10.5Cerro Verde Bank Loan due 2004
    
    
    
    
    
    
    3.0Cerro Verde Project Financing
    
    
    
    
    
    
    30.9Columbian Chemicals Korea
    
    
    14.5
    
    
    
    24.5Columbian Tiszai Carbon Ltda. (Hungary)
    
    
    
    
    
    
    5.3Columbian Carbon Spain, S.A.
    
    
    0.8
    
    
    
    1.4Cyprus Amax Chile Ltd.
    
    
    
    
    
    
    10.0El Abra Project Financing
    
    
    187.9
    
    
    
    246.3Phelps Dodge Dublin
    
    
    1.4
    
    
    
    2.4Various Pollution Control and Industrial
Development Revenue Bonds
    
    
    33.5
    
    
    
    35.5Long-term debt and capital lease obligations, including
current portion
    
    
    1,908.5
    
    
    
    2,075.4Less current portion
    
    
    204.6
    
    
    
    127.0Long-term debt and capital lease obligations excluding
current portion
    
    $
    1,703.9
    
    
    
    1,948.4
 The amounts included above are shown net of unamortized discounts and
purchase price adjustments of $9.6 million and $13.3 million at December 31,
2003 and 2002, respectively.  The following is a table of future maturities of long-term debt at
December 31, 2003:  Project andSubsidiaryCorporate
    
    Debt Financing
    
    Total2004
    
    $
    97.2
    
    
    
    107.4
    
    
    
    204.62005
    
    
    230.8
    
    
    
    96.4
    
    
    
    327.22006
    
    
    6.3
    
    
    
    82.0
    
    
    
    88.32007
    
    
    180.7
    
    
    
    45.3
    
    
    
    226.02008
    
    
    1.9
    
    
    
    18.5
    
    
    
    20.4Thereafter
    
    
    1,042.0
    
    
    
    
    
    
    
    1,042.0$
    1,558.9
    
    
    
    349.6
    
    
    
    1,908.5
  Our Cerro Verde mine had project financing that required semi-annual
installments of varying amounts through April 1, 2005. In April 2003, Cerro
Verde made a $6.0 million installment payment and, during July and August of
2003, prepaid the remaining $24.0 million of its outstanding project financing
and terminated an interest rate swap contract that converted a portion of its
floating-rate debt into fixed-rate debt.




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##### Table of Contents



111 In July 2002, the Company purchased $480.7 million of its long-term debt
on the open market for $511.2 million, which resulted in a 2002 third quarter
charge of $31.3 million ($26.6 million after taxes) for early debt
extinguishment costs that included issuance costs and other book adjustments
($0.8 million). The face value of debt repurchased comprised the following:  Face Value6.375% Notes due 2004
    
    $
    15.06.625% Notes due 2005
    
    
    32.07.375% Notes due 2007
    
    
    74.58.75% Notes due 2011
    
    
    240.78.375% Debentures due 2023
    
    
    2.27.125% Debentures due 2027
    
    
    35.09.50% Notes due 2031
    
    
    81.3$
    480.7
  On April 1, 2002, we retired our 10.125 percent Notes ($150.0 million),
then due, in their entirety. The 6.375 percent Notes, due in 2004, bear interest payable semi-annually
on May 1 and November 1. These notes are not redeemable by the Company prior to
maturity and will not be entitled to any sinking fund. The 6.625 percent Notes, due October 15, 2005, bear interest payable
semi-annually on October 15 and April 15. In the event of a rating decline
occurring within 90 days of certain designated events (which, to the extent
beyond our control, generally involve a change of or contest for control), each
holder of a note may require the Company to redeem the holders notes, in whole
or in part, at 100 percent of the principal amount plus accrued interest to the
date of redemption. Otherwise, the notes are not redeemable by the Company
prior to maturity. The 7.375 percent Notes, due May 15, 2007, bear interest payable
semi-annually on May 15 and November 15. These notes are not redeemable by the
Company prior to maturity and will not be entitled to any sinking fund. The 5.45 percent Air Quality Control Obligations, due June 1, 2009, bear
interest payable semi-annually on June 1 and December 1. Beginning on June 1,
2004, these tax-exempt, unsecured notes are redeemable at the option of the
Company at 102 percent of the principal amount, together with any accrued and
unpaid interest, declining at a rate of 1 percent per year until June 1, 2006,
and at 100 percent on June 1, 2006, and thereafter. The 6.5 percent Air Quality Control Obligations, due April 1, 2013, bear
interest payable semi-annually on April 1 and October 1. Beginning on April 1,
2003, these tax-exempt, unsecured notes are redeemable at the option of the
Company at 102 percent of the principal amount, together with any accrued and
unpaid interest, declining at a rate of 1 percent per year until April 1, 2005,
and at 100 percent on April 1, 2005, and thereafter. The 8.75 percent Notes, due June 1, 2011, and the 9.5 percent Notes, due
June 1, 2031, bear interest payable semi-annually on June 1 and December 1.
These notes are redeemable in whole or in part, at the option of the Company,
at a redemption price equal to any accrued and unpaid interest plus the greater
of (i) 100 percent of the principal amount of the notes to be redeemed and (ii)
the sum of the present values of the remaining scheduled payments discounted to
the redemption date, on a semi-annual basis, at the yield of a U.S. Treasury
security having a comparable maturity to the remaining term of the notes plus,
in the case of the notes due 2011, 45 basis points and, in the case of the
notes due 2031, 50 basis points. The notes are not entitled to any sinking
fund. We applied proceeds from the sale of these notes to repay corporate
short-term borrowings and current maturities of long-term debt. We reduced
principal outstanding on our 8.75 percent and 9.5 percent Notes by $240.7
million and $81.3 million, respectively, in July 2002 by means of open-market
repurchases. The 8.375 percent Debentures, due in 2023, bear interest payable
semi-annually on February 1 and August 1. The debentures were not redeemable
prior to February 1, 2003. Since that date, at the option of the Company, the
debentures may be redeemed in whole or in part at 103.73 percent of the
principal amount, together with any accrued and unpaid interest, declining at
the rate of 0.375 percent per year to February 1, 2013, and at 100 percent on
February 1, 2013, and thereafter. In the event of a rating decline occurring
within 90 days (subject to extension under limited circumstances) of certain
designated events (which, to the extent beyond our control, generally involve a
change of or contest for control), each holder of a note may require the
Company to redeem the holders notes, in whole or in part, at 100 percent of
the principal amount plus accrued interest to the date of redemption. Rating
declines that occur at any other time do not trigger an obligation to redeem
any such notes. The 7.125 percent Debentures, due in 2027, bear interest payable
semi-annually on May 1 and November 1. The debentures are redeemable by the
Company at any time prior to maturity at par plus a yield maintenance premium. As of December 31, 2003, our 80 percent-owned joint venture interest in
Candelaria mining operation in Chile had project debt outstanding of $144.9
million. The debt comprised $120.6 million of floating-rate, dollar-denominated
debt (tied to six-month LIBOR), $12.6 million of fixed-rate, dollar-denominated
debt and $11.7 million to recognize the market value of interest rate swap
agreements that convert the floating-rate debt to fixed rates. The debt and
repayments are scheduled to vary from period to period with all debt maturing
by the year 2008. Candelaria did not borrow funds in 2003 or 2002. At December
31, 2003, the overall weighted average interest rate including the interest
rate swap was 7.85 percent. The debt obligations and the interest rate swaps
are non-recourse to us. Under the proportional consolidation method, the debt
amounts listed above represent our 80 percent share. Cerro Verde had a revolving credit facility, for up to $35 million, that
could be used and repaid whenever it had excess cash. In 2003, the revolving
credit facility was not renewed; therefore, there was no amount outstanding on
the revolving facility as of December 31, 2003, compared with a balance
outstanding of $3.0 million as of December 31, 2002. On December 31, 2003, our Columbian Chemicals Korea operation had
long-term debt outstanding in the amount of $14.5 million. The debt comprises
three bank loans that bear variable-rate, semi-annual interest based on LIBOR
plus spreads ranging from 1.80 to 1.95 percent. Each loan amortizes principal
semi-annually, with $12.5 million due in 2004 and final maturity in April 2005.




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##### Table of Contents



112 During 2003, Cyprus Amax Chile Ltd., a Chilean entity, repaid an
outstanding $10 million bank loan that was secured by a cash time deposit in
the same amount. The loan had a variable-rate, semi-annual interest at a rate
of LIBOR plus 0.2375 percent per year and would have matured in November 2004. At year-end 2003, our 51 percent joint venture interest in El Abra mining
operations had outstanding project-financed debt of $187.9 million. This debt
comprised: (i) a syndicated loan facility with two tranches totaling $159.7
million (Tranche A: $122.1 million; Tranche B: $37.6 million); and (ii) a
trade-related facility with a German institution totaling $28.2 million. The
Company currently has guarantees outstanding of $73.7 million on this project
debt (including its share of Tranche B debt, as well as Corporación Nacional
del Cobre de Chiles (CODELCOs) share). The debt had an initial 9.5-year term,
due May 15, 2007, and requires semi-annual principal payments that began on May
15, 1998. The Company had converted a portion of this floating-rate debt to
fixed-rate debt with the use of interest rate swap agreements. These agreements
terminated in November 2003. The weighted average interest rate of this debt at
December 31, 2003, was 2.89 percent. The loan agreement specifies certain
restrictions on additional borrowings by El Abra and on dividend and
subordinated debt payments. Under the proportional consolidation method, the
debt amounts listed above represent our 51 percent share. The various pollution control and industrial development revenue bonds are
due through 2009. The interest on the bonds is paid either quarterly or
semi-annually at various times of the year. The interest rates on the bonds at
December 31, 2003, ranged from 1.10 percent to 7.25 percent. The revolving credit agreement between the Company and several lenders
that became effective on May 10, 2000, remains in effect. The facility is to be
used for general corporate purposes. The agreement permits borrowings of up to
$1 billion from time to time until its scheduled maturity on May 10, 2005. The
agreement allows for one-year extensions of the maturity date under certain
conditions subject to the approval of lenders holding at least a majority of
the commitments. In the event of such approval, total commitments under the
agreement may total less than $1 billion depending upon the willingness of the
approving and other lenders to assume the commitments of those lenders electing
not to participate in the renewal. Under the agreement, interest is payable at
a variable rate based on the agent banks prime rate or at a fixed rate, based
on the LIBOR or at fixed rates offered independently by the several lenders,
for maturities of up to 360 days. This agreement provides for a facility fee
(currently 22.5 basis points (0.225 percent)) ranging from 9 basis points to 35
basis points (depending on our public debt rating) on total commitments. The
agreement requires us to maintain a minimum consolidated tangible net worth of
$1.5 billion and limits indebtedness to 60 percent of total consolidated
tangible capitalization. There were no borrowings under the agreement at
December 31, 2003 or 2002. We established a commercial paper program on August 15, 1997, under a
private placement agency agreement between the Company and two placement
agents. The agreement permits us to issue up to $1 billion of short-term
promissory notes (generally known as commercial paper) at any time. Commercial
paper may bear interest or be sold at a discount, as mutually agreed by the
placement agents and us at the time of each issuance. Our commercial paper
program requires that issuances of commercial paper be backed by an undrawn
line of credit; the revolving credit agreement described above provides such
support. At our current short-term credit ratings (A-3 by Standard and Poors
and P-3 by Moodys), market demand for our commercial paper is extremely
limited. There were no borrowings under this commercial paper program at
December 31, 2003 or 2002. On December 31, 2003, our Columbian Chemicals Canada operation had
short-term debt outstanding against its revolving credit facility in the amount
of $3.4 million. The $3.9 million facility is guaranteed by the Company and
matures in November 2004. Variable-rate interest is paid monthly based on the
Canadian prime rate. Short-term debt was $50.5 million, all by our international operations, at
December 31, 2003, compared with $35.2 million at December 31, 2002. The weighted average interest rate on total short-term borrowings at
December 31, 2003, and December 31, 2002, was 5.75 percent and 3.1 percent,
respectively. 15. Shareholders Equity As of December 31, 2003, there were 91.0 million shares of common stock
outstanding and 1.7 million shares authorized for repurchase. In June 2002, the
Company issued 10.0 million common shares along with 2.0 million of mandatory
convertible preferred shares in a block trade with J.P. Morgan. As of December 31, 2003, there were 2.0 million shares of cumulative
preferred stock outstanding; 6.0 million shares are authorized with a par value
of $1.00 each. The Series A Mandatory Convertible Preferred Stock (Series A Stock) is
convertible into 2.083 shares of Common Stock, subject to certain adjustments,
at any time prior to August 15, 2005, and is entitled to an annual dividend of
$6.75, paid quarterly. On August 15, 2005, each
share of Series A Stock will automatically convert, subject to certain
adjustments, into between 2.083 and 2.5 shares of Common Stock depending on the
then-current market price of our Common Stock based on the average closing
price of the 20-day period preceding the conversion date. Each share of Series
A Stock is non-voting and entitled to a liquidation preference of $100 plus any
accrued but unpaid dividends. We have in place a Preferred Share Purchase Rights Plan that contains
provisions to protect stockholders in the event of unsolicited offers or
attempts to acquire Phelps Dodge, including acquisitions in the open market of
shares constituting control without offering fair value to all stockholders and
other coercive or unfair takeover tactics that could impair the ability of the
Board of Directors to represent the stockholders interests fully. 16. Stock Option Plans; Restricted Stock Executives and other key employees have been granted options to purchase
common shares under stock option plans adopted in 1993, 1998 and 2003. The
option price equals the fair market value of the common shares on the day of
the grant, and an options maximum term is 10 years. Options granted vest
ratably over a three-year period.




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##### Table of Contents



113 The 2003 plan provides (and the 1993 and 1998 plan provided) for the
issuance to executives and other key employees, without any payment by them, of
common shares subject to certain restrictions (Restricted Stock). There were
451,906 shares of Restricted Stock outstanding and 2,206,391 shares available
for grant at December 31, 2003. At December 31, 2003, 4,547,819 shares were available for option grants
(including 2,206,391 shares as Restricted Stock awards) under the 2003 plan.
These amounts are subject to future adjustment as described in the plan
document. No further options may be granted under the 1998, 1993 or 1989 plans. During 2003, 2002 and 2001, the Company awarded 118,000, 205,700 and
11,700 shares, respectively, of Restricted Stock under the 1998 plan, with
weighted-average fair values at the date of grant of $34.95, $40.35 and $40.33
per share, respectively. Compensation expense recorded in 2003, 2002 and 2001
for Restricted Stock was $4.5 million, $2.7 million and $2.1 million,
respectively. Restricted Stock generally becomes fully vested in five years.
Although the July 2002 award becomes fully vested in five years, a portion of
the shares included in that award will vest on the third and fourth
anniversaries of the award. In connection with the 1999 acquisition, former Cyprus Amax stock options
were converted into 1,870,804 Phelps Dodge options, which retain the terms by
which they were originally granted under the Management Incentive Program of
Cyprus Amax Minerals Company. These options carry a maximum term of 10 years
and became fully vested upon the acquisition of Cyprus Amax in October 1999.
Exercise periods ranged up to eight years at acquisition. No further options
may be granted under this plan. The 1997 Directors Stock Unit Plan provides to each non-employee director
an annual grant of stock units having a value equivalent to our common shares.
This plan replaced the 1989 Directors Stock Option Plan. The options granted
under the 1989 Directors Stock Option Plan expire three years after the
termination of service as a director. Changes during 2001, 2002 and 2003 in options outstanding
for the combined plans were as follows:  Average OptionShares
    
    Price Per ShareOutstanding at December 31, 2000
    
    
    8,179,836
    
    
    $
    60.95Granted
    
    
    1,420,090
    
    
    
    34.80Exercised
    
    
    (12,403
    )
    
    
    40.30Expired or terminated
    
    
    (468,670
    )
    
    
    60.73Outstanding at December 31, 2001
    
    
    9,118,853
    
    
    
    56.91Granted
    
    
    802,800
    
    
    
    40.12Exercised
    
    
    (8,080
    )
    
    
    30.24Expired or terminated
    
    
    (978,972
    )
    
    
    57.56Outstanding at December 31, 2002
    
    
    8,934,601
    
    
    
    55.36Granted
    
    
    15,500
    
    
    
    43.23Exercised
    
    
    (1,958,523
    )
    
    
    50.82Expired or terminated
    
    
    (501,536
    )
    
    
    74.32Outstanding at December 31, 2003
    
    
    6,490,042
    
    
    
    55.23
  Options outstanding based on a range of exercise prices at
December 31, 2003, were as follows:  Weighted AverageRange of
    
    Options
    
    Weighted Average
    
    OutstandingExercise Prices
    
    Outstanding
    
    Remaining Term
    
    Option Price$27-40
    
    
    1,046,558
    
    
    8 years
    
    $
    34.4640-60
    
    
    3,046,752
    
    
    6 years
    
    
    50.1460-80
    
    
    2,266,756
    
    
    3 years
    
    
    70.0280-100
    
    
    129,976
    
    
    1 year
    
    
    83.826,490,042
  Exercisable options by plan at December 31, 2003, were as
follows:  Weighted AverageOption PriceShares
    
    Per SharePD Plans2003 Plan
    
    
    
    
    
    $
    1998 Plan
    
    
    2,976,068
    
    
    
    48.521993 Plan
    
    
    1,650,166
    
    
    
    67.881989 Directors Stock Option Plan
    
    
    37,884
    
    
    
    51.53Cyprus Amax Plans
    
    
    900,558
    
    
    
    72.375,564,676
  Exercisable options by range of exercise prices at December 31, 2003, were as follows:  Options
    
    Weighted AverageRange of
    
    Exercisable
    
    OutstandingExercise Prices
    
    at 12/31/03
    
    Option Price$27-40
    
    
    604,338
    
    
    $
    34.4240-60
    
    
    2,563,606
    
    
    
    51.8860-80
    
    
    2,266,756
    
    
    
    70.0280-100
    
    
    129,976
    
    
    
    83.825,564,676




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##### Table of Contents



114 Equity compensation plans at December 31, 2003, were as
follows:  (a)
    
    (b)
    
    (c)Plan Category
    
    Number of
    
    Weighted-
    
    Number of securitiessecurities to
    
    average
    
    remaining for futurebe issued upon
    
    exercise price
    
    issuance underexercise of
    
    of outstanding
    
    equity compensationoutstanding
    
    options,
    
    plans (excludingoptions, warrants
    
    warrants
    
    securities reflectedand rights
    
    and rights
    

in column (a))Equity
compensation plans approved by
security holders
    
    
    6,490,042
    
    
    $
    55.23
    
    
    
    4,547,819Equity
compensation plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    6,490,042
    
    
    $
    55.23
    
    
    
    4,547,819
  Changes during 2001, 2002 and 2003 in Restricted Stock were as follows:  SharesOutstanding at December 31, 2000
    
    
    219,578Granted
    
    
    11,700Terminated
    
    
    (26,533
    )Released
    
    
    (15,011
    )Outstanding at December 31, 2001
    
    
    189,734Granted
    
    
    205,700Terminated
    
    
    (19,800
    )Released
    
    
    (16,450
    )Outstanding at December 31, 2002
    
    
    359,184Granted
    
    
    118,000Terminated
    
    
    (6,200
    )Released
    
    
    (19,078
    )Outstanding at December 31, 2003
    
    
    451,906
  The fair value of each option grant is estimated on the date of grant
using a Black-Scholes option-pricing model with the following assumptions:  2003
    
    2002
    
    2001Expected dividend yield
    
    
    0.00
    %
    
    
    3.04
    %
    
    
    3.16
    %Expected stock price volatility
    
    
    43.4
    %
    
    
    38.8
    %
    
    
    40.9
    %Risk-free interest rate
    
    
    2.9
    %
    
    
    3.3
    %
    
    
    3.4
    %Expected life of options
    
    5 years
    
    3 years
    
    3 years
  The weighted-average fair value of options per share granted during 2003
was $18.06 per share, compared with $9.76 in 2002 and $8.84 in 2001. 17. Pension Plans We have trusteed, non-contributory pension plans covering substantially
all our U.S. employees and some employees of international subsidiaries. The
applicable plan design determines the manner in which the benefits are
calculated for any particular group of employees. With respect to certain of
these plans, the benefits are calculated based on final average monthly
compensation and years of service. In the case of other plans, the benefits are
calculated based on a fixed amount for each year of service. Participants
generally vest in their accrued benefits after five years of service. Our funding policy provides that contributions to pension trusts shall be
at least equal to the minimum funding requirements of the Employee Retirement
Income Security Act of 1974, as amended, for U.S. plans; or, in the case of
international plans, the minimum legal requirements that may be applicable in
the various countries. Additional contributions also may be made from time to
time. Contributions were approximately $7 million in 2003 and 2002, mostly for
plans at international subsidiaries and a supplemental retirement plan. The
minimum 2004 cash contribution for the Phelps Dodge Retirement Plan and U.S.
pension plans for bargained employees is approximately $4 million. However, the
Company expects to contribute approximately $87 million in the 2004 third
quarter based on its current assessment of the economic environment. A final
determination will be made prior to the required contribution date. In some of our plans, the plan assets exceed the accumulated benefit
obligations (overfunded plans), while in the remainder, the accumulated benefit
obligations exceed the plan assets (underfunded plans). The following table
presents underfunded plans at December 31:  2003
    
