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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

Commission file number 1-82

PHELPS DODGE CORPORATION

(a New York corporation)

13-1808503
(I.R.S. Employer Identification No.)

One North Central Avenue, Phoenix, AZ 85004-2306

Registrants telephone number: (602) 366-8100

Securities registered pursuant to Section 12(b) of the Act:

|                                         |  |                        
|---------------------------------------- |  | -----------------------
|                                         |  | Name of each exchange  
|Title of each class                      |  | on which registered    
|                                         |  |                        
|Common Shares, $6.25 par value per share |  | New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x   No .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of 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]

The aggregate market value of Common Shares of the issuer held by nonaffiliates
at March 7, 2002, was approximately $2,207,072,004.

Number of Common Shares outstanding at March 7, 2002: 78,702,077 shares.

Documents Incorporated by Reference:

|                                        |  |                 
|--------------------------------------- |  | ----------------
|Document                                |  | Location in 10-K
|                                        |  |                 
|Proxy Statement for 2002 Annual Meeting |  | Part III        



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TABLE OF CONTENTS



|           |                                                                                   |                                                                         |  |  |  |  |  | 
|---------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------- |  |  |  |  |  | 
|Part I    
|           | Items 1. and 2. Business and Properties                                          
|           |                                                                                   | PHELPS DODGE MINING COMPANY                                            
|           |                                                                                   | Properties, Facilities and Production                                  
|           |                                                                                   | Mining Operations                                                      
|           |                                                                                   | Phelps Dodge Copper Production Data, by Source (a)                     
|           |                                                                                   | Phelps Dodge Copper Production Data, by Source (a)                     
|           |                                                                                   | Phelps Dodge Metal Production and Sales (a) (d)                        
|           |                                                                                   | Phelps Dodge Smelter, Refinery and Rod Production (a)                  
|           |                                                                                   | Other Mining Operations and Investments                                
|           |                                                                                   | Exploration                                                            
|           |                                                                                   | Process Technology                                                     
|           |                                                                                   | Ore Reserves                                                           
|           |                                                                                   | Sales and Competition                                                  
|           |                                                                                   | Prices, Supply and Consumption                                         
|           |                                                                                   | Costs                                                                  
|           |                                                                                   | Environmental and Other Regulatory Matters                             
|           |                                                                                   | Ownership of Property                                                  
|           |                                                                                   | PHELPS DODGE INDUSTRIES                                                
|           |                                                                                   | Specialty Chemicals Segment                                            
|           |                                                                                   | Wire and Cable Segment                                                 
|           |                                                                                   | Environmental Matters                                                  
|           |                                                                                   | LABOR MATTERS                                                          
|           |                                                                                   | RESEARCH AND DEVELOPMENT                                               
|           |                                                                                   | OTHER ENVIRONMENTAL MATTERS                                            
|           | Item 3. Legal Proceedings                                                        
|           | Item 4. Submission of Matters to a Vote of Security Holders                      
|Part II   
|           | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters
|           | Item 6. Selected Financial Data                                                  
|           | Item 7. Managements Discussion and Analysis                                     
|           | Item 7A. Quantitative and Qualitative Disclosures About Market Risk              
|           | Item 8. Financial Statements and Supplementary Data                              
|           | Item 9. Disagreements on Accounting and Financial Disclosure                     
|           |                                                                                   | MANAGEMENTS DISCUSSION AND ANALYSIS                                   
|           |                                                                                   | RESULTS OF PHELPS DODGE MINING COMPANY                                 
|           |                                                                                   | RESULTS OF PHELPS DODGE INDUSTRIES                                     
|           |                                                                                   | OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS     
|           |                                                                                   | CHANGES IN FINANCIAL CONDITION; CAPITALIZATION                         
|           |                                                                                   | CAPITAL OUTLAYS                                                        
|           |                                                                                   | INFLATION                                                              
|           |                                                                                   | DIVIDENDS AND MARKET PRICE RANGES                                      
|           |                                                                                   | QUARTERLY FINANCIAL DATA                                               
|           |                                                                                   | INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                             
|           |                                                                                   | REPORT OF MANAGEMENT                                                   
|           |                                                                                   | REPORT OF INDEPENDENT ACCOUNTANTS                                      
|           |                                                                                   | REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE      
|           |                                                                                   | STATEMENTS OF CONSOLIDATED OPERATIONS                                  
|           |                                                                                   | CONSOLIDATED BALANCE SHEET                                             
|           |                                                                                   | CONSOLIDATED STATEMENTS OF CASH FLOWS                                  
|           |                                                                                   | CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS EQUITY                 
|           |                                                                                   | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                             
|           |                                                                                   | FINANCIAL DATA BY GEOGRAPHIC AREA                                      
|           |                                                                                   | FINANCIAL DATA BY BUSINESS SEGMENT                                     
|Part III  
|           |                                                                                   | Items 10, 11, 12 and 13.                                               
|Part IV   
|           |                                                                                   | Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
|           |                                                                                   | VALUATION AND QUALIFYING ACCOUNTS AND RESERVES                         
|SIGNATURES
|EX-12     
|EX-21     
|EX-23     
|EX-24     



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##### Table of Contents



PHELPS DODGE CORPORATION

Annual Report on Form 10-K
For the Year Ended December 31, 2001

Table of Contents

|         |                                                                                   |                             |                                                                    |                                                   |    |      |    | 
|-------- | --------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------------------------------ | ------------------------------------------------- | -- | ---- | -- | 
|         |                                                                                   |                             |                                                                    |                                                   |    | Page
|         |                                                                                   |                             |                                                                    |                                                   |    |     
|Part I.  |                                                                                   |                             |                                                                    |                                                  
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|         | Items 1. and 2. Business and Properties                                           |                             |                                                                    | 1                                                 |   
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|         |                                                                                   | Phelps Dodge Mining Company |                                                                    |                                                   | 1  |     
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|         |                                                                                   |                             | Properties, Facilities and Production                              |                                                   |    | 2    |   
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|         |                                                                                   |                             |                                                                    | Mining Operations                                 |    |      | 2  | 
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|         |                                                                                   |                             |                                                                    | Phelps Dodge Copper Production Data, by Source    |    |      | 6  | 
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|         |                                                                                   |                             |                                                                    | Phelps Dodge Metal Production and Sales           |    |      | 8  | 
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|         |                                                                                   |                             |                                                                    | Phelps Dodge Smelter, Refinery and Rod Production |    |      | 9  | 
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|         |                                                                                   |                             |                                                                    | Other Mining Operations and Investments           |    |      | 10 | 
|        
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|         |                                                                                   |                             | Exploration                                                        |                                                   |    | 10   |   
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|         |                                                                                   |                             | Process Technology                                                 |                                                   |    | 11   |   
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|         |                                                                                   |                             | Ore Reserves                                                       |                                                   |    | 12   |   
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|         |                                                                                   |                             | Sales and Competition                                              |                                                   |    | 14   |   
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|         |                                                                                   |                             | Prices, Supply and Consumption                                     |                                                   |    | 14   |   
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|         |                                                                                   |                             | Costs                                                              |                                                   |    | 15   |   
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|         |                                                                                   |                             | Environmental and Other Regulatory Matters                         |                                                   |    | 15   |   
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|         |                                                                                   |                             | Ownership of Property                                              |                                                   |    | 18   |   
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|         |                                                                                   | Phelps Dodge Industries     |                                                                    |                                                   | 19 |     
|        
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|         |                                                                                   |                             | Specialty Chemicals Segment                                        |                                                   |    | 19   |   
|        
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|         |                                                                                   |                             | Wire and Cable Segment                                             |                                                   |    | 20   |   
|        
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|        
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|         |                                                                                   |                             | Environmental Matters                                              |                                                   |    | 21   |   
|        
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|         |                                                                                   | Labor Matters               |                                                                    |                                                   | 21 |     
|        
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|         |                                                                                   | Research and Development    |                                                                    |                                                   | 22 |     
|        
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|         |                                                                                   | Other Environmental Matters |                                                                    |                                                   | 22 |     
|        
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|         |                                                                                   |                             |                                                                    |                                                  
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|         | Item 3. Legal Proceedings                                                         |                             |                                                                    | 24                                                |   
|        
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|         |                                                                                   |                             |                                                                    |                                                  
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|         | Item 4. Submission of Matters to a Vote of Security Holders                       |                             |                                                                    | 29                                                |   
|        
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|         |                                                                                   |                             |                                                                    |                                                  
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|         | Executive Officers of Phelps Dodge Corporation                                    |                             |                                                                    | 29                                                |   
|        
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|         |                                                                                   |                             |                                                                    |                                                  
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|Part II. |                                                                                   |                             |                                                                    |                                                  
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|         | Item 5. Market for the Registrants Common Equity and Related
Stockholder Matters |                             |                                                                    | 30                                                |   
|        
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|         |                                                                                   |                             |                                                                    |                                                  
|        
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|         | Item 6. Selected Financial Data                                                   |                             |                                                                    | 30                                                |   
|        
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|         |                                                                                   |                             |                                                                    |                                                  
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|         | Item 7. Managements Discussion and Analysis
Managements Discussion and Analysis |                             |                                                                    | 31                                                |   
|        
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|         |                                                                                   |                             | Results of Phelps Dodge Mining Company                             |                                                   |    | 33   |   
|        
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|         |                                                                                   |                             | Results of Phelps Dodge Industries                                 |                                                   |    | 37   |   
|        
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|         |                                                                                   |                             | Other Matters Relating to the Statement of Consolidated Operations |                                                   |    | 38   |   
|        
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|         |                                                                                   |                             | Changes in Financial Condition; Capitalization                     |                                                   |    | 39   |   
|        
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|         |                                                                                   |                             | Capital Outlays                                                    |                                                   |    | 48   |   
|        
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|        
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|         |                                                                                   |                             | Inflation                                                          |                                                   |    | 48   |   





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|--------- | ----------------------------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------- | --- | -- | ---- |  | 
|          |                                                                         |                                                                   |                                   |     |    | Page
|          |                                                                         |                                                                   |                                   |     |    |     
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|          |                                                                         |                                                                   | Dividends and Market Price Ranges |     |    | 48   | 
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|          |                                                                         |                                                                   | Quarterly Financial Data          |     |    | 49   | 
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|          |                                                                         |                                                                   |                                   |    
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|          | Item 7A. Quantitative and Qualitative Disclosures About Market Risk     |                                                                   |                                   | 30  |   
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|          | Item 8. Financial Statements and Supplementary Data                     |                                                                   |                                   |     |   
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|          |                                                                         | Index to Consolidated Financial Statements                        |                                   |     | 50 |     
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|          |                                                                         | Report of Management                                              |                                   |     | 50 |     
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|          |                                                                         | Report of Independent Accountants                                 |                                   |     | 51 |     
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|          |                                                                         | Report of Independent Accountants on Financial Statement Schedule |                                   |     | 51 |     
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|          |                                                                         | Statement of Consolidated Operations                              |                                   |     | 52 |     
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|          |                                                                         | Consolidated Balance Sheet                                        |                                   |     | 53 |     
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|          |                                                                         | Consolidated Statement of Cash Flows                              |                                   |     | 54 |     
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|          |                                                                         | Consolidated Statement of Common Shareholders Equity             |                                   |     | 55 |     
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|          |                                                                         | Notes to Consolidated Financial Statements                        |                                   |     | 56 |     
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|          |                                                                         | Financial Data by Geographic Area                                 |                                   |     | 83 |     
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|          |                                                                         | Financial Data by Business Segment                                |                                   |     | 84 |     
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|          |                                                                         |                                                                   |                                   |    
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|          | Item 9. Disagreements on Accounting and Financial Disclosure            |                                                                   |                                   | N/A |   
|         
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|          |                                                                         |                                                                   |                                   |    
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|Part III. |                                                                         |                                                                   |                                   |    
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|          | Item 10. Directors and Executive Officers of the Registrant             |                                                                   |                                   | 85  |   
|         
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|          | Item 11. Executive Compensation                                         |                                                                   |                                   | 85  |   
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|          | Item 12. Security Ownership of Certain Beneficial Owners and Management |                                                                   |                                   | 85  |   
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|          | Item 13. Certain Relationships and Related Transactions                 |                                                                   |                                   | 85  |   
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|Part IV.  |                                                                         |                                                                   |                                   |    
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|          | Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K |                                                                   |                                   | 85  |   
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|          |                                                                         |                                                                   |                                   |    
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|          | Valuation and Qualifying Accounts and Reserves                          |                                                                   |                                   | 90  |   
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|          |                                                                         |                                                                   |                                   |    
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|          | Signatures                                                              |                                                                   |                                   | 91  |   





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PHELPS DODGE CORPORATION

2001 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 ours) 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) thereby
enhancing our copper assets with significant operations in the United States
and South America. As a result of the acquisition, we also became the worlds
largest producer/processor of molybdenum and molybdenum products.

The Company consists of two divisions: (i) Phelps Dodge Mining Company
(PD Mining) and (ii) Phelps Dodge Industries (PD Industries).



| | (i)  |  | PD Mining is a business segment 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.
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii) |  | PD Industries includes our specialty chemicals segment and
our wire and cable segment.                                                                                                                                                                                                                                   

In 2001, PD Mining produced 1,160,100 tons of copper for our account from
worldwide mining operations, and an additional 250,800 tons of copper for the
accounts of our minority interest joint-venture partners. Gold, silver,
molybdenum, copper sulfate, rhenium and sulfuric acid are by-products of our
copper operations. Production of copper for our own account from our U.S.
operations constituted approximately 52 percent of the copper mined in the
United States in 2001. 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. We also explore for metals and minerals throughout the world.

Our international mining operations include Candelaria and El Abra, major
copper mines in Chile, the Cerro Verde copper mine in Peru, and other
operations and investments in Chile and Peru. These operations produce a
variety of metals and minerals including copper, gold and silver.

Molybdenum concentrate is produced at our Henderson mine in Colorado, and
as a by-product at several of our U.S. copper operations. The concentrate is
roasted to produce molybdic oxide at one of our three roasting operations, and
various molybdenum metallurgical and chemical products are produced at our four
conversion facilities.

In addition to our mining interests, we produce engineered products
principally for the global energy, telecommunications, transportation and
specialty chemicals sectors through PD Industries.

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,
belting 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 and other
copper products for sale principally to original equipment manufacturers for
use in electrical motors, generators, transformers and other products, and
manufactures copper and aluminum energy cables, telecommunications cables and
specialty conductors.

In December 2000, Phelps Dodge announced its intention to explore
strategic alternatives for, including the potential sale of, its specialty
chemicals and wire and cable segments. In May 2001, we terminated that sales
process, noting that the then current economic environment was not delivering
transactions that offered appropriate value for our shareholders. We have
continued to seek strategic alternatives, as may be appropriate, for these
businesses.

Our world headquarters is located in Phoenix, Arizona, and is a leased
property. We employed approximately 14,500 people worldwide on December 31,
2001.

Throughout this document, unless otherwise stated, all references to tons
are to short tons, and references to ounces are to troy ounces.




PHELPS DODGE MINING COMPANY

PD Mining is our international business segment that comprises a group of
companies involved in vertically integrated copper operations including mining,
concentrating, electrowinning, smelting and refining, rod production,
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marketing
and sales, and related activities. PD Mining sells copper to others primarily
as rod, cathode or concentrate, and as rod to our wire and cable segment. In
addition, PD Mining at times smelts and refines copper and produces copper rod
for customers on a toll basis. It is also an integrated producer of
molybdenum, with mining, roasting and processing facilities producing
molybdenum concentrate as well as metallurgical and chemical products. In
addition, it produces gold, silver, molybdenum, copper sulfate, rhenium and
copper chemicals as by-products, and sulfuric acid from its air quality control
facilities. This business segment also includes worldwide mineral exploration
and development programs, and a process technology center that directs its
activities at improving existing processes and developing new cost-competitive
technologies.




Properties, Facilities and Production




Mining Operations

We produce electrowon copper cathode at solution extraction/electrowinning
(SX/EW) operations near Tyrone and Silver City, New Mexico; Morenci, Miami,
Bagdad and Green Valley, Arizona; near Arequipa, Peru; and near Calama, Chile.
We produce copper concentrate from open-pit mines and concentrators located at
Bagdad and Green Valley, Arizona; Silver City, New Mexico; and near Copiapó,
Chile.

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. Sumitomo takes in kind its share of Morenci production.
Morenci is the largest copper producing operation in North America.

In March 2001, the Company completed its $220 million mine-for-leach
project at Morenci. This project included expansion of the mines crushing and
conveying system; installation of stackers, a mobile conveyor system that
delivers crushed ore onto leach stockpiles; expansion of existing solution
extraction facilities; and construction of a new electrowinning tankhouse. As
a result, the Morenci concentrator was placed on care-and-maintenance status.
The crushing facility at the Metcalf concentrator is continuing to process
75,000 tons of ore daily for the expanded leach operation. The new
mine-for-leach facilities are expected to increase Morencis annual electrowon
cathode production capacity to 820 million pounds. Morenci could produce
copper concentrate under certain favorable economic circumstances.

In 1999, the Metcalf concentrator was permanently closed as a result of
the acquisition of Cyprus Amax together with the conversion of Morenci to
mine-for-leach processing. This resulted in an impairment of $88 million
pre-tax that was recorded in 1999. (Refer to Note 3 to the consolidated
financial statements for more information.)

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 and produces copper concentrate with significant molybdenum
and minor silver by-products. 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 current economic environment, the Bagdad mine was
curtailed temporarily to produce at one-half its capacity, eliminating 70,500
tons of annual copper production. In February 2002, we announced that Bagdad
will begin construction of a $40 million copper concentrate leaching
demonstration plant that is designed to recover commercial-grade copper cathode
from chalcopyrite concentrates. If successful, this technique could assist in
our long-term cost reduction strategy.

We also 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. Sierritas
on-site roasters process molybdenum concentrates produced at Sierrita, Bagdad
and Chino, and on a toll basis for third parties. The resulting 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 current economic environment, production at
the Sierrita mine was reduced temporarily to one-half of its capacity,
eliminating 49,600 tons of annual copper production and 7 million tons of
molybdenum concentrate.

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 current economic environment, the Miami mine and refinery were
closed temporarily. This action eliminated 49,600 tons of annual copper
production, in addition to an earlier reduction of 42,500 tons for 2002
resulting from a new mine plan implemented in 2000.

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
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Mines Company (Chino), a general partnership in which we hold a
two-thirds interest. Heisei Minerals Corporation (Heisei), a subsidiary of
Mitsubishi Materials Corporation and Mitsubishi Corporation, owns the remaining
one-third interest in Chino. Each partner purchases 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 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. These actions eliminated approximately 71,600 and 72,800
tons, respectively, for a total of 144,400 tons of annual copper production.

Phelps Dodge operates 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 also operate the Candelaria mine located near Copiapó in the Atacama
Desert of northern Chile. The operation presently consists of an open-pit
copper mine, concentrator, port and associated facilities. We own an 80
percent interest in Candelaria 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 51 percent of Sociedad Contractual Minera El Abra (El
Abra), which 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, which began commercial
production in the second half of 1996, consists of a mine-for-leach, 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. El Abra
also contains a copper sulfide deposit with currently identified mineralized
material of about 650 million tons. In 2001, El Abra initiated a $70 million
project (including our partners share) to leach uncrushed run-of-mine (ROM)
material. The ROM project allows El Abra to maintain tankhouse design
capacity. Production from the ROM project started in January 2002; full
production is scheduled for the second half of 2002.