    2002Projected benefit calculation
    
    $
    1,174
    
    
    
    1,064Accumulated benefit obligation
    
    $
    1,086
    
    
    
    981Fair value of plan assets
    
    $
    864
    
    
    
    770
  Our pension plans were valued between December 1, 2001, and January 1,
2002, and between December 1, 2002, and January 1, 2003. Obligations were
projected to and assets were valued as of the end of 2002 and 2003. The
majority of plan assets are invested in a diversified portfolio of stocks,
bonds and cash or cash equivalents. A small portion of the plan assets is
invested in pooled real estate and other private investment funds. The Phelps Dodge Corporation Defined Benefit Master Trust (Master Trust),
which holds plan assets for the Phelps Dodge Retirement Plan and U.S. pension
plans for bargained employees, constituted 95 percent of total plan assets as
of year-end 2003. These plans accounted for approximately 90 percent of benefit
obligations. The following table represents the asset mix of the investment
portfolio for this trust at December 31:  2003
    
    2002Asset category:Equity securities
    
    
    57
    %
    
    
    52
    %Fixed income
    
    
    33
    
    
    
    38Real estate
    
    
    7
    
    
    
    7Other
    
    
    3
    
    
    
    3100
    %
    
    
    100
    %




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##### Table of Contents



115 At December 31, 2003, the equity securities included 36 percent U.S.
equities, 13 percent international equities and 8 percent emerging market
equities; and the fixed income included 17 percent U.S. fixed income, 5 percent
international fixed income, 3 percent emerging market fixed income, 5 percent
U.S. high yield, and 3 percent treasury inflation-protected securities. At
December 31, 2002, the equity securities included 37 percent U.S. equities, 12
percent international equities and 3 percent emerging market equities; and the
fixed income included 20 percent U.S. fixed income, 5 percent international
fixed income, 4 percent emerging market fixed income, 5 percent U.S. high
yield, and 4 percent treasury inflation-protected securities. Our policy for determining asset-mix targets for the Master Trust includes
the periodic development of asset/liability studies by a nationally recognized
third-party investment consultant (to determine our expected long-term rate of
return and expected risk for various investment portfolios). Management
considers these studies in the formal establishment of asset-mix targets that
are presented to the Finance Committee of the board of directors. Our expected long-term rate of return on plan assets is updated at least
annually, taking into consideration our asset allocation, historical returns on
the types of assets held in the Master Trust, and the current economic
environment. Based on these factors, we expect our pension assets will earn an
average of 8.5 percent per annum during the 20 years beginning December 1,
2003, with a standard deviation of 10.7 percent. The 8.5 percent estimation was
based on a passive return on a compound basis of 8.0 percent and a premium for
active management of 0.5 percent. On an arithmetic average basis, the passive
return would have been 8.5 percent with a premium for active management of 0.5
percent. The expected return as of December 1, 2002, was 8.75 percent with a
standard deviation of 10.6 percent. For estimation purposes, we assume our long-term asset mix generally will
be consistent with the current mix. Changes in our asset mix could impact the
amount of recorded pension income or expense, the funded status of the plan and
the need for future cash contributions. A lower-than-expected return on assets
also would decrease plan assets and decrease the amount of recorded pension
income (or increase recorded pension expense) in future years. When calculating
the expected return on plan assets, the Company uses a market-related value of
assets that spreads asset gains and losses over five years. As a result,
changes in the fair value of assets prior to January 1, 2004, will be reflected
in the results of operations by January 1, 2009. The fair value of all plan assets ($893 million at year-end 2003 and $830
million at year-end 2002) is impacted by general market conditions. If actual
returns on plan assets vary from the expected returns, actual results could
differ. A third-party independent actuary determines our net pension asset or
liability and associated income or expense. We recognize in our financial
statements an accrued liability (or a prepaid pension expense) for the
difference between pension cost and contributions to the plan. In addition, as
required by SFAS No. 87, a minimum pension liability is recorded when a plans
accumulated benefit obligation exceeds the plans assets by more than the
amount of accrued liability recognized for that plan. Our benefit obligation totaled $1,197 million and $1,111 million at
year-end 2003 and 2002, respectively. Among the assumptions used to estimate
the benefit obligation is a benchmark discount rate used to calculate the
expected present value of future benefit payments. For our U.S. plans, the
discount rate assumption is designed to reflect yields on high-quality,
fixed-income investments for a given duration. We utilized a nationally
recognized third-party actuary to construct a bond portfolio comprising
non-callable bonds from the S&P bond listing rated AA- or higher. The portfolio
was constructed such that cash flow generated by the portfolio matched
projected future cash flow from the pension plan. The model portfolio used 33
bonds resulting in a discount rate of approximately 6.25 percent for our
pension plans. Changes in this assumption are reflected in our benefit
obligation and, therefore, in the liabilities and income or expense we record. We periodically review our actual asset mix, benchmark discount rate,
expected rate of return and other actuarial assumptions and adjust them as
deemed necessary. Our assumption concerning
the average rate of compensation increase was 4 percent for all periods. The following table presents the benefit obligation, changes in plan
assets, the funded status of the pension plans and the assumptions used at
December 31:  2003
    
    2002Weighted-average assumptions:Discount rate
    
    
    6.25
    %
    
    
    6.75
    %Rate of increase in salary levels
    
    
    4.00
    %
    
    
    4.00
    %Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    1,111
    
    
    
    1,006Service cost
 benefits earned during the period
    
    
    21
    
    
    
    20Interest cost on benefit obligation
    
    
    72
    
    
    
    70Plan amendments
    
    
    
    
    
    
    1Actuarial loss
    
    
    60
    
    
    
    71Benefits paid
    
    
    (78
    )
    
    
    (73
    )Special retirement benefits
    
    
    2
    
    
    
    10Currency translation adjustments
    
    
    9
    
    
    
    6Benefit obligation at end of year
    
    $
    1,197
    
    
    
    1,111Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    830
    
    
    
    940Actual return (loss) on plan assets
    
    
    129
    
    
    
    (48
    )Employer contributions
    
    
    7
    
    
    
    7Currency translation adjustments
    
    
    5
    
    
    
    4Benefits paid
    
    
    (78
    )
    
    
    (73
    )Fair value of plan assets at end of year
    
    $
    893
    
    
    
    830Funded status
    
    $
    (304
    )
    
    
    (281
    )Unrecognized actuarial loss
    
    
    274
    
    
    
    257Unrecognized prior service cost
    
    
    18
    
    
    
    20Net amount recognized
    
    $
    (12
    )
    
    
    (4
    )Amounts recognized in the balance sheet consist of:Prepaid benefit cost
    
    $
    13
    
    
    
    29Accrued benefit liability
    
    
    (223
    )
    
    
    (211
    )Intangible asset
    
    
    21
    
    
    
    20Deferred tax benefit
    
    
    13
    
    
    
    12Accumulated other comprehensive income
    
    
    164
    
    
    
    146Net amount recognized
    
    $
    (12
    )
    
    
    (4
    )




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##### Table of Contents



116 Assumptions used as of the beginning of the plan year to determine the
listed components of net periodic benefit cost for the associated year consist
of the following:  2003
    
    2002
    
    2001Weighted-average assumptions:Discount rate
    
    
    6.75
    %
    
    
    7.25
    %
    
    
    7.75
    %Expected long-term rate of return
    
    
    8.75
    %
    
    
    9.00
    %
    
    
    9.50
    %Rate of increase in salary levels
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Components of net periodic benefit cost:Service cost  benefits earned during the period
    
    $
    20.9
    
    
    
    20.3
    
    
    
    18.8Interest cost on benefit obligation
    
    
    72.1
    
    
    
    70.0
    
    
    
    69.4Expected return on plan assets
    
    
    (86.4
    )
    
    
    (92.7
    )
    
    
    (99.0
    )Amortization of transition obligation
    
    
    0.1
    
    
    
    1.1
    
    
    
    0.3Amortization of prior service cost
    
    
    3.5
    
    
    
    3.7
    
    
    
    3.9Amortization of actuarial loss (gain)
    
    
    2.8
    
    
    
    (0.4
    )
    
    
    (6.0
    )Curtailments and special retirement benefits
    
    
    2.0
    
    
    
    10.2
    
    
    
    3.9Recognized prior service cost
    
    
    0.2
    
    
    
    2.1
    
    
    
    0.2Net periodic benefit cost (income)
    
    $
    15.2
    
    
    
    14.3
    
    
    
    (8.5
    )
  We recognize a minimum liability in our financial statements for our
underfunded pension plans. The accrued pension benefit cost was $223 million,
which included an additional minimum liability of $198 million and was included
in Other Liabilities and Deferred Credits at December 31, 2003, compared with
$211 million, which included an additional minimum liability of $178 million
(included in Other Liabilities and Deferred Credits) at December 31, 2002.
The additional minimum liability was offset by a $21 million intangible asset,
a $164 million reduction in Shareholders Equity and a $13 million deferred
tax benefit at December 31, 2003, compared with a $20 million intangible asset,
a $146 million reduction in Shareholders Equity and a $12 million deferred
tax benefit at December 31, 2002. 18. Postretirement and Other Employee Benefits Other Than Pensions We record obligations for postretirement medical and life insurance
benefits on the accrual basis. One of the principal requirements of this method
is that the expected cost of providing such postretirement benefits be accrued
during the years employees render the necessary service. Our postretirement plans provide medical coverage benefits for many
employees retiring from active service. The coverage is provided on a
non-contributory basis for certain groups of retirees and on a contributory
basis for other groups. The majority of these medical benefits are paid by the
Company. We also provide life insurance benefits to our U.S. employees who
retire from active service and to some of our international employees. Life
insurance benefits for retirees also are available pursuant to the terms of
certain collective bargaining agreements. The majority of the costs of such
life insurance benefits were paid out of a previously established fund
maintained by an insurance company. Our funding policy provides that contributions to our postretirement and
other employee benefits other than pensions shall be at least equal to our cash
basis obligation. Additional contributions also may be made from time to time.
Contributions for our postretirement benefit plans were approximately $28
million in 2003 and approximately $28 million in 2002. Cash contributions (net
of employee contributions) for 2004 are expected to range between $26 million
to $30 million. The following table represents the asset mix of the investment portfolio
for our postretirement benefit plans at December 31:  2003
    
    2002Asset category:Core U.S. fixed income
    
    
    60
    %
    
    
    60
    %Growth equity
    
    
    40
    %
    
    
    40
    %100
    %
    
    
    100
    %
  The fair value of all plan assets ($5 million at year-end 2003 and $7
million at year-end 2002) is impacted by general market conditions. If actual
returns on plan assets vary from the expected returns, actual results could
differ. A third-party independent actuary determines our net postretirement
liability and associated income or expense. We recognize in our financial
statements an accrued liability for the difference between postretirement cost
and contributions to the plan. The long-term expected rate of return on plan assets for our
postretirement medical and life insurance benefit plans and the discount rate
were determined on the same basis as our pension plan. Based on our asset
allocation, historical returns on the types of assets held in the trust, and
the current economic environment we expect our postretirement medical and life
insurance benefit assets will earn an average of 6.50 percent per annum over
the long-term beginning December 1, 2003. The cash flow generated by the
constructed bond portfolio comprising non-callable bonds from the S&P bond
listing rated AA- or higher that was matched to projected future cash flow from
the postretirement medical and life insurance benefit plans resulted in a
discount rate of approximately 6.25 percent. Changes in this assumption are
reflected in our benefit obligation and, therefore, in our liabilities and
income or expense we record. We periodically review our actual asset mix, benchmark discount rate,
expected rate of return and other actuarial assumptions and adjust them as
deemed necessary. Our assumption concerning the average rate of compensation
increase was 4 percent for all periods.




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##### Table of Contents



117 The following table presents the change in benefit obligation, change in
plan assets, the funded status of the postretirement benefit plans and the
assumptions used at December 31:  2003
    
    2002Weighted-average assumptions:Expected long-term rate of return on plan assets
    
    
    6.50
    %
    
    
    8.00
    %Discount rate
    
    
    6.25
    %
    
    
    6.75
    %Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    369
    
    
    
    329Service cost  benefits earned during the year
    
    
    4
    
    
    
    4Interest cost on benefit obligation
    
    
    23
    
    
    
    22Actuarial loss
    
    
    9
    
    
    
    40Benefits paid, net of employee contributions
    
    
    (30
    )
    
    
    (29
    )Other
    
    
    14
    
    
    
    3Benefit obligation at end of year
    
    $
    389
    
    
    
    369Change in plan assets:Fair value of plan assets at
beginning of year
    
    $
    7
    
    
    
    8Actual return on plan assets
    
    
    
    
    
    
    Employer contributions
    
    
    28
    
    
    
    28Benefits paid, net of employee contributions
    
    
    (30
    )
    
    
    (29
    )Fair value of plan assets at end of year
    
    $
    5
    
    
    
    7Unfunded status
    
    $
    (384
    )
    
    
    (362
    )Unrecognized actuarial loss (gain)
    
    
    43
    
    
    
    32Unrecognized prior service cost
    
    
    9
    
    
    
    11Net amount recognized  accrued liability
    
    $
    (332
    )
    
    
    (319
    )
  Assumptions used as of the beginning of the plan year to determine the
listed components of net periodic postretirement benefit cost were as follows:  2003
    
    2002
    
    2001Weighted-average assumptions:Discount rate
    
    
    6.75
    %
    
    
    7.25
    %
    
    
    7.75
    %Expected long-term rate of return on plan assets
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %Rate of increase in salary levels
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Components of net periodic benefit cost:Service cost  benefits earned during the year
    
    $
    4.4
    
    
    
    4.2
    
    
    
    3.9Interest cost
    
    
    23.4
    
    
    
    21.7
    
    
    
    22.6Expected return on plan assets
    
    
    (0.6
    )
    
    
    (0.7
    )
    
    
    (0.8
    )Amortization of:Unrecognized prior service cost
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.3Unrecognized net gain
    
    
    (0.4
    )
    
    
    (0.3
    )
    
    
    (1.1
    )Curtailments and special retirement benefits
    
    
    12.5
    
    
    
    3.4
    
    
    
    0.5Net periodic benefit cost
    
    $
    40.6
    
    
    
    29.6
    
    
    
    26.4
  The assumed medical care trend rates at December 31 were:  2003
    
    2002Medical care cost trend rate assumed for major medical
plan for the next year
    
    
    11
    %
    
    
    11
    %Medical care cost trend rate assumed for basic only
plan for the next year
    
    
    8
    %
    
    
    8
    %Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate)
    
    
    5
    %
    
    
    5
    %Year that the rate reaches the ultimate trend rate
    
    
    2010
    
    
    
    2009
  Assumed medical care cost trend rates have a significant effect on the
amounts reported for the postretirement medical benefits. A 1-percentage-point
change in the medical care cost trend rates assumed for postretirement medical
benefits would have the following effects:  1 Percentage-PointIncrease
    
    DecreaseEffect on total of service and interest cost components
    
    $
    1.4
    
    
    
    1.3Effect on postretirement benefit obligation
    
    $
    18.4
    
    
    
    16.7
  In December 2003, The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 was enacted. Our accumulated postretirement benefit
obligation and net periodic postretirement benefit cost do not reflect the
effects that the requirements of this law may have on those calculations. FASB
is expected to provide additional guidance for the accounting treatment related
to the requirements of this statute, which could require changes to previously
reported information. We have a number of postemployment plans covering severance, long-term
disability income, health care, life insurance, continuation of health and life
insurance coverage for disabled employees or other welfare benefits. At
December 31, 2003 and 2002, the accumulated postemployment disability benefit
consisted of a current portion of $5.9 million and $3.6 million, respectively,
included in accounts payable and accrued expenses and $22.7 million and $18.0
million, respectively, included in other liabilities and deferred credits. We also sponsor savings plans for the majority of our employees. The plans
allow employees to contribute a portion of their pre-tax and/or after-tax
income in accordance with specified guidelines. The principal savings plan is a
qualified 401(k) plan for all U.S. salaried and non-bargained hourly employees.
In this plan, participants exercise control and direct the investment of their
contributions and account balances among a broad range of investment options,
including company stock. Participants also may direct their contributions into
a brokerage option through which they can invest in stocks, bonds and mutual
funds. Participants may change investment direction or transfer existing
balances at any time without restriction, with some exceptions for certain
officers and other insiders. We match a percentage of employee pre-tax deferral
contributions up to certain limits. These matching contributions are made in
cash, which is immediately invested according to each employees current
investment direction. Our contributions amounted to $11.4 million in 2003,
$11.5 million in 2002 and $13.3 million in 2001.




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##### Table of Contents



118 19. Commitments Phelps Dodge leases mineral interests and various other types of
properties, including shovels, offices and miscellaneous equipment. Certain of
the mineral leases require minimum annual royalty payments, and others provide
for royalties based on production. Summarized below at December 31, 2003, are future minimum rentals and
royalties under non-cancelable leases:  Operating
    
    Mineral
    
    CapitalLeases
    
    Royalties
    
    Leases2004
    
    $
    18.3
    
    
    
    1.3
    
    
    
    4.12005
    
    
    16.6
    
    
    
    1.3
    
    
    
    4.02006
    
    
    15.4
    
    
    
    1.3
    
    
    
    2007
    
    
    12.8
    
    
    
    1.3
    
    
    
    2008
    
    
    11.9
    
    
    
    1.3
    
    
    
    After 2008
    
    
    32.9
    
    
    
    16.1
    
    
    
    Total payments
    
    $
    107.9
    
    
    
    22.6
    
    
    
    8.1Less imputed interest
    
    
    
    
    
    
    
    
    
    
    (0.9
    )Present value of lease payments
    
    
    
    
    
    
    
    
    
    
    7.2Less current portion
    
    
    
    
    
    
    
    
    
    
    (3.5
    )Present value of long-term payments
    
    
    
    
    
    
    
    
    
    $
    3.7
  Summarized below at December 31, 2003, is future sub-lease income:  Sub-leaseIncome2004
    
    $
    0.42005
    
    
    0.52006
    
    
    0.42007
    
    
    0.52008
    
    
    0.5After 2008
    
    
    1.8$
    4.1
  Rent and royalty expenses for the years ended December 31 were as follows:  2003
    
    2002
    
    2001Rental expense
    
    $
    23.0
    
    
    
    21.4
    
    
    
    22.4Mineral royalty
    
    
    1.3
    
    
    
    1.3
    
    
    
    0.6$
    24.3
    
    
    
    22.7
    
    
    
    23.0
  Phelps Dodge has unconditional purchase obligations (take-or-pay
contracts) of $584.9 million comprising the procurement of electricity
(approximately 39 percent); petroleum-based products (approximately 24
percent); copper anode (approximately 14 percent); natural gas (approximately 5
percent); transportation (approximately 3 percent); sulfuric acid
(approximately 4 percent); oxygen (approximately 3 percent); port fee
commitments (approximately 2 percent); and other supplies (approximately 6
percent) that are essential to our operations worldwide. Approximately 85
percent of our take-or-pay electricity obligations are through PD Energy
Services, the legal entity used to manage power for PDMC, at generally
fixed-price arrangements. PD Energy Services has the right and the ability to
resell the electricity as circumstances warrant. Obligations for
petroleum-based feedstock at our Specialty Chemicals segment, which is
converted into carbon black, are for specific quantities and will ultimately be
purchased based upon prevailing market prices at that time. These
petroleum-based products may be re-sold to others if circumstances warrant.
Obligations for natural gas provide for deliveries of specified volumes, at
market-based prices, primarily to our carbon black operation in Brazil.
Obligations for copper anode provide for deliveries of specified volumes, at
market-based prices, to our El Paso Refinery. Transportation obligations are
primarily for importing sulfuric acid to El Abra. Our sulfuric acid purchases
provide for deliveries of specified volumes, based primarily on negotiated
rates, to El Abra and Cerro Verde. Our oxygen obligations provide for
deliveries of specified volumes, at fixed prices, to Bagdad. Our carbon black
facility in the United Kingdom has port fee commitments. Our future commitments are $200.1 million, $108.9 million, $77.0 million,
$68.2 million, $44.4 million, and $86.3 million for 2004, 2005, 2006, 2007,
2008, and after 2008, respectively. 20. Guarantees In November 2002, FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon issuance of certain guarantees, a guarantor must
recognize a liability for the fair value of an obligation assumed under the
guarantee. FIN 45 also requires significant new disclosures by guarantors, in
both interim and annual financial statements, about obligations associated with
guarantees issued. FIN 45 disclosure requirements were effective for our year
ended December 31, 2002, and the initial recognition and measurement provisions
were applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Phelps Dodge as a guarantor is involved in financial
guarantees (including option guarantees and indirect guarantees of the
indebtedness of others) and indemnities. Our financial guarantees primarily consist of the Cyprus Amax guarantee to
cover our partners share of El Abras Tranche B debt. The value of our
partners 49 percent share of the project debt we guarantee (which reflects our
maximum potential payment) totaled $36.1 million at December 31, 2003. This
debt matures in May 2007 (refer to Note 14, Debt and Other Financing, for
additional discussions concerning our project debt and guarantee arrangement at
El Abra). As of December 31, 2003, the Company has not recorded any liability
on its financial statements in connection with this guarantee as the Company
does not believe, based on information available, that it is probable that any
amounts will be paid under this guarantee. At our Morenci mine in Arizona, we have a venture agreement dated February
7, 1986, with our business partner, Sumitomo, that includes a put/call option
guarantee clause. We hold an 85 percent undivided interest in the Morenci
complex. Under certain conditions defined in the venture agreement, our partner
has the right to sell its 15 percent share to the Company. Likewise, under
certain conditions, the Company has the right to exercise its purchase option
to acquire our business partners share of the venture. Based on calculations
defined in the venture agreement, at December 31, 2003, the maximum potential
payment the Company is obligated to make to our business partner upon exercise
of the put option (or the Companys exercise of its call option) totaled
approximately $101 million. As of December 31, 2003, the Company has not
recorded any liability on its financial statements in connection with this
guarantee as the Company does not believe, based on information available, that
it is




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##### Table of Contents



119 probable that any amounts will be paid under this guarantee as the fair
value is well in excess of the exercise price. One of our subsidiaries has entered into an indirect guarantee to pledge
certain of our land and improvements as collateral to a lender for a real
estate development loan issued on behalf of our joint venture investment. The
Company owns a 50 percent interest in the joint venture and has guaranteed
payment of any amounts due on the loan in the event of the joint ventures loan
default. The loan value and maximum potential payment for this guarantee at
December 31, 2003, was approximately $23 million. The estimated fair value of
our collateralized land at year-end was approximately $5 million. As of
December 31, 2003, the Company has not recorded any liability on its financial
statements in connection with this guarantee as the Company does not believe,
based on information available, that it is probable that any amounts will be
paid under this guarantee. The Company (and its subsidiaries, including Cyprus Amax Minerals Company)
has, as part of its merger, acquisition, divestiture and other transactions,
entered into during the ordinary course of business (including transactions
involving the purchase and sale of property), from time to time, indemnified
certain sellers, buyers or other parties related to the transaction from and
against certain liabilities associated with conditions in existence (or claims
associated with actions taken) prior to the closing date of the transaction. In
certain transactions, the Company indemnified the counterparty from and against
certain excluded or retained liabilities existing at the time of sale that
would otherwise have been transferred to the party at closing. These indemnity
provisions generally require Phelps Dodge (or its subsidiaries) to indemnify
the party against certain liabilities that may arise in the future from the
pre-closing activities of the Company or assets sold or purchased. The
indemnity classifications include environmental, tax and certain operating
liabilities, claims or litigation existing at closing and various excluded
liabilities or obligations. Most of these indemnity obligations arise from
transactions that closed many years ago, and given the nature of these
indemnity obligations, it is impossible to estimate the maximum potential
exposure. Except as described in the following sentence, we do not consider any
of such obligations as having a probable likelihood of payment that is
reasonably estimable, and accordingly, we have not recorded any obligations
associated with these indemnities. With respect to our environmental indemnity
obligations, any expected costs from these guarantees are accrued when
potential environmental obligations are considered by management to be probable
and the costs can be reasonably estimated (refer to Note 21, Contingencies, for
further discussions concerning our environmental reserve process). 21. Contingencies Letters of Credit and Surety Bonds Phelps Dodge had standby letters of credit totaling $103.6 million at
December 31, 2003, primarily for Candelarias project financing; insurance
programs associated with workers compensation, casualty and owner controlled
reinsurance, indemnity agreements, general and automobile liability; and
reclamation and environmental obligations. In addition, Phelps Dodge had surety
bonds totaling $173.1 million at December 31, 2003, associated with reclamation
and closure bonds ($152.6 million or 88.2 percent), which are discussed below,
and self-insurance bonds for workers compensation ($19.9 million or 11.5
percent). Phelps Dodge also had performance guarantees of $28.1 million
primarily associated with our Wire and Cable segments sales contracts. The terms and conditions presently available from one of our principal
surety bond providers for reclamation and other types of long-lived surety
bonds have made this type of financial assurance economically impracticable in
many instances. Insurance The Company purchases a variety of insurance products to mitigate
insurable losses. The various insurance products typically have specified
deductible amounts, retention requirements and policy limits. The Company
purchases all-risk property insurance with varying site deductibles and an
annual aggregate corporate property deductible of $30 million. The Company
generally is self-insured for workers compensation, but purchases excess
insurance up to statutory limits. An actuarial study is performed annually by a
licensed third-party actuary for the Companys various casualty programs,
including workers compensation, to estimate required insurance reserves.
Insurance reserves totaled $45.8 million and $52.7 million at December 31, 2003
and 2002, respectively. The Company pays its portion of a variety of insurance claims and losses
associated with property, general liability, workers compensation and auto.
The total amount paid pursuant to these programs was $13.1 million, $20.2
million and $26.8 million in 2003, 2002 and 2001, respectively. Group medical
and other insurance benefit costs paid by the Company for both active and
retired participants totaled approximately $98 million,
$104 million and $102
million in 2003, 2002 and 2001, respectively. Other Taxes It is possible that Phelps Dodge Corporation and certain of its
subsidiaries may be considered to conduct business in Texas where they do not
directly operate due to the processing of copper by affiliates in that state. If they
were considered to conduct business in Texas, they would be obligated to pay
franchise taxes they have not previously paid. We are analyzing whether any
taxes, interest or penalties should be paid, and have applied to resolve the
matter through a voluntary compliance program. Based upon our review, we have
estimated a range of reasonably possible loss of $8 million to $25 million, and, as no point within that
range is more likely than any other, the lower end of the range has been
recorded. Environmental Phelps Dodge is subject to various federal, state and local environmental
laws and regulations that govern emissions of air pollutants; discharges of
water pollutants; and generation, handling, storage and disposal of hazardous
substances, hazardous wastes and other toxic materials. The Company is also
subject to potential liabilities arising under CERCLA or similar state laws
that impose responsibility on persons who arranged for the disposal of
hazardous substances, and on current and previous owners and operators of a
facility for the cleanup of hazardous substances released from the facility
into the environment. In addition, the Company is subject to potential
liabilities under the Resource Conservation and Recovery Act (RCRA) and
analogous state laws that require responsible par-




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##### Table of Contents



120 ties to remediate releases of hazardous or solid waste constituents into
the environment associated with past or present activities. Phelps Dodge or its subsidiaries have been advised by EPA, the U.S. Forest
Service and several state agencies that they may be liable under CERCLA or
similar state laws and regulations for costs of responding to environmental and
natural resource conditions at a number of sites that have been or are being
investigated by EPA, the U.S. Forest Service or states to determine whether
releases of hazardous substances have occurred and, if so, to develop and
implement remedial actions to address environmental and natural resource
concerns. Phelps Dodge has provided reserves for potential environmental obligations
that management considers probable and for which reasonable estimates can be
made. For closed facilities and closed portions of operating facilities with
closure obligations, an environmental liability is considered probable and is
accrued when a closure determination is made and approved by management.
Environmental liabilities attributed to CERCLA or analogous state programs are
considered probable when a claim is asserted, or is probable of assertion, and
we have been associated with the site. Other environmental remediation
liabilities are considered probable based upon specific facts and
circumstances. Liability estimates are based on an evaluation of, among other
factors, currently available facts, existing technology, presently enacted laws
and regulations, Phelps Dodges experience in remediation, other companies
remediation experience, Phelps Dodges status as a potentially responsible
party (PRP), and the ability of other PRPs to pay their allocated portions.
Accordingly, total environmental reserves of $317.2 million and $305.9 million
were recorded as of December 31, 2003 and 2002, respectively. The long-term
portion of these reserves is included in other liabilities and deferred credits
on the Consolidated Balance Sheet and amounted to $271.3 million and $261.7
million at December 31, 2003 and 2002, respectively. The site currently considered to be the most significant is the Pinal
Creek site near Miami, Arizona. Pinal Creek Site The Pinal Creek site was listed under the Arizona Department of
Environmental Quality (ADEQ) Water Quality Assurance Revolving Fund program in
1989 for contamination in the shallow alluvial aquifers within the Pinal Creek
drainage near Miami, Arizona. Since that time, environmental remediation has
been performed by the members of the Pinal Creek Group (PCG), comprising Phelps
Dodge Miami, Inc. (a wholly owned subsidiary of the Company) and two other
companies. In 1998, the District Court approved a Consent Decree between the
PCG members and the state of Arizona resolving all matters related to an
enforcement action contemplated by the state of Arizona against the PCG members
with respect to the groundwater matter. The Consent Decree committed Phelps
Dodge Miami, Inc. and the other PCG members to complete the remediation work
outlined in the Consent Decree. That work continues at this time pursuant to
the Consent Decree and consistent with the National Contingency Plan prepared
by EPA under CERCLA. Phelps Dodge Miami, Inc. and the other members of the PCG are pursuing
contribution litigation against three other parties involved with the site. At
least two of the three defendants now have admitted direct liability as
responsible parties. The first phase of the case has been assigned a trial date
in August 2004. Phelps Dodge Miami, Inc. also asserted claims against certain
past insurance carriers. As of November 2002, all of the carriers have settled
or had their liability adjudicated. One carrier has appealed the judgment
against it. In addition, a dispute between one dissenting PCG member and Phelps Dodge
Miami, Inc. and the other PCG member was filed in Superior Court in 2002. The
litigation seeks a declaratory judgment on the dissenting members contract
liability under the PCG agreement. Trial for this matter is scheduled for
mid-2004. While significant recoveries may be achieved in the contribution
litigation, the Company cannot reasonably estimate the amount and, therefore,
has not taken potential recoveries into consideration in the recorded reserve. Phelps Dodge Miami, Inc.s share of the planned remediation work has a
cost range for reasonably expected outcomes estimated to be from $110 million
to $216 million. Approximately $113 million remained in the Companys Pinal
Creek remediation reserve at December 31, 2003. The sites that had the largest adjustments to their reserves were the
Yonkers and American Zinc and Chemical sites. Yonkers Site In 1984, the Company sold a cable manufacturing facility located in
Yonkers, New York. In 2000, the owner of the property entered into a consent
order with the New York State Department of Environmental Conservation (NYSDEC)
under which the owner committed to complete a remedial investigation and
feasibility study. In December 2001, the Company entered into an Interim
Agreement with the owner of the property regarding the owners claim for
indemnification from the Company for certain environmental liabilities at the
facility. The owner submitted its feasibility study to NYSDEC in December 2003.
The feasibility study recommends excavation of PCB-contaminated soil, either
removal of PCB and lead contamination from, or demolition of PCB- and
lead-contaminated buildings, and monitored natural recovery of PCB-contaminated
sediments in the Hudson River. Based on the feasibility study, and taking into
consideration the reasonably possible allocation percentages that could apply
to the Company and the property owner, the Companys remedial costs may range
from $20 million to $37 million, with a most likely point in the range of $20
million. American Zinc and Chemical Site In June 1999, Cyprus Amax, now a subsidiary of Phelps Dodge, received an
information request from the Pennsylvania Department of Environmental
Protection (PADEP) regarding the former American Zinc and Chemical (AZC) site
in Langeloth, Pennsylvania. The AZC site consists primarily of a former zinc
smelter facility operated until 1947 by the former American Zinc and Chemical
Company and includes some or all of a contiguous, currently operating
molybdenum refinery formerly owned by the Climax Molybdenum Company, which is
indirectly owned by Cyprus Amax. The American Zinc and Chemical Company, which
was dissolved in 1951, also was a subsidiary of a corporate predecessor to
Cyprus Amax. In discussions with Cyprus Amax in 2001 and early 2002, PADEP informally
indicated that it expects Cyprus Amax to investigate and remediate negative
environmental conditions at the AZC site, which predominate at and about the
former zinc smelter facility. The Com-




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##### Table of Contents



121 panys Form 10-K for the year ended December 31, 2002, indicated
preliminary evaluations of the nature and extent of conditions at the site may
range in cost from $18 million to $52 million. The Company reserved $20 million
for possible remediation work at this site. Recently, an engineering evaluation
and reasonable-cost analysis was performed to estimate the cost and feasibility
of implementing the most likely remedial action that PADEP would accept based
on effectiveness and implementability. To check the validity of the analysis,
estimated site remedial costs were compared with costs from other environmental
sites that have implemented similar remedial actions. In addition, a
reasonable-cost analysis was performed on other possible remedial alternatives
so a range of costs could be established for consideration. This analysis
indicated that remediation of the site may range from $9 million to $43
million, with a most likely point in the range of $9 million. The most likely
remedial action would include an additional site investigation study,
implementation of storm water controls, constructing an engineered cap over 60
acres of slag and process waste, and long-term monitoring and operation and
maintenance of the site. While the Company has reduced its reserve to $9
million for possible remediation work at the site, Cyprus Amax continues to
believe and will continue to indicate to PADEP that the Company is not liable
for the actions of its former subsidiary, American Zinc and Chemical Company,
under existing federal and state environmental laws. To date, PADEP has not
responded to Cyprus Amaxs assertion that it is not liable. Other In 2003, the Company recognized charges of $28.4 million for environmental
remediation. The two sites with significant changes were the Yonkers site (an
increase of $16.7 million) and the AZC site (a decrease of $10.4 million). The
remainder of environmental remediation charges was primarily at closed sites,
none of which increased or decreased individually more than approximately $7
million. At December 31, 2003, the cost range for reasonably possible outcomes for
all reservable environmental remediation sites other than Pinal Creek, Yonkers
and AZC was estimated to be from $133 million to $329 million, of which $175
million has been reserved. Work on these sites is expected to be substantially
completed in the next several years, subject to inherent delays involved in the
remediation process. Phelps Dodge believes certain insurance policies partially cover the
foregoing environmental liabilities; however, some of the insurance carriers
have denied coverage. We presently are negotiating with the carriers over some
of these disputes. Further, Phelps Dodge believes it has other potential claims
for recovery from other third parties, including the United States Government
and other PRPs. Neither insurance recoveries nor other claims or offsets are
recognized unless such offsets are considered probable of realization. In 2003
and 2002, the Company recognized proceeds from settlements reached with several
insurance companies on historic environmental liability claims of $0.5 million
and $34.3 million, net of fees and expenses, respectively. Phelps Dodge has a number of sites that are not the subject of an
environmental reserve because it is not probable that a successful claim will
be made against the Company for those sites, but for which there is a
reasonably possible likelihood of an environmental remediation liability. At
December 31, 2003, the cost range for reasonably possible outcomes for all such
sites was estimated to be from $3 million to $17 million. The liabilities
arising from potential environmental obligations that have not been reserved at
this time may be material to the results of any single quarter or year in the
future. Management, however, believes the liability arising from potential
environmental obligations is not likely to have a material adverse effect on
the Companys liquidity or financial position as such obligations could be
satisfied over a period of years. The following table summarizes environmental reserve activities for the
years ended December 31:  2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    305.9
    
    
    
    311.2
    
    
    
    307.1Additions to reserves*
    
    
    54.6
    
    
    
    18.3
    
    
    
    37.1Reductions in reserve estimate
    
    
    (12.7
    )
    
    
    (4.3
    )
    
    
    (6.0
    )Spending against reserves
    
    
    (24.1
    )
    
    
    (19.3
    )
    
    
    (27.0
    )Reclassification to asset
retirement obligation**
    
    
    (6.5
    )
    
    
    
    
    
    
    Balance, end of year
    
    $
    317.2
    
    
    
    305.9
    
    
    
    311.2
   *
    
    2003 included $13.5 million for our acquisition of Heiseis one-third
interest in Chino Mines Company.**
    
    Upon adoption of SFAS No. 143, reserves for certain matters ($6.5
million) required by reclamation rules or laws were reclassified to asset
retirement obligations (previously classified as environmental reserves). Closure and Reclamation Since adopting SFAS No. 143, effective January 1, 2003, we recognize asset
retirement obligations (AROs) as liabilities when incurred, with initial
measurement at fair value. These liabilities are accreted to full value over
time through charges to income. In addition, asset retirement costs (ARCs) are
capitalized as part of the related assets carrying value and are depreciated
on a units-of-production basis over the assets respective useful life.
Reclamation costs for future disturbances are recognized as an ARO and as a
related ARC in the period incurred. Prior to the adoption of SFAS No. 143, the
Company recognized estimated final reclamation costs over the life of active
mining properties on a units-of-production basis. For non-operating sites on
care-and-maintenance status, we suspended accrual of mine closure costs until
the site resumed production. When management determined a mine should be
permanently closed, any unrecognized closure obligation was recognized. The
Companys cost estimates for reclamation and closure consider mining and
operating plans, use of Company resources, and other factors necessary to
achieve compliance with laws and regulations. These cost estimates may differ
from financial assurance cost estimate requirements due to a variety of factors
including historical cost advantages, savings from use of the Companys own
personnel and equipment versus third-party contractor costs, and opportunities
to prepare each site for more efficient reclamation through careful development
of the site over time.