We own approximately 82 percent of the common stock of Sociedad Minera
Cerro Verde S.A. (Cerro Verde). Compañia 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 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 20,000 tons of annual
copper production. The Ojos del Salado operations remain on
care-and-maintenance status.

In February 1998, we acquired Cobre Mining Company Inc. (Cobre) located in
southwestern New Mexico adjacent to our Chino operations. The primary assets
of Cobre include an open-pit copper mine, two underground copper mines, two
mills, and the surrounding 11,000 acres of land, including mineral rights. In
late 1998 and early 1999, all operations were indefinitely suspended reducing
copper production by 35,000 tons per year. The entire Cobre operation remains
on care-and-maintenance status.

We are the worlds leading producer of copper using the SX/EW process. In
2001, we produced a total of 910,000 tons of cathode copper at our SX/EW
facilities, compared with 806,300 tons in 2000 and 511,500 tons in 1999. SX/EW
is a cost-effective process of 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, 248,000 tons at El Abra,
75,000 tons at Chino, 75,000 tons at Tyrone, 105,000 tons at Miami, 92,000 tons
at Cerro Verde, 16,000 tons at Bagdad and 35,000 tons at Sierrita.

We own and operate a copper smelter in Miami, Arizona, and, through Chino
Mines Company, a two-thirds interest in 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 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. As
a result of the successful acquisition of Cyprus Amax and the conversion at
Morenci to a mine-for-leach operation, the Hidalgo smelter is expected to be
reconfigured to allow it to be a reliable source of sulfuric acid. This
reconfiguration plan resulted in a pre-tax write-down of the Hidalgo assets of
$201.5 million in 1999.

We refine our share of anode copper production from our smelters at our
refineries in El Paso, Texas, and Miami, Arizona. During 2001, 2000 and 1999,
the El Paso refinery operated significantly below capacity due to the late
Table of Contents

- 4 -

1999
third quarter closing of the Hidalgo smelter. The closure of the Hidalgo
smelter resulted not only in a curtailment of operations at the 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
temporarily was closed. Our refineries also produce varying quantities of
gold, silver and copper sulfate and recover small amounts of selenium, rhenium,
platinum and palladium as by-products of the copper refining process.

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.

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 mill. 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 products
are made for final sale to customers. A portion of Hendersons production is
sold to customers as molybdenum disulfide. In 1999, Hendersons mine was
modernized (i) to replace a 20-year old underground and surface rail
transportation system with a modern conveyor and (ii) to develop a new
production level using more efficient high-lift caving methods. The new
crushing and conveying system reached full capacity in early 2000.

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.

Phelps Dodge also owns the Climax molybdenum mine near Leadville,
Colorado. The operation consists of both an underground and open-pit mine, and
an 18,000 ton-per-day concentrator. The operation is on care-and-maintenance
status. The property occupies 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 powder. 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, technical grade oxide is further
refined into various high-purity molybdenum chemicals for a wide range of uses
by chemical and catalyst manufacturers. The Fort Madison facilities produce
ammonium dimolybdate, pure molybdic oxide,
ammonium heptamolybdate, ammonium octamolybdate, sodium molybdate,
sublimed pure molybdic oxide and molysulfide disulfide.

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 powder at our conversion
plant located in Stowmarket, United Kingdom, for both European and worldwide
customers. The plant is operated as both an internal and external customer
tolling facility.

The following tables show our worldwide copper production by source for
the years 1997 through 2001; 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | temporary closure of the Miami mine and refinery in January 2002;                                                                                                                                     
|
| |  |  | curtailment of production at Sierrita and Bagdad to one-half capacity in January 2002;                                                                                                                
|
| |  |  | conversion of the Morenci operations to mine-for-leach during
1999 and 2000 with completion in the 2001 first quarter;                                                                                
|
| |  |  | curtailment of Henderson operations beginning in the 2000
second quarter;                                                                                                                             
|
| |  |  | acquisition of Cyprus Amax on October 16, 1999 (the primary
assets acquired included the                                                                                                              





---



##### Table of Contents



- 5 -



| |   |  | 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 the Metcalf concentrator at the end of
1999;                                                                                                                                                                        
|
| |  |  | temporary closure of the Hidalgo smelter facilities in
September 1999 (Hidalgo smelter is expected to be reconfigured to an
acid conversion facility);                                                                                   
|
| |  |  | sale of Phelps Dodge Mining (Pty.) Limited (fluorspar
operation) at the end of the 1999 second quarter;                                                                                                                                  
|
| |  |  | acquisition of Cobre in February 1998 followed by suspension of
underground mining in October 1998 and the remaining facilities in
March 1999;                                                                                           
|
| |  |  | suspension of operations at Ojos del Salado in October 1998;                                                                                                                                                                             
|
| |  |  | completion of the Southwest solution extraction project at Morenci in the 1998 third quarter;                                                                                                                                            
|
| |  |  | expansion of concentrator operations at Candelaria in the 1997 fourth quarter; and                                                                                                                                                       
|
| |  |  | expansion of Chinos SX/EW operation at Santa Rita in 1997.                                                                                                                                                                              





---



##### Table of Contents



- 6 -




Phelps Dodge Copper Production Data, by Source (a)
(thousand tons)

|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |         |         | 
|----------------------------------- | -------------------------------------- | ------------------------------------ |  | ------- | ------- | ---- |  | ------- | ------- | ---- |  | ------- | ------- |  |  | ------- | ------- |  |  | ------- | ------- | 
|                                    |                                        |                                      |  | 2001    |         | 2000 |  | 1999    |         | 1998 |  | 1997   
|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |        
|Material mined (b)                  |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |        
|                                   
|                                   
|                                   
|                                   
|                                    | Bagdad                                 |                                      |  | 63,680  |         |      |  | 69,101  |         |      |  | 16,233  |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Candelaria                             |                                      |  | 126,509 |         |      |  | 116,541 |         |      |  | 126,903 |         |  |  | 131,155 |         |  |  | 90,045  |        
|                                   
|                                   
|                                   
|                                   
|                                    | Cerro Verde                            |                                      |  | 68,685  |         |      |  | 61,400  |         |      |  | 11,459  |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Chino                                  |                                      |  | 59,277  |         |      |  | 61,519  |         |      |  | 44,562  |         |  |  | 117,432 |         |  |  | 121,639 |        
|                                   
|                                   
|                                   
|                                   
|                                    | Cobre                                  |                                      |  |        |         |      |  |        |         |      |  | 4,558   |         |  |  | 15,763  |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | El Abra                                |                                      |  | 82,737  |         |      |  | 84,734  |         |      |  | 10,029  |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Miami                                  |                                      |  | 32,702  |         |      |  | 46,446  |         |      |  | 13,787  |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Morenci                                |                                      |  | 281,474 |         |      |  | 274,871 |         |      |  | 297,872 |         |  |  | 288,200 |         |  |  | 291,698 |        
|                                   
|                                   
|                                   
|                                   
|                                    | Ojos del Salado                        |                                      |  |        |         |      |  |        |         |      |  |        |         |  |  | 1,336   |         |  |  | 1,713   |        
|                                   
|                                   
|                                   
|                                   
|                                    | Sierrita                               |                                      |  | 60,869  |         |      |  | 75,319  |         |      |  | 15,875  |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Tyrone                                 |                                      |  | 73,990  |         |      |  | 113,937 |         |      |  | 113,422 |         |  |  | 108,359 |         |  |  | 107,896 |        
|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |         |        
|                                    |                                        | Total material mined                 |  |         | 849,923 |      |  |         | 903,868 |      |  |         | 654,700 |  |  |         | 662,245 |  |  |         | 612,991 | 
|                                   
|                                   
|                                   
|                                   
|                                    | Less minority participants shares (c) |                                      |  | 127,821 |         |      |  | 126,565 |         |      |  | 89,830  |         |  |  | 108,605 |         |  |  | 102,305 |        
|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |         |        
|                                    |                                        | Net Phelps Dodge share               |  |         | 722,102 |      |  |         | 777,303 |      |  |         | 564,870 |  |  |         | 553,640 |  |  |         | 510,686 | 
|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |         |        
|Mill ore processed                  |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |        
|                                   
|                                   
|                                   
|                                   
|                                    | Bagdad                                 |                                      |  | 31,667  |         |      |  | 29,586  |         |      |  | 6,211   |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Candelaria                             |                                      |  | 27,365  |         |      |  | 26,165  |         |      |  | 22,405  |         |  |  | 24,432  |         |  |  | 13,055  |        
|                                   
|                                   
|                                   
|                                   
|                                    | Chino                                  |                                      |  | 3,109   |         |      |  | 16,177  |         |      |  | 16,056  |         |  |  | 16,431  |         |  |  | 16,969  |        
|                                   
|                                   
|                                   
|                                   
|                                    | Cobre                                  |                                      |  |        |         |      |  |        |         |      |  | 654     |         |  |  | 4,291   |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Morenci                                |                                      |  | 4,301   |         |      |  | 26,698  |         |      |  | 38,283  |         |  |  | 47,108  |         |  |  | 47,713  |        
|                                   
|                                   
|                                   
|                                   
|                                    | Ojos del Salado                        |                                      |  |        |         |      |  |        |         |      |  |        |         |  |  | 1,210   |         |  |  | 1,539   |        
|                                   
|                                   
|                                   
|                                   
|                                    | Sierrita                               |                                      |  | 38,133  |         |      |  | 38,319  |         |      |  | 8,046   |         |  |  |        |         |  |  |        |        
|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |         |        
|                                    |                                        | Total mill ore processed             |  |         | 104,575 |      |  |         | 136,945 |      |  |         | 91,655  |  |  |         | 93,472  |  |  |         | 79,276  | 
|                                   
|                                   
|                                   
|                                   
|                                    | Less minority participants shares (c) |                                      |  | 7,154   |         |      |  | 14,629  |         |      |  | 15,575  |         |  |  | 17,429  |         |  |  | 15,424  |        
|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |         |        
|                                    |                                        | Net Phelps Dodge share               |  |         | 97,421  |      |  |         | 122,316 |      |  |         | 76,080  |  |  |         | 76,043  |  |  |         | 63,852  | 
|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |         |        
|Leach ore placed in stockpiles      |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |        
|                                   
|                                   
|                                   
|                                   
|                                    | Bagdad                                 |                                      |  | 696     |         |      |  |        |         |      |  |        |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Cerro Verde                            |                                      |  | 23,436  |         |      |  | 17,833  |         |      |  | 2,642   |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Chino                                  |                                      |  | 31,009  |         |      |  | 12,875  |         |      |  | 12,400  |         |  |  | 44,734  |         |  |  | 40,857  |        
|                                   
|                                   
|                                   
|                                   
|                                    | El Abra                                |                                      |  | 75,875  |         |      |  | 62,042  |         |      |  | 8,678   |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Miami                                  |                                      |  | 10,208  |         |      |  | 11,032  |         |      |  | 2,379   |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Morenci                                |                                      |  | 258,202 |         |      |  | 236,696 |         |      |  | 250,680 |         |  |  | 232,120 |         |  |  | 233,467 |        
|                                   
|                                   
|                                   
|                                   
|                                    | Sierrita                               |                                      |  | 14,347  |         |      |  | 18,386  |         |      |  | 4,307   |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Tyrone                                 |                                      |  | 27,513  |         |      |  | 51,446  |         |      |  | 55,693  |         |  |  | 55,086  |         |  |  | 50,528  |        
|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |         |        
|                                    |                                        | Total leach ore placed in stockpiles |  |         | 441,286 |      |  |         | 410,310 |      |  |         | 336,779 |  |  |         | 331,940 |  |  |         | 324,852 | 
|                                   
|                                   
|                                   
|                                   
|                                    | Less minority participants shares (c) |                                      |  | 86,244  |         |      |  | 70,196  |         |      |  | 45,987  |         |  |  | 49,728  |         |  |  | 48,638  |        
|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |         |        
|                                    |                                        | Net Phelps Dodge share               |  |         | 355,042 |      |  |         | 340,114 |      |  |         | 290,792 |  |  |         | 282,212 |  |  |         | 276,214 | 
|                                    |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |         |        
|Grade of ore mined  percent copper |                                        |                                      |  |         |         |      |  |         |         |      |  |         |         |  |  |         |         |  |  |        
|                                   
|                                   
|                                   
|                                   
|                                    | Bagdad  mill                          |                                      |  | 0.43    |         |      |  | 0.43    |         |      |  | 0.43    |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Bagdad  leach                         |                                      |  | 0.28    |         |      |  |        |         |      |  |        |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Candelaria  mill                      |                                      |  | 0.96    |         |      |  | 0.93    |         |      |  | 1.22    |         |  |  | 1.07    |         |  |  | 1.45    |        
|                                   
|                                   
|                                   
|                                   
|                                    | Cerro Verde  leach                    |                                      |  | 0.53    |         |      |  | 0.59    |         |      |  | 0.78    |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Chino  mill                           |                                      |  | 0.79    |         |      |  | 0.83    |         |      |  | 0.59    |         |  |  | 0.68    |         |  |  | 0.69    |        
|                                   
|                                   
|                                   
|                                   
|                                    | Chino  leach                          |                                      |  | 0.48    |         |      |  | 0.22    |         |      |  | 0.25    |         |  |  | 0.18    |         |  |  | 0.17    |        
|                                   
|                                   
|                                   
|                                   
|                                    | Cobre  mill                           |                                      |  |        |         |      |  |        |         |      |  | 1.00    |         |  |  | 0.79    |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | El Abra  leach                        |                                      |  | 0.61    |         |      |  | 0.60    |         |      |  | 0.79    |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Miami  leach                          |                                      |  | 0.41    |         |      |  | 0.71    |         |      |  | 0.52    |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Morenci  mill                         |                                      |  | 0.78    |         |      |  | 0.71    |         |      |  | 0.68    |         |  |  | 0.68    |         |  |  | 0.72    |        
|                                   
|                                   
|                                   
|                                   
|                                    | Morenci  leach                        |                                      |  | 0.30    |         |      |  | 0.26    |         |      |  | 0.26    |         |  |  | 0.26    |         |  |  | 0.26    |        
|                                   
|                                   
|                                   
|                                   
|                                    | Ojos del Salado  mill                 |                                      |  |        |         |      |  |        |         |      |  |        |         |  |  | 1.64    |         |  |  | 1.54    |        
|                                   
|                                   
|                                   
|                                   
|                                    | Sierrita  mill                        |                                      |  | 0.29    |         |      |  | 0.29    |         |      |  | 0.29    |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Sierrita  leach                       |                                      |  | 0.22    |         |      |  | 0.20    |         |      |  | 0.20    |         |  |  |        |         |  |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    | Tyrone  leach                         |                                      |  | 0.29    |         |      |  | 0.26    |         |      |  | 0.28    |         |  |  | 0.26    |         |  |  | 0.29    |        
|                                   
|                                   
|                                   
|                                   
|                                    |                                        | Average copper grade  mill          |  |         | 0.54    |      |  |         | 0.59    |      |  |         | 0.75    |  |  |         | 0.80    |  |  |         | 0.85    | 
|                                   
|                                   
|                                   
|                                   
|                                    |                                        | Average copper grade  leach         |  |         | 0.38    |      |  |         | 0.33    |      |  |         | 0.28    |  |  |         | 0.25    |  |  |         | 0.25    | 





---



##### Table of Contents



- 7 -




Phelps Dodge Copper Production Data, by Source (a)
(thousand tons)

|                      |                                        |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |       | 
|--------------------- | -------------------------------------- | --------------------------- |  | ----- | ------- | ---- |  | ----- | ------- | ---- |  | ----- | ------- |  |  | ----- | ------- |  |  | ----- | ----- | 
|                      |                                        |                             |  | 2001  |         | 2000 |  | 1999  |         | 1998 |  | 1997 
|                      |                                        |                             |  |       |         |      |  |       |         |      |  |      
|Copper Production (d) |                                        |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |      
|                     
|                     
|                     
|                     
|                      | Bagdad:                                |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Concentrate                 |  |       | 118.1   |      |  |       | 111.5   |      |  |       | 22.3    |  |  |       |        |  |  |       |      | 
|                     
|                     
|                     
|                     
|                      |                                        | Electrowon                  |  |       | 10.5    |      |  |       | 11.8    |      |  |       | 2.9     |  |  |       |        |  |  |       |      | 
|                     
|                     
|                     
|                     
|                      | Candelaria:                            |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Concentrate                 |  |       | 243.2   |      |  |       | 224.7   |      |  |       | 250.1   |  |  |       | 236.9   |  |  |       | 171.7 | 
|                     
|                     
|                     
|                     
|                      | Cerro Verde:                           |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Electrowon                  |  |       | 84.9    |      |  |       | 78.7    |      |  |       | 16.2    |  |  |       |        |  |  |       |      | 
|                     
|                     
|                     
|                     
|                      | Chino:                                 |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Concentrate and precipitate |  |       | 18.3    |      |  |       | 87.0    |      |  |       | 74.3    |  |  |       | 85.5    |  |  |       | 99.9  | 
|                     
|                     
|                     
|                     
|                      |                                        | Electrowon                  |  |       | 59.9    |      |  |       | 48.6    |      |  |       | 55.8    |  |  |       | 72.4    |  |  |       | 69.1  | 
|                     
|                     
|                     
|                     
|                      | Cobre:                                 |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Concentrate                 |  |       |        |      |  |       |        |      |  |       | 6.6     |  |  |       | 34.2    |  |  |       |      | 
|                     
|                     
|                     
|                     
|                      | El Abra:                               |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Electrowon                  |  |       | 239.8   |      |  |       | 217.4   |      |  |       | 52.8    |  |  |       |        |  |  |       |      | 
|                     
|                     
|                     
|                     
|                      | Miami:                                 |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Electrowon                  |  |       | 44.1    |      |  |       | 59.3    |      |  |       | 13.2    |  |  |       |        |  |  |       |      | 
|                     
|                     
|                     
|                     
|                      | Morenci:                               |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Concentrate                 |  |       | 23.5    |      |  |       | 132.3   |      |  |       | 195.2   |  |  |       | 247.2   |  |  |       | 269.9 | 
|                     
|                     
|                     
|                     
|                      |                                        | Electrowon                  |  |       | 368.1   |      |  |       | 284.7   |      |  |       | 284.7   |  |  |       | 275.8   |  |  |       | 272.3 | 
|                     
|                     
|                     
|                     
|                      | Ojos del Salado:                       |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Concentrate                 |  |       |        |      |  |       |        |      |  |       |        |  |  |       | 17.9    |  |  |       | 21.1  | 
|                     
|                     
|                     
|                     
|                      | Sierrita:                              |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Concentrate                 |  |       | 94.6    |      |  |       | 95.9    |      |  |       | 19.7    |  |  |       |        |  |  |       |      | 
|                     
|                     
|                     
|                     
|                      |                                        | Electrowon                  |  |       | 26.3    |      |  |       | 26.5    |      |  |       | 5.8     |  |  |       |        |  |  |       |      | 
|                     
|                     
|                     
|                     
|                      | Tyrone:                                |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |      
|                     
|                     
|                     
|                     
|                      |                                        | Precipitate                 |  |       |        |      |  |       |        |      |  |       |        |  |  |       |        |  |  |       | 2.6   | 
|                     
|                     
|                     
|                     
|                      |                                        | Electrowon                  |  |       | 76.4    |      |  |       | 79.3    |      |  |       | 80.1    |  |  |       | 82.6    |  |  |       | 76.6  | 
|                     
|                     
|                     
|                     
|                      | Other                                  |                             |  | 3.2   |         |      |  | 1.3   |         |      |  | 1.6   |         |  |  | 0.2   |         |  |  | 0.9   |      
|                      |                                        |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |       | 
|                      |                                        | Total copper production     |  |       | 1,410.9 |      |  |       | 1,459.0 |      |  |       | 1,081.3 |  |  |       | 1,052.7 |  |  |       | 984.1 | 
|                     
|                     
|                     
|                     
|                      | Less minority participants shares (c) |                             |  | 250.8 |         |      |  | 258.7 |         |      |  | 191.2 |         |  |  | 178.7 |         |  |  | 172.0 |      
|                      |                                        |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |       | 
|                      |                                        | Net Phelps Dodge share      |  |       | 1,160.1 |      |  |       | 1,200.3 |      |  |       | 890.1   |  |  |       | 874.0   |  |  |       | 812.1 | 
|                      |                                        |                             |  |       |         |      |  |       |         |      |  |       |         |  |  |       |         |  |  |       |       | 