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##### Table of Contents



122 The following tables summarize the asset retirement obligation/closure and
reclamation accrual and asset retirement cost activities for the years ended
December 31:  Asset retirement obligations2003*
    
    2002**
    
    2001**Balance, beginning of year
    
    $
    138.6
    
    
    
    100.6
    
    
    
    98.6Liability recorded upon adoption of
SFAS No. 143***
    
    
    10.4
    
    
    
    
    
    
    
    New liabilities during period
    
    
    16.8
    
    
    
    33.1
    
    
    
    10.1Accretion expense
    
    
    14.7
    
    
    
    6.7
    
    
    
    6.4Payments
    
    
    (1.8
    )
    
    
    (1.8
    )
    
    
    (9.6
    )Revisions in estimated cash flows
    
    
    46.4
    
    
    
    
    
    
    
    Foreign currency translation adjustments
    
    
    0.2
    
    
    
    
    
    
    
    Deductions
    
    
    
    
    
    
    
    
    
    
    (4.9
    )Balance, end of year
    
    $
    225.3
    
    
    
    138.6
    
    
    
    100.6
   *
    
    Reflected accrual balances under SFAS No. 143.**
    
    Reflected accrual balances on a units-of-production basis.***
    
    Amount includes $7.9 million of reclassifications from environmental
reserves ($6.5 million) and other liabilities ($1.4 million). Refer to
Note 1, Summary of Significant Accounting Policies, for further
discussion.   Asset retirement costs*2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    
    
    
    
    
    
    
    
    Net asset recorded upon adoption of
SFAS No. 143**
    
    
    36.3
    
    
    
    
    
    
    
    New assets during the period
    
    
    1.0
    
    
    
    
    
    
    
    Depreciation expense
    
    
    (5.5
    )
    
    
    
    
    
    
    Revisions in estimated cash flows
    
    
    46.4
    
    
    
    
    
    
    
    Balance, end of year
    
    $
    78.2
    
    
    
    
    
    
    
    
   *
    
    Only required under SFAS No. 143.**
    
    Refer to Note 1, Summary of Significant Accounting Policies, for further
discussion. During 2003, we revised our cash flow estimates ($43.9 million discounted)
for the Chino and Tyrone mines based on an agreement reached in May 2003 with
the New Mexico Environment Department (NMED) and the Mining and Minerals
Division (MMD) of the New Mexico Energy, Minerals and Natural
Resources Department
for the financial assurance requirements as part of the closure plans related
to our operations at Chino, Cobre and Tyrone. In September 2003, this agreement
was finalized with NMED and MMD. In December 2003, MMD approved Chinos
closeout plan and Phelps Dodge tentatively finalized the closure project
listing and cash flow estimates for the accelerated reclamation as described in
the September 2003 finalized agreement (refer to discussion below).
Additionally, we revised our cash flow estimates at Twin Buttes ($2.2 million
discounted) resulting from a change in probabilities due to the propertys
lease agreement expiring in the 2003 fourth quarter (although lease renewal
negotiations are ongoing) and at Hidalgo ($0.3 million discounted) associated
with the Brockman Silica mine. The impact of these changes in estimates
resulted in an increase to accretion and depreciation expense of approximately
$4 million for the year ended December 31, 2003. Additionally, we recognized reclamation costs of $1.0 million for new
disturbances and $15.8 million associated with our acquisition of Heiseis
one-third interest in Chino Mines Company. In connection with the transaction,
we received $64 million placed in a trust that is legally restricted to fund
Chinos financial assurance obligations. (Refer to Note 2, Acquisitions and
Divestitures, for further discussion.) We have estimated that our share of the total cost of asset retirement
obligations, including anticipated future disturbances, for the year ended
December 31, 2003, aggregated approximately $1.2 billion (unescalated,
undiscounted and on a third-party cost basis), leaving approximately $1.0
billion remaining to be accreted over time. These aggregate costs may increase
or decrease materially in the future as a result of changes in regulations,
technology, mine plans or other factors. Asset retirement obligation activities
and expenditures generally are made over an extended period of time commencing
near the end of the mine life. Significant Arizona Closure and Reclamation Programs ADEQ has adopted regulations for its aquifer protection permit (APP)
program that replaced the previous Arizona groundwater quality protection
permit regulations. Several of our properties continue to operate pursuant to
the transition provisions for existing facilities under the APP regulations.
The APP regulations require permits for certain facilities, activities and
structures for mining, concentrating and smelting. The APP requires compliance
with aquifer water quality standards at an applicable point of compliance well
or location. The APP also may require mitigation and discharge reduction or
elimination of some discharges. Existing facilities operating under the APP
transition provisions are not required to modify operations until requested by
the state of Arizona, or unless a major modification at the facility alters the
existing discharge characteristics. We have received an APP for our Morenci
operations, for portions of our Bagdad and Miami mines, for the sewage
treatment facility at Ajo, and for a closed tailing pile in Clarkdale, Arizona.
We have also conducted groundwater studies and submitted APP applications for
several of our other properties and facilities, including the Bagdad, Sierrita
and Miami mines, our Safford development property and Ajo, Copper Queen and
United Verde branches. We will continue to submit all required APP applications
for our remaining properties and facilities, as well as for any new properties
or facilities. We do not know what the APP requirements are going to be for all
existing and new facilities and, therefore, it is not possible for us to
estimate costs associated with those requirements. We are likely to continue to
have to make expenditures to comply with the APP program. An application for an APP requires a description of a closure strategy to
meet applicable groundwater protection requirements following cessation of
operations and a cost estimate to implement the closure strategy. An APP may
specify closure requirements, which may include post-closure monitoring and
maintenance requirements. A more detailed closure plan must be submitted within
90 days after a permittee notifies ADEQ of its intent to cease operations. A
permit applicant must demonstrate its financial capability to meet the costs
required under the APP, including closure costs. Portions of the Companys Arizona mining operations that operated after
January 1, 1986, also are subject to the Arizona Mined Land Reclamation Act
(AMLRA). AMLRA requires reclamation to achieve stability and safety consistent
with post-mining land use objectives specified in a reclamation plan.
Reclamation plans require approval by the State Mine Inspector and must include
a cost estimate to perform the reclamation measures specified in the plan.




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123 Financial assurance must be provided under AMLRA covering the estimated
cost of performing the reclamation plan. Both under APP regulations and AMLRA, a publicly traded company may
satisfy the financial assurance requirements by showing that its unsecured debt
rating is investment grade and that it meets certain requirements regarding
assets in relation to the estimated closure and post-closure cost and
reclamation cost estimates. An investment-grade bond rating is one of the
financial strength tests under the Arizona Act. Phelps Dodges senior unsecured
debt currently carries an investment-grade rating, albeit at the lowest level
in the category. Additionally, the Company currently meets another financial
strength test in Arizona that is not ratings dependent. At December 31, 2003 and 2002, we had accrued closure costs of
approximately $43 million for our Arizona operations. The amount of financial
assurance currently demonstrated for closure and reclamation activities is
approximately $105 million. If the Companys bond rating falls below
investment-grade, the Arizona mining operations would be required to supply
financial assurance in another form. Cyprus Tohono Corporation (Cyprus Tohono), a wholly owned subsidiary of
Cyprus Amax, leases lands on the Tohono Oodham Indian Nation (the Nation). The
leased lands include the site of a mining operation, currently on
care-and-maintenance status, comprising an open pit, underground mine workings,
leach and non-leach rock stockpiles, tailing and evaporation ponds, SX/EW
operations, and ancillary facilities. Many of these facilities are covered by
Mine Plans of Operations (MPOs) that were issued by the federal Bureau of Land
Management (BLM). The leases and MPOs impose certain environmental compliance,
closure and reclamation requirements upon Cyprus Tohono. The closure and
reclamation requirements under the leases require action to be taken upon
termination of the leases, which currently expire between 2012 and 2017, unless
terminated earlier in accordance with the terms of the leases. Preliminary
studies indicate that closure and reclamation requirements, excluding any
potential Superfund environmental response costs, are estimated to cost $5.0
million. The Nation, along with several federal agencies, have notified Cyprus
Tohono of groundwater quality concerns and concerns with other environmental
impacts of historical mining operations. In 2003, Cyprus Tohono expanded its
groundwater monitoring well network, and samples from a few of the new wells
show values above primary and secondary drinking water standards. Tests of a
neighboring Native American villages water supply well indicate elevated
concentrations of sulfate. Cyprus Tohono has installed new water wells and
provided an alternative water supply to the village. EPA has completed a Preliminary Assessment and Site Investigation (PA/SI)
of the Tohono mine under the federal Superfund program and has concluded that
the site is eligible for listing on the National Priorities List. We are unable
to project the remedial action measures, if any, that may be required as a
result of the PA/SI; however, based upon our best estimates of remedial actions
that Cyprus Tohono may undertake, the Company reserved $11.1 million for Cyprus
Tohono for this Superfund matter. Cyprus Tohono has submitted to EPA a proposal
for closure of several of the facilities of concern identified in the PA/SI.
Cyprus Tohono is subject to financial assurance for mine reclamation. It has
proposed interim financial assurance in the amount of $5.1 million, of which
$5.0 million would be in the form of a Company performance guarantee. Both the
Nation and the Bureau of Indian Affairs have conditionally accepted this
proposal. The Companys historic United Verde mine has obtained an APP for closure
of a tailing pond located near Clarkdale, Arizona, and is awaiting approval of
an APP for existing mine water discharge containment facilities at the mine
near Jerome, Arizona. The tailing pond has not received tailing discharges
since the early 1950s, but has received discharges of municipal sewage effluent
from the town of Clarkdale since the late 1970s. Closure work under the APP for
the tailing pond has been partially completed, but the remaining work has not
been completed pending the issuance of a storm water discharge permit under the
Clean Water Act for construction of a related development project. Construction
of improvements under the proposed APP for the mine are expected to begin
following issuance of the APP. Implementation of the plan under the proposed
APP is required under the terms of a Consent Decree settling alleged Clean
Water Act violations and entered by the U.S. District Court for the District of
Arizona on November 23, 2003. A voluntary remediation project also is under way
under supervision of ADEQ at the nearby historic Iron King mine to treat
potential discharges of acidic water from an adit. Additional work may be
required at historical mine workings in the district that are owned by the
Company to satisfy requirements under storm water discharge permits. At the
United Verde mine, APP costs are estimated to be $13.5 million; at the
Clarkdale tailing, APP costs are estimated to be $12.1 million; and at the Iron
King mine, voluntary remediation costs are estimated to be $2.1 million. These
amounts, totaling $27.7 million, are included in environmental reserves. Significant New Mexico Closure and Reclamation Programs Background The Companys New Mexico operations, Chino Mines Company (Chino), Phelps
Dodge Tyrone, Inc. (Tyrone), Cobre Mining Company (Cobre), and Phelps Dodge
Hidalgo, Inc. (Hidalgo), each are subject to regulation under the New Mexico
Water Quality Act and the Water Quality Control Commission (WQCC) regulations
adopted under that Act. Each of these operations holds one or more discharge
permits issued by NMED under WQCC regulations. The discharge permits specify
operational and monitoring requirements to protect groundwater quality. Under
the discharge permits for Chino, Tyrone, Cobre and Hidalgo, NMED has required
each of these operations to submit closure plans for approval. The closure
plans must describe the measures to be taken to prevent groundwater quality
standards from being exceeded following closure of the discharging facilities
and to abate any groundwater or surface water contamination. Each discharge
permit is issued for a period of no more than five years and the permit is
reviewed each time that it is renewed. Under certain circumstances, NMED may
require submission and approval of abatement plans to address the exceedance of
applicable water quality standards. In addition, Chino, Tyrone and Cobre are subject to regulation under the
New Mexico Mining Act (the Mining Act), which was enacted in 1993, and the
Mining Act Rules, which were adopted by the New Mexico Mining Commission (the
Mining Commission) in their original form in 1994. Chino, Tyrone and Cobre hold
permits issued by MMD




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124 of the Energy, Minerals and Natural Resources Department under the Mining
Act. Under the Mining Act, Chino, Tyrone and Cobre are required to submit and
obtain approval of closeout plans describing the reclamation to be performed
following closure of the mines. The reclamation must be designed to achieve a
self-sustaining ecosystem or a post-mining land use, unless MMD approves a
waiver of this requirement because achieving this requirement is technically or
economically infeasible or would be environmentally unsound. Regardless of
whether a waiver is issued, however, reclamation must be performed to achieve
all applicable air, water quality, and other environmental standards. Financial assurance is required to ensure that funding will be available
to perform both the closure plans and the closeout plans. The amount of the
financial assurance is based upon a cost estimate to complete the closure
and/or closeout plan. The cost estimate is based upon the assumption that the
operator will default at the point in time when closure and reclamation will be
most expensive and that the state will use the financial assurance to hire and
oversee a third-party contractor to perform the closure and/or closeout plan.
The cost estimates are subject to approval by NMED and MMD. When an operation
is subject to both a closure plan and a closeout plan, the plans typically
overlap. In that case, the financial assurance typically is provided jointly to
NMED and to MMD. Both NMED and MMD calculate the required amount of financial
assurance based upon a net present value (NPV) method when the closure plan
and/or closeout plan require performance over a long period of time. Use of the
NPV method requires NMED and/or MMD approval of appropriate discount and
escalation rates. The Companys cost estimates to perform the work itself generally are
substantially lower than the cost estimates used for financial assurance due to
the Companys historical cost advantages, savings from the use of the Companys
own personnel and equipment as opposed to third-party contractor costs,
opportunities to prepare the site for more efficient reclamation and the
omission of agency oversight costs. The process of obtaining approved closure plans and closeout plans has
been long and difficult, particularly for the operations subject to both WQCC
regulations and the Mining Act. The plans must be site-specific. Detailed
scientific studies have been required for each site. The sites are very large
and complex, involving many different types of facilities such as open pits,
mine stockpiles, tailing impoundments and smelter facilities. Many of the
regulatory requirements, as well as closure and reclamation technologies, are
relatively new and have been evolving while the plans have been developed,
including recent rule changes. Some of the closure and reclamation measures are
unproven over long periods of time at these or similar sites; so this
performance is not easily predicted. NMED and MMD have separate procedures for
review of closure and closeout plans, including consideration of waiver
requests, approval of plans, issuance of permits and approval of financial
assurance. These procedures include public notice, comment, and hearing
requirements, opportunities for appeals, and reviews of NMED and MMD actions by
WQCC and the Mining Commission. Chino Mines Company Chino submitted its first proposed site-wide combined closure/closeout
plan (CCP) at the end of 1997, the original deadline for approval of closeout
plans under the Mining Act, and obtained an extension for closeout plan
approval until December 31, 1999. The closure and closeout plans were combined
into one plan due to the overlapping requirements of WQCC regulations and the
Mining Act. In 1999, NMED required Chino to provide interim financial
assurance, pending approval of the closure plan, and Chino complied by
providing a surety bond for approximately $56 million. Also in 1999, the Mining
Commission extended the closeout plan approval deadline until December 31,
2001. Chino submitted a comprehensive CCP incorporating the results of the
scientific studies performed by Chino in March 2001. That CCP requested a
waiver of requirements to reclaim the open pit and steep stockpile slopes and
included a cost estimate for approximately $100 million, which included the
estimated cost of 30 years of water treatment. In July 2001, NMED published a
draft site-wide closure permit and set a public hearing for August 2001. NMEDs
draft closure permit required that all stockpiles be regraded, required thicker
soil covers than proposed by Chino, required 100 years of water treatment and
more stringent water treatment requirements, and proposed additional permit
conditions not proposed by Chino. A two-week public hearing was held in August
2001 concerning NMEDs draft closure permit. Following that hearing, Chino,
NMED and MMD conducted negotiations concerning a possible compromise on the
CCP. Agreement was reached on a compromise closure permit in December 2001. In
December 2001, the Mining Commission again extended the closeout plan approval
deadline until October 1, 2002. Another public hearing was held in February 2002 on the compromise closure
permit supported by both Chino and NMED. The estimated cost of the compromise
CCP was approximately $391 million over 100 years on an undiscounted and
unescalated basis. The conditions of the compromise permit required additional
studies and submission of a revised closure plan reflecting the outcome of
those studies prior to expiration of the five-year period of the closure
permit. As of October 1, 2002, NMED had not finalized its decision on the
compromise permit, and, consequently, MMD was unable to approve the closeout
plan. MMD then issued a Notice of Violation (NOV) to Chino for failing to meet
the October 1, 2002, deadline. The NOV did not impose any penalties, but
ordered Chino to obtain approval by a new deadline and reserved the right to
assess penalties for noncompliance. Chino appealed the NOV to the Mining
Commission, which held a public hearing on the NOV in December 2002. The Mining
Commission upheld the NOV, but modified the deadline for closeout plan approval
until seven months after NMED issued Chinos closure permit, subject to
extension by MMD for good cause. On February 24, 2003, NMED issued Chinos closure permit, consistent with
the compromise permit. Under the closure permit, the amount of financial
assurance was established at approximately $191 million on an NPV basis. In May
2003, Chino and Phelps Dodge reached an agreement with NMED and MMD on a
framework for financial assurance providing for a cash trust fund, collateral
and a third-party guarantee from Phelps Dodge. In June 2003, MMD filed a
petition with the Mining Commission to amend the Mining Act Rules to allow a
trust fund to be used as financial assurance. In July 2003, the Company
announced that a Phelps Dodge subsidiary would acquire Heiseis one-third
partnership interest in Chino. As part of the




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125 terms of that acquisition, Heisei agreed to provide cash funding for
one-third of the financial assurance amount. To reflect the agreement with Heisei, in September 2003 the financial
assurance agreement was modified to provide for one-third of the financial
assurance in the form of a trust fund and the remainder in the form of a
third-party guarantee by Phelps Dodge. The September 2003 agreement also
included a schedule for accelerated reclamation at Chino. MMD extended the
deadline for Chino to obtain approval of its closeout plan pending the
conclusion of the Mining Commission hearings on the proposed rule changes and
to allow time to hold a public hearing on the closeout plan and financial
assurance. The Mining Commission finalized the rule changes at a public hearing
on November 17, 2003. In October 2003, WQCC dismissed an appeal of Chinos closure permit filed
by a third party. WQCCs action has since been appealed to the New Mexico Court
of Appeals. MMD held a public hearing on Chinos closeout plan and financial assurance
proposal on December 13, 2003. Following consideration of the public comments
and finalization of the permit and financial assurance documentation, MMD
approved the closeout plan and financial assurance on December 18, 2003,
meeting the December 19, 2003, deadline for closeout plan approval set by MMD
and satisfying the requirements of the NOV. The closeout plan approved by MMD incorporates the requirements of the
NMED closure permit and includes a waiver from the requirement to achieve a
self-sustaining ecosystem or post-mining land use for the open pit and a
portion of the mine stockpiles, consistent with the terms of the NMED closure
permit. It also incorporates a schedule for reclamation of inactive portions of
the Chino operations and for reclamation following closure of active
operations. Based upon minor adjustments to reflect additional requirements,
the approved third-party cost estimate is approximately $395 million, and the
approved financial assurance requirement is approximately $192 million on an
NPV basis. Heisei provided funding of approximately $64 million on behalf of
Chino for the Chino trust fund. Phelps Dodge issued a third-party guarantee for
approximately $128 million for the balance of the financial assurance.
Following NMEDs and MMDs acceptance of the financial assurance, NMED released
Chinos $56 million interim surety bond as of December 31, 2003. The Company estimates its cost to perform the requirements of the approved
Chino closure permit and closeout plan to be approximately $287 million
(undiscounted and unescalated) over the 100-year period of the CCP. That
estimate is approximately one-third lower than the estimated cost used as the
basis for the financial assurance amount due to the factors discussed above and
reflects our internal cost estimate. Our cost estimate used to determine the
fair value of our reclamation accrual was approximately $389 million
(undiscounted, unescalated and on a third-party cost basis), as required by
SFAS No. 143, and excludes approximately $6 million of environmental costs from
the financial assurance cost estimate, which are recognized in environmental
reserves (they are not within the scope of SFAS No. 143). At December 31, 2003
and 2002, we had accrued approximately $39 million (100 percent basis) and $8
million (two-thirds basis), respectively, for reclamation at Chino. In December 1994, Chino entered into an Administrative Order on Consent
(AOC) with NMED. The AOC requires Chino to perform a CERCLA quality
investigation of environmental impacts and potential risks to human health and
the environment associated with portions of the Chino property affected by
historical mining operations. The remedial investigations began in 1995 and are
still under way, although substantial portions of the remedial investigations
are near completion. While some remediation is expected to be required, no
feasibility studies have yet been completed, and NMED has not yet issued a
record of decision regarding any remediation that may be required under the
AOC. The Companys estimated cost is $23.6 million. In addition to work under
the AOC, Chino is continuing ongoing projects to control blowing dust at an
estimated cost of $4.8 million and to excavate and remove copper-bearing
sediments from an area known as Lake One for copper recovery in existing
leach stockpiles at the mine. The Companys estimated cost for Lake One is $4.7
million. The Companys aggregate reserve for liability under the Chino AOC and
for the interim work on the tailing ponds and Lake One is $33.1 million. Phelps Dodge Tyrone, Inc. Tyrone submitted its first proposed site-wide combined CCP at the end of
1997, the original deadline for approval of closeout plans under the Mining
Act, and obtained an extension for closeout plan approval until December 31,
1999. The closure and closeout plans were combined into one plan due to the
overlapping requirements of WQCC regulations and the Mining Act. In 1999, NMED
required Tyrone to provide interim financial assurance, pending approval of the
closure plan, and Tyrone complied by providing a surety bond for approximately
$58 million. Also in 1999, the Mining Commission extended the closeout plan
approval deadline until December 31, 2001. Tyrone submitted a comprehensive CCP in May 2001 incorporating the results
of the scientific studies performed by Tyrone. That CCP requested a waiver of
requirements to reclaim the open pit and steep stockpile slopes and included a
cost estimate for approximately $121 million, which included the estimated cost
of 30 years of water treatment. In late 2001, the Mining Commission again
extended the closeout plan approval deadline until October 1, 2002. In April 2002, NMED published a draft site-wide closure permit and set a
public hearing for May 2002. NMEDs draft closure permit required that all
stockpiles be regraded, required thicker soil covers than proposed by Tyrone,
required 100 years of water treatment and more stringent water treatment
requirements, and proposed additional permit conditions opposed by Tyrone. NMED
estimated the cost of its proposed permit at approximately $440 million on an
unescalated and undiscounted basis over a 100-year closure period. Tyrone
submitted a revised plan in response to NMEDs draft permit, including concepts
for regrading and covering the mine stockpiles modeled after the Chino
compromise permit and proposing upgraded water treatment technology. Tyrone
estimated the cost of its proposal at approximately $328 million on the same
basis. A two-week public hearing was held in May 2002. As of October 1, 2002, NMED had not reached a decision on Tyrones permit,
and, consequently, MMD was unable to approve the closeout plan. MMD then issued
an NOV to Tyrone for failing to meet the October 1, 2002 deadline. The NOV did
not impose any penalties, but ordered Tyrone to obtain closeout plan approval
by a new deadline and reserved the right to impose penalties for noncompli-