---



##### Table of Contents



- 8 -




Phelps Dodge Metal Production and Sales (a) (d)

|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |         | 
|-------------------------------------------------- | -------------------------------------- | ---------------------- | ---- | ------- | ------- | ---- | ---- | ------- | ------- | ---- | ---- | ------- | ----- |  | ---- | ------- | ------- |  | ---- | ------- | ------- | 
|                                                   |                                        |                        |      | 2001    |         | 2000 |      | 1999    |         | 1998 |      | 1997   
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |        
|Copper (thousand tons)                             |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Total production                       |                        |      | 1,410.9 |         |      |      | 1,459.0 |         |      |      | 1,081.3 |       |  |      | 1,052.7 |         |  |      | 984.1   |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Less minority participants shares (c) |                        |      | 250.8   |         |      |      | 258.7   |         |      |      | 191.2   |       |  |      | 178.7   |         |  |      | 172.0   |        
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|                                                   |                                        | Net Phelps Dodge share |      |         | 1,160.1 |      |      |         | 1,200.3 |      |      |         | 890.1 |  |      |         | 874.0   |  |      |         | 812.1   | 
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|                                                   | Sales (e)                              |                        |      | 1,170.8 |         |      |      | 1,200.6 |         |      |      | 884.2   |       |  |      | 876.3   |         |  |      | 812.8   |        
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|Gold (thousand ounces)                             |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Total production                       |                        |      | 140     |         |      |      | 148     |         |      |      | 174     |       |  |      | 185     |         |  |      | 139     |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Less minority participants shares (c) |                        |      | 31      |         |      |      | 31      |         |      |      | 35      |       |  |      | 36      |         |  |      | 30      |        
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|                                                   |                                        | Net Phelps Dodge share |      |         | 109     |      |      |         | 117     |      |      |         | 139   |  |      |         | 149     |  |      |         | 109     | 
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|                                                   | Sales (e)                              |                        |      | 77      |         |      |      | 120     |         |      |      | 136     |       |  |      | 145     |         |  |      | 113     |        
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|Silver (thousand ounces)                           |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Total production                       |                        |      | 3,773   |         |      |      | 4,877   |         |      |      | 4,532   |       |  |      | 3,566   |         |  |      | 3,254   |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Less minority participants shares (c) |                        |      | 490     |         |      |      | 549     |         |      |      | 842     |       |  |      | 713     |         |  |      | 677     |        
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|                                                   |                                        | Net Phelps Dodge share |      |         | 3,283   |      |      |         | 4,328   |      |      |         | 3,690 |  |      |         | 2,853   |  |      |         | 2,577   | 
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|                                                   | Sales (e)                              |                        |      | 2,720   |         |      |      | 4,578   |         |      |      | 3,375   |       |  |      | 3,095   |         |  |      | 2,637   |        
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|Molybdenum (thousand pounds)                       |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Total production                       |                        |      | 55,515  |         |      |      | 51,478  |         |      |      | 8,303   |       |  |      | 1,369   |         |  |      | 2,121   |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Less minority participants share (c)  |                        |      | 50      |         |      |      | 419     |         |      |      | 241     |       |  |      | 355     |         |  |      | 472     |        
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|                                                   |                                        | Net Phelps Dodge share |      |         | 55,465  |      |      |         | 51,059  |      |      |         | 8,062 |  |      |         | 1,014   |  |      |         | 1,649   | 
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|                                                   | Sales                                  |                        |      | 56,714  |         |      |      | 57,988  |         |      |      | 11,417  |       |  |      | 1,050   |         |  |      | 1,272   |        
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|Sulfuric acid (thousand tons) (f)                  |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Total production                       |                        |      | 1,236.7 |         |      |      | 1,231.8 |         |      |      | 1,172.1 |       |  |      | 1,222.1 |         |  |      | 1,263.4 |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Less minority participants share (c)  |                        |      | 190.2   |         |      |      | 186.3   |         |      |      | 212.5   |       |  |      | 200.9   |         |  |      | 210.5   |        
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|                                                   |                                        | Net Phelps Dodge share |      |         | 1,046.5 |      |      |         | 1,045.5 |      |      |         | 959.6 |  |      |         | 1,021.2 |  |      |         | 1,052.9 | 
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|                                                   | Sales                                  |                        |      | 15.9    |         |      |      | 4.2     |         |      |      | 625.5   |       |  |      | 196.1   |         |  |      | 383.5   |        
|                                                   |                                        |                        |      |         |         |      |      |         |         |      |      |         |       |  |      |         |         |  |      |         |        
|COMEX copper price per pound (g)                   |                                        | $                      | 0.73 |         |         |      | 0.84 |         |         |      | 0.72 |         |       |  | 0.75 |         |         |  | 1.04 |        
|                                                  
|                                                  
|                                                  
|                                                  
|LME copper price per pound (h)                     |                                        | $                      | 0.72 |         |         |      | 0.82 |         |         |      | 0.71 |         |       |  | 0.75 |         |         |  | 1.03 |        
|                                                  
|                                                  
|                                                  
|                                                  
|Metals Week  molybdenum oxide price per pound (i) |                                        | $                      | 2.36 |         |         |      | 2.51 |         |         |      | 2.66 |         |       |  | 3.42 |         |         |  | 4.31 |        





---



##### Table of Contents



- 9 -




Phelps Dodge Smelter, Refinery and Rod Production (a)

|                        |                                       |                        |       |         |       |      |         |         |       |      |       |         |       |  |       |         |       |  |       |         |       | 
|----------------------- | ------------------------------------- | ---------------------- | ----- | ------- | ----- | ---- | ------- | ------- | ----- | ---- | ----- | ------- | ----- |  | ----- | ------- | ----- |  | ----- | ------- | ----- | 
|                        |                                       |                        |       | 2001    |       | 2000 |         | 1999    |       | 1998 |       | 1997   
|                        |                                       |                        |       |         |       |      |         |         |       |      |       |        
|Smelters (j)            |                                       |                        |       |         |       |      |         |         |       |      |       |         |       |  |       |         |       |  |       |        
|                       
|                       
|                       
|                       
|                        | Total copper (thousand tons)          |                        |       | 463.5   |       |      |         | 439.8   |       |      |       | 267.4   |       |  |       | 405.8   |       |  |       | 419.1   |      
|                       
|                       
|                       
|                       
|                        | Less minority participants share (c) |                        |       | 36.7    |       |      |         | 49.5    |       |      |       | 57.0    |       |  |       | 60.1    |       |  |       | 64.5    |      
|                        |                                       |                        |       |         |       |      |         |         |       |      |       |         |       |  |       |         |       |  |       |         |      
|                        |                                       | Net Phelps Dodge share |       |         | 426.8 |      |         |         | 390.3 |      |       |         | 210.4 |  |       |         | 345.7 |  |       |         | 354.6 | 
|                        |                                       |                        |       |         |       |      |         |         |       |      |       |         |       |  |       |         |       |  |       |         |      
|Refineries (k)          |                                       |                        |       |         |       |      |         |         |       |      |       |         |       |  |       |         |       |  |       |        
|                       
|                       
|                       
|                       
|                        | Copper (thousand tons)                |                        |       | 502.6   |       |      |         | 471.2   |       |      |       | 422.6   |       |  |       | 429.3   |       |  |       | 455.3   |      
|                       
|                       
|                       
|                       
|                        | Gold (thousand ounces)                |                        |       | 86.6    |       |      |         | 52.6    |       |      |       | 72.9    |       |  |       | 74.6    |       |  |       | 107.9   |      
|                       
|                       
|                       
|                       
|                        | Silver (thousand ounces)              |                        |       | 3,719.1 |       |      |         | 3,838.9 |       |      |       | 3,681.5 |       |  |       | 2,523.8 |       |  |       | 2,843.0 |      
|                       
|                       
|                       
|                       
|Rod (thousand tons) (l) |                                       |                        | 879.8 |         |       |      | 1,153.9 |         |       |      | 805.1 |         |       |  | 764.4 |         |       |  | 747.0 |        

Footnotes to tables on pages 6 through 9:



---

|(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, 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 molybdenum dealer oxide average price per pound  as quoted in PlattsMetals 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.                                                                                                                                                                         





---



##### Table of Contents



- 10 -




Other Mining Operations and 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. The common stock we hold as well as that held by Grupo Mexico and
Cerro Trading Company is not registered for trading. 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. During 2001,
we received dividend payments of $4.0 million from SPCC, compared with $3.8
million in 2000 and $1.7 million in 1999.

In May 1997, we acquired an indirect 40 percent voting interest,
representing a 26.67 percent economic interest, in a leading Peruvian zinc
mining company, Compañía San Ignacio de Morococha S.A. (SIMSA) and its San
Vicente mine. SIMSAs other shareholder with voting shares is 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.

Other operations include the Tohono copper operation in south central
Arizona, which consists of an open pit, heap-leach pads and an SX/EW operation
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 pads 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.

In March 2000, we sold Cyprus Australia Coal Company, a wholly owned
subsidiary which we acquired as part of the Cyprus transaction, to a subsidiary
of Glencore International for $150 million in cash.

In the 1999 second quarter, we sold Phelps Dodge Mining (Pty.) Limited,
our wholly owned subsidiary that operated the Witkop open-pit fluorspar mine
and mill in the western Transvaal, South Africa. Witkop produced acid-grade
fluorspar concentrates for customers in South Africa, the United States,
Europe, Australia and Asia. The mine was sold to The South African Land and
Exploration Company Limited for $12.5 million in cash.




Exploration

Our exploration groups primary objectives are to increase the Companys
reserve base through discoveries, acquisitions and joint ventures and, where
appropriate, to diversify into other metals, minerals and geographic areas.
Exploration is focused on large-scale copper, and copper and gold deposits in
the four principal copper-producing regions of the world: southwest North
America, South American Cordillera, Central Africa and Australia, as well as in
other prospective areas. This group operates in more than 14 countries and
maintains offices in Australia, Brazil, Canada, Chile, India, Indonesia,
Mexico, Peru and the United States.

In 2001, Phelps Dodge expended $36.8 million on worldwide exploration,
compared with $39.7 million in 2000 and $41.0 million in 1999. Approximately
14 percent of the 2001 expenditures occurred in the United States with 13
percent being spent at our U.S. mines. This compares with 23 percent in 2000
(17 percent at U.S. mine sites) and 25 percent in 1999 (19 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
10 percent at our South American mine sites.

During 2001, exploration efforts continued at our existing copper
operations. A major drilling program to delineate mineralized material for the
first phase of mining at the Garfield area of Morenci was completed, and mining
of this deposit began in May. Significant new zones of mineralization were
discovered adjacent to the Candelaria mine in Chile, and near the Tyrone mine
in New Mexico. Exploration programs continued to define additional sulfide
mineralized material at our El Abra and Cerro Verde mines.

Environmental permitting is in progress to advance development of the Dos
Pobres and San Juan deposits in the Safford District in eastern Arizona. The
two deposits contain a total of 630 million tons of leachable reserves with a
grade of 0.32 percent copper. Additionally, the Dos Pobres deposit contains
mineralized material consisting of 330 million tons of primary sulfides with a
grade of 0.65 percent copper.

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.

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 does not
meet our development criteria.





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##### Table of Contents



- 11 -

Work on our Ambatovy nickel/cobalt deposit in central Madagascar remains
on hold pending resolution of certain regulatory and permitting issues, and
evaluation of strategic options. Mineralized material of 210 million tons at
an estimated grade of 1.1 percent nickel and 0.1 percent cobalt previously was
identified in a feasibility study.

The Kansanshi project in Zambia was sold to First Quantum Minerals during
2001 for $2.5 million in cash, 1.4 million shares of First Quantum stock, and
future cash payments upon production.




Process Technology

The objectives of PD Minings process technology center (PTC) in Safford,
Arizona, are to enhance and strengthen the Companys competitive position in
the world copper market. The PTC was established in 1996 to provide
metallurgical process development and process optimization services,
metallurgical testing and advanced material characterization services to meet
the needs of PD Mining 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. These activities
dovetail with our Quest for Zeroprogram (refer to discussion of Quest for Zero
program in Managements Discussion and Analysis). PTC employs approximately 60
engineers, scientists and technical support staff. The facilities include:



| |  | a large-column leaching facility for testing run-of-mine material;                                         
|- |  | -----------------------------------------------------------------------------------------------------------
| 
| |  | a continuous SX/EW test facility capable of producing 1.5 tons of cathode copper per day;                  
| 
| |  | a small-column leaching test facility with a capacity of 250 tests per year for crushed material;          
| 
| |  | a metallurgical laboratory for biological leaching and other biological applications; and                  
| 
| |  | a material characterization laboratory with advanced mineralogy, analytical 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
2001 were:



| |  | the completion of continuous pilot plant testing of Phelps Dodges proprietary concentrate leaching technology at the Hazen
Research facility in Golden, Colorado;           
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the execution of a technology development agreement with Placer Dome Inc. for the joint development of concentrate leaching
technology;                                      
| 
| |  | the advancement of proprietary technology for heap and stockpile leaching of low-grade chalcopyrite ores;                                                                    
| 
| |  | the investigation of alternative sulfuric acid production techniques; and                                                                                                    
| 
| |  | the development of specialized procedures for the use of the QemSCAN scanning electron microscope and the ordering of a
second unit to be installed at the PTC in early 2002.





---



##### Table of Contents



- 12 -




Ore Reserves

Ore reserves at each of our active operations and at Ajo, Chino, Climax, Cobre,
Miami, Ojos del Salado, and Safford have been estimated as follows:

|                        |          |                                               |         |        |  |          |      |         |  |        |      |               |  |                    |       |          |  |  |      |  |  |  |         |  |  |  |      |  |  |  |       | 
|----------------------- | -------- | --------------------------------------------- | ------- | ------ |  | -------- | ---- | ------- |  | ------ | ---- | ------------- |  | ------------------ | ----- | -------- |  |  | ---- |  |  |  | ------- |  |  |  | ---- |  |  |  | ----- | 
|                        |          | Total Reserves Estimated at December 31, 2001
|                        |          |                                              
|                        |          |                                               |         |        |  |          |      |         |  |        |      |               |  | Leachable Reserves
|                        | Millable |                                               |         |        |  |          |     
|                        |          |                                               |         |        |  | Reserves |      |         |  |        |      | Crushed Leach |  | Run-of-Mine (ROM)  |       | Phelps  
|                        |          |                                               |         |        |  |          |      | Dodge  
|                        |          | Million                                       |         | %      |  | %        |      | Million |  | %      |      | Million       |  | %                  |       | Interest
|                        |          | Tons                                          |         | Copper |  | Moly     |      | Tons    |  | Copper |      | Tons          |  | Copper             |       | (%)     
|                        |          |                                               |         |        |  |          |      |         |  |        |      |               |  |                    |       |         
|Ajo (1)                 |          |                                               | 150.0   |        |  |          | 0.56 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  |        |  |  |  |     |  |  |  | 100.0 | 
|                       
|                       
|                       
|                       
|Bagdad                  |          |                                               | 884.9   |        |  |          | 0.36 |         |  |        | 0.02 |               |  |                    |      |          |  |  |     |  |  |  | 17.7    |  |  |  | 0.29 |  |  |  | 100.0 | 
|                       
|                       
|                       
|                       
|Candelaria (2)          |          |                                               | 375.7   |        |  |          | 0.83 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  |        |  |  |  |     |  |  |  | 80.0  | 
|                       
|                       
|                       
|                       
|Cerro Verde (3)         |          |                                               | 464.0   |        |  |          | 0.61 |         |  |        | 0.02 |               |  |                    | 207.2 |          |  |  | 0.66 |  |  |  | 123.3   |  |  |  | 0.28 |  |  |  | 82.0  | 
|                       
|                       
|                       
|                       
|Chino (4)               |          |                                               | 303.6   |        |  |          | 0.59 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  | 448.8   |  |  |  | 0.30 |  |  |  | 66.7  | 
|                       
|                       
|                       
|                       
|Cobre (4)               |          |                                               | 132.4   |        |  |          | 0.73 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  | 98.0    |  |  |  | 0.35 |  |  |  | 100.0 | 
|                       
|                       
|                       
|                       
|El Abra (5)             |          |                                               |        |        |  |          |     |         |  |        |     |               |  |                    | 353.0 |          |  |  | 0.55 |  |  |  | 383.8   |  |  |  | 0.30 |  |  |  | 51.0  | 
|                       
|                       
|                       
|                       
|Miami (4)               |          |                                               |        |        |  |          |     |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  | 117.6   |  |  |  | 0.38 |  |  |  | 100.0 | 
|                       
|                       
|                       
|                       
|Morenci (6)             |          |                                               | 128.7   |        |  |          | 0.41 |         |  |        |     |               |  |                    | 468.8 |          |  |  | 0.60 |  |  |  | 2,853.0 |  |  |  | 0.22 |  |  |  | 85.0  | 
|                       
|                       
|                       
|                       
|Ojos del Salado (2) (4) |          |                                               | 18.7    |        |  |          | 1.32 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  |        |  |  |  |     |  |  |  | 100.0 | 
|                       
|                       
|                       
|                       
|Safford (1)             |          |                                               |        |        |  |          |     |         |  |        |     |               |  |                    | 474.7 |          |  |  | 0.39 |  |  |  | 151.6   |  |  |  | 0.16 |  |  |  | 100.0 | 
|                       
|                       
|                       
|                       
|Sierrita                |          |                                               | 1,052.1 |        |  |          | 0.27 |         |  |        | 0.03 |               |  |                    |      |          |  |  |     |  |  |  | 62.5    |  |  |  | 0.19 |  |  |  | 100.0 | 
|                       
|                       
|                       
|                       
|Tyrone                  |          |                                               |        |        |  |          |     |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  | 434.3   |  |  |  | 0.29 |  |  |  | 100.0 | 
|                       
|                       
|                       
|                       
|Climax (4)              |          |                                               | 145.2   |        |  |          |     |         |  |        | 0.23 |               |  |                    |      |          |  |  |     |  |  |  |        |  |  |  |     |  |  |  | 100.0 | 
|                       
|                       
|                       
|                       
|Henderson               |          |                                               | 175.9   |        |  |          |     |         |  |        | 0.21 |               |  |                    |      |          |  |  |     |  |  |  |        |  |  |  |     |  |  |  | 100.0 | 

|                |          |                                               |         |        |  |          |      |         |  |        |      |               |  |                    |       |          |  |  |      |  |  |  |         |  |  |  |      |  |  |  |       | 
|--------------- | -------- | --------------------------------------------- | ------- | ------ |  | -------- | ---- | ------- |  | ------ | ---- | ------------- |  | ------------------ | ----- | -------- |  |  | ---- |  |  |  | ------- |  |  |  | ---- |  |  |  | ----- | 
|                |          | Total Reserves Estimated at December 31, 2000
|                |          |                                              
|                |          |                                               |         |        |  |          |      |         |  |        |      |               |  | Leachable Reserves
|                | Millable |                                               |         |        |  |          |     
|                |          |                                               |         |        |  | Reserves |      |         |  |        |      | Crushed Leach |  | Run-of-Mine (ROM)  |       | Phelps  
|                |          |                                               |         |        |  |          |      | Dodge  
|                |          | Million                                       |         | %      |  | %        |      | Million |  | %      |      | Million       |  | %                  |       | Interest
|                |          | Tons                                          |         | Copper |  | Moly     |      | Tons    |  | Copper |      | Tons          |  | Copper             |       | (%)     
|                |          |                                               |         |        |  |          |      |         |  |        |      |               |  |                    |       |         
|Ajo             |          |                                               | 150.0   |        |  |          | 0.56 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  |         |  |  |  |      |  |  |  | 100.0 | 
|               
|               
|               
|               
|Bagdad          |          |                                               | 915.7   |        |  |          | 0.36 |         |  |        | 0.02 |               |  |                    |      |          |  |  |     |  |  |  | 17.7    |  |  |  | 0.29 |  |  |  | 100.0 | 
|               
|               
|               
|               
|Candelaria      |          |                                               | 403.4   |        |  |          | 0.84 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  |        |  |  |  |     |  |  |  | 80.0  | 
|               
|               
|               
|               
|Cerro Verde     |          |                                               | 464.0   |        |  |          | 0.61 |         |  |        | 0.02 |               |  |                    | 167.0 |          |  |  | 0.65 |  |  |  | 27.0    |  |  |  | 0.33 |  |  |  | 82.0  | 
|               
|               
|               
|               
|Chino           |          |                                               | 310.0   |        |  |          | 0.60 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  | 476.2   |  |  |  | 0.30 |  |  |  | 66.7  | 
|               
|               
|               
|               
|Cobre           |          |                                               | 132.4   |        |  |          | 0.73 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  | 98.0    |  |  |  | 0.35 |  |  |  | 100.0 | 
|               
|               
|               
|               
|El Abra         |          |                                               |        |        |  |          |     |         |  |        |     |               |  |                    | 852.1 |          |  |  | 0.45 |  |  |  |        |  |  |  |     |  |  |  | 51.0  | 
|               
|               
|               
|               
|Miami           |          |                                               |        |        |  |          |     |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  | 127.9   |  |  |  | 0.38 |  |  |  | 100.0 | 
|               
|               
|               
|               
|Morenci         |          |                                               | 362.7   |        |  |          | 0.64 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  | 1,680.9 |  |  |  | 0.23 |  |  |  | 85.0  | 
|               
|               
|               
|               
|Ojos del Salado |          |                                               | 18.7    |        |  |          | 1.32 |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  |        |  |  |  |     |  |  |  | 100.0 | 
|               
|               
|               
|               
|Safford         |          |                                               | 330.0   |        |  |          | 0.65 |         |  |        |     |               |  |                    | 470.0 |          |  |  | 0.39 |  |  |  | 160.0   |  |  |  | 0.16 |  |  |  | 100.0 | 
|               
|               
|               
|               
|Sierrita        |          |                                               | 1,091.6 |        |  |          | 0.27 |         |  |        | 0.03 |               |  |                    |      |          |  |  |     |  |  |  | 48.5    |  |  |  | 0.19 |  |  |  | 100.0 | 
|               
|               
|               
|               
|Tyrone          |          |                                               |        |        |  |          |     |         |  |        |     |               |  |                    |      |          |  |  |     |  |  |  | 460.7   |  |  |  | 0.30 |  |  |  | 100.0 | 
|               
|               
|               
|               
|Climax          |          |                                               | 145.2   |        |  |          |     |         |  |        | 0.23 |               |  |                    |      |          |  |  |     |  |  |  |        |  |  |  |     |  |  |  | 100.0 | 
|               
|               
|               
|               
|Henderson       |          |                                               | 181.5   |        |  |          |     |         |  |        | 0.21 |               |  |                    |      |          |  |  |     |  |  |  |        |  |  |  |     |  |  |  | 100.0 | 



---

|(1) |  | The Safford and Ajo properties are at various stages in the permitting process. It is likely that initial mining at Safford will target
leach reserves and the underground mill reserves will not be targeted until later in the mine life. Therefore, underground mill reserves
were reclassified as other mineralized material; however, there has been no change in the underlying drill data for the underground
mill reserves.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The Candelaria and Ojos del Salado deposits also contain, respectively, 0.006 ounces and 0.008 ounces of gold per ton.                                                                                                                                                                                                                                                                                                             
|   
|   
|   
|   
|(3) |  | PD owns 82 percent of Cerro Verdes stock and 100 percent of copper production and reserves. Leach reserves were increased
due to a new mine design based on additional drilling.                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|(4) |  | Cobre, Ojos del Saldo, Miami, Chino and Climax are on care-and-maintenance status with no current mining taking place pending an
improvement in the prices of copper and molybdenum.                                                                                                                                                                                                                                               
|   
|   
|   
|   
|(5) |  | El Abra reserves decreased as a result of additional in-fill drilling and a new pit design completed at the end of 2001.                                                                                                                                                                                                                                                                                                           
|   
|   
|   
|   
|(6) |  | The Morenci reserves show the transfer of mill reserves to leachable reserves and the conversion of other mineralized material
into reserves based on new drilling data.                                                                                                                                                                                                                                                           

Our estimated share of aggregate copper and molybdenum ore reserves at the above named properties as of December 31, 2001 is as follows:

|                                                        |  |      |      |      |  |      |      |      |  |      |      |  |  |  |      |  |  |  |      | 
|------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- |  |  |  | ---- |  |  |  | ---- | 
|                                                        |  | 2001 |      | 2000 |  | 1999 |      | 1998 |  | 1997
|                                                        |  |      |      |      |  |      |      |      |  |     
|Milling reserves (billion tons)                         |  |      | 3.6  |      |  |      | 4.3  |      |  |      | 4.2  |  |  |  | 1.6  |  |  |  | 1.6  | 
|                                                       
|                                                       
|                                                       
|                                                       
|Leaching reserves (billion tons)                        |  |      | 5.2  |      |  |      | 3.8  |      |  |      | 4.1  |  |  |  | 3.2  |  |  |  | 2.5  | 
|                                                       
|                                                       
|                                                       
|                                                       
|Commercially recoverable copper (million of tons)       |  |      | 23.0 |      |  |      | 24.1 |      |  |      | 24.4 |  |  |  | 14.5 |  |  |  | 13.7 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Commercially recoverable molybdenum (billion of pounds) |  |      | 2.1  |      |  |      | 2.2  |      |  |      | 2.2  |  |  |  |     |  |  |  |     | 





---



##### Table of Contents



- 13 -

Ore reserves are those estimated quantities of ore that may be mined
profitably and processed for extraction of their constituent values. Estimates
of our reserves are based upon our engineering evaluations of assay values
derived from samplings 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. Leaching reserves include copper estimated to be
recoverable from leach reserves remaining to be mined at Bagdad, Cerro Verde,
Chino, Cobre, El Abra, Miami, Morenci, Safford, Sierrita and Tyrone.
Commercially recoverable copper includes our share of the amount of copper
estimated to be recoverable from milling and leaching reserves as well as the
copper that will be recovered from existing stockpiles of leach material at
Bagdad, Cerro Verde, Chino, Cobre, El Abra, Miami, Morenci, Sierrita and
Tyrone.

Ore reserves projected as of December 31, 2001, for Southern Peru Copper
Corporation (in which we hold a 14.0 percent interest), based on available
information, were 2.0 billion tons of millable reserves at a grade of 0.68
percent copper and 1.1 billion tons of leachable reserves at an average grade
of 0.22 percent copper. These in-pit reserves are the combined totals for both
the Cuajone and Toquepala properties.

We hold various other 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, 2001:

|                      |  |            |  |         |     |                  |  |                   |      |          |  |        |       |        |  |          |      |  |  |  |      |  |  |  |       |  |  | 
|--------------------- |  | ---------- |  | ------- | --- | ---------------- |  | ----------------- | ---- | -------- |  | ------ | ----- | ------ |  | -------- | ---- |  |  |  | ---- |  |  |  | ----- |  |  | 
|                      |  |            |  |         |     | Milling Material |  | Leaching Material |      |          |  |        |       | Phelps
|                      |  |            |  |         |     |                  |  |                   |      |          |  |        |       | Dodge 
|                      |  |            |  |         |     | Millions         |  | %                 |      | Millions |  | %      |       | %      |  | Interest
|Property/Deposit      |  | Location   |  | of Tons |     | Copper           |  | of Tons           |      | Copper   |  | Nickel |       | (%)   
|                      |  |            |  |         |     |                  |  |                   |      |          |  |        |       |       
|Ambatovy*             |  | Madagascar |  |         |    |                  |  |                   |     |          |  |        | 210   |        |  |          |     |  |  |  | 1.10 |  |  |  | 100.0 | 
|                     
|                     
|                     
|                     
|Candelaria Norte**    |  | Chile      |  |         | 12  |                  |  |                   | 2.15 |          |  |        |      |        |  |          |     |  |  |  |     |  |  |  | 80.0  | 
|                     
|                     
|                     
|                     
|Cochise/Bisbee        |  | Arizona    |  |         |    |                  |  |                   |     |          |  |        | 276   |        |  |          | 0.47 |  |  |  |     |  |  |  | 100.0 | 
|                     
|                     
|                     
|                     
|El Abra               |  | Chile      |  |         | 650 |                  |  |                   | 0.53 |          |  |        | 100   |        |  |          | 0.31 |  |  |  |     |  |  |  | 51.0  | 
|                     
|                     
|                     
|                     
|Lone Star (Safford)   |  | Arizona    |  |         |    |                  |  |                   |     |          |  |        | 1,600 |        |  |          | 0.38 |  |  |  |     |  |  |  | 100.0 | 
|                     
|                     
|                     
|                     
|Lumwana               |  | Zambia     |  |         | 220 |                  |  |                   | 0.83 |          |  |        |      |        |  |          |     |  |  |  |     |  |  |  | 85.0  | 
|                     
|                     
|                     
|                     
|Morenci               |  | Arizona    |  |         |    |                  |  |                   |     |          |  |        | 1,750 |        |  |          | 0.27 |  |  |  |     |  |  |  | 85.0  | 
|                     
|                     
|                     
|                     
|Niagara (Tyrone)      |  | New Mexico |  |         |    |                  |  |                   |     |          |  |        | 500   |        |  |          | 0.29 |  |  |  |     |  |  |  | 100.0 | 
|                     
|                     
|                     
|                     
|Safford (Underground) |  | Arizona    |  |         | 330 |                  |  |                   | 0.65 |          |  |        |      |        |  |          |     |  |  |  |     |  |  |  | 100.0 | 
|                     
|                     
|                     
|                     
|Sanchez (Safford)     |  | Arizona    |  |         |    |                  |  |                   |     |          |  |        | 230   |        |  |          | 0.29 |  |  |  |     |  |  |  | 100.0 | 
|                     
|                     
|                     
|                     
|Tohono                |  | Arizona    |  |         | 276 |                  |  |                   | 0.70 |          |  |        | 404   |        |  |          | 0.63 |  |  |  |     |  |  |  | 100.0 | 

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note: |  | PDs ownership interests in the Kansanshi and Sossego properties
were sold during 2001. In addition, the Piedras Verdes investment
was written down in the fourth quarter of 2001, resulting in the
exclusion of its mineralized material of 290 million tons of leach
material at 0.33 percent copper.                                                                                                  
|     
|     
|     
|     
|*     |  | Ambatovy deposit also contains 0.10 percent cobalt.                                                                                                                                                                                                                                                                                                                                                      
|     
|     
|     
|     
|**    |  | Candelaria Norte (formerly referred to as Manto Norte) is a
potential underground mine. The stated tonnage also contains 0.015
ounces of gold per ton.                                                                                                                                                                                                                                                   
|     
|     
|     
|     
|Note: |  | Mineralized material is a mineralized body that 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 a 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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Sales and Competition

The majority of our copper, produced or purchased, is cast into rod. Rod
sales to outside wire and cable manufacturers constituted approximately 47
percent of PD Minings sales in 2001 and 57 percent in 2000. We also sell
copper as concentrate and cathode. 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 sell our copper rod and cathode at a premium over New York Commodity
Exchange (COMEX) or London Metal Exchange (LME) prices. We also sell copper
concentrate based on COMEX or LME prices. 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 have historically also
entered into price protection arrangements from time to time, depending on
market circumstances, to ensure a minimum price for a portion of expected
future mine production. (Refer to Managements Discussion and Analysis and
Notes 1 and 19 to the consolidated financial statements for a further
discussion of such arrangements.)

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 that
our ongoing programs to contain costs, improve productivity and employ new
technologies will significantly narrow these cost advantages and place us in a
competitive position with respect to a number of our international competitors.
For a discussion of the effects of energy costs, see Costs beginning on page
15.

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.

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 catalysts for petroleum refining,
lubricants and feedstock for pure molybdenum metal used in electronics. A
substantial portion of Phelps Dodges expected 2002 molybdenum production is
committed for sale throughout the world pursuant to annual and/or quarterly
agreements based on prevailing market prices one month prior to the time of
sale.

The molybdenum market is generally characterized by cyclical and volatile
prices, little product differentiation and strong competition. 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. Exports from China can also influence
competitive conditions.




Prices, Supply and Consumption

Copper is an internationally traded commodity, and its prices are
effectively determined by the two major metals exchanges  COMEX and LME. 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 values.

In 2001, the COMEX copper price averaged 73 cents per pound, 11 cents less
than the 2000 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 one 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 have been 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 continues to expand
supported by increases in consumer demand, government-funded infrastructure
projects, and its recent acceptance into the World Trade Organization.

The COMEX copper price averaged 84 cents per pound for the year 2000, a
12-cent improvement over the previous year. The increase in price was
triggered by deficit market conditions created by robust demand for the metal
coupled with lower world copper production growth fol-





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lowing the closure of
nearly 780,000 metric tons of capacity during 1998 and 1999. After having
added nearly 480,000 metric tons during the previous two years, combined
Western exchange inventories topped 930,000 metric tons in early March 2000.
During the remainder of the year, LME and COMEX inventories declined by
approximately 515,000 metric tons to end the year at 415,000 metric tons, a
decline of 52 percent from the beginning of the year.

In 1999, the COMEX copper price averaged 72 cents per pound, 3 cents lower
than the 1998 average. The decrease in price from the previous year primarily
was due to a market surplus brought on by production increases and low
consumption growth. As a result of the surplus, exchange inventories grew to
record levels and the price dropped to 61 cents per pound during March. Western
World exchange inventories increased by 196,000 metric tons in 1999, following
the 1998 increase of 257,000 metric tons.

Molybdenum demand depends heavily on worldwide steel industry consumption
and to a lesser extent on chemical applications. During 2001, demand in Europe
and Japan held steady compared with 2000; however, a 10 percent reduction in
U.S. demand resulted in a global demand decrease of 3 percent year on year.
Even though worldwide molybdenum production decreased 12 percent, the
molybdenum business and prices remained depressed during 2001 as the industry
struggled to reduce a large overhang of inventory, which had been built in
prior years, and the negative impact of a global economic slowdown. Primary
mine production cuts, which took place in 2000, remained in place during 2001.
Additional supply curtailments are projected in 2002 as a result of announced
production curtailments at several large copper mines that produce molybdenum
as a by-product.

Following a brief period of rising prices in the first half of the year,
prices reversed direction and weakened throughout the second half of 2001.
Metals Weekdealer oxide prices averaged $2.36 per pound in 2001 compared with
$2.51 per pound in 2000 and $2.66 per pound in 1999. Phelps Dodge received an
average realized price of $3.64 per pound and $3.99 per pound for molybdenum
products in 2001 and 2000, respectively, reflecting a broad mix of upgraded
molybdenum products as well as technical grade molybdic oxide.




Costs

In 2001, implied unit cost of copper production increased 3 cents per
pound to 75 cents per pound primarily due to slightly higher energy costs and
depreciation expense. In 2000, implied unit cost of copper production was
adversely impacted by the effects of abnormally high spot prices for energy,
which increased our costs by approximately 4 cents per pound to 72 cents per
pound relative to those experienced in 1999. Implied unit cost of copper
production is based on PD Minings all-in operating margin per pound of copper
sold (i.e., PD Mining operating income (loss) before special items, divided by
pounds of PD-mined copper sold, plus or minus the LME copper price).

Energy, including electricity, diesel fuel and natural gas, represents a
significant portion of the production costs for PD Mining. During 2000, our
Arizona and New Mexico operations were adversely affected by significantly
higher costs for electricity, diesel fuel and natural gas.

In response to the volatile electricity market, the Company implemented a
power cost stabilization plan in March 2001 that reduced electricity-related
costs at the U.S. mining operations. The plan 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, Phelps Dodge entered into price protection
programs in late 2000 and early 2001 designed to protect the Company against a
significant upward movement in prices while retaining the flexibility to
participate in any favorable price movement. (Refer to Note 19 to the
consolidated financial statements for further discussion of this program.)

As a result of the above-mentioned plans and programs, in 2001 Phelps
Dodge was able to reduce and mitigate the impacts of volatile electricity
markets and rising diesel fuel and natural gas prices.




Environmental and Other Regulatory Matters

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. Continuously improving environmental
performance is our goal. Good progress has been made to meet the challenge of
increasingly complex environmental regulations. Major environmental programs
and developments of particular interest are summarized in the paragraphs that
follow.

The federal Clean Air Act, as amended (the Clean Air Act), has had a
significant impact, particularly on our smelters and power plants. Costs
associated with environmental compliance have increased over time, and we
expect these costs to continue to rise in the future. The 1990 Amendments to
the Clean Air Act require the U.S. Environmental Protection Agency (EPA) to
develop and implement many new requirements, and they allow states to establish
new programs to implement some of the new requirements, such as the
requirements for operating permits





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under Title V of the 1990 Amendments and
hazardous air pollutants under Title III of the 1990 Amendments. Because EPA
has not yet adopted or implemented all of the changes required by Congress, the
air quality laws will continue to expand and change in coming years as EPA
develops new requirements and then implements them or allows the states to
implement them. In response to these new laws, several of our subsidiaries
have submitted applications for, and in some cases received, Title V operating
permits. Our power plants have been evaluated for potential applicability to
Prevention of Significant Deterioration (PSD) regulations. These programs will
likely increase our regulatory obligations and compliance costs. These costs
could include implementation of maximum achievable control technology (MACT)
for those facilities determined to be a major source of federal Hazardous Air
Pollutants (HAPs). For example, it is expected that one of our smelters will
be regulated as a major source of HAPs. Until more of the implementing
regulations are adopted, more Title V permits are issued, and more experience
with the new programs is gained, it is not possible to determine the full
impact of these requirements.

The solid wastes of our domestic copper operations are subject to
regulation under the federal Resource Conservation and Recovery Act (RCRA) and
related state laws. Historically, mining wastes have been exempted from the
federal hazardous waste regulations under RCRA. As a result of decisions
made by EPA, all extraction and beneficiation wastes and 20 mineral
processing wastes retain the exemption, and are to be regulated as solid
waste, rather than as hazardous waste under RCRA Subtitle C. Only three of
the 20 exempt processing wastes are copper processing wastes. Because of
this EPA regulation, the generation and management of any other mineral,
smelting or refining waste could be subject to hazardous waste regulation if
the waste exhibits a hazardous waste characteristic or if EPA specifically
designates it as a listed hazardous waste. We have taken steps to address
the potential regulation as hazardous waste of any of our wastes which no
longer meet the definition of exempt mineral processing wastes.