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126 ance. Tyrone appealed the NOV to the Mining Commission, which held a
public hearing on the NOV in December 2002. The Mining Commission upheld the
NOV, but modified the deadline for closeout plan approval until twelve months
after NMED issued Tyrones closure permit, subject to extension by MMD for good
cause. NMEDs Hearing Officer issued a decision concerning the contested permit
conditions on March 7, 2003. The Hearing Officer adopted many of Tyrones
proposed changes to NMEDs draft permit, but sided with the NMED staff on
requirements for regrading and covers. NMED issued Tyrones closure permit on
April 8, 2003, in accordance with the Hearing Officers decision. The estimated
third-party cost under the closure permit is approximately $433 million. Tyrone
appealed the closure permit to WQCC, which held a public hearing to take
evidence concluding on November 13, 2003. WQCC has scheduled closing arguments
and deliberation on the appeal at a meeting beginning on April 13, 2004. Based upon the closure permit issued by NMED, the amount of financial
assurance for Tyrone on an NPV basis is approximately $267 million. In May
2003, Tyrone and Phelps Dodge reached an agreement with NMED and MMD on a
framework for financial assurance providing for a cash trust fund, collateral
and a third-party guarantee from Phelps Dodge. The agreement also requires
Chino, Tyrone and Cobre to expend a combined minimum of $30 million on
accelerated reclamation over 10 years. In September 2003, the financial
assurance agreement was modified to include additional details. Tyrone agreed
to establish a trust fund in the initial amount of $17 million, and to
contribute $500,000 per quarter over a five-year period to increase the cash
funding to a total of $27 million. Tyrone also agreed to provide collateral to
NMED and MMD so that at least 30 percent of the financial assurance is in the
form of a trust fund or collateral. Once the trust fund and collateral are in
place, NMED will release the $58 million interim surety bond. NMED and MMD
agreed that the balance, or 70 percent of the financial assurance, may be
provided in the form of a third-party guarantee issued by Phelps Dodge. The
September 2003 agreement also included a schedule for accelerated reclamation
at Tyrone. Financial assurance under this agreement is subject to completion of
the permitting process, including consideration of public comments. On October 15, 2003, Tyrone and NMED finalized a settlement agreement
establishing a detailed schedule for reclamation of the inactive tailing
impoundments at Tyrone over an eight-year period. As reclamation is completed
on portions of the facilities, the closure cost estimate and, accordingly, the
required amount of financial assurance, may be reduced. The deadline for Tyrone to obtain MMDs approval of its closeout plan is
April 8, 2004, subject to extension by MMD for good cause. Tyrone is working
with MMD on permit conditions for approval of the closeout plan and with both
MMD and NMED on financial assurance consistent with the September 2003
agreement. MMD must hold a public hearing and consider public comments before
it approves the closeout plan and financial assurance. Approval of a closeout
plan consistent with the NMED closure permit also will require approval of a
waiver of the requirement to achieve a self-sustaining ecosystem or post-mining
land use for the open pit and a portion of the mine stockpiles where regrading
and cover are not proposed. Managements internal cost estimate for performance of reclamation at
Tyrone is approximately $257 million (undiscounted and unescalated) over the
100-year period of the CCP. That estimate is approximately one-third lower than
the estimated cost used as the basis for the financial assurance amount due to
the factors discussed above and reflects our internal cost estimate. Our cost
estimate used to determine the fair value of our reclamation accrual was
approximately $427 million (undiscounted, unescalated and on a third-party cost
basis), as required by SFAS No. 143, and excludes approximately $6 million of
environmental costs from the financial assurance cost estimate, which are
recognized in environmental reserves (they are not within the scope of SFAS No.
143). At December 31, 2003 and 2002, we had accrued approximately $81 million
and $27 million, respectively, for reclamation at Tyrone. Cobre Mining Company At the time of our acquisition of Cobre in 1998, Cobre had submitted
proposed closure and closeout plans and had posted a surety bond for
approximately $2 million with both MMD and NMED. Cobre submitted a
comprehensive proposed CCP in May 2001 incorporating the results of the
scientific studies completed by Cobre to both NMED and MMD. As of October 1, 2002, NMED had not issued a closure permit to Cobre, and,
consequently, MMD was unable to approve the proposed closeout plan. MMD then
issued an NOV to Cobre for failing to meet the October 1, 2002 deadline. The
NOV did not impose any penalties, but ordered Cobre to obtain closeout plan
approval by a new deadline. Cobre appealed the NOV to the Mining Commission,
which held a public hearing on the NOV in December 2002. The Mining Commission
upheld the NOV, but modified the deadline for closeout plan approval until nine
months after NMED issues Cobres closure discharge plan, subject to extension
by MMD for good cause. Cobre is currently awaiting a draft closure permit from
NMED. In May 2003, Cobre and Phelps Dodge reached an agreement with NMED and MMD
on a framework for financial assurance providing for a cash trust fund,
collateral and a third-party guarantee from Phelps Dodge. The agreement also
requires Chino, Tyrone and Cobre to expend a combined minimum of $30 million on
accelerated reclamation over 10 years. In September 2003, the financial
assurance agreement was modified to include additional details. Cobre agreed to
establish a trust fund in the initial amount of $1 million, and to contribute
$100,000 per quarter over a five-year period to increase the cash funding to a
total of $3 million. Cobre also agreed to provide collateral to NMED and MMD so
that at least 30 percent of the financial assurance is in the form of a trust
fund or collateral. NMED and MMD agreed that the balance, or 70 percent of the
financial assurance, may be provided in the form of a third-party guarantee
issued by Phelps Dodge. The September 2003 agreement also included a schedule
for accelerated reclamation at Cobre. Financial assurance under this agreement
is subject to completion of the permitting process, including consideration of
public comments. Based upon the proposed CCP for Cobre submitted in 2001, the current cost
estimate for reclamation at Cobre is approximately $9 million. Our cost
estimate used to determine the fair value of our reclamation accrual was
approximately $41 million (undiscounted, unescalated and on a third-party cost
basis), as required by SFAS No. 143. Both of these estimates will be updated
when NMED issues




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127 the closure permit. At December 31, 2003 and 2002, we had accrued closure
costs of approximately $7 million and $2 million, respectively, at Cobre. Phelps Dodge Hidalgo, Inc. Hidalgo obtained approval of a closure plan under a discharge permit
issued by NMED in 2000. In accordance with the permit, Hidalgo provided
financial assurance to NMED in the form of surety bonds for approximately $11
million. Since obtaining approval of the closure plan, Hidalgo has completed
the closure of a former wastewater evaporation pond by construction of a soil
cap approved by NMED. The discharge permit under which the closure plan was
approved also requires corrective action for contaminated groundwater near the
smelters closed former wastewater evaporation pond. Impacted groundwater is
pumped from a series of wells, treated in a neutralization facility, and
discharged to a series of lined impoundments or to an irrigation system. The
discharge permit requires a comprehensive groundwater study to characterize
groundwater at the site. The discharge permit requires updates of the closure
plan, and NMED could require future enhancement of the system based upon the
results of the ongoing study when the permit expires in 2005 or, in certain
circumstances, earlier. Hidalgo is not subject to the Mining Act and,
consequently, does not require a closeout plan. Our cost estimate used to
determine the fair value of our reclamation accrual was approximately $7
million (undiscounted, unescalated and on a third-party cost basis), as
required by SFAS No. 143. At December 31, 2003 and 2002, we had accrued closure
costs of approximately $4 million and $7 million, respectively, at Hidalgo. Significant Colorado Reclamation Program Our Climax and Henderson mines in Colorado are subject to permitting
requirements under the Colorado Mined Land Reclamation Act, which requires
approval of reclamation plans and provisions for financial assurance. These
mines have had approved mined-land reclamation plans for several years and have
provided the required financial assurance to the state of Colorado in the
amount of $52.4 million and $10.1 million, respectively, for Climax and
Henderson. As a result of adjustments to the approved cost estimates for
various reasons, the amount of financial assurance requirements can increase or
decrease over time. At December 31, 2003 and 2002, we had accrued closure costs
of approximately $18 million and $19 million, respectively, for our Colorado
operations. Other Some portions of our mining operations located on public lands are subject
to mine plans of operation approved by the federal BLM. BLMs regulations
include financial assurance requirements for reclamation plans required as part
of the approved plans of operation. As a result of recent changes to BLMs
regulations, including more stringent financial assurance requirements,
increases in existing financial assurance amounts held by BLM could be
required. Currently, financial assurance for the Companys operations held by
BLM totals $3.4 million. The Company is investigating available options to provide additional
financial assurance and, in some instances, to replace existing financial
assurance. The cost of surety bonds, the traditional source of financial
assurance, has increased significantly over the past few years, and many surety
companies are now requiring an increased level of collateral supporting the
bonds such that they no longer are economically prudent. Some surety companies
that issued surety bonds to the Company are seeking to exit the market for
reclamation bonds. The terms and conditions presently available from one of our
principal surety bond providers for reclamation and other types of long-lived
surety bonds have made this type of financial assurance economically
impracticable in certain instances. We are working with the impacted state and
federal agencies to put in place acceptable alternative forms of financial
assurance in a timely fashion. Portions of Title 30, Chapter 2, of the United States Code govern access
to federal lands for exploration and mining purposes (the General Mining Law).
In 2002, legislation was introduced in the U.S. House of Representatives to
amend the General Mining Law. Similar legislation has been introduced in
Congress during the 1990s. None of these bills has been enacted into law.
Concepts in the legislation over the years have included the payment of
royalties on minerals extracted from federal lands, payment of fair market
value for patenting federal lands and reversion of patented lands used for
non-mining purposes to the federal government. Several of these same concepts
and others likely will continue to be pursued legislatively in the future. Our Chino and Cobre copper operations in New Mexico; our Climax molybdenum
mine in Colorado; our Ojos del Salado copper operations in Chile; and our Miami
copper mine and refinery and Tohono copper operations in Arizona were on
care-and-maintenance status during 2003.




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128 The following table lists for each operation: (i) the date it was placed
on care-and-maintenance status; (ii) net property, plant and equipment; (iii)
estimated closure costs; (iv) accrued closure costs; and (v) unaccrued closure
costs.  At 12/31/03Date
    
    NetPlaced on
    
    Property,
    
    Est.Care-and-
    
    Plant and
    
    Closure
    
    AccruedMaintenance
    
    Equip. (1)
    
    Costs*
    
    (2)
    
    UnaccruedChino (3)
    
    1Q02
    
    
    $
    325
    
    
    
    389
    
    
    
    39
    
    
    
    350Cobre
    
    1Q99
    
    
    
    59
    
    
    
    41
    
    
    
    7
    
    
    
    34Climax (4)
    
    Acq. 4Q99
    
    
    
    137
    
    
    
    60
    
    
    
    15
    
    
    
    45Ojos del Salado
    
    4Q98
    
    
    
    23
    
    
    
    2
    
    
    
    
    
    
    
    2Miami Mine and
Refinery
    
    1Q02
    
    
    
    143
    
    
    
    41
    
    
    
    15
    
    
    
    26Tohono
    
    4Q99
    
    
    
    1
    
    
    
    5
    
    
    
    2
    
    
    
    3$
    688
    
    
    
    538
    
    
    
    78
    
    
    
    460
   *
    
    Estimated closure costs are unescalated, undiscounted and on a
third-party cost basis and reflect the closure cost estimate for the
entire site.   (1)
    
    Because depreciation for our mines and smelters is principally recognized
on a units-of-production basis, these assets are generally not subject to
depreciation due to their temporary curtailment status. Depreciation is
recognized at the Chino and Miami operations associated with residual
SX/EW cathode production, and at
Climax primarily associated with equipment for water management. Additionally,
there are certain short-lived assets that are continuing to be depreciated on
a straight-line basis while the sites are on care-and-maintenance status.(2)
    
    For sites placed on care-and-maintenance status, we continue to recognize
accretion expense for our asset retirement obligations.(3)
    
    Our closure cost estimates for Chino were updated effective December 2003
to reflect the change in closure estimates associated with the stipulated
agreement reached with the state of New Mexico and for our acquisition of
Heiseis one-third share in Chino Mines Company (refer to Note 2,
Acquisitions and Divestitures, for further discussion). The estimated
unaccrued closure costs increased as of December 2003 by approximately
$190 million at Chino.(4)
    
    We acquired Climax in the fourth quarter of 1999 as part of the Cyprus
Amax acquisition. The Climax molybdenum mine had been placed on
care-and-maintenance in 1995 by the predecessor owner. At year-end 2003,
as well
as at the acquisition, we expected to bring Climax into production concurrent
with the exhaustion of the Henderson molybdenum mine reserves. The Company considers the curtailment of these operations to be temporary
and not permanent. Given the long lives of our base metal ore reserves and the
pronounced price cycles that have repeated with regularity over a long period,
the Company conducts its business and believes it is appropriate to evaluate
the viability of its base metal reserves with a long-term perspective. While
operations are considered permanently closed and written off as they become
technologically obsolete or as ore reserves are depleted, we do not consider
operations permanently impaired as a result of short- to intermediate-term
fluctuations in base metal prices. There is persuasive evidence that copper and
molybdenum price cycles range from eight to 10 years in duration on average. Because these are non-replenishable natural resources and we have the
flexibility to curtail or produce in order to optimize their value, we do not
consider the operations in question permanently closed. Nonetheless, each of
these care-and-maintenance operations is evaluated at least annually for
closure and/or impairment. If and when management determines any of these
properties should be permanently closed, any unrecognized closure obligation
would be recognized in that period. Similarly, any impairment of assets would
be recognized. Legal In November 2002, Columbian Chemicals Company was contacted by U.S. and
European antitrust authorities regarding a joint investigation they initiated
into alleged price fixing in the carbon black industry. European antitrust
authorities reviewed documents at three of Columbian Chemicals facilities in
Europe, and U.S. authorities contacted Columbian Chemicals headquarters in
Marietta, Georgia. The Company and Columbian Chemicals Company, together with several other
companies, were named as defendants in an action entitled Technical Industries,
Inc. v. Cabot Corporation, et al., filed on January 30, 2003, in the U.S.
District Court in Boston, Massachusetts, and 14 other actions filed in four
U.S. district courts, on behalf of a purported class of all individuals or
entities who purchased carbon black directly from the defendants since January
1999. The Judicial Panel on Multidistrict Litigation, consolidated all of these
actions in the U.S. District Court for the District of Massachusetts under the
caption In re Carbon Black Antitrust Litigation. The consolidated complaint
filed in these actions by the plaintiffs has dropped the Company as a
defendant. The consolidated complaint, which alleges that the defendants fixed
the prices of carbon black and engaged in other unlawful activities in
violation of the U.S. antitrust laws, seeks treble damages in an unspecified
amount and attorneys fees. The Company and Columbian Chemicals Company,
together with several other companies, have also been named as defendants in an
action entitled Level Construction, Inc. v. Cabot Corporation, et al., filed in
Superior Court of the state of California for the County of San Francisco and
eight other actions filed in California Superior Courts on behalf of a
purported class of indirect purchasers of carbon black in the state of
California from as early as November 1998 to the present. The complaints allege
similar claims by indirect purchasers under California state law and seek
treble damages in an unspecified amount and attorneys fees. These complaints
have been consolidated in the Superior Court of the State of California for the
County of San Francisco under the caption Carbon Black Cases. The consolidated
complaint filed in these actions by the plaintiffs has dropped the Company as a
defendant. Similar class actions have been filed in state courts in North
Carolina, Florida, Kansas, New Jersey, South Dakota and Tennessee on behalf of
indirect purchases of carbon black in those and six other states alleging
violations of state antitrust and deceptive trade practices laws. Columbian has
also received a demand for relief on behalf of indirect purchasers in
Massachusetts, but no lawsuit has been filed. The Company believes the claims
are without merit and intends to defend the lawsuits vigorously. Since approximately 1990, Phelps Dodge or its subsidiaries have been named
as a defendant in a number of product liability or premises lawsuits brought by
electricians and other skilled tradesmen or contractors claiming injury from
exposure to asbestos found in limited lines of electrical wire products
produced or marketed many years ago, or from asbestos at certain Phelps Dodge
properties. Phelps Dodge presently believes its liability, if any, in these
matters will not have a material adverse effect, either individually or in the
aggregate, upon its business, financial condition, liquidity, results of
operations or cash flow. There can be no assurance, however, that future
developments will not alter this conclusion.




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129 22. Derivative Financial Instruments and Fair Value of Financial Instruments The following is a summary of our price protection programs:  (Units in millions)12/31/03
    
    12/31/02Fair Value HedgesCopper fixed-price (lbs.)
    
    
    11
    
    
    
    17Foreign currency (USD)
    
    $
    19
    
    
    
    16Fixed-to-floating interest rate swaps (USD)
    
    $
    
    
    
    
    375Cash Flow HedgesMetal purchase (lbs.)
    
    
    10
    
    
    
    14Floating-to-fixed interest rate swaps (USD)
    
    $
    121
    
    
    
    274Diesel fuel price protection (gallons)
    
    
    37
    
    
    
    24Natural gas price protection (decatherms)
    
    
    8
    
    
    
    4Derivative Financial InstrumentsNot Qualifying for Hedge AccountingCopper fixed-price rod sales (lbs.)
    
    
    42
    
    
    
    37Copper quotational period swaps (lbs.)
    
    
    14
    
    
    
    Other diesel fuel price protection (gallons)
    
    
    13
    
    
    
    
  We do not purchase, hold or sell derivative contracts unless we have an
existing asset or obligation or we anticipate a future activity that is likely
to occur and will result in exposing us to market risk. We do not enter into
any contracts for speculative purposes. We will use various strategies to
manage our market risk, including the use of derivative contracts to limit,
offset or reduce our market exposure. Derivative financial instruments are used
to manage well-defined commodity price, energy, foreign exchange and interest
rate risks from our primary business activities. The fair values of our
derivative instruments are based on quoted market prices for similar
instruments and on market closing prices at year end. A summary of the
derivative instruments we hold is discussed below. Metals Hedging Fair Value Hedges Copper Fixed-Price Hedging. Some of our copper wire customers request a fixed
sales price instead of the COMEX average price in the month of shipment or
receipt. As a convenience to these customers, we enter into copper swap and
futures contracts to hedge our fixed-price sales exposure in a manner that will
allow us to receive the COMEX average price in the month of shipment or receipt
while our customers receive the fixed price they requested. We accomplish this
by liquidating the copper futures contracts and settling the copper swap
contracts during the month of shipment or receipt, which generally results in
the realization of the COMEX average price. At December 31, 2003, our copper futures and swap contracts had maturities
through December 2004. We did not have any significant gains or losses during
the year resulting from ineffectiveness. Cash Flow Hedges Copper Price Protection Program. We may purchase or sell copper options to
hedge a portion of our expected future sales in order to limit the effects of
potential decreases in copper selling prices. We did not have any outstanding
copper price protection contracts in place during 2003 or 2002. Metal Purchase Hedging Our South American wire and cable operations may enter into aluminum or
copper swap contracts to hedge our raw material purchase price exposure on
fixed-price sales contracts to allow us to lock in the cost of raw material
used in fixed-price cable sold to customers. These swap contracts generally are
settled during the month of shipment or receipt of metal, which results in a
net LME price consistent with that agreed to with our customers. Hedge gains or
losses from the swap contracts are recognized in cost of products sold. At December 31, 2003, our outstanding metal swap contracts had maturities
through April 2005. We did not have any significant gains or losses during the
year resulting from ineffectiveness. Foreign Currency Hedging Fair Value Hedges As a global company, we transact business in many countries and in many
currencies. Foreign currency transactions of our international subsidiaries
increase our risks because exchange rates can change between the time
agreements are made and the time foreign currency transactions are settled. We
manage these exposures by entering into forward exchange contracts in the same
currency as the transaction to lock in or minimize the effects of changes in
exchange rates. With regard to foreign currency transactions, we may hedge or
protect the functional currencies of our international subsidiaries
transactions for which we have a firm legal obligation or when anticipated
transactions are likely to occur. Our foreign exchange contracts in place at December 31, 2003, have
maturities through March 2004. We did not have any significant gains or losses
during the year resulting from ineffectiveness. Interest Rate Hedging Fair Value Hedges Fixed-to-Floating Interest Rate Swaps. In some situations, we may enter into
interest rate swap contracts to protect against changes in the fair value of
the underlying fixed-rate debt that result from changes in the general level of
market interest rates. In May 2003, we terminated $375 million of interest rate
swaps associated with corporate debt maturing in 2005 and 2007. We received
cash proceeds of $35.9 million; $34.6 million was reflected as a deferred gain
on the balance sheet and will be amortized over the remaining life of the
underlying debt using the effective interest method. Amortization of these
gains reduced interest expense by $6.3 million in 2003. During the third quarter of 2002, the Company repurchased debt hedged by
interest rate swaps that resulted in our termination of a like portion of the
interest rate swaps ($25 million), which resulted in the recognition of a gain
of $1.3 million. In addition, during May 2001, we entered into $900 million in interest
rate swap contracts to convert fixed-rate debt to floating-rate debt. In August
2001, we unwound these interest rate swaps, resulting in a gain of $23.2
million of which $4.7 million related to reduced interest expense. The
remaining $18.5 million is being amortized into earnings over the remaining
life of the respective notes. Our interest rate swaps were considered to be fully effective with any
resulting gains or losses on the derivative offset by a similar amount on the
underlying interest payments or fair value of the debt. We did not recognize
any significant gains or losses during the year resulting from ineffectiveness.
At December 31, 2003, we did not have any outstanding fixed-to-floating
interest rate swaps.