In 1998, EPA finalized its supplemental Land Disposal Restriction Phase IV
(LDR) rules which impose hazardous waste regulation on processing waste or
secondary material that is stored or treated before it is recycled. This final
LDR rule also subjects mineral processing materials 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.
While EPAs final LDR rule likely will require us to continue to make
expenditures, it is not possible to determine the full impact on us of the new
LDR requirements until the requirements are fully adopted and implemented by
Arizona, New Mexico, Texas and Colorado.

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.

Our domestic copper operations are also subject to federal and state laws
and regulations protecting both surface water and groundwater quality. We
possess, or have applied for, the necessary permits or governmental approvals
presently required under these rules and regulations.

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 have received authorization to implement this program in lieu of EPA,
Arizona and New Mexico have not received such authorization and therefore the
NPDES permit program in Arizona and New Mexico continues to be implemented
primarily by EPA. Arizona recently submitted a package to EPA Region 9 to
obtain authorization to implement the NPDES permit program in Arizona. The
package could be approved as early as June 2002. The NPDES permit program also
regulates the discharge of storm water runoff from active and inactive mines.
Although EPA has issued general permits that purport to cover discharges from
active and inactive mines, there is the potential that such discharges will
have to be covered in the future by individual NPDES permits, which permits may
impose more stringent discharge limits and other conditions on storm water
discharges from such sites. 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.

Section 303(d) of the federal Clean Water Act and implementing regulations
require states to submit to EPA on a periodic basis a list of waters not
meeting water quality standards (i.e., the 303(d) list of impaired waters).
Waters on a states 303(d) list must then be prioritized for development of a
total maximum daily load (TMDL). A TMDL is a calculation of the maximum amount
of a pollutant that a waterbody can receive and still meet water quality
standards, and an allocation of that amount to the pollutants sources. The
303(d) lists for Arizona, New Mexico and Colorado identify several impaired
waterbodies in the vicinity of Phelps Dodge operations in these respective
states. TMDLs for several of these waterbodies are currently being
established. We will be required to make expenditures with respect to this
program; however, the full amount is difficult to





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estimate since the program is still being developed and refined.

Arizona 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 new facilities, activities and
structures for mining, concentrating and smelting. The APP 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, or unless a major modification
at the facility alters the existing discharge characteristics. We have
received an APP for our Morenci operations, for a portion of the Bagdad mine,
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 such costs.
We are likely to continue to have to make expenditures to comply with the APP
program and regulations.

At the Hidalgo smelter in Playas, New Mexico, in accordance with the
groundwater discharge plan approved by the New Mexico Environment Department
(NMED) under state water quality law, we continue to monitor and report to NMED
on our progress associated with groundwater quality near the smelters
compacted, clay-lined evaporation pond. We have implemented appropriate
technologies and contingency plans to protect groundwater beneath the
evaporation pond. We have constructed a cap over the evaporation pond which
was approved by NMED and have commenced a groundwater remediation program for
any existing contamination. To do this we have installed a neutralization
facility, a series of lined impoundments, and a series of pump-back wells that
are being operated to remediate groundwater and to prevent future
contamination.

On December 23, 1994, Chino, located near Silver City, New Mexico, entered
into an Administrative Order on Consent (AOC) with NMED. This AOC requires
Chino to study the environmental impacts and potential health risks associated
with portions of the Chino property affected by historical mining operations.
We acquired Chino at the end of 1986. The studies began in 1995 and, while we
currently are unaware of any additional liabilities that need to be accrued,
until the studies are completed, it is not possible to determine the nature,
extent, cost and timing of remedial work that could be required under the AOC.
Remedial work is expected to be required under the AOC.

Our mining operations are subject to laws and regulations establishing new
requirements for mined land reclamation and financial assurance. Colorado
passed a mined land reclamation law in the early 1970s establishing a Mined
Land Reclamation Board that adopted regulations in 1977. Significant changes
were made in 1993. Our Colorado mining operations have had approved mined land
reclamation plans and financial assurance under these laws for several years.
Arizona enacted its mined land reclamation law in 1994. Our Arizona mining
operations submitted proposed reclamation plans and financial assurance
following the adoption of implementing rules in 1997, and all of our Arizona
operations have approved plans and financial assurance totaling approximately
$70 million. New Mexico passed a mined land reclamation law in 1993
authorizing regulations that were adopted in 1994. The permitting process for
New Mexico mining operations commenced in December 1994. Approval of closeout
plans describing the reclamation planned for the Chino, Tyrone and Cobre mines
currently is due by October 1, 2002. Two New Mexico State agencies currently
are reviewing the permit applications for facility closure and reclamation, and
one public hearing was held on Chinos plan to protect water quality in August
2001. A second public hearing was held in February 2002 on the Chino plan to
discuss a draft permit proposed jointly by Chino and NMED. The Company is
awaiting the hearing officers decision. The cost estimate to carry out this
plan, including water treatment for 100 years, if needed, is $386 million in
current dollars. This figure compares to Chinos previous estimate of
approximately $100 million. The final cost estimate is subject to the results
of the hearing and any subsequent judicial appeals. Actual reclamation costs
may differ significantly from the cost estimate based on a variety of factors
including possible changes in legal standards over time and potential cost
savings from use of the Companys own personnel and equipment at each site
versus third-party contractor costs (under New Mexico law, financial assurance requirements are calculated based on estimated third-party costs),
advances in technology and reclamation techniques, and opportunities to prepare
each site for more efficient reclamation through careful development of the
site over time. The plan also calls for studies over the next four to five
years to refine the plan.

The Company is continuing to negotiate with the State regarding the amount
of financial assurance required to cover the $386 million cost estimate. When
adjusted to reflect net present value based upon appropriate escalation and
discount rates, the amount required for financial assurance would be reduced.
The final permits are subject to the public hearing process and consideration
of public comments, and a portion of the plan will require the issuance of a
waiver of certain standards as authorized by the New Mexico Mining Act.





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The Company expects the next hearing on the Tyrone plan in May 2002. The
anticipated cost estimate, financial assurance requirement, and actual
reclamation costs for the Tyrone plan are expected to be comparable to the
Chino plan. The initial hearing for the Cobre plan will likely occur in summer
2002. The Company expects the cost estimate for the Cobre plan to be
approximately $40 million.

New Mexicos mined land reclamation law requires financial assurance
covering reclamation costs from all companies. In contrast, Arizonas Mine
Land Reclamation Act permits a company to satisfy financial assurance
requirements by demonstrating it has financial strength to fund 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 presently has a credit rating one level above non-investment grade;
however, it has been placed on Negative Outlook. If a downgrade occurs, the
Company will need to provide financial assurance in Arizona.

The costs of surety bonds (the traditional source of financial assurance)
has increased significantly during the past six months. Also, many surety
companies are now requiring an increased level of collateral supporting the
bonds. If surety bonds are unavailable, the Company could be required to post
cash or other collateral directly in support of financial assurance
obligations.

The federal Bureau of Land Management adopted amended regulations
governing mined land reclamation for mining on federal lands in January 2001.
New financial assurance requirements for existing operations took effect in
June 2001, although the new reclamation requirements took effect only for new
mining and certain modifications to existing mining activities. Mined land
reclamation is an ongoing activity and we recognize estimated reclamation costs
using a units-of-production basis calculation. These laws and regulations and
the associated plan approval and permitting requirements will likely increase
our regulatory obligations and compliance costs over time with respect to mine
closure and reclamation.

In 1995, legislation was introduced in both the U.S. House of
Representatives and the U.S. Senate to amend the Mining Law of 1872. None of
the bills was enacted into law. Also, mining law amendments were added to the
1996 budget reconciliation bill, which was vetoed by the President. Among
other things, the amendments contained in the 1996 bill would have imposed a 5
percent net proceeds royalty on minerals extracted from federal lands, required
payment of fair market value for patenting federal lands, and required that
patented lands used for non-mining purposes revert to the federal government.
Several of these same concepts 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 $20 million in 2002 and approximately $26
million in 2003; $10 million was spent on such programs in 2001. We also
anticipate making significant capital and other expenditures beyond 2003 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 potentially material. (Refer to the discussion
of OTHER ENVIRONMENTAL MATTERS.)

We do not expect that the 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

Generally, most of the land occupied by our copper and molybdenum mines,
concentrators, SX/EW facilities, smelters, refineries, rod mills, and
molybdenum roasters or processing facilities is owned by, or is located on
unpatented mining claims owned by, the Company. Certain portions of our Miami,
Bagdad, Sierrita, Tyrone, Chino and Cobre operations 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. Cyprus Tohono Corporation holds
leases for land, water and business purposes on land owned by the Tohono
Oodham Indian Nation for its operation that is presently on
care-and-maintenance status. We also lease space for small sales offices in
various locations.





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PHELPS DODGE INDUSTRIES

PD Industries 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. In
December 2000, we announced our intention to explore strategic alternatives
for, including the potential sale of, our specialty chemicals and wire and
cable segments. In May 2001, we terminated that sales process, noting that the
then current economic environment was not delivering transactions that offered
appropriate value to our shareholders. We have continued to seek strategic
alternatives, as may be appropriate, for these businesses.




Specialty Chemicals Segment

Columbian Chemicals Company and its subsidiaries (Columbian Chemicals),
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 (although our El Dorado, Arkansas, plant is temporarily closed), with
approximately 40 percent of our production in North America and the remaining
60 percent at facilities in Europe, Asia and South America. 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 in 11 countries
and make use of distributors worldwide.

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 Chemicals Japan, a sales and distribution 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 an 110,000 metric-ton-per-year manufacturing
plant.

In October 1998, we acquired the Brazilian carbon black manufacturing
business of Copebras S.A., a subsidiary of Minorco, for $220 million. This
manufacturing facility has an annual production capacity of 170,000 metric tons
of carbon black.

In November 1999, our manufacturing facility in Bataan, Philippines, was
closed as it did not have the economies of scale to compete profitably with
imports from larger regional producers. 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.

Extensive research and development and engineering are 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 the companys plants worldwide.

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 substantial portion
of our carbon black sales. In addition, we maintain 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 which 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 six major carbon black
producers in the United States, three in Canada, three in western Europe and
two in South America (although a third producer has announced its intention to
open a facility later in 2002). There also are many producers in Asia. The
carbon black industry is highly competitive, particularly in the rubber black
market.





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##### Table of Contents



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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
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. 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
Sevalco and Hannover facilities. The land at its closed Philippine facility is
leased through a 40 percent-owned subsidiary.




Wire and Cable Segment

The wire and cable segment, headquartered in Coral Gables, Florida,
consists of three worldwide product line businesses and a shared support
services operation. The three product line businesses are 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; Laurinburg,
North Carolina; and El Paso, Texas. We also manufacture magnet wire at wholly
owned subsidiaries in Mureck, Austria, and Monterrey, Mexico. Our
multi-product factory in Zambia also produces magnet wire. As part of a
manufacturing rationalization program aimed at significant cost reductions, the
Hopkinsville, Kentucky, plant was closed in 2000 and its value was written down
by an additional $3.3 million in the second quarter of 2001. Its productive
assets were moved to other facilities in the United States and Mexico. 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. Those conditions led to a
determination that we should assess the recoverability of our Austrian wire and
cable asset values. In addition, we permanently ceased the relatively small
production of magnet wire at our company in Venezuela in 1999.

Energy and telecommunication cables for international markets are
manufactured 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 (a fourth facility was
closed in 1999), 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 companies located in Greece and India, accounted for on
the cost basis.

In January 2001, Alcoa Aluminio, S.A. exercised a put option that required
Phelps Dodge to acquire an additional 40 percent interest in Alcoa Fios e Cabos
Electricos, S.A., our wire and cable facility in Brazil, in which we already
held a 60 percent interest. The transaction closed in March 2001, and the
final settlement price was $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. 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 heightened global competition for
telecommunication cable. The plant closure resulted in a special, pre-tax
charge of $4.6 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.

During 1999, we converted a small manufacturing facility in Ecuador to a
distribution center. Also in 1999, we opened a distribution center in
Colombia. In all, 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. At the end of 1999,
we recognized impairments of our equity basis investment in China as well as an
impairment of the telecommunications business in the
Philippines. (Refer to Note 3 to the consolidated financial statements
for a further discussion of the 1999, 2000 and 2001 restructurings and
impairments.)

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





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and
consumer electronics markets. Those products are manufactured in plants
located in Inman, South Carolina; Trenton, Georgia; and West Caldwell 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. Their productive capacities were transferred to the remaining
facilities.

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 which 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 mining segment.

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 facilities in
Fairfield and 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 PD Industries division will total approximately $6 million in 2002
and approximately $19 million in 2003; $5 million was spent on these programs
in 2001. We anticipate making significant capital and other expenditures after
2003 for continued compliance with environmental laws and regulations. Our
U.S. carbon black plants will be subject to new Maximum Achievable Control
Technology (MACT) requirements under the Clean Air Act that are scheduled to be
promulgated during 2002. It is expected that companies subject to the act will
have several years to achieve compliance with the MACT requirements. 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. (Refer to the discussion of OTHER ENVIRONMENTAL MATTERS.)




LABOR MATTERS

Employees at PD Mining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.

In addition, we currently have labor agreements covering most of our U.S.
and international manufacturing division plants. Our specialty chemicals plant
in Trecate,





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Italy, had an agreement covering 44 employees that expired on
December 31, 2001; negotiations are still ongoing in regard to this agreement.
Our specialty chemicals plant in Hamilton, Ontario, Canada, has an agreement
covering 67 employees that expires on September 30, 2002. Our specialty
chemicals facilities in Cubatao and Sao Paulo, Brazil, have agreements covering
209 and 31 employees, respectively, that expire on October 31, 2002. Our
specialty chemicals plant in Hannover, Germany, has an agreement covering 72
employees that expires on June 30, 2002. Our specialty chemicals plant in
Yosu, South Korea, has a wages agreement covering 51 employees that expires
March 31, 2002. Our specialty chemicals plant in Santander, Spain, has an
agreement covering 35 employees that expires on December 31, 2002.

Our wire plant in Bayway, New Jersey, has an agreement covering 65
employees that expired on July 31, 2000; negotiations are still ongoing in
regard to this agreement. Our plant in Zambia has an agreement covering
approximately 110 employees that expired on March 31, 2001. A new one-year
agreement was ratified with effective dates of May 2001 through July 2002. Our
magnet wire plant in Monterrey, Mexico, has an agreement covering approximately
170 hourly employees that expired February 28, 2001, and a new agreement was
ratified with effective dates of March 2001 through March 2002. Negotiations
are set to begin in March 2002. Our magnet wire plant in Fort Wayne, Indiana,
has an agreement covering approximately 250 employees that expires in May 2002.
Negotiations are set to begin in April 2002. Our magnet wire plant in Austria
has an agreement covering approximately 70 employees that expires in October
2002. Our wire and cable facilities in Brazil have agreements covering
approximately 270 and 80 employees that expire in September and November 2002,
respectively. Our wire and cable plant in Venezuela has an agreement covering
approximately 70 employees that expires in December 2002.

Our El Abra mine in Chile had a labor agreement that expired on October
30, 2001. A new three-year agreement was ratified with effective dates of
October 31, 2001, through October 31, 2004. Candelaria has a labor agreement
expiring in 2003. Our Chino mine in Hurley, New Mexico, has an agreement that
expires on November 18, 2002. Our molybdenum operations in Stowmarket and
Rotterdam have agreements covering approximately 40 and 50 employees,
respectively, that expire on May 31 and March 31, 2002.




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 black 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 $27.1 million in 2001, compared with $24.7 million in 2000
and $16.5 million in 1999.




OTHER ENVIRONMENTAL MATTERS

Phelps Dodge or its subsidiaries have been advised by EPA, the United
States Forest Service and several state agencies that they may be liable under
the Comprehensive Environmental Response Compensation and Liability Act
(CERCLA) or similar state laws and regulations for costs of responding to
environmental conditions at a number of sites that have been or are being
investigated by EPA, the Forest Service or states to determine whether releases
of hazardous substances have occurred and, if so, to develop and implement
remedial actions.

Phelps Dodge has provided reserves for potential environmental obligations
that management considers probable and for which reasonable estimates of such
obligations 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 $311.2
million and $307.1 million, respectively, were recorded as of December 31, 2001
and 2000. The long-term portion of these reserves is included in other
liabilities and deferred credits on the consolidated balance sheet and amounted
to $264.3 million and $244.9 million at December 31, 2001 and 2000,
respectively.

The sites for which Phelps Dodge has received a notice of potential
liability or an information request that are currently considered to be the
most significant are the Pinal Creek site in Miami, Arizona, the former
American Zinc and Chemical site in Langeloth, Pennsylvania, and the Tohono
Oodham Nation sites.

At the Pinal Creek site, remediation is being performed by the Pinal Creek
Group, which includes Phelps Dodge Miami Inc. and other companies that have
been de-





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termined to have contributed through historic mining activities to the
contaminated groundwater plume in the shallow alluvial aquifers of Pinal Creek.
The remediation work is being conducted in accordance with the requirements of
the Arizona Department of Environmental Qualitys Water Quality Assurance
Revolving Fund program. In addition, the remedial action is consistent with
the National Contingency Plan prepared by EPA as required by CERCLA. Ongoing
remediation efforts have resulted in continued improvement of the water quality
in the area. In November 1997, the Pinal Creek Group joined with the State of
Arizona in requesting the District Court to approve and enter a Consent Decree
resolving all matters related to an enforcement action contemplated by the
State of Arizona with respect to the groundwater matter. On August 13, 1998,
the court approved and entered the Decree that commits the Pinal Creek Group to
complete the remediation work outlined in the remedial action plan that was
submitted to the State in May 1997. Phelps Dodge Miami Inc. is pursuing
contribution litigation against other parties involved in this matter and has
asserted claims against certain of its past insurance carriers. While
significant recoveries are expected, 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 $119 million to $222 million, and, as no point within that range is
more likely than any other, the lower end of the range has been reserved as
required by generally accepted accounting principles.

In June 1999, Cyprus Amax received an information request from the
Pennsylvania Department of Environmental Protection regarding the former
American Zinc and Chemical site in Langeloth, Pennsylvania. The site is
currently being investigated by the State of Pennsylvania. Studies initiated
to determine the nature and extent of remediation work that may be required on
the property indicated a cost range for reasonably expected outcomes estimated
to be from $18 million to $52 million. Phelps Dodge has reserved $20 million
for the possible remediation work at the Langeloth site representing the most
likely point within the range of estimates.

Cyprus Tohono Corporation (Cyprus Tohono), a wholly owned subsidiary of
Cyprus Amax Corporation, holds three leases for lands on the Tohono Oodham
Indian Nation (the Nation). The leased lands include the site of an inactive
mining operation, including an open pit, leach and waste rock stockpiles,
tailing and evaporation ponds, ore roasting and SX/EW operations, and ancillary
facilities. The leases impose certain environmental compliance, closure and
reclamation requirements upon Cyprus Tohono as the lessee. 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. The Nation,
along with several federal agencies who assist the Nation, have notified Cyprus
Tohono of water quality concerns and concerns with other environmental impacts
of historical mining operations. The Nation has requested that Cyprus Tohono
consider accelerating closure and reclamation under the leases, in lieu of or
in addition to interim reclamation and corrective measures being considered by
Cyprus Tohono to protect water quality and mitigate other potential
environmental impacts. We are unable to estimate the total costs of the
corrective, closure and reclamation measures that may be instituted by Cyprus
Tohono as a result of these investigations; however, preliminary studies
indicate that interim reclamation and corrective measures could range from $7
million to $15 million. As a result of meetings and determinations in the 2001
fourth quarter, and based upon our best estimate of activities and costs, an
$11 million reserve was recognized.