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##### Table of Contents



130 Cash Flow Hedges Floating-to-Fixed Interest Rate Swaps. In some situations, we are exposed to
increasing costs from interest rates associated with floating-rate debt. We may
enter into interest rate swap contracts to protect against our exposure to
variability in future interest payments attributable to increases in interest
rates of the designated floating-rate debt. At year-end 2003, we had
approximately $12 million in unrealized losses recorded in other comprehensive
income (loss) related to the swap contracts. At December 31, 2003 interest
rates, approximately $5 million of this amount would be charged to earnings in
2004. The interest rate swaps have maturities through December 2008. Hedge
ineffectiveness did not have a material impact during the year ended December
31, 2003. Energy Price Protection Programs Cash Flow Hedges Diesel Fuel Price Protection Program. We purchase significant quantities of
diesel fuel to operate our mine sites as an input to the manufacturing process.
Price volatility of diesel fuel impacts our cost of products sold. The
objective of the diesel fuel price protection program is to protect against a
significant upward movement in diesel fuel prices while retaining the
flexibility to participate in some downward price movement. To implement these
objectives, we may purchase out-of-the-money (OTM) diesel fuel call options
and/or fixed-price swaps. Purchase of these call options protect us against
significant upward movement in diesel fuel prices while allowing us full
participation in downward movements. Purchase of fixed-price swaps create
certainty of the diesel fuel purchase price during the hedge period. Our diesel fuel option contracts have maturities through December 2004.
Effectiveness is assessed using an intrinsic value method with the time value
of money component recognized immediately in earnings. During 2003,
approximately $1 million in option premiums were reflected in cost of products
sold associated with amounts excluded from the hedge effectiveness assessment. Natural Gas Price Protection Program. We purchase significant quantities of
natural gas to supply our operations primarily as an input for electricity
generation, copper refining and carbon black manufacturing. Price volatility of
natural gas impacts our cost of products sold. The objective of the natural gas
price protection program is to protect against a significant upward movement in
natural gas prices while retaining the flexibility to participate in downward
price movements. To implement these objectives, we may purchase OTM call
options for natural gas. Purchase of these call options protects us against
significant upward movement in natural gas prices while allowing us full
participation in downward movements in natural gas prices. Our natural gas call option contracts outstanding at year-end 2003 protect
our domestic operations through December 2004. Effectiveness is assessed using
an intrinsic value method with the time value of money component recognized
immediately in earnings. During 2003, approximately $3 million of option
premiums were reflected in cost of products sold associated with amounts
excluded from the hedge effectiveness assessment. Feedstock Oil Price Protection Program. We purchase significant quantities of
feedstock oil (a derivative of petroleum) that is the primary raw material used
in the manufacture of carbon black. Feedstock oil typically exceeds 50 percent
of the total manufacturing costs for our Specialty Chemicals segment. The
objective of the feedstock oil price protection program is to protect against a
significant upward movement in feedstock oil prices while retaining the
flexibility to participate in downward price movements. To implement these
objectives, we may purchase OTM call options for feedstock oil. Purchase of
these call options protects us against significant upward movement in feedstock
oil prices while allowing us full participation in downward movements in
prices. Our feedstock oil option contracts (119,000 barrels) outstanding at
year-end 2003 are in place through February 2004. Effectiveness is assessed
using an intrinsic value method with the time value of money component
recognized immediately in earnings. During 2003, approximately $0.8 million of
option premiums were reflected in cost of products sold associated with amounts
excluded from the hedge effectiveness assessment. Other Protection Programs Our copper fixed-price rod sales program, gold price protection program,
copper quotational period swap program and other diesel fuel price protection
programs did not meet all of the criteria to qualify under SFAS Nos. 133, 138
and 149 as hedge transactions. These derivative contracts and programs are
discussed below. Copper Fixed-Price Rod Sales Program. Some of our copper rod customers request
a fixed sales price instead of the COMEX average price in the month of shipment
or receipt. As a convenience to these customers, we enter into copper swap and
futures contracts to protect the sales in a manner that will allow us to
receive the COMEX average price in the month of shipment or receipt while our
customers receive the fixed price they requested. We accomplish this by
liquidating the copper futures contracts and settling the copper swap contracts
during the month of shipment or receipt, which generally results in the
realization of the COMEX average price. At year-end 2003, an unrealized gain of approximately $4.4 million
associated with the rod price protection program was recorded to cost of
products sold. At December 31, 2003, our copper rod protection program had
maturities through March 2005. Gold Price Protection Program. Our 80 percent partnership interest in
Candelaria (mining operation in Chile) produces and sells a substantial amount
of copper concentrate. The copper concentrate contains small amounts of
precious metals, including gold. To protect our exposure to reduced gold
selling prices while retaining the ability to participate in some price
increases, we entered into zero-cost gold collars. The simultaneous purchase of
a put option and sale of a call option (collar) provides downside price
protection against substantial declines in gold selling prices while retaining
the ability to participate in some price increases. At year-end 2003, an unrealized loss of approximately $1.8 million
associated with the sold call options was recorded to cost of products sold. At
December 31, 2003, our gold price protection program (86,400 ounces) had
maturities through December 2004. Copper Quotational Period Swap Program. Candelarias copper concentrate is
sold at the average LME copper price in the month of shipment. If copper
shipments have a price settlement basis other than the month of shipment,
copper swap transactions may be used




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##### Table of Contents



131 to realign the shipment and pricing month in order that Phelps Dodge receives
the month of shipment average LME copper price. At year-end 2003, an unrealized gain of approximately $1.2 million
associated with the copper swap contracts was recorded to cost of products
sold. At December 31, 2003, our copper quotational period swap program had
maturities through January 2004. Other Diesel Fuel Price Protection Programs. Some of our diesel fuel price
protection programs do not qualify under SFAS Nos. 133, 138 and 149 as hedge
transactions. We purchase significant quantities of diesel fuel to operate our
mine sites as an input to the manufacturing process. Price volatility of diesel
fuel impacts our cost of production sold. The objective of the diesel fuel
price protection program is to protect against a significant upward movement in
diesel fuel prices while retaining the flexibility to participate in some
downward price movement. To implement these objectives, we may purchase OTM
diesel fuel call options and/or fixed-price swaps. Purchase of these call
options protects us against significant upward movement in diesel fuel prices
while allowing us full participation in downward movements. Purchase of
fixed-price swaps creates certainty of the diesel fuel purchase price during the
hedge period. At year-end 2003, there was no unrealized gain or loss associated with
these diesel fuel option contracts. At December 31, 2003, these diesel fuel
option contracts had maturities through December 2004. Credit Risk We are exposed to credit loss in cases where the financial institutions
with which we have entered into derivative transactions (commodity, foreign
exchange and currency/interest rate swaps) are unable to pay us when they owe
us funds as a result of our protection agreements with them. To minimize the
risk of such losses, we only use highly rated financial institutions that meet
certain requirements. We also periodically review the creditworthiness of these
institutions to ensure that they are maintaining their ratings. We do not
anticipate that any of the financial institutions that we deal with will
default on their obligations. As of December 31, 2003, the maximum amount of
credit exposure was approximately $8 million. Other Financial Instruments The methods and assumptions we used to estimate the fair value of each
group of financial instruments for which we can reasonably determine a value
are as follows: Cash and Cash Equivalents. The financial statement amount is a reasonable
estimate of the fair value because of the short maturity of these instruments. Investments and Long-Term Receivables. The fair values of some investments are
estimated based on quoted market prices for those or similar investments. The
fair values of other types of instruments are estimated by discounting the
future cash flows using the current rates at which similar instruments would be
made with similar credit ratings and maturities. Long-Term Debt. The fair value of substantially all of our long-term debt is
estimated based on the quoted market prices for the same or similar issues or
on the current notes offered to us for debt with similar remaining maturities. A comparison of the carrying amount and the estimated fair values of our
financial instruments at December 31, 2003, was as follows:  Carrying
    
    FairAmount
    
    ValueCash and cash equivalents
    
    $
    683.8
    
    
    
    683.8Investments and long-term receivables
(excluding $33.0 million of equity investments
for which it is not practicable to estimate fair value)*
    
    $
    111.3
    
    
    
    624.9Long-term debt (including amounts due within one year)
    
    $
    1,908.5
    
    
    
    2,088.8
   *
    
    Our largest cost basis investment is our minority interest in SPCC, which
is carried at a book value of $13.2 million. Our ownership interest in
SPCC is represented by our share of a class of SPCC common stock that is
currently not registered for trading on any public exchange. Based on the
New York Stock Exchange closing market price of listed SPCC shares on
December 31, 2003, an estimate of the fair value of our investment is
approximately $527 million. 23. Business Segment Data Our business consists of two major divisions, PDMC and PDI. The principal
activities of each division are described below, and the accompanying tables
present results of operations and other financial information by significant
geographic area and by segment. PDMC is our international business division that comprises our vertically
integrated copper operations from mining through rod production, primary
molybdenum operations through conversion, marketing and sales, and worldwide
exploration. PDMC comprises 11 reportable segments. Our copper mines comprise five reportable segments in the United States
(Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre and Tyrone) and three
reportable segments in South America (Candelaria/Ojos del Salado, Cerro Verde
and El Abra). These segments include open-pit mining, sulfide ore concentrating
and electrowinning. In addition, they produce gold and silver, and the Bagdad
and Sierrita mines also produce molybdenum and rhenium as by-products. PDMCs Manufacturing and Sales segment consists of conversion facilities
including our smelters, refineries and rod mills, as well as sales and
marketing. The Manufacturing and Sales segment sells copper to others primarily
as rod, cathode or concentrate, and as rod to PDIs Wire and Cable segment. In
addition, at times it smelts and refines copper and produces copper rod for
customers on a toll basis. Toll arrangements require the tolling customer to
deliver appropriate copper-bearing material to our facilities, which we then
process into a product that is returned to the customer. The customer pays PDMC
for processing its material into the specified products. The Primary Molybdenum segment consists of the Henderson and Climax mines
and related conversion facilities. This segment is an integrated producer of
molybdenum, with mining, roasting and processing facilities producing
high-purity, molybdenum-based chemical and metallurgical products. In addition,
at times it roasts and/or processes material on a toll basis. Toll arrangements
require the tolling customer to deliver appropriate molybdenum-bearing material
to our facilities, which we then process into a product that is returned to the
customer. The customer pays PDMC for processing its material into the specified
products. The Other Mining segment includes our worldwide mineral exploration and
development programs, a process technology center that




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##### Table of Contents



132 directs its activities at improving existing processes and developing new
cost-competitive technologies, and other ancillary operations. The U.S. mines transfer their copper production to the Manufacturing and
Sales segment of PDMC. Intersegment revenues of the individual U.S. mines
represent an internal allocation based on PDMCs sales to unaffiliated
customers. Additionally, the South American mines sold approximately 44 percent
of their copper to the Manufacturing and Sales segment in 2003 and 2002, and
approximately 40 percent in 2001. Intersegment sales by the South American
mines are based upon arms-length prices at the time of the sale. Intersegment
sales of any individual mine may not be reflective of the actual prices PDMC
ultimately receives due to a variety of factors, including additional
processing, timing of sales to unaffiliated customers and certain
transportation premiums. In addition to the allocation of revenues, management allocates certain
operating costs, expenses and capital of PDMCs segments that may not be
reflective of market conditions. We also do not allocate all costs and expenses
applicable to a mine or operation from the division or corporate offices.
Accordingly, the segment information reflects management determinations that
may not be indicative of actual financial performance of each segment as if it
was an independent entity. PDI, our manufacturing division, produces engineered products principally
for the global energy, telecommunications, transportation and specialty
chemicals sectors. Its operations are characterized by products with
significant market share, internationally competitive cost and quality, and
specialized engineering capabilities. The manufacturing division includes our
Specialty Chemicals segment and our Wire and Cable segment. Our Specialty
Chemicals segment includes Columbian Chemicals Company and its subsidiaries
(Columbian Chemicals or Columbian). Our Wire and Cable segment consists of
three worldwide product line businesses including magnet wire, energy and
telecommunications cables, and specialty conductors. Interdivision sales reflect the transfer of copper from PDMC to PDI at the
same prices charged to outside customers. 
 The following tables give a summary of financial data by geographic area
and business segments for the years 2000 through 2002. (Refer to Notes 2,
Acquisitions and Divestitures, and 3, Special Items and Provisions, to the
Consolidated Financial Statements for a discussion of major unusual items
during the three-year period.) Financial Data By Geographic Area  2003
    
    2002
    
    2001Sales and other operating revenues:Unaffiliated customersUnited States
    
    $
    2,601.1
    
    
    
    2,301.8
    
    
    
    2,651.3Latin America
    
    
    1,044.6
    
    
    
    986.2
    
    
    
    929.9Other
    
    
    497.0
    
    
    
    434.0
    
    
    
    421.2$
    4,142.7
    
    
    
    3,722.0
    
    
    
    4,002.4Long-lived assets at December 31:United States
    
    $
    3,654.9
    
    
    
    3,656.0
    
    
    
    3,927.2Latin America*
    
    
    1,538.7
    
    
    
    1,645.3
    
    
    
    1,820.4Other
    
    
    281.7
    
    
    
    288.5
    
    
    
    301.7$
    5,475.3
    
    
    
    5,589.8
    
    
    
    6,049.3* Long-lived assets in Chile
    
    $
    984.0
    
    
    
    1,057.0
    
    
    
    1,134.8
  Revenue is attributed to countries based on the location the sale
originated.




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##### Table of Contents



133 
 Financial Data By Business Segment U.S. Mines
    
    South American MinesBagdad/
    
    Miami/
    
    Chino/
    
    
    
    
    
    Candelaria/
    
    Cerro
    
    
    
    
    
    PrimaryMorenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    Ojos del Salado
    
    Verde
    
    El Abra
    
    Molybdenum2003Sales & other operating revenues:Unaffiliated
customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    218.5
    
    
    
    41.4
    
    
    
    136.2
    
    
    
    383.6Intersegment
    
    
    587.8
    
    
    
    469.2
    
    
    
    32.9
    
    
    
    45.9
    
    
    
    93.4
    
    
    
    101.4
    
    
    
    115.3
    
    
    
    93.2
    
    
    
    Depreciation, depletion and amortization
    
    
    76.1
    
    
    
    33.9
    
    
    
    6.9
    
    
    
    9.0
    
    
    
    13.0
    
    
    
    43.5
    
    
    
    28.7
    
    
    
    67.7
    
    
    
    25.5Operating income (loss) before special
items and provisions
    
    
    78.5
    
    
    
    81.0
    
    
    
    (5.5
    )
    
    
    (4.1
    )
    
    
    (16.7
    )
    
    
    100.5
    
    
    
    42.7
    
    
    
    39.4
    
    
    
    8.6Special items and provisions
    
    
    (1.1
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    (1.3
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    77.4
    
    
    
    81.0
    
    
    
    (6.0
    )
    
    
    (5.4
    )
    
    
    (17.2
    )
    
    
    100.5
    
    
    
    42.7
    
    
    
    39.4
    
    
    
    8.6Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    0.2
    
    
    
    
    
    
    
    0.3Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.2
    
    
    
    1.8
    
    
    
    14.8
    
    
    
    Equity earnings (losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting change
    
    
    3.6
    
    
    
    2.6
    
    
    
    (2.7
    )
    
    
    (4.3
    )
    
    
    2.7
    
    
    
    
    
    
    
    0.9
    
    
    
    (0.4
    )
    
    
    1.4Equity basis investments
    
    
    
    
    
    
    0.4
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    Assets at December 31
    
    
    1,008.9
    
    
    
    739.5
    
    
    
    119.0
    
    
    
    413.2
    
    
    
    168.3
    
    
    
    684.5
    
    
    
    440.8
    
    
    
    532.9
    
    
    
    787.6Expenditures for segment assets*
    
    
    16.5
    
    
    
    18.5
    
    
    
    1.2
    
    
    
    (46.7
    )
    
    
    2.0
    
    
    
    4.6
    
    
    
    5.1
    
    
    
    1.0
    
    
    
    13.4
  *
    
    2003 expenditures for segment assets included $50 million of cash received and $0.9 million of cash acquired from Heisei in connection with the acquisition of their one-third partnership interest in Chino Mines Company.
(Refer to Note 2, Acquisition and Divestitures, for further discussion.) 2002Sales & other operating revenues:Unaffiliated
customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    163.5
    
    
    
    36.8
    
    
    
    172.5
    
    
    
    268.7Intersegment
    
    
    521.9
    
    
    
    363.6
    
    
    
    22.8
    
    
    
    58.1
    
    
    
    103.7
    
    
    
    102.7
    
    
    
    97.2
    
    
    
    89.9
    
    
    
    Depreciation, depletion and amortization
    
    
    78.7
    
    
    
    27.4
    
    
    
    5.7
    
    
    
    11.2
    
    
    
    12.5
    
    
    
    39.0
    
    
    
    30.8
    
    
    
    63.1
    
    
    
    24.1Operating income (loss) before special
items and provisions
    
    
    24.6
    
    
    
    19.9
    
    
    
    (13.3
    )
    
    
    6.8
    
    
    
    1.6
    
    
    
    47.6
    
    
    
    24.8
    
    
    
    (7.0
    )
    
    
    7.6Special items and provisions
    
    
    (0.5
    )
    
    
    0.3
    
    
    
    (2.3
    )
    
    
    (117.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0Operating income (loss)
    
    
    24.1
    
    
    
    20.2
    
    
    
    (15.6
    )
    
    
    (110.4
    )
    
    
    1.6
    
    
    
    47.6
    
    
    
    24.8
    
    
    
    (7.0
    )
    
    
    8.6Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.4Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20.7
    
    
    
    5.3
    
    
    
    21.6
    
    
    
    (0.4
    )Equity earnings (losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity basis investments
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    Assets at December 31
    
    
    1,077.4
    
    
    
    766.1
    
    
    
    124.7
    
    
    
    282.6
    
    
    
    150.9
    
    
    
    633.5
    
    
    
    428.0
    
    
    
    504.5
    
    
    
    779.0Expenditures for segment assets
    
    
    9.9
    
    
    
    41.6
    
    
    
    0.3
    
    
    
    3.1
    
    
    
    3.6
    
    
    
    2.2
    
    
    
    7.3
    
    
    
    6.3
    
    
    
    9.8
  2001Sales & other operating revenues:Unaffiliated
customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    202.2
    
    
    
    32.2
    
    
    
    118.8
    
    
    
    226.3Intersegment
    
    
    494.2
    
    
    
    474.8
    
    
    
    69.6
    
    
    
    73.4
    
    
    
    113.7
    
    
    
    79.7
    
    
    
    86.5
    
    
    
    67.5
    
    
    
    Depreciation, depletion and amortization
    
    
    90.5
    
    
    
    36.2
    
    
    
    7.2
    
    
    
    12.2
    
    
    
    13.2
    
    
    
    42.6
    
    
    
    40.0
    
    
    
    42.6
    
    
    
    21.2Operating income (loss) before special
items and provisions
    
    
    (60.4
    )
    
    
    18.4
    
    
    
    (1.5
    )
    
    
    (12.5
    )
    
    
    (14.4
    )
    
    
    50.0
    
    
    
    1.8
    
    
    
    5.5
    
    
    
    (11.1
    )Special items and provisions
    
    
    (1.5
    )
    
    
    (6.9
    )
    
    
    (3.6
    )
    
    
    (3.0
    )
    
    
    (1.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Operating income (loss)
    
    
    (61.9
    )
    
    
    11.5
    
    
    
    (5.1
    )
    
    
    (15.5
    )
    
    
    (16.3
    )
    
    
    50.0
    
    
    
    1.8
    
    
    
    5.5
    
    
    
    (11.7
    )Interest income
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    4.7
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.9Interest expense
    
    
    0.7
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    21.5
    
    
    
    8.1
    
    
    
    25.0
    
    
    
    0.2Equity earnings (losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity basis investments
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    Assets at December 31
    
    
    1,155.4
    
    
    
    783.8
    
    
    
    132.6
    
    
    
    420.2
    
    
    
    139.4
    
    
    
    660.8
    
    
    
    452.4
    
    
    
    575.6
    
    
    
    801.6Expenditures for segment assets
    
    
    61.0
    
    
    
    9.3
    
    
    
    3.3
    
    
    
    4.0
    
    
    
    5.4
    
    
    
    5.7
    
    
    
    14.2
    
    
    
    40.9
    
    
    
    8.9
  Note: Refer to Notes 2 and 3 to the Consolidated Financial Statements for a discussion of major unusual items during the three-year period.