In December 2001, the Company entered into a Memorandum of Understanding
with the owner of a Yonkers, New York, property regarding certain environmental
liabilities estimated to range from $6 million to $11 million. The Company
sold that property to the owner in 1984. Based on information supplied by the
property owner, the Company recognized a best estimate $7 million charge
associated with environmental remediation at that site. Also in the 2001
fourth quarter, the Company recognized
charges of $13 million for environmental remediation primarily at closed
sites, none of which, individually was more than $3 million.

At December 31, 2001, the cost range for reasonably possible outcomes for
all reservable environmental remediation sites other than Pinal Creek and
Langeloth was estimated to be from $151 million to $242 million of which $172
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 are presently litigating these disputes. Further,
Phelps Dodge believes that it has other potential claims for recovery from
other third parties, including the United States Government and other PRPs, as
well as liability offsets through lower cost remedial solutions. Neither
insurance recoveries nor other claims or offsets are recognized unless such
offsets are considered probable of realization. In 2001, the Company
recognized proceeds from settlements reached with several insurance companies
on historic environmental liability claims of $61.8 million, net of fees and
expenses.

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 pos-





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sible likelihood of an environmental remediation liability. At
December 31, 2001, the cost range for reasonably possible outcomes for all such
sites was estimated to be from $3 million to $21 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 many 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, please refer
to PD Mining  Environmental and Other Regulatory Matters and PD Industries -
Environmental Matters. The estimates given in those discussions of the capital
expenditures to comply with environmental laws and regulations in 2002 and
2003, and the expenditures in 2001, 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 three times in 2001
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. As a participating
member of these trade associations, we also are active in legal proceedings
challenging administrative regulations which are considered by the trade
association to be poor policy. In some instances, the legal challenges brought
by the trade associations request that the government consider the full impact
and results of the proposed regulation on business operations. For example,
the EPA is requiring air quality controls and air measurement obligations that
industry considers too burdensome.

II.     Water rights adjudication proceedings.



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | A. The following state water rights adjudication proceedings are
pending in Arizona Superior Court:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. In re the General Adjudication of All Rights to Use Water in the
Little Colorado River System and Source, No. 6417 (Superior Court of
Arizona, Apache County).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (a) Petition was filed by us on or about February 17, 1978, and
process has been served on all potential claimants. Virtually all
statements of claimant have been filed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (b) The principal parties, in addition to us, are the State of
Arizona, the Navajo Nation, the Hopi Indian Tribe, the San Juan Southern
Paiute Tribe and the United States on its own behalf and on behalf of
those Indian tribes. In this adjudication and in the adjudications
reported in items 2.(a), (b) and (c) below, the United States and the
Indian tribes seek to have determined and quantified their rights to use
water arising under federal law on the basis that, when the Indian
reservations and other federal reservations were established by the
United States, water was reserved from appropriation under state law for
the use of those reservations.
|
| | (c) This proceeding could affect, among other things, our rights
to impound water in Show Low Lake and Blue Ridge Reservoir and to
transport this water into the Salt River and Verde River watersheds for
exchange with the Salt River Valley Water Users Association. We have
filed statements of claimant for these and other water claims. This
litigation is stayed pending the outcome of current settlement
negotiations. The Court has not set a final schedule of cases to go to
trial, should the litigation resume.                                                                                                                                               
|
| | 2. In re the General Adjudication of All Rights to Use Water in the
Gila River System and Source, Nos. W-1 (Salt River), W-2 (Verde River),
W-3 (Gila River) and W-4 (San Pedro River) (Superior Court of Arizona,
Maricopa County). As a result of consolidation proceedings, this action
now includes general adjudication proceedings with respect to the
following three principal river systems and sources:                                                                                                                                                                                                                                                             



| |                                                   
| | --------------------------------------------------
| | (a) The Gila River System and Source Adjudication:



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Petition was filed by us on February 17, 1978. Process
has been served on water claimants in the upper and lower reaches of
the watershed and virtually all statements of claimant have been
filed.
|
| | (ii) The principal parties, in addition to us, are the Gila
Valley Irrigation District, the San Carlos Irrigation and Drainage
District, the State                                                     





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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | of Arizona, the San Carlos Apache Tribe, the
Gila River Indian Community and the United States on its own behalf
and on behalf of the tribe and the community.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (iii) This proceeding could affect, among other things, our
claim to the approximately 3,000 acre-feet of water that it diverts
annually from Eagle Creek, Chase Creek or the San Francisco River
and its claims to percolating groundwater that is pumped from wells
located north of its Morenci Branch operations in the Mud Springs
and Bee Canyon areas and in the vicinity of the New Cornelia Branch
at Ajo. We have filed statements of claimant with respect to waters
that it diverts from these sources. This proceeding also could
affect water right claims associated with recently acquired Cyprus
operations at Sierrita, Twin Buttes and the Christmas mine, and
miscellaneous former Cyprus land holdings in the area encompassed by
the Gila River System and Source Adjudication. Statements of
claimant have been filed in connection with these claims, and are
under review for possible amendment and supplementation.                                                                                                                                                                                                                                                                
|
| | (iv) In 1997, issues of dispute arose between Phelps Dodge and
the San Carlos Apache Tribe (the Tribe) regarding our use and
occupancy of the Black River Pump Station which delivers water to
the Morenci operation. On May 12, 1997, the Tribe filed suit
against us in San Carlos Apache Court, seeking our eviction from the
Tribes Reservation and claiming substantial compensatory and
punitive damages, among other relief. In May 1997, we reached an
agreement with the Tribe, and subsequently federal legislation (Pub.
L. No. 105-18, 5003, 111 stat. 158, 181-87) was adopted which
mandated dismissal of the tribal court suit. The legislation
prescribes arrangements intended to ensure a future supply of water
for the Morenci mining complex in exchange for certain payments by
us. The legislation does not address any potential claims by the
Tribe relating to our historical occupancy and operation of our
facilities on the Tribes Reservation, but does require that any
such claims be brought, if at all, exclusively in federal district
court. By order dated October 13, 1997, the tribal court dismissed
the lawsuit with prejudice, as contemplated by the legislation.
|
| | The 1997 legislation required that the Company and the Tribe
enter a lease for the delivery of Central Arizona Project (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 in accordance
with the 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
that will allow the delivery of Central Arizona Project water to
Morenci.                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (v) On September 19, 2001, the Regional Director of the Bureau
of Indian Affairs issued a decision requiring the Bureau of
Reclamation to cease deliveries of water to the Company from the
Black River Pump Station. The decision asserts that Phelps Dodge
failed to make payment for leased CAP water. Because only water
collected in the Companys reservoirs (and not CAP water) is
delivered through the Black River Pump Station, the Company believes
that CAP water issues are irrelevant to the Black River deliveries. In addition, specific legislation governing the
operation of the Black River Pump Station provides that any disputes
must be resolved in federal court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | The Company appealed the decision claiming a lack of
jurisdiction and authority and asserted that the decision was not
supported by the relevant law or other facts. The Company also
requested a stay of the decision pending the outcome of the appeal.
As a result of the finalization of the San Carlos Apache-CAP lease
and exchange on January 24, 2002, Phelps Dodge and the United States
filed a stipulation vacating the decision by the Regional Director
of the Bureau of Indian Affairs and the Companys appeal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                





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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (vi) On May 4, 1998, we executed a settlement agreement with
the Gila River Indian Community (the Community) that resolves the
issues between us and the Community pertinent to this litigation.
This settlement is subject to the approval of the Secretary of the
Interior and the passage of federal legislation.                                                                                                                                                                                                        
|
| | (b) The Salt River System and Source Adjudication:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (i) Petition was filed by the Salt River Valley Water Users
Association on or about April 25, 1974. Process has been served,
and statements of claimant have been filed by virtually all
claimants.                                                                                                                                                                                                                                                                                                                        
|
| | (ii) Principal parties, in addition to us, include the
petitioner, the State of Arizona and the United States, on its own
behalf and on behalf of various Indian tribes and communities
including the White Mountain Apache Tribe, the San Carlos Apache
Tribe, the Fort McDowell Mohave-Apache Indian Community, the Salt
River Pima-Maricopa Indian Community and the Gila River Indian
Community.                                                                                                                        
|
| | (iii) We have filed a statement of claimant to assert our
interest in the water exchange agreement with the Salt River Valley
Water Users Association by virtue of which it diverts from the
Black River water claimed by the Association and repays the
Association with water impounded in Show Low Lake and Blue Ridge
Reservoir on the Little Colorado River Watershed, and to assert our
interest in water credits to which we are entitled as a result of
our construction of the Horseshoe Dam on the Verde River.
|
| | (iv) The Salt River Pima-Maricopa Indian Community, Salt River
Valley Water Users Association, the principal Salt River Valley
Cities, the State of Arizona and others have negotiated a settlement
as among themselves for the Verde and Salt River system. The
settlement has been approved by Congress, the President and the
Arizona Superior Court. Under the settlement, the Salt River
Pima-Maricopa Indian Community waived all water claims it has
against all other water claimants (including us) in Arizona.   
|
| | (v) Active proceedings with respect to other claimants have
not yet commenced in this adjudication.                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | (vi) This proceeding could affect, among other things, the
water claims associated with the recently acquired Cyprus operation
at Miami, and miscellaneous former Cyprus land holdings in the area
encompassed by the Salt River System and Source Adjudication.
Statements of claimant have been filed in connection with these
claims, and are under review for possible amendment and
supplementation.                                                                                                                   



| |                                                    
| | ---------------------------------------------------
| | (c) The Verde River System and Source Adjudication:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Petition was filed by the Salt River Valley Water Users
Association on or about February 24, 1976, and process has been
served. Virtually all statements of claimant have been filed.                                                                                                                                                                                                                                                                        
|
| | (ii) The principal parties, in addition to us, are the
petitioner, the Fort McDowell Mohave-Apache Indian Community, the
Payson Community of Yavapai Apache Indians, the Salt River
Pima-Maricopa Indian Community, the Gila River Indian Community, the
United States on its own behalf and on behalf of those Indian
communities, and the State of Arizona.                                                                                                     
|
| | (iii) This proceeding could affect, among other things, our
Horseshoe Dam water credits with the Salt River Valley Water
Users Association resulting from its construction of the Horseshoe
Dam on the Verde River. (See the Black River water exchange
referred to in Paragraph II.A. 2.(b)(iii) above.) We have filed
statements of claimant with respect to Horseshoe Dam and water
claims associated with the former operations of the United Verde
Branch.
|
| | (iv) The Fort McDowell Mohave-Apache Indian Community, Salt
River Valley Water Users                                                                                                                                                                                                                                                                                                                                                                             





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##### Table of Contents



- 27 -



| |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 us) in Arizona.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | B. The following proceedings involving water rights adjudication are
pending in the United States District Court for the District of Arizona:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. On June 29, 1988, the Gila River Indian Community filed a
complaint-in-intervention in United States v. Gila Valley Irrigation
District, et al., and Globe Equity No. 59 (D. Ariz.). The underlying
action was initiated by the United States in October 1925 to determine
conflicting claims to water rights in certain portions of the Gila River
watershed. Although we were named and served as a defendant in that
action, we were 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 ours. The Court retained, and still has,
jurisdiction of the case. The complaint-in-intervention does not name us
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 we divert annually from Eagle
Creek, Chase Creek or the San Francisco River pursuant to the agreement
between us and the Gila Valley Irrigation District.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | During 1998, we purchased farmlands with associated water rights that
are the subject of this litigation. As a result, we have been named and
served as a party in this case. The lands and associated water rights are
not currently used in connection with any mining operation of ours.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | 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 United States District Court for the District of Arizona
claiming prior and paramount rights to use waters which are presently
being used by many water users, including us, 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 impact water right claims associated with the recently
acquired Cyprus operations at Sierrita and Twin Buttes, 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 paid a penalty of $500,000, and is performing environmental
studies on environmental impacts near the rod mill. We also funded a
supplemental environmental project to be administered by CDEP, and tested the
rod mills newly installed state-of-the-art air pollution control equipment.

IV.     On October 1, 1997, EPA issued a Notice of Violation (NOV) to Cyprus
Amaxs (now the Companys)





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##### Table of Contents



- 28 -

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 a 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
pending resolution of the issues raised in the NOVs.

V.     In 2001, the Pinal Creek Group, comprising
Phelps Dodge Miami, Inc. (a wholly owned subsidiary of the Company) and other
companies, continued remediation of groundwater quality in the shallow alluvial
aquifers along Pinal Creek near Miami, Arizona. The remediation work is being
conducted in accordance with the requirements of the Arizona Department of
Environmental Qualitys Water Quality Assurance Revolving Fund program. In
addition, the remedial action is consistent with the National Contingency Plan
prepared by EPA as required by CERCLA. The ongoing remediation program has
resulted in continued improvement of the water quality in the area. In
November 1997, Phelps Dodge Miami, Inc., as a member of the Pinal Creek Group,
joined with the State of Arizona in requesting the District Court to enter and
approve a Consent Decree resolving all matters related to an enforcement action
contemplated by the State of Arizona with respect to the groundwater matter.
On August 13, 1998, the court approved and entered the Decree that committed
Phelps Dodge Miami, Inc. and the other Pinal Creek Group members to complete
the remediation work outlined in the remedial action plan that was submitted to
the State in May 1997. Approximately $119 million remained in the Companys
Pinal Creek remediation reserve at December 31, 2001. Phelps Dodge Miami, Inc.
is pursuing contribution litigation against other parties involved in this
matter and has asserted claims against certain of its past insurance carriers.
While significant recoveries may be achieved, the Company cannot reasonably
estimate the amount and, therefore, has not taken potential recoveries into
consideration in the recorded reserve.

VI.     On February 28, 2000, Cobre Mining
Company (Cobre) received an Administrative Order (Docket No. CWA-6 1014-00, the
Order) from EPA. The Order alleges violations of the Clean Water Act,
requires Cobre to deliver a response stating the steps it has taken to address
each of the incidents leading to the alleged violations, and requires Cobre to
show cause why no further action is necessary. Cobre submitted its response to
EPA and is prepared to construct certain storm water control upgrades as part
of that response. Cobre and EPA entered into a Consent Order resolving EPAs
civil penalty claims for this matter for $137,500.

VII. 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. 1198 (JSM), which
was filed on November 9, 1999, in the United States 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 subsequent agreement by soliciting an alternative takeover
proposal for Asarco from another company. Cyprus seeks compensatory damages of
not less than $90 million. Asarco filed an answer to the complaint on November
30, 1999. On November 8, 2000, Asarco filed a motion for judgment on the
pleadings pursuant to federal rules. On March 14, 2001, the Court denied the
motion by Asarco for judgment on the pleadings pursuant to Fed. R. Civ. P.
12(c). 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.

VIII. In September 2000, RAG American Coal Company (RAG) filed a complaint
against Cyprus Amax Minerals Company and Amax Energy Inc. (Cyprus) in the
Supreme Court of New York, County of New York (RAG American Coal Company v.
Cyprus Amax Minerals Company and Amax Energy Inc., [CV 00-604200]). The
complaint alleges claims relating to breach of contract, fraud, negligent
misrepresentation, and negligence arising from alleged inaccuracies in
financial statements relating to the sale by Cyprus of its coal subsidiary to
RAG in June 1999. The complaint seeks damages in the amount of $115 million
under four different legal theories (breach of contract, fraud, negligent
misrepresentation and negligence). Cyprus has filed a motion to dismiss, which
has been fully briefed and remains pending.

IX.     On June 14, 2001, the New Mexico Environmental Department
(Department), pursuant to the New Mexico Air Quality Control Act, issued
Compliance Orders to Chino Mines Company and Phelps Dodge Tyrone, Inc. which
alleged that the companies failed to obtain construction permits for the
construction of solvent extraction electrowinning plants in 1987 and 1983,
respectively. In contrast, Department management reportedly had determined in
the 1980s that permits were not required. Both facilities obtained permits for
these plants before the Orders were issued. Chino Mines Company and Phelps
Dodge Tyrone, Inc. have each filed a Request for Hearing and Answer with the
Department in order to assert their defenses to the Compliance Order.

X.     On May 30, 2001, the United States Department of Justice notified the
Company of alleged violations of the Clean Water Act at the United Verde Mine.
The
Table of Contents

- 29 -

Company is preparing a response to the Departments allegations.

XI.     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 believes that the corporations
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.




Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the fourth quarter of 2001 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, 2002, the executive
officers of Phelps Dodge Corporation were as follows:

|                       |  |        |    |          |  |                                                               |  |  |      | 
|---------------------- |  | ------ | -- | -------- |  | ------------------------------------------------------------- |  |  | ---- | 
|                       |  | Age at |    |          |  | Officer of the                                               
|Name                   |  | 3/1/02 |    | Position |  | Corporation Since                                            
|                       |  |        |    |          |  |                                                              
|J. Steven Whisler      |  |        | 47 |          |  | Chairman of the Board, President and
Chief Executive Officer  |  |  | 1987 | 
|                      
|                      
|                      
|                      
|Manuel J. Iraola       |  |        | 53 |          |  | Senior Vice President; President,
Phelps Dodge Industries     |  |  | 1995 | 
|                      
|                      
|                      
|                      
|Timothy R. Snider      |  |        | 51 |          |  | Senior Vice President; President,
Phelps Dodge Mining Company |  |  | 1997 | 
|                      
|                      
|                      
|                      
|S. David Colton        |  |        | 46 |          |  | Senior Vice President, General Counsel
and Secretary          |  |  | 1998 | 
|                      
|                      
|                      
|                      
|Arthur R. Miele        |  |        | 60 |          |  | Senior Vice President, Marketing                              |  |  | 1987 | 
|                      
|                      
|                      
|                      
|Kalidas V. Madhavpeddi |  |        | 46 |          |  | Senior Vice President, Business
Development                   |  |  | 1999 | 
|                      
|                      
|                      
|                      
|Ramiro G. Peru         |  |        | 46 |          |  | Senior Vice President and Chief
Financial Officer             |  |  | 1995 | 
|                      
|                      
|                      
|                      
|David L. Pulatie       |  |        | 60 |          |  | Senior Vice President, Human Resources                        |  |  | 1999 | 

Except as stated below, all of the above have been officers of Phelps
Dodge Corporation for the past five years.

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. 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. Madhavpeddi was elected Senior Vice President, Business Development in
November 2000. He was elected Vice President, Business Development in November
1999. Prior to that time, Mr. Madhavpeddi was Vice President, Business
Development of Phelps Dodge Mining Company, a position he held since 1995.





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##### Table of Contents



- 30 -




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 48 and 49 of this report.




Item 6. Selected Financial Data

(in millions except per share amounts)

|                                   |                            |   |         |       |      |  |         |      |      |  |         |       |   |  |         |      |  |  |         |      | 
|---------------------------------- | -------------------------- | - | ------- | ----- | ---- |  | ------- | ---- | ---- |  | ------- | ----- | - |  | ------- | ---- |  |  | ------- | ---- | 
|                                   |                            |   | 2001    |       | 2000 |  | 1999    |      | 1998 |  | 1997   
|                                   |                            |   |         |       |      |  |         |      |      |  |        
|Sales and other operating revenues |                            | $ | 4,002.4 |       |      |  | 4,525.1 |      |      |  | 3,114.4 |       |   |  | 3,063.4 |      |  |  | 3,914.3 |     
|                                  
|                                  
|                                  
|                                  
|Net income (loss) (a)              |                            | $ | (275.0  | )     |      |  | 29.0    |      |      |  | (257.8  | )     |   |  | 190.9   |      |  |  | 408.5   |     
|                                  
|                                  
|                                  
|                                  
|                                   | Per common share  basic   |   | $       | (3.50 | )    |  |         | 0.37 |      |  |         | (4.19 | ) |  |         | 3.28 |  |  |         | 6.68 | 
|                                  
|                                  
|                                  
|                                  
|                                   | Per common share  diluted |   | $       | (3.50 | )    |  |         | 0.37 |      |  |         | (4.19 | ) |  |         | 3.26 |  |  |         | 6.63 | 
|                                  
|                                  
|                                  
|                                  
|Total assets                       |                            | $ | 7,618.8 |       |      |  | 7,830.8 |      |      |  | 8,229.0 |       |   |  | 5,036.5 |      |  |  | 4,965.2 |     
|                                  
|                                  
|                                  
|                                  
|Long-term debt                     |                            | $ | 2,522.0 |       |      |  | 1,963.0 |      |      |  | 2,172.5 |       |   |  | 836.4   |      |  |  | 857.1   |     
|                                  
|                                  
|                                  
|                                  
|Dividends per common share         |                            | $ | 0.75    |       |      |  | 2.00    |      |      |  | 2.00    |       |   |  | 2.00    |      |  |  | 2.00    |     



---

|(a) |  | For a further discussion of earnings, please see Managements Discussion
and Analysis.
|--- |  | --------------------------------------------------------------------------------------

|      |  |                                                                                                                                                                                            
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note: |  | See Managements Discussion and Analysis for a discussion of the effect on our results of material changes
in the price we receive for copper or in implied unit cost of copper production.




Item 7. Managements Discussion and Analysis

The information called for in Item 7 appears on pages 31 through 49 of
this report.




Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information called for in Item 7A appears on pages 31 and 41 through
44 of this report.




Item 8. Financial Statements and Supplementary Data

The information called for in Item 8 appears on pages 50 through 84 of
this report.




Item 9. Disagreements on Accounting and Financial Disclosure

None.





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##### Table of Contents



- 31 -




MANAGEMENTS DISCUSSION AND ANALYSIS

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 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 for closure financial assurances;
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.

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 accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires Phelps Dodges management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, 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 amortization determination; environmental,
reclamation and closure obligations; asset impairments (including estimates of
future cash flows); postemployment, postretirement and other employee benefit
liabilities; bad debts; restructuring; valuation allowances for deferred tax
assets; contingencies and litigation; and fair value of financial instruments.
Phelps Dodge bases its estimates on 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.

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 ore reserves. Phelps Dodge uses
its ore reserve estimates in determining the unit basis for mine depreciation
and closure rates, as well as in evaluating mine asset impairments. Changes in
ore reserve estimates could significantly affect these items.

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, resulting in an impairment of 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.





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##### Table of Contents



- 32 -

Phelps Dodge records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While Phelps
Dodge has considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event Phelps Dodge were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should Phelps Dodge determine that it would
not be able to realize all or part of its net deferred tax asset in the future,
an adjustment to the deferred tax asset would be charged to income in the
period such determination was made. Phelps Dodge assesses these determinations
at least quarterly.

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
reasonably can be 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. Phelps Dodge assesses
environmental liabilities quarterly.

Reclamation is an ongoing activity and we recognize estimated final
reclamation costs over the life of active mining properties on a
units-of-production basis. Non-operating sites that are currently on
care-and-maintenance status suspend accruing mine closure costs until the site
resumes production. When management determines a mine should be permanently
closed, any unrecognized closure obligation is recognized. Phelps Dodge
assesses mine closure costs at least annually or when facts and circumstances
change.

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 discussions of Significant Accounting Policies in Note 1 to the
consolidated financial statements.

Consolidated Financial Results

Consolidated financial results (in millions except per common share
amounts):

|                                                                                |  |   |         |   |      |  |         |  |  |  |         |   | 
|------------------------------------------------------------------------------- |  | - | ------- | - | ---- |  | ------- |  |  |  | ------- | - | 
|                                                                                |  |   | 2001    |   | 2000 |  | 1999   
|                                                                                |  |   |         |   |      |  |        
|Sales and other operating revenues                                              |  | $ | 4,002.4 |   |      |  | 4,525.1 |  |  |  | 3,114.4 |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Operating income (loss) before special items                                    |  | $ | (76.5   | ) |      |  | 294.4   |  |  |  | 139.8   |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Operating income (loss)                                                         |  | $ | (44.9   | ) |      |  | 237.0   |  |  |  | (315.6  | )
|Net income (loss) before special items                                          |  | $ | (297.5  | ) |      |  | 72.3    |  |  |  | 21.7    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Net income (loss) before cumulative effect of accounting change                 |  | $ | (273.0  | ) |      |  | 29.0    |  |  |  | (254.3  | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Cumulative effect                                                               |  | $ | (2.0    | ) |      |  |        |  |  |  | (3.5    | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |  |   |         |   |      |  |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Net income (loss)                                                               |  | $ | (275.0  | ) |      |  | 29.0    |  |  |  | (257.8  | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Net income (loss) per common share, basic and diluted, before cumulative effect |  | $ | (3.47   | ) |      |  | 0.37    |  |  |  | (4.13   | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Net income (loss) per common share, basic and diluted                           |  | $ | (3.50   | ) |      |  | 0.37    |  |  |  | (4.19   | )

In 2001, consolidated losses were $297.5 million, or $3.79 per common
share, before special items. (All references to per share earnings or charges
are based on diluted earnings per share.) In 2000, consolidated earnings were
$72.3 million, or 92 cents per common share, before special items. The
decrease in earnings in 2001, before special items, was due to 11 cents per
pound lower copper prices ($251 million), higher implied unit cost of copper
production ($82 million), 59 million pounds of lower produced copper sales
volumes ($6 million), lower PD Industries operating income ($43 million), lower
miscellaneous income ($12 million), and higher interest expense ($10 million),
partially offset by lower Corporate and Other selling and general
administrative expenses ($12 million).

In 1999, consolidated earnings were $21.7 million, or 35 cents per common
share, before special items. Results for the year include those of Cyprus Amax
Minerals Company (Cyprus Amax) for the two and one-half month period beginning
on October 16, 1999 (the effective acquisition date by Phelps Dodge). The
increase in 2000 earnings from 1999, before special items, was due to 11 cents
per pound higher copper prices ($264 million) and increased sales volumes ($30
million) resulting from the acquisition of Cyprus Amax, partially offset by
higher implied unit cost of copper production ($130 million) largely as a
result of higher en-





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##### Table of Contents



- 33 -

ergy-related costs, higher Corporate and Other selling and
general administrative costs ($13 million) and higher interest expense ($97
million).

Special items and their impact on earnings are illustrated in the
following tables for 2001, 2000 and 1999:

|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |       |  
|---------------------------------------------------------- | ------------------------------------------- | ---------------------------------------------------------- | -------------------------------------- | ------ | -------- | ------ | ------- | ----- | ----- | ----- | -
|                                                           |                                             |                                                            |                                        |        | $ in     |        |         |       |      
|                                                           |                                             |                                                            |                                        |        | millions |        | $/share
|                                                           |                                             |                                                            |                                        |        |          |        |        
|                                                          
|                                                          
|                                                          
|                                                          
|2001 full-year loss after-tax and before special items     |                                             | $                                                          | (297.5                                 | )      |          |        | (3.79   | )    
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|Special, after-tax items:*                                 |                                             |                                                            |                                        |        |          |        |         |      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Restructuring programs                                     |                                        |        | (29.8    | )      |         |       | (0.38 | )    
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Environmental provisions                                   |                                        |        | (31.1    | )      |         |       | (0.40 | )    
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Asset impairments                                          |                                        |        | (12.9    | )      |         |       | (0.16 | )    
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Environmental insurance recoveries                         |                                        |        | 61.8     |        |         |       | 0.79  |      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Gain on sale of Sossego                                    |                                        |        | 39.9     |        |         |       | 0.51  |      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Cumulative effect of accounting change                     |                                        |        | (2.0     | )      |         |       | (0.03 | )    
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Other                                                      |                                        |        | (3.4     | )      |         |       | (0.04 | )    
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|                                                           |                                             |                                                            | 22.5                                   |        |          |        | 0.29    |      
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|2001 full-year net loss after special items                |                                             | $                                                          | (275.0                                 | )      |          |        | (3.50   | )    
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|                                                          
|                                                          
|                                                          
|                                                          
|2000 full-year earnings after-tax and before special items |                                             | $                                                          | 72.3                                   |        |          |        | 0.92    |      
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|Special, after-tax items:*                                 |                                             |                                                            |                                        |        |          |        |         |      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Restructuring programs                                     |                                        |        | (56.4    | )      |         |       | (0.72 | )    
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Income tax refund and other                                |                                        |        | 13.1     |        |         |       | 0.17  |      
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|                                                           |                                             |                                                            | (43.3                                  | )      |          |        | (0.55   | )    
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|2000 full-year net income after special items              |                                             | $                                                          | 29.0                                   |        |          |        | 0.37    |      
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | 1999 full-year earnings after-tax and before special items |                                        | $      | 21.7     |        |         |       | 0.35  |      
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|                                                           | Special, after-tax items: *                 |                                                            |                                        |        |          |        |         |       |      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             |                                                            | Asset impairments                      |        |          | (222.5 | )       |       |       | (3.61 | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             |                                                            | Environmental provisions               |        |          | (17.8  | )       |       |       | (0.29 | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             |                                                            | Restructuring programs                 |        |          | (65.7  | )       |       |       | (1.07 | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             |                                                            | Cumulative effect of accounting change |        |          | (3.5   | )       |       |       | (0.06 | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             |                                                            | Adjustment for prior years taxes      |        |          | 30.0   |         |       |       | 0.49  |  
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|                                                           |                                             |                                                            | (279.5                                 | )      |          |        | (4.54   | )    
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      
|                                                           | 1999 full-year net loss after special items |                                                            | $                                      | (257.8 | )        |        |         | (4.19 | )    
|                                                           |                                             |                                                            |                                        |        |          |        |         |       |       |      



---

|* |  | Refer to Note 3 to the consolidated financial statements and Business
Segments in Managements Discussion and Analysis for further discussion of
these special items.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

Quest for ZeroOperational Improvement Program

In May 2001, Phelps Dodge commenced Quest for Zero, our company-wide,
comprehensive, lean-production program designed to deliver $400 million of
annual operating income improvements by the end of 2003. During 2001, we
achieved $55 million in improvements. PD Mining is pursuing aggressively its
Quest for Zerotarget of all-in 60 cents per pound implied unit cost of copper
production by the end of 2003. This target is the heart of our Quest for Zero
program, and should enhance the tremendous leverage we have to rising copper
prices.

Business Segments

Results for 2001, 2000 and 1999 can be meaningfully compared by separate
reference to our reporting divisions, PD Mining and PD Industries. 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 20 to the consolidated financial statements for
further segment information.)




RESULTS OF PHELPS DODGE MINING COMPANY

PD Mining is our international business segment that comprises a group of
companies involved in vertically integrated copper operations including mining,
concentrating, electrowinning, smelting, refining, rod production, marketing
and sales, and related activities. PD Mining sells copper to others primarily
as rod, cathode or concentrate, and as rod to our wire and cable segment. In
addition, PD Mining at times smelts and refines copper and produces copper rod
for customers on a toll basis. It is also an integrated producer of
molybdenum, with mining, roasting and processing facilities producing
molybdenum concentrate as well as metallurgical and chemical products. In
addition, it produces gold, silver, molybdenum, copper sulfate, rhenium and
copper chemicals as by-products, and sulfuric acid from its air quality control
facilities. This business segment also includes worldwide mineral exploration
and development programs, and a process technology center that directs its
activities at improving existing processes and developing new cost-competitive
technologies.

On October 16, 1999, Phelps Dodge acquired Cyprus Amax Minerals Company.
This included (i) the Bagdad copper mine in northwestern Arizona; (ii) the
Sierrita copper mine in south central Arizona; (iii) the Miami copper mine,
smelter, refinery and rod mill near Miami, Arizona; (iv) a copper rod plant in
Chicago, Illinois; (v) an 82 percent interest in the Cerro Verde copper mine in
Peru; (vi) a 51 percent interest in the El Abra copper mine in northern Chile;
(vii) the Henderson molybdenum mine near Empire, Colorado; (viii) the Climax
molybdenum mine in Colorado, which is on care-and-maintenance status; (ix)
molybdenum conversion facilities in the United States and Europe; and (x) other
mining-related facilities.





---



##### Table of Contents



- 34 -

Major operating and financial results for the years 2001, 2000 and 1999
are illustrated in the following table:

|                                           |                                                      |   |       |         |  |      |       |                       |  |  |        |         |  | 
|------------------------------------------ | ---------------------------------------------------- | - | ----- | ------- |  | ---- | ----- | --------------------- |  |  | ------ | ------- |  | 
|                                           |                                                      |   |       | 2001    |  | 2000 |       | 1999*                
|                                           |                                                      |   |       |         |  |      |       |                      
|Copper (from own mines  thousand tons) ** |                                                      |   |       |         |  |      |       |                       |  |  |        |        
|                                          
|                                          
|                                          
|                                          
|                                           | Production                                           |   |       | 1,160.1 |  |      |       | 1,200.3               |  |  |        | 890.1   | 
|                                          
|                                          
|                                          
|                                          
|                                           | Sales                                                |   |       | 1,170.8 |  |      |       | 1,200.6               |  |  |        | 884.2   | 
|                                          
|                                          
|                                          
|                                          
|                                           | COMEX average spot copper price per pound  cathodes |   | $     | 0.73    |  |      |       | 0.84                  |  |  |        | 0.72    | 
|                                          
|                                          
|                                          
|                                          
|                                           | LME average spot copper price per pound  cathodes   |   |       | 0.72    |  |      |       | 0.82                  |  |  |        | 0.71    | 
|                                          
|                                          
|                                          
|                                          
|                                           | Implied unit cost of copper production***            |   |       | 0.75    |  |      |       | 0.72                  |  |  |        | 0.67    | 
|                                          
|                                          
|                                          
|                                          
|                                           | Molybdenum production (million pounds) **            |   |       | 55.5    |  |      |       | 51.1                  |  |  |        | 8.1     | 
|                                          
|                                          
|                                          
|                                          
|Metals Week                                |                                                      |   |       |         |  |      |       |                       |  |  |        |        
|                                          
|                                          
|                                          
|                                          
|                                           | Molybdenum oxide price per pound                     |   | $     | 2.36    |  |      |       | 2.51                  |  |  |        | 2.66    | 
|                                          
|                                          
|                                          
|                                          
|                                           |                                                      |   |       |         |  |      |       | (millions of dollars) |  |  |        |         |  | 
|                                          
|                                          
|                                          
|                                          
|Sales and other operating revenues         |                                                      |   |       |         |  |      |       |                       |  |  |        |        
|                                          
|                                          
|                                          
|                                          
|                                           | unaffiliated customers                               |   | $     | 2,649.5 |  |      |       | 3,073.7               |  |  |        | 1,786.6 | 
|                                          
|                                          
|                                          
|                                          
|Operating income (loss)                    |                                                      | $ | (92.2 | )       |  |      | 243.3 |                       |  |  | (301.0 | )      



---

|*  |  | Includes the results of Cyprus Amax only for the 2.5-month period
following the effective date of acquisition, October 16, 1999.                                                                                                                                                                                                                                                                    
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | Worldwide copper and molybdenum production and sales exclude the amounts
attributable to (i) the 15 percent undivided interest in the Morenci,
Arizona, copper mining complex, (ii) the one-third partnership interest in
Chino Mines Company in New Mexico, (iii) the 20 percent interest in
Candelaria in Chile, and (iv) the 49 percent interest in the El Abra
copper mining operation in Chile.

(thousand tons)

|                            |                           |  |       |       |      |  |       |       |  |  |       |      | 
|--------------------------- | ------------------------- |  | ----- | ----- | ---- |  | ----- | ----- |  |  | ----- | ---- | 
|                            |                           |  | 2001  |       | 2000 |  | 1999 
|                            |                           |  |       |       |      |  |      
|Excluded copper production: |                           |  |       |       |      |  |       |       |  |  |       |     
|                           
|                           
|                           
|                           
|                            | Morenci  for Sumitomo    |  |       | 58.8  |      |  |       | 62.6  |  |  |       | 72.0 | 
|                           
|                           
|                           
|                           
|                            | Chino  for Heisei        |  |       | 26.0  |      |  |       | 44.7  |  |  |       | 43.3 | 
|                           
|                           
|                           
|                           
|                            | Candelaria  for Sumitomo |  |       | 48.6  |      |  |       | 44.9  |  |  |       | 50.0 | 
|                           
|                           
|                           
|                           
|                            | El Abra  for CODELCO     |  |       | 117.4 |      |  |       | 106.5 |  |  |       | 25.9 | 
|                            |                           |  |       |       |      |  |       |       |  |  |       |      | 
|                            |                           |  | 250.8 |       |      |  | 258.7 |       |  |  | 191.2 |     
|                            |                           |  |       |       |      |  |       |       |  |  |       |      | 



---

|*** |  | Implied unit cost of copper production is based on PD Minings all-in
operating margin per pound of copper sold (i.e., PD Mining operating
income (loss) before special items, divided by pounds of PD-mined copper
sold, plus or minus the LME copper price).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PD Mining  Operating Income (Loss)

($ in millions)

|                                             |  |   |       |   |      |  |       |   |  |  |        |   | 
|-------------------------------------------- |  | - | ----- | - | ---- |  | ----- | - |  |  | ------ | - | 
|                                             |  |   | 2001  |   | 2000 |  | 1999 
|                                             |  |   |       |   |      |  |      
|                                            
|                                            
|                                            
|                                            
|Operating income (loss) before special items |  | $ | (90.1 | ) |      |  | 249.1 |   |  |  | 84.2   |  
|                                            
|                                            
|                                            
|                                            
|Special, pre-tax items                       |  |   | (2.1  | ) |      |  | (5.8  | ) |  |  | (385.2 | )
|                                             |  |   |       |   |      |  |       |   |  |  |        |   | 
|                                            
|                                            
|                                            
|                                            
|Operating income (loss) after special items  |  | $ | (92.2 | ) |      |  | 243.3 |   |  |  | (301.0 | )
|                                             |  |   |       |   |      |  |       |   |  |  |        |   | 

Our PD Mining segment reported an operating loss of $90.1 million in 2001
before special, pre-tax items of $2.1 million, compared with income of $249.1
million in 2000 before $5.8 million of special, pre-tax items and income of
$84.2 million in 1999 before special, pre-tax items of $385.2 million. Special
items in operating income are as follows:

($ in millions)

|                         |  |      |       |      |  |      |      |   |  |  |        |  
|------------------------ |  | ---- | ----- | ---- |  | ---- | ---- | - |  |  | ------ | -
|                         |  | 2001 |       | 2000 |  | 1999
|                         |  |      |       |      |  |     
|Restructuring programs   |  | $    | (27.1 | )    |  |      | (5.8 | ) |  |  | (36.6  | )
|                        
|                        
|                        
|                        
|Environmental provisions |  |      | (14.9 | )    |  |      |     |   |  |  | (28.2  | )
|                        
|                        
|                        
|                        
|Gain on sale of Sossego  |  |      | 39.9  |      |  |      |     |   |  |  |       |  
|                        
|                        
|                        
|                        
|Asset impairments        |  |      |      |      |  |      |     |   |  |  | (320.4 | )
|                         |  |      |       |      |  |      |      |   |  |  |        |  
|                         |  | $    | (2.1  | )    |  |      | (5.8 | ) |  |  | (385.2 | )
|                         |  |      |       |      |  |      |      |   |  |  |        |  

The 2001 decrease in operating income of $339.2 million, before special
items, was primarily due to lower copper prices ($251 million), higher implied
unit cost of copper production costs ($82 million) and 59 million pounds of
lower produced copper sales volumes ($6 million).