---



##### Table of Contents



134 Financial Data By Business Segment(continued) Corporate,Manufacturing
    
    Other
    
    PDMC
    
    PDMC
    
    Specialty
    
    Wire &
    
    PDI
    
    Other &and Sales
    
    Mining
    
    Eliminations
    
    Subtotal
    
    Chemicals
    
    Cable
    
    Subtotal
    
    Eliminations
    
    Totals2003Sales & other operating revenues:Unaffiliated
customers
    
    
    2,026.8
    
    
    
    21.8
    
    
    
    
    
    
    
    2,828.6
    
    
    
    644.2
    
    
    
    669.9
    
    
    
    1,314.1
    
    
    
    
    
    
    
    4,142.7Intersegment
    
    
    302.5
    
    
    
    67.4
    
    
    
    (1,781.8
    )
    
    
    127.2
    
    
    
    
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    (127.5
    )
    
    
    Depreciation, depletion and amortization
    
    
    16.9
    
    
    
    6.8
    
    
    
    
    
    
    
    328.0
    
    
    
    45.9
    
    
    
    35.5
    
    
    
    81.4
    
    
    
    13.2
    
    
    
    422.6Operating income (loss) before special
items and provisions
    
    
    32.0
    
    
    
    (85.7
    )
    
    
    
    
    
    
    270.7
    
    
    
    51.1
    
    
    
    15.7
    
    
    
    66.8
    
    
    
    (101.9
    )
    
    
    235.6Special items and provisions
    
    
    (0.1
    )
    
    
    (2.0
    )
    
    
    
    
    
    
    (5.5
    )
    
    
    3.7
    
    
    
    (2.0
    )
    
    
    1.7
    
    
    
    (34.2
    )
    
    
    (38.0
    )Operating income (loss)
    
    
    31.9
    
    
    
    (87.7
    )
    
    
    
    
    
    
    265.2
    
    
    
    54.8
    
    
    
    13.7
    
    
    
    68.5
    
    
    
    (136.1
    )
    
    
    197.6Interest income
    
    
    
    
    
    
    4.8
    
    
    
    (4.3
    )
    
    
    2.0
    
    
    
    7.6
    
    
    
    0.9
    
    
    
    8.5
    
    
    
    5.9
    
    
    
    16.4Interest expense
    
    
    4.3
    
    
    
    0.3
    
    
    
    (4.3
    )
    
    
    31.1
    
    
    
    29.9
    
    
    
    5.1
    
    
    
    35.0
    
    
    
    79.7
    
    
    
    145.8Equity earnings (losses)
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    2.1
    
    
    
    2.7Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68.3Cumulative effect of accounting change
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    8.5
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5
    
    
    
    (0.6
    )
    
    
    8.4Equity basis investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    6.0
    
    
    
    6.0
    
    
    
    25.5
    
    
    
    33.1Assets at December 31
    
    
    467.6
    
    
    
    1,489.3
    
    
    
    (1,613.7
    )
    
    
    5,237.9
    
    
    
    759.0
    
    
    
    521.6
    
    
    
    1,280.6
    
    
    
    754.4
    
    
    
    7,272.9Expenditures for segment assets*
    
    
    9.9
    
    
    
    9.6
    
    
    
    (1.8
    )
    
    
    33.3
    
    
    
    23.9
    
    
    
    17.1
    
    
    
    41.0
    
    
    
    28.1
    
    
    
    102.4
  *
    
    2003 expenditures for segment assets included $50 million of cash received and $0.9 million of cash acquired from Heisei in connection with the acquisition of their one-third partnership interest in Chino Mines
Company. (Refer to Note 2, Acquisitions and Divestitures, for further discussion.) 2002Sales & other operating revenues:Unaffiliated
customers
    
    
    1,823.4
    
    
    
    20.2
    
    
    
    
    
    
    
    2,485.8
    
    
    
    548.8
    
    
    
    687.4
    
    
    
    1,236.2
    
    
    
    
    
    
    
    3,722.0Intersegment
    
    
    395.8
    
    
    
    57.2
    
    
    
    (1,676.5
    )
    
    
    136.4
    
    
    
    
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    (136.8
    )
    
    
    Depreciation, depletion and amortization
    
    
    24.5
    
    
    
    2.8
    
    
    
    
    
    
    
    319.8
    
    
    
    41.3
    
    
    
    40.7
    
    
    
    82.0
    
    
    
    8.4
    
    
    
    410.2Operating income (loss) before special
items and provisions
    
    
    4.9
    
    
    
    (65.6
    )
    
    
    
    
    
    
    51.9
    
    
    
    47.0
    
    
    
    5.6
    
    
    
    52.6
    
    
    
    (77.4
    )
    
    
    27.1Special items and provisions
    
    
    0.2
    
    
    
    1.6
    
    
    
    
    
    
    
    (116.9
    )
    
    
    1.1
    
    
    
    (23.1
    )
    
    
    (22.0
    )
    
    
    (97.5
    )
    
    
    (236.4
    )Operating income (loss)
    
    
    5.1
    
    
    
    (64.0
    )
    
    
    
    
    
    
    (65.0
    )
    
    
    48.1
    
    
    
    (17.5
    )
    
    
    30.6
    
    
    
    (174.9
    )
    
    
    (209.3
    )Interest income
    
    
    
    
    
    
    3.8
    
    
    
    (2.9
    )
    
    
    3.0
    
    
    
    4.2
    
    
    
    1.4
    
    
    
    5.6
    
    
    
    7.2
    
    
    
    15.8Interest expense
    
    
    2.9
    
    
    
    0.5
    
    
    
    (2.9
    )
    
    
    47.7
    
    
    
    28.9
    
    
    
    3.4
    
    
    
    32.3
    
    
    
    107.0
    
    
    
    187.0Equity earnings (losses)
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    1.9
    
    
    
    2.7Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22.9
    )
    
    
    (22.9
    )
    
    
    
    
    
    
    (22.9
    )Equity basis investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    5.2
    
    
    
    5.2
    
    
    
    25.8
    
    
    
    31.8Assets at December 31
    
    
    476.0
    
    
    
    1,696.4
    
    
    
    (1,790.8
    )
    
    
    5,128.3
    
    
    
    679.2
    
    
    
    506.9
    
    
    
    1,186.1
    
    
    
    714.6
    
    
    
    7,029.0Expenditures for segment assets
    
    
    7.0
    
    
    
    2.6
    
    
    
    
    
    
    
    93.7
    
    
    
    24.1
    
    
    
    9.3
    
    
    
    33.4
    
    
    
    6.1
    
    
    
    133.2
  2001Sales & other operating revenues:Unaffiliated
customers
    
    
    2,056.7
    
    
    
    12.6
    
    
    
    
    
    
    
    2,649.5
    
    
    
    582.0
    
    
    
    770.9
    
    
    
    1,352.9
    
    
    
    
    
    
    
    4,002.4Intersegment
    
    
    501.3
    
    
    
    65.7
    
    
    
    (1,873.4
    )
    
    
    153.0
    
    
    
    
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    (153.2
    )
    
    
    Depreciation, depletion and amortization
    
    
    33.7
    
    
    
    4.7
    
    
    
    
    
    
    
    344.1
    
    
    
    43.7
    
    
    
    47.0
    
    
    
    90.7
    
    
    
    5.1
    
    
    
    439.9Operating income (loss) before special
items and provisions
    
    
    21.1
    
    
    
    (78.4
    )
    
    
    
    
    
    
    (81.5
    )
    
    
    63.2
    
    
    
    15.5
    
    
    
    78.7
    
    
    
    (66.6
    )
    
    
    (69.4
    )Special items and provisions
    
    
    (6.9
    )
    
    
    22.3
    
    
    
    
    
    
    
    (2.1
    )
    
    
    (1.4
    )
    
    
    (3.3
    )
    
    
    (4.7
    )
    
    
    47.4
    
    
    
    40.6Operating income (loss)
    
    
    14.2
    
    
    
    (56.1
    )
    
    
    
    
    
    
    (83.6
    )
    
    
    61.8
    
    
    
    12.2
    
    
    
    74.0
    
    
    
    (19.2
    )
    
    
    (28.8
    )Interest income
    
    
    
    
    
    
    7.6
    
    
    
    (5.9
    )
    
    
    8.0
    
    
    
    4.3
    
    
    
    1.3
    
    
    
    5.6
    
    
    
    9.7
    
    
    
    23.3Interest expense
    
    
    5.6
    
    
    
    0.9
    
    
    
    (5.9
    )
    
    
    56.3
    
    
    
    42.4
    
    
    
    5.7
    
    
    
    48.1
    
    
    
    123.1
    
    
    
    227.5Equity earnings (losses)
    
    
    
    
    
    
    (2.9
    )
    
    
    
    
    
    
    (3.0
    )
    
    
    
    
    
    
    0.9
    
    
    
    0.9
    
    
    
    1.8
    
    
    
    (0.3
    )Cumulative effect of accounting change
    
    
    (2.0
    )
    
    
    
    
    
    
    
    
    
    
    (2.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.0
    )Equity basis investments
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    4.9
    
    
    
    4.9
    
    
    
    28.4
    
    
    
    34.1Assets at December 31
    
    
    559.4
    
    
    
    1,748.4
    
    
    
    (1,826.6
    )
    
    
    5,603.0
    
    
    
    709.0
    
    
    
    638.1
    
    
    
    1,347.1
    
    
    
    634.2
    
    
    
    7,584.3Expenditures for segment assets
    
    
    31.4
    
    
    
    7.5
    
    
    
    9.0
    
    
    
    200.6
    
    
    
    28.9
    
    
    
    57.6
    
    
    
    86.5
    
    
    
    23.9
    
    
    
    311.0
  Note: Refer to Notes 2 and 3 to the Consolidated Financial Statements for a discussion of major unusual items during the three-year period.    Table of Contents  135 PART III  
  Items 10, 11, 12, 13 and 14. The information called for by Part III (Items 10, 11, 12, 13 and 14) is
incorporated herein by reference from the material included under the captions
Election of Directors, Corporate Governance and General
Information Concerning the Board of Directors and its Committees,
Compensation Committee Interlocks and Insider Participation, Share
Ownership of Directors and Executive Officers, Section 16(a)
Beneficial Ownership Reporting Compliance, Equity Compensation Plan
Information, Executive Compensation, Pension and Other Retirement
Benefits and Principal Accounting Firm Fees
 in
Phelps Dodge Corporations definitive proxy statement (to be filed pursuant to
Regulation 14A) for its Annual Meeting of Shareholders to be held May 28, 2004
(the 2004 Proxy Statement), except that the information regarding executive
officers called for by Item 401 of Regulation S-K is included in Part I of this
report. The 2004 Proxy Statement is being prepared and will be filed with the
Securities and Exchange Commission and furnished to shareholders on or about
April 16, 2004. Additionally, the Companys Code of Business Ethics and Policies,
Directors Code of Business Conduct and Ethics, Corporate Governance
Guidelines, and the charters of the Audit Committee, Committee on Directors and
Corporate Governance, and Compensation and Management Development Committee are
available and maintained on the Companys Web site
(http://www.phelpsdodge.com). 
 Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a)1.
    
    
    Financial Statements:Statement of Consolidated Operations, page 88.Consolidated Balance Sheet, page 89.Consolidated Statement of Cash Flows, page 90.Consolidated Statement of Shareholders Equity, page 91.2.
    
    
    Financial Statement Schedule:Valuation and Qualifying Accounts and Reserves, page 138.3.
    
    
    Exhibits:3.
    1
    
    Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999) as amended by the Certificate of
Amendment to the Restated Certificate of Incorporation of Phelps Dodge
Corporation (incorporated by reference to Exhibit 2.3 of the Companys
Registration Statement on Form 8-A, filed with the SEC on June 10, 2002
(SEC File No. 1-82)).3.
    2
    
    Amended and Restated By-Laws of the Company, effective as of
September 5, 2001 (incorporated by reference
to Exhibit 3.2 of the Companys Form 10-Q for the
quarter ended September 30, 2001 (SEC File No. 1-82)).4.
    1
    
    Credit Agreement, effective May 10, 2000, among the
Company, the Lenders parties thereto, Salomon Smith Barney Inc., Bank of
Tokyo-Mitsubishi Trust Company,
and Citibank, N.A., as agent (incorporated by reference to Exhibit 4.2 of
the Companys Form 10-Q for the quarter ended March 31, 2000 (SEC File
No. 1-82)).4.
    2
    
    Rights Agreement, dated as of February 5, 1998 between the Company
and The Chase Manhattan Bank (which
replaces the Rights Agreement dated as of July 29, 1988 as amended and
restated as of December 6, 1989, the rights issued thereunder having been
redeemed by the Company), which includes the form of Certificate
of Amendment setting forth the terms of the Junior Participating
Cumulative Preferred Shares, par value $1.00 per share, as Exhibit A, the
form of Rights Certificate as
Exhibit B and the Summary of Rights to Purchase Preferred Shares as
Exhibit C (incorporated by reference to Exhibit 1 of the Companys
Current Report on Form 8-K and in the Companys Form 8-A, both filed on
February 6, 1998 (SEC File No. 1-82)).Note: Certain instruments with respect to long-term debt
of the Company have not been filed as Exhibits to this Report since the
total amount of securities authorized under any such instrument does not
exceed 10 percent of the total assets of the Company and its subsidiaries
on a consolidated basis. The Company agrees to furnish a copy of each
such instrument upon request of the Securities and Exchange Commission.4.
    3
    
    Form of Indenture, dated as of September 22, 1997, between the
Company and The Chase Manhattan Bank,
as Trustee (incorporated by reference to the Companys Registration Statement and Post-Effective Amendment
No. 1 on Form S-3 (Registration Nos. 333-36415 and
33-44380)) filed with the Securities and Exchange Commission on September 25, 1997 (incorporated by reference
to Exhibit 4.3 of the Companys Form 10-Q for the quarter ended September 30, 1997 (SEC File No. 1-82)).4.
    4
    
    Form of 6.375 percent Note, due November 1, 2004, of
the Company issued on November 5, 1997, pursuant to the Indenture, dated
as of September 22, 1997, between
the Company and The Chase Manhattan Bank, as
Trustee (incorporated by reference to the Companys
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 3, 1997 and Exhibit 4.4 of Form 10-Q for the
quarter ended September 30, 1997 (SEC File No. 1-82)).4.
    5
    
    Form of 7.125 percent Debenture, due November 1, 2027, of the Company
issued on November 5, 1997, pursuant
to the Indenture, dated as of September 22, 1997, between the Company and
The Chase Manhattan Bank, as Trustee (incorporated by reference to the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 3, 1997 and Exhibit 4.5 of the
    Table of Contents  136 Companys
Form 10-Q for the quarter ended September 30, 1997 (SEC File No. 1-82)).4.
    6
    
    Tripartite/Conversion Agreement, dated as of August 8, 2000, among
The Chase Manhattan Bank and First Union
National Bank, and acknowledged by the Company, pursuant to which First Union
National Bank succeeded The Chase Manhattan Bank as
trustee under the Indenture dated as of September 22, 1997 (incorporated by
reference to the Companys Registration Statement on Form S-3 (Reg. No.
333-43890) filed with the Securities and
Exchange Commission on August 16, 2000).4.
    7
    
    Form of 8.75 percent Note due June 1, 2011, of the
Company issued on May 30, 2001, pursuant to the
Indenture dated September 22, 1997, between the
Company and First Union National Bank, as successor Trustee (incorporated by reference to the Current Report
on Form 8-K filed with the Securities and Exchange
Commission on May 30, 2001 (SEC File No. 1-82)).4.
    8
    
    Form of 9.5 percent Note due June 1, 2031, of the
Company issued on May 30, 2001, pursuant to the Indenture dated
September 22, 1997, between the Company and First Union National Bank, as successor
Trustee (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission
May 30, 2001 (SEC File No. 1-82)).4.
    9
    
    Form of Common Share Certificate of the Company
(incorporated by reference to Exhibit 4.9 of the Companys Form 10-Q for the quarter ended June 30, 2002
(SEC File No. 1-82)).4.
    10
    
    Form of 6.75 percent Series A Mandatory Convertible
Preferred Share Certificate of the Company (incorporated by reference to
Exhibit 4.10 of the Companys Form 10-Q for the quarter ended June 30,
2002 (SEC File No. 1-82)).10.


    
    Management contracts and compensatory plans and agreements.10.
    1
    
    The Companys 1989 Directors Stock Option Plan (the 1989 Directors
Plan), as amended to and including June 3, 1992, suspended effective
November 6, 1996 (incorporated by reference to Exhibit 10.3 of the
Companys Form 10-Q for the quarter ended June 30,
1992 (SEC File No. 1-82)). Form of Stock Option Agreement under the 1989 Directors Plan
(incorporated by reference to the Companys Registration Statement on
Form S-8 (Reg. No. 33-34362)).10.
    2
    
    The Companys 1993 Stock Option and Restricted Stock Plan (the 1993
Plan), as amended through December 1, 1993, and form of Restricted Stock
letter under the 1993 Plan (incorporated by reference to Exhibit 10.4 of
the Companys 1993 Form 10-K (SEC File No. 1-82)). Amendment to 1993
Plan effective May 7, 1997 (incorporated by reference to Exhibit 10.15
of the Companys Form 10-Q for the quarter ended June 30, 1997 (SEC File
No. 1-82)). Amended and restated form of Stock Option Agreement, amended
through February 5, 1997 (incorporated by reference to Exhibit 10.3 of
the Companys 1997 Form 10-K (SEC File No. 1-82)).Note: Omitted from filing pursuant to the Instruction to Item 601(b) (10)
are actual Stock Option Agreements between the Company and certain
officers, under the 1993 Plan, and certain Directors, under the 1989
Directors Plan, which contain substantial similar provisions to Exhibits
10.1 and 10.2 above.10.
    3
    
    Description of the Companys Incentive Compensation Plan
(incorporated by reference to Exhibit 10.5 of the
Corporations 1993 Form 10-K (SEC File No. 1-82)).10.
    4
    
    Amended and restated Deferred Compensation Plan for
the Directors of the Company, dated as of December 3, 1998, effective
January 1, 1999 (incorporated by reference to Exhibit 10.5 of the
Companys 1998 Form 10-K
(SEC File No. 1-82)).10.
    5
    
    Form of Change-of-Control Agreement between the
Company and certain executives, including all of the
current executive officers to be listed in the summary
compensation table to the 2003 Proxy Statement
(incorporated by reference to Exhibit 10.5 of the
Companys 2002 Form 10-K (SEC File No. 1-82)).10.
    6
    
    Amended and restated form of Severance Agreement
between the Company and certain executives, including all of the current
executive officers to be listed in the
summary compensation table to the 2003 Proxy Statement (incorporated by
reference to Exhibit 10.7 of the
Companys 1997 Form 10-K (SEC File No. 1-82)).10.
    7
    
    The Companys Retirement Plan for Directors, effective January 1,
1988, terminated for active directors effective December 31, 1997
(incorporated by reference to Exhibit 10.13 of the
Companys 1987 Form 10-K (SEC File
No. 1-82)).10.
    8
    
    The Companys Supplemental
Retirement Plan (which amends and restates
the provisions of the Companys Supplemental Retirement Plan, which was
effective (except as otherwise noted therein) as of January 1,
1997),
effective (except as otherwise provided therein) as of January 1, 2001
(SEC File No. 1-82).10.
    9
    
    The Companys Supplemental Savings Plan (which amends and restates
the provisions of the Companys Supplemental Savings Plan, which was
effective (except as otherwise noted therein) as of January 1,
1997),
effective (except as otherwise noted therein) as of January 1, 2003 (SEC
File No. 1-82).10.
    10
    
    The Companys Directors Stock Unit Plan effective January 1, 1997
(incorporated by reference to Exhibit 10.10 of the
Companys 1996 Form 10-K (SEC File No. 1-82)) as amended and restated, effective January 1,
1998 (incorporated by reference to Exhibit 10.11 of the Companys 1997
Form 10-K (SEC File No. 1-82)). First Amendment to Plan, effective as of
January 1, 2001 (incorporated by reference to Exhibit 10.11 of the
Companys Form 10-Q for the quarter ended June 30,
2000 (SEC File No. 1-82)).10.
    11
    
    The Companys 1998 Stock Option and Restricted Stock Plan (the 1998
Plan) and forms Restricted Stock Agree-
    Table of Contents  137 ment under the 1998 Plan,
effective March 4, 1998 (incorporated by reference to Exhibit 10.12 of
the Companys Form 10-Q for the quarter ended June 30, 1998 (SEC File
No. 1-82)), and amended form of Stock Option Agreement, effective June 22, 1999 (incorporated by reference to the Companys Form 10-Q for the
quarter ended June 30, 1999 (SEC File No. 1-82)) and amended Form of
Restricted Stock Letter Agreement, effective as of July 8, 2002
(incorporated by reference to the Companys Form 10-Q for the quarter
ended September 30, 2002 (SEC File No. 1-82)). First Amendment to the
1998 Plan, effective as of May 4, 2000 (incorporated by reference to
Exhibit 10.12 of the Companys Form 10-Q for the quarter ended June 30,
2000 (SEC File No. 1-82)).Note: Omitted from filing pursuant to the Instruction to
Item 601(b) (10) are actual Stock Option Agreements
between the Company and certain officers under the
1998 Plan, which contain substantially similar provisions
to Exhibit 10.11 above.10.
    12
    
    The Companys 2003 Stock Option and Restricted
Stock Plan (the 2003 Plan), and forms of: (i) Stock Option Agreement;
(ii) Supplement A to Stock Option Agreement; (iii) Supplement B to Stock
Option Agreement; (iv) Restricted Stock Letter Agreement; (v) Restricted Stock Letter Agreement
(cliff vesting), each effective May 23, 2003 (incorporated by reference
to Exhibit 10.14 of the Companys Form 10-Q for the
quarter ended June 30, 2003 (SEC File No. 1-82)); form of Restricted Stock Letter (graduated
vesting) (incorporated by reference to Exhibit 10.14 of the Companys
Form 10-Q for the quarter ended September 30, 2003 (SEC File No. 1-82));
and form of amended Restricted Stock letters (graduated and cliff
vesting), effective February 3, 2004 (SEC File No. 1-82).Note: Omitted from the filing pursuant to the Instruction
to Item 601 (b) (10) are any actual agreement between the Company and
certain officers under the 2003 Plan, which contain subsequently similar
provisions to Exhibit 10.12 above.11
    
    
    Computation of per share earnings.12.
    1
    
    Computation of ratios of earnings to fixed charges.12.
    2
    
    Computation of ratios of total debt to total capitalization.21
    
    
    List of Subsidiaries and Investments.23
    
    
    Consent of PricewaterhouseCoopers LLP.24
    
    
    Powers of Attorney executed by certain officers and
directors who signed this Annual Report on Form 10-K.Note: Shareholders may obtain copies of Exhibits by making written
request to the Secretary of the Corporation and paying copying costs of
10 cents per page, plus
postage.31
    
    
    Certifications of J. Steven Whisler, Chairman and Chief Executive
Officer of the Company, and Ramiro G. Peru, Senior Vice President and
Chief Financial Officer of the Company, pursuant to Rule 13a-14(a) of
the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of
2002.32
    
    
    Certifications of J. Steven Whisler, Chairman and Chief Executive
Officer of the Company, and Ramiro G. Peru, Senior Vice President and
Chief Financial Officer of the Company, pursuant to 18 United States
Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act
of 2002.
 (b)
    
    Reports on Form 8-K:The Company filed the following Current Reports on Form 8-K during the 2003
fourth quarter: (i) Current Report on Form 8-K bearing cover date of October
29, 2003, in which the Company reported under Item 9 and 12 that it had
issued a press release announcing financial results for the three- and
nine-months ended September 30, 2003; and (ii) Current Report on Form 8-K
bearing cover date of January 29, 2004, in which the Company reported under
Item 9 and 12 that it had issued a press release announcing financial results
for the three- and twelve-months ended December 31, 2003.
    Table of Contents  138 Schedule II Phelps Dodge Corporation and Consolidated Subsidiaries 
  (In millions)AdditionsBalance at
    
    Charged to
    
    
    
    
    
    
    
    
    
    Balancebeginning
    
    costs and
    
    
    
    
    
    
    
    
    
    at endof period
    
    expenses
    
    Other
    
    Deductions
    
    of periodReserve deducted in balance sheet
from the asset to which applicable:Accounts Receivable:December 31, 2003
    
    $
    14.1
    
    
    
    0.9
    
    
    
    (1.4
    )
    
    
    3.5
    
    
    
    10.1December 31, 2002
    
    $
    14.2
    
    
    
    5.0
    
    
    
    (0.5
    )
    
    
    4.6
    
    
    
    14.1December 31, 2001
    
    $
    17.6
    
    
    
    1.9
    
    
    
    0.6
    
    
    
    5.9
    
    
    
    14.2Supplies:December 31, 2003
    
    $
    28.4
    
    
    
    8.1
    
    
    
    0.2
    
    
    
    4.9
    
    
    
    31.8December 31, 2002
    
    $
    27.2
    
    
    
    9.7
    
    
    
    1.8
    
    
    
    10.3
    
    
    
    28.4December 31, 2001
    
    $
    24.2
    
    
    
    4.0
    
    
    
    0.5
    
    
    
    1.5
    
    
    
    27.2Deferred Tax Assets:December 31, 2003
    
    $
    508.4
    
    
    
    47.0
    
    
    
    
    
    
    
    94.1
    
    
    
    461.3December 31, 2002
    
    $
    550.4
    
    
    
    70.6
    
    
    
    
    
    
    
    112.6
    
    
    
    508.4December 31, 2001
    
    $
    280.2
    
    
    
    275.1
    
    
    
    
    
    
    
    4.9
    
    
    
    550.4
    Table of Contents  139 
 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. PHELPS DODGE CORPORATION(Registrant)February 26, 2004
    
    By:
    
    /s/ Ramiro G. PeruRamiro G. Peru
Senior Vice President
and Chief Financial Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. /s/
J. Steven Whisler
    
    Chairman, Chief Executive Officer
and Director
(Principal Executive Officer)
    
    February 26, 2004J. Steven Whisler/s/
Ramiro G. Peru
    
    Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
    
    February 26, 2004Ramiro G. Peru/s/ Stanton K. Rideout
    
    Vice President and Controller
(Principal Accounting Officer)
    
    February 26, 2004Stanton K. Rideout(Robert
N. Burt, Archie W. Dunham, William A. Franke, Robert D. Johnson,
Marie L. Knowles, Robert D. Krebs,
Jon C. Madonna,
Gordon R. Parker, William J. Post, Jack E. Thompson, Directors)
    
    February 26, 2004
 By:
    
    /s/ Ramiro G. PeruRamiro G. Peru
Attorney-in-fact
    Table of Contents  Exhibit Index Exhibits:3.1
    
    Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999) as amended by the Certificate of
Amendment to the Restated Certificate of Incorporation of Phelps Dodge
Corporation (incorporated by reference to Exhibit 2.3 of the Companys
Registration Statement on Form 8-A, filed with the SEC on June 10, 2002
(SEC File No. 1-82)).3.2
    
    Amended and Restated By-Laws of the Company, effective as of
September 5, 2001 (incorporated by reference
to Exhibit 3.2 of the Companys Form 10-Q for the
quarter ended September 30, 2001 (SEC File No. 1-82)).4.1
    
    Credit Agreement, effective May 10, 2000, among the
Company, the Lenders parties thereto, Salomon Smith Barney Inc., Bank of
Tokyo-Mitsubishi Trust Company,
and Citibank, N.A., as agent (incorporated by reference to Exhibit 4.2 of
the Companys Form 10-Q for the quarter ended March 31, 2000 (SEC File
No. 1-82)).4.2
    
    Rights Agreement, dated as of February 5, 1998 between the Company
and The Chase Manhattan Bank (which
replaces the Rights Agreement dated as of July 29, 1988 as amended and
restated as of December 6, 1989, the rights issued thereunder having been
redeemed by the Company), which includes the form of Certificate
of Amendment setting forth the terms of the Junior Participating
Cumulative Preferred Shares, par value $1.00 per share, as Exhibit A, the
form of Rights Certificate as
Exhibit B and the Summary of Rights to Purchase Preferred Shares as
Exhibit C (incorporated by reference to Exhibit 1 of the Companys
Current Report on Form 8-K and in the Companys Form 8-A, both filed on
February 6, 1998 (SEC File No. 1-82)).Note: Certain instruments with respect to long-term debt
of the Company have not been filed as Exhibits to this Report since the
total amount of securities authorized under any such instrument does not
exceed 10 percent of the total assets of the Company and its subsidiaries
on a consolidated basis. The Company agrees to furnish a copy of each
such instrument upon request of the Securities and Exchange Commission.4.3
    
    Form of Indenture, dated as of September 22, 1997, between the
Company and The Chase Manhattan Bank,
as Trustee (incorporated by reference to the Companys Registration Statement and Post-Effective Amendment
No. 1 on Form S-3 (Registration Nos. 333-36415 and
33-44380)) filed with the Securities and Exchange Commission on September 25, 1997 (incorporated by reference
to Exhibit 4.3 of the Companys Form 10-Q for the quarter ended September 30, 1997 (SEC File No. 1-82)).4.4
    
    Form of 6.375 percent Note, due November 1, 2004, of
the Company issued on November 5, 1997, pursuant to the Indenture, dated
as of September 22, 1997, between
the Company and The Chase Manhattan Bank, as
Trustee (incorporated by reference to the Companys
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 3, 1997 and Exhibit 4.4 of Form 10-Q for the
quarter ended September 30, 1997 (SEC File No. 1-82)).4.5
    
    Form of 7.125 percent Debenture, due November 1, 2027, of the Company
issued on November 5, 1997, pursuant
to the Indenture, dated as of September 22, 1997, between the Company and
The Chase Manhattan Bank, as Trustee (incorporated by reference to the
Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 3, 1997 and Exhibit 4.5 of the Companys
Form 10-Q for the quarter ended September 30, 1997 (SEC File No. 1-82)).4.6
    
    Tripartite/Conversion Agreement, dated as of August 8, 2000, among
The Chase Manhattan Bank and First Union
National Bank, and acknowledged by the Company,
    Table of Contents  pursuant to which First Union
National Bank succeeded The Chase Manhattan Bank as
trustee under the Indenture dated as of September 22, 1997 (incorporated by
reference to the Companys Registration Statement on Form S-3 (Reg. No.
333-43890) filed with the Securities and
Exchange Commission on August 16, 2000).4.7
    
    Form of 8.75 percent Note due June 1, 2011, of the
Company issued on May 30, 2001, pursuant to the
Indenture dated September 22, 1997, between the
Company and First Union National Bank, as successor Trustee (incorporated by reference to the Current Report
on Form 8-K filed with the Securities and Exchange
Commission on May 30, 2001 (SEC File No. 1-82)).4.8
    
    Form of 9.5 percent Note due June 1, 2031, of the
Company issued on May 30, 2001, pursuant to the Indenture dated September
22, 1997, between the Company and First Union National Bank, as successor
Trustee (incorporated by reference to the Current Report on Form
8-K filed with the Securities and Exchange Commission
May 30, 2001 (SEC File No. 1-82)).4.9
    
    Form of Common Share Certificate of the Company
(incorporated by reference to Exhibit 4.9 of the Companys Form 10-Q for the quarter ended June 30, 2002
(SEC File No. 1-82)).4.10
    
    Form of 6.75 percent Series A Mandatory Convertible
Preferred Share Certificate of the Company (incorporated by reference to
Exhibit 4.10 of the Companys Form 10-Q for the quarter ended June 30,
2002 (SEC File No. 1-82)).10.
    
    Management contracts and compensatory plans and agreements.10.1
    
    The Companys 1989 Directors Stock Option Plan (the 1989 Directors
Plan), as amended to and including June 3, 1992, suspended effective
November 6, 1996 (incorporated by reference to Exhibit 10.3 of the
Companys Form 10-Q for the quarter ended June 30, 1992 (SEC File No.
1-82)). Form of Stock Option Agreement under the 1989 Directors Plan
(incorporated by reference to the Companys Registration Statement on
Form S-8 (Reg. No. 33-34362)).10.2
    
    The Companys 1993 Stock Option and Restricted Stock Plan (the 1993
Plan), as amended through December 1, 1993, and form of Restricted Stock
letter under the 1993 Plan (incorporated by reference to Exhibit 10.4 of
the Companys 1993 Form 10-K (SEC File No. 1-82)). Amendment to 1993
Plan effective May 7, 1997 (incorporated by reference to Exhibit 10.15
of the Companys Form 10-Q for the quarter ended June 30, 1997 (SEC File
No. 1-82)). Amended and restated form of Stock Option Agreement, amended
through February 5, 1997 (incorporated by reference to Exhibit 10.3 of
the Companys 1997 Form 10-K (SEC File No. 1-82)).Note: Omitted from filing pursuant to the Instruction to Item 601(b) (10)
are actual Stock Option Agreements between the Company and certain
officers, under the 1993 Plan, and certain Directors, under the 1989
Directors Plan, which contain substantial similar provisions to Exhibits
10.1 and 10.2 above.10.3
    
    Description of the Companys Incentive Compensation Plan
(incorporated by reference to Exhibit 10.5 of the
Corporations 1993 Form 10-K (SEC File No. 1-82)).10.4
    
    Amended and restated Deferred Compensation Plan for
the Directors of the Company, dated as of December 3, 1998, effective
January 1, 1999 (incorporated by reference to Exhibit 10.5 of the
Companys 1998 Form 10-K
(SEC File No. 1-82)).10.5
    
    Form of Change-of-Control Agreement between the
Company and certain executives, including all of the
current executive officers to be listed in the summary
compensation table to the 2003 Proxy Statement
(incorporated by reference to Exhibit 10.5 of the
Companys 2002 Form 10-K (SEC File No. 1-82)).10.6
    
    Amended and restated form of Severance Agreement
between the Company and certain executives, including all of the current
executive officers to be listed in the
summary compensation table to the 2003 Proxy Statement (incorporated by
reference to Exhibit 10.7 of the
Companys 1997 Form 10-K (SEC File No. 1-82)).10.7
    
    The Companys Retirement Plan for Directors, effective January 1,
1988, terminated for active directors effective December 31, 1997
(incorporated by reference to Exhibit 10.13 of the Companys 1987 Form
10-K (SEC File
No. 1-82)).10.8
    
    The Companys Supplemental Retirement Plan (which amends and restates
the provisions of the Companys Supplemental Retirement Plan, which was
effective (except as otherwise noted therein) as of January 1,
1997),
effective (except as otherwise provided therein) as of January 1, 2001
(SEC File No. 1-82).10.9
    
    The Companys Supplemental Savings Plan (which amends and restates
the provisions of the Companys Supplemental Savings Plan, which was
effective (except as otherwise noted therein) as of January 1,
1997),
effective (except as otherwise noted therein) as of January 1, 2003 (SEC
File No. 1-82).10.10
    
    The Companys Directors Stock Unit Plan effective January 1, 1997
(incorporated by reference to Exhibit 10.10 of the Companys 1996 Form
10-K (SEC File No. 1-82)) as amended and restated, effective January 1,
1998 (incorporated by reference to Exhibit 10.11 of the Companys 1997
Form 10-K (SEC File No. 1-82)). First Amendment to Plan, effective as of
January 1, 2001 (incorporated by reference to Exhibit 10.11 of the
Companys Form 10-Q for the quarter ended June 30, 2000 (SEC File No.
1-82)).10.11
    
    The Companys 1998 Stock Option and Restricted Stock Plan (the 1998
Plan) and forms Restricted Stock Agreement under the 1998 Plan,
effective March 4, 1998 (incorporated by reference to Exhibit 10.12 of
the Companys Form 10-Q for the quarter ended June 30, 1998 (SEC File
No. 1-82)), and amended form of Stock Option Agreement,
    Table of Contents  effective June 22, 1999 (incorporated by reference to the Companys Form 10-Q for the
quarter ended June 30, 1999 (SEC File No. 1-82)) and amended Form of
Restricted Stock Letter Agreement, effective as of July 8, 2002
(incorporated by reference to the Companys Form 10-Q for the quarter
ended September 30, 2002 (SEC File No. 1-82)). First Amendment to the
1998 Plan, effective as of May 4, 2000 (incorporated by reference to
Exhibit 10.12 of the Companys Form 10-Q for the quarter ended June 30,
2000 (SEC File No. 1-82)).Note: Omitted from filing pursuant to the Instruction to
Item 601(b) (10) are actual Stock Option Agreements
between the Company and certain officers under the
1998 Plan, which contain substantially similar provisions
to Exhibit 10.11 above.10.12
    
    The Companys 2003 Stock Option and Restricted
Stock Plan (the 2003 Plan), and forms of: (i) Stock Option Agreement;
(ii) Supplement A to Stock Option Agreement; (iii) Supplement B to Stock
Option Agreement; (iv)
Restricted Stock Letter Agreement; (v) Restricted Stock Letter Agreement
(cliff vesting), each effective May 23, 2003 (incorporated by reference
to Exhibit 10.14 of the Companys Form 10-Q for the quarter ended June
30, 2003 (SEC File No. 1-82)); form of Restricted Stock Letter (graduated
vesting) (incorporated by reference to Exhibit 10.14 of the Companys
Form 10-Q for the quarter ended September 30, 2003 (SEC File No. 1-82));
and form of amended Restricted Stock letters (graduated and cliff
vesting), effective February 3, 2004 (SEC File No. 1-82).Note: Omitted from the filing pursuant to the Instruction
to Item 601 (b) (10) are any actual agreement between the Company and
certain officers under the 2003 Plan, which contain subsequently similar
provisions to Exhibit 10.12 above.11
    
    Computation of per share earnings.12.1
    
    Computation of ratios of earnings to fixed charges.12.2
    
    Computation of ratios of total debt to total capitalization.21
    
    List of Subsidiaries and Investments.23
    
    Consent of PricewaterhouseCoopers LLP.24
    
    Powers of Attorney executed by certain officers and
directors who signed this Annual Report on Form 10-K.Note: Shareholders may obtain copies of Exhibits by making written
request to the Secretary of the Corporation and paying copying costs of
10 cents per page, plus
postage.31
    
    Certifications of J. Steven Whisler, Chairman and Chief Executive
Officer of the Company, and Ramiro G. Peru, Senior Vice President and
Chief Financial Officer of the Company, pursuant to Rule 13a-14(a) of
the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of
2002.32
    
    Certifications of J. Steven Whisler, Chairman and Chief Executive
Officer of the Company, and Ramiro G. Peru, Senior Vice President and
Chief Financial Officer of the Company, pursuant to 18 United States
Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act
of 2002.