The 2000 increase in operating income of $164.9 million, before special
items, was principally a result of higher average copper prices ($264 million)
and increased sales volumes ($30 million) resulting from the acquisition of
Cyprus Amax, partially offset by higher implied unit cost of copper production
($130 million) largely as a result of higher energy-related costs.

Copper is an internationally traded commodity, and its price is
effectively determined by the two major metals exchanges  the New York
Commodity Exchange (COMEX) and the London Metal Exchange (LME). 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, 2001. We
principally base our





---



##### Table of Contents



- 35 -

selling price for U.S. sales on the COMEX spot price per
pound of copper cathode, which averaged 73 cents in 2001, 84 cents in 2000, and
72 cents in 1999. Internationally, our copper selling prices are generally
based on the LME spot price for cathode. The LME spot price per pound of
copper averaged 72 cents in 2001, 82 cents in 2000 and 71 cents in 1999. The
COMEX and LME prices averaged 71 cents and 69 cents per pound, respectively,
for the first two months of 2002, and closed at 74 cents and 73 cents,
respectively, on March 7, 2002.

During 2001, two restructuring/operational improvement plans occurred. In
the fourth quarter, Phelps Dodge announced a series of actions to address the
current economic environment, including changes in copper operations that will
lead to curtailment of approximately 220,000 metric tons of copper production
annually (including our partners share), and the reduction of approximately
1,600 employees, that resulted in a special net charge of $17.1 million. In
the second quarter, Phelps Dodge announced a restructuring of our professional,
administrative and operations support functions, as well as various other
operational improvements that resulted in a net charge of $10.0 million.
Additionally, 2001 included a $14.9 million charge 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 the Sossego project.

During 2000, Phelps Dodge curtailed molybdenum production by approximately
20 percent and reduced its workforce by approximately 130 workers at its
Henderson mine in Colorado. The curtailment of production resulted in a
special, pre-tax charge of $4.3 million for severance-related costs.
Additionally, our Miami, Arizona, copper mine reduced its mining activities.
The new mine plan temporarily suspended stripping in a highercost portion of
the mine and has allowed the redistribution of a variety of mining equipment,
including shovels and haul trucks, to other PD mining operations to reduce
overall capital expenditures. The reduction of mining activities resulted in a
special, pre-tax charge of $1.5 million for severance and other related costs.

During 1999, the special, pre-tax items were as follows: $320.4 million
of asset impairments including the writedown of the Hidalgo smelter in New
Mexico ($201.5 million), the Metcalf concentrator at the Morenci operations in
Arizona ($88.0 million), a real estate development project in Arizona ($12.2
million), a mine development project at the Tyrone operations in New Mexico
($11.9 million), mine development at the Copper Basin project in Arizona ($6.8
million), $28.2 million for environmental provisions, and $36.6 million for the
restructuring plan announced in the 1999 second quarter.

In 2001, implied unit cost of copper production increased 3 cents per
pound to 75 cents per pound primarily due to slightly higher energy costs and
depreciation expense. In 2000, implied unit cost of copper production was
adversely impacted by the effects of abnormally high spot prices for energy,
which increased our costs by approximately 4 cents per pound to 72 cents per
pound relative to those experienced in 1999.

Energy, including electricity, diesel fuel and natural gas, represents a
significant portion of the production costs for PD Mining. During 2000, our
Arizona and New Mexico operations were adversely affected by significantly
higher costs for electricity, diesel fuel and natural gas.

In response to the volatile electricity market, the Company implemented a
power cost stabilization plan in March 2001 that reduced electricity-related
costs at the U.S. mining operations. The plan 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, Phelps Dodge entered into price protection
programs in late 2000 and early 2001 designed to protect the Company against a
significant upward movement in prices while retaining the flexibility to
participate in any favorable price movement. (Refer to Note 19 to the
consolidated financial statements for further discussion of this program.)

As a result of the above-mentioned plans and programs, in 2001 Phelps
Dodge was able to reduce and 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 our implied
unit cost of copper production, has a significant effect on our results. Based
on expected 2002 annual production of approximately 2.0 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 $20 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 2001, the Company sold
approximately 11
Table of Contents

- 36 -

percent, 31 percent and 58 percent of its copper as
concentrates, copper cathode and copper rod, respectively.

Additionally in 2001, operations outside the United States provided 22
percent of PD Minings sales (including sales through PD Minings U.S.-based
sales company), compared with 18 percent in 2000 and 16 percent in 1999.
During the year, operations outside the United States contributed a reduction
of 8 percent of the segments operating loss, compared with a contribution of
operating income of 29 percent and 67 percent in 2000 and 1999, respectively.

As a result of the Cyprus Amax acquisition in the fourth quarter of 1999,
Phelps Dodge acquired a 51 percent interest in the El Abra open-pit copper
mining operation located in Chiles Region II. Corporación Nacional del Cobre
de Chile (CODELCO), a Chilean state-owned company, owns the remaining 49
percent interest. In December 2001, El Abra completed its $70 million
Run-of-Mine project to deal with ore grade depletion issues. This capital
project, combined with extremely low copper prices, resulted in a cash
shortfall of approximately $70 million in the fourth quarter that was covered
by subordinated loans
from Phelps Dodge and CODELCO. The proceeds from these subordinated loans
were used to meet scheduled senior long-term debt payments and associated
interest. It is probable that cash shortfalls could develop again in 2002 if
low copper prices prevail. The sponsors are evaluating alternative strategies
to address such a scenario should it unfold. Payments of scheduled long-term
debt for 2002 total approximately $105 million (divided into semi-annual
payments due in May and November).

We have approximately 1 billion pounds of copper production at facilities
on a care-and-maintenance status that could be brought to the market with
minimal capital and lead-time. We have additional sources of copper that could
be developed; however, permitting and significant capital expenditures would be
required to develop such additional production capacity.

The molybdenum market is generally characterized by cyclical and volatile
prices, little product differentiation and strong competition. The Platts
Metals Weekmolybdenum technical grade (dealer oxide) price averaged $2.36 per
pound in 2001, compared with $2.51 and $2.66 per pound in 2000 and 1999,
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.
Exports from China can also influence competitive conditions.

The 2001 exploration program continued to place emphasis on the search for
and delineation of large-scale copper, and copper and gold deposits. Phelps
Dodge expended $36.8 million on worldwide exploration during 2001, compared
with $39.7 million in 2000 and $41.0 million in 1999. Approximately 14 percent
of the 2001 expenditures occurred in the United States with 17 percent being
spent at our mine sites. The balance of exploration expenditures was spent
principally in Australasia, Brazil, Chile, Mexico, Canada, Peru and Central
Africa. Refer to Business and Properties, Exploration for further discussion.

PD Mining  Other Matters

In 1997, issues of dispute arose between Phelps Dodge and the San Carlos
Apache Tribe (the Tribe) regarding our use and occupancy of the Black River
Pump Station which delivers water to the Morenci operation. On May 12, 1997,
the Tribe filed suit against us in San Carlos Apache Court, seeking our
eviction from the Tribes Reservation and claiming substantial compensatory and
punitive damages, among other relief. In May 1997, we reached an agreement
with the Tribe, and subsequently federal legislation (Pub. L. No. 105-18, 5003,
111 stat. 158, 181-87) was adopted which mandated dismissal of the tribal court
suit. The legislation prescribes arrangements intended to ensure a future
supply of water for the Morenci mining complex in exchange for certain payments
by us. The legislation does not address any potential claims by the Tribe
relating to our historical occupancy and operation of our facilities on the
Tribes Reservation, but does require that any such claims be brought, if at
all, exclusively in federal district court. By order dated October 13, 1997,
the tribal court dismissed the lawsuit with prejudice, as contemplated by the
legislation.

The 1997 legislation required that the Company and the Tribe enter into a
lease for the delivery of Central Arizona Project 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 in accordance with the
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 that will allow the delivery of Central Arizona
Project water to Morenci.





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##### Table of Contents



- 37 -




RESULTS OF PHELPS DODGE INDUSTRIES

PD Industries, 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.
Our wire and cable segment consists of three worldwide product line businesses
including magnet wire, energy and telecommunication cables, and specialty
conductors. In December 2000, Phelps Dodge announced its intention to explore
strategic alternatives for, including the potential sale of, PD Industries. In
May 2001, we terminated that sales process, noting that the then current
economic environment was not delivering transactions that offered appropriate
value for our shareholders. We have continued to seek strategic alternatives,
as may be appropriate, for these businesses.

($ in millions)

|                         |                                                              |   |         |       |      |  |         |       |   |  |         |       |  
|------------------------ | ------------------------------------------------------------ | - | ------- | ----- | ---- |  | ------- | ----- | - |  | ------- | ----- | -
|                         |                                                              |   | 2001    |       | 2000 |  | 1999   
|                         |                                                              |   |         |       |      |  |        
|                        
|                        
|                        
|                        
|                         | Sales and other operating revenues (unaffiliated customers): |   |         |       |      |  |         |       |   |  |         |       |  
|                        
|                        
|                        
|                        
|                         | Specialty chemicals                                          |   | $       | 582.0 |      |  |         | 598.4 |   |  |         | 543.0 |  
|                        
|                        
|                        
|                        
|                         | Wire and cable                                               |   |         | 770.9 |      |  |         | 853.0 |   |  |         | 784.8 |  
|                         |                                                              |   |         |       |      |  |         |       |   |  |         |       |  
|                         |                                                              | $ | 1,352.9 |       |      |  | 1,451.4 |       |   |  | 1,327.8 |      
|                         |                                                              |   |         |       |      |  |         |       |   |  |         |       |  
|Operating income (loss): |                                                              |   |         |       |      |  |         |       |   |  |         |      
|                        
|                        
|                        
|                        
|                         | Specialty chemicals                                          |   | $       | 61.8  |      |  |         | 88.1  |   |  |         | 92.5  |  
|                        
|                        
|                        
|                        
|                         | Wire and cable                                               |   |         | 12.2  |      |  |         | (17.8 | ) |  |         | (42.8 | )
|                         |                                                              |   |         |       |      |  |         |       |   |  |         |       |  
|                         |                                                              | $ | 74.0    |       |      |  | 70.3    |       |   |  | 49.7    |      
|                         |                                                              |   |         |       |      |  |         |       |   |  |         |       |  

PD Industries reported sales to unaffiliated customers of $1,352.9 million
in 2001, compared with $1,451.4 million in 2000 and $1,327.8 million in 1999.
The decrease in 2001 principally reflected lower sales volumes due to continued
economic weakness principally in North America. The 2000 increase reflected
higher average sales prices in the carbon black segment as a result of the
partial pass through to customers of higher feedstock costs, partially offset
by lower sales volumes. Additionally, wire and cable segment sales improved as
a result of a higher level of infrastructure development worldwide.

PD Industries  Operating Income

($ in millions)

|                                      |  |   |      |   |      |  |       |   |  |  |       |   | 
|------------------------------------- |  | - | ---- | - | ---- |  | ----- | - |  |  | ----- | - | 
|                                      |  |   | 2001 |   | 2000 |  | 1999 
|                                      |  |   |      |   |      |  |      
|                                     
|                                     
|                                     
|                                     
|Operating income before special items |  | $ | 78.7 |   |      |  | 121.9 |   |  |  | 119.7 |  
|                                     
|                                     
|                                     
|                                     
|Special, pre-tax items                |  |   | (4.7 | ) |      |  | (51.6 | ) |  |  | (70.0 | )
|                                      |  |   |      |   |      |  |       |   |  |  |       |   | 
|                                     
|                                     
|                                     
|                                     
|Operating income after special items  |  | $ | 74.0 |   |      |  | 70.3  |   |  |  | 49.7  |  
|                                      |  |   |      |   |      |  |       |   |  |  |       |   | 

Our PD Industries division reported operating income of $78.7 million in
2001 before special, pre-tax items of $4.7 million, compared with $121.9
million in 2000 before special, pre-tax items of $51.6 million, and $119.7
million in 1999 before special, pre-tax items of $70.0 million. The special
items in operating income were as follows:

($ in millions)

|                                           |  |      |      |      |  |      |       |   |  |  |       |  
|------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                           |  | 2001 |      | 2000 |  | 1999
|                                           |  |      |      |      |  |     
|Restructuring programs                     |  | $    | (1.4 | )    |  |      | (7.3  | ) |  |  | (58.1 | )
|                                          
|                                          
|                                          
|                                          
|Hopkinsville facility write-down           |  |      | (3.3 | )    |  |      |      |   |  |  |      |  
|                                          
|                                          
|                                          
|                                          
|Wire and cable closure/impairments         |  |      |     |      |  |      | (38.7 | ) |  |  | (11.9 | )
|                                          
|                                          
|                                          
|                                          
|Wire and cable working capital
write-downs |  |      |     |      |  |      | (5.6  | ) |  |  |      |  
|                                           |  |      |      |      |  |      |       |   |  |  |       |  
|                                           |  | $    | (4.7 | )    |  |      | (51.6 | ) |  |  | (70.0 | )
|                                           |  |      |      |      |  |      |       |   |  |  |       |  

In 2001, operations outside the United States provided 64 percent of PD
Industries sales, compared with 63 percent in 2000 and 55 percent in 1999.
During the year, operations outside the United States contributed 67 percent of
PD Industries operating income, compared with 48 percent in 2000 and 59
percent in 1999.

Specialty Chemicals  Operating Income

($ in millions)

|                                      |  |   |      |   |      |  |      |  |  |  |       |   | 
|------------------------------------- |  | - | ---- | - | ---- |  | ---- |  |  |  | ----- | - | 
|                                      |  |   | 2001 |   | 2000 |  | 1999
|                                      |  |   |      |   |      |  |     
|                                     
|                                     
|                                     
|                                     
|Operating income before special items |  | $ | 63.2 |   |      |  | 88.1 |  |  |  | 110.2 |  
|                                     
|                                     
|                                     
|                                     
|Special, pre-tax items                |  |   | (1.4 | ) |      |  |     |  |  |  | (17.7 | )
|                                      |  |   |      |   |      |  |      |  |  |  |       |   | 
|                                     
|                                     
|                                     
|                                     
|Operating income after special items  |  | $ | 61.8 |   |      |  | 88.1 |  |  |  | 92.5  |  
|                                      |  |   |      |   |      |  |      |  |  |  |       |   | 

Columbian Chemicals 2001 operating income before special items was $24.9
million less than in 2000 primarily due to the impact of the downturn in the
U.S. economy, the deterioration of the Brazilian real to the U.S. dollar and
lower sales volumes.





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##### Table of Contents



- 38 -

Columbian Chemicals 2000 operating income decreased $22.1 million
compared with the prior year primarily due to the effect of higher oil prices
on feedstock costs with only limited success in passing along these higher
costs to customers, and the unfavorable impact of weaker European currencies.

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.

Production was discontinued at the Bataan, Philippines, facility in
November 1999, resulting in a special, pre-tax item to operating income of
$17.7 million. The Philippine plant, which had a relatively small production
capacity of 18,000 metric tons, did not have economies of scale necessary to
compete profitably with imports from larger regional producers.

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. Columbian manages and operates the business, including the 110,000
metric-ton-per-year manufacturing plant located in Yosu, South Korea.

Wire and Cable  Operating Income (Loss)

($ in millions)

|                                            |  |   |      |   |      |  |       |   |  |  |       |   | 
|------------------------------------------- |  | - | ---- | - | ---- |  | ----- | - |  |  | ----- | - | 
|                                            |  |   | 2001 |   | 2000 |  | 1999 
|                                            |  |   |      |   |      |  |      
|Operating income before special items       |  | $ | 15.5 |   |      |  | 33.8  |   |  |  | 9.5   |  
|                                           
|                                           
|                                           
|                                           
|Special, pre-tax items                      |  |   | (3.3 | ) |      |  | (51.6 | ) |  |  | (52.3 | )
|                                            |  |   |      |   |      |  |       |   |  |  |       |   | 
|Operating income (loss) after special items |  | $ | 12.2 |   |      |  | (17.8 | ) |  |  | (42.8 | )
|                                           
|                                           
|                                           
|                                           
|                                            |  |   |      |   |      |  |       |   |  |  |       |   | 

Wire and cables 2001 operating income before special items was $18.3
million less than in 2000 due to the slowdown in the U.S. economy affecting the
aerospace market segment and lower sales volumes due to a decline in consumer
durables, and automotive and industrial goods.

Our wire and cable segment reported operating income of $33.8 million in
2000 before special, pre-tax items. The special, pre-tax items were as
follows: $36.1 million due to impairments in Venezuela, Austria and El
Salvador, $9.9 million for the June 30, 1999, and June 27, 2000, restructuring
programs, and $5.6 million for working capital writedowns recorded in 2000.
The increase in operating income was due primarily to economic improvement in
Asia and South America and the realization of benefits from the previously
initiated restructuring programs in 1999 and 2000.

Our wire and cable segment reported operating income of $9.5 million in
1999 before special, pre-tax items. The special, pre-tax items were as
follows: $11.9 million of asset impairments to write down our international
telecommunications assets and $40.4 million for the June 30, 1999,
restructuring plan. (Refer to Note 3 to the consolidated financial statements
for further discussion of these special items.)

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.




OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS

Depreciation, Depletion and Amortization Expense

Depreciation, depletion and amortization expense was $465.3 million in
2001, compared with $464.2 million in 2000 and $329.1 million in 1999. The
2001 depreciation, depletion and amortization expense remained essentially
constant with the 2000 expense. The 2000 increase primarily resulted from a
full year of depreciation expense ($159.6 million) resulting from the October
1999 acquisition of Cyprus Amax, partially offset by decreases in production at
certain U.S. and international mines, as well as plant shutdowns and closures.
(Refer to Note 1 to the consolidated financial statements for a discussion of
depreciation methods.)

Selling and General Administrative Expense

Selling and general administrative expense was $116.5 million in 2001,
compared with $135.1 million in 2000 and $115.5 million in 1999. The 2001
decrease primarily resulted from restructuring programs that reduced selling
and general administrative employees and associated costs, including the
cancellation of 2001 company-wide annual incentive compensation payments ($10
million). The 2000 increase primarily resulted from higher costs to support
acquired entities and an increase in molybdenum selling expenses, partially
offset by the elimination of duplicate Cyprus sales company expenses.

Interest Expense

We reported net interest expense in 2001 of $225.9 million, compared with
$213.3 million in 2000 and $120.2 million in 1999. (For a further discussion
on interest rates and related debt, refer to Note 12 to the consolidated
finan-





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##### Table of Contents



- 39 -

cial statements.) Net interest expense increased in 2001 primarily due to
higher average interest rates reflecting the Companys issuance of $900 million
in 10-year and 30-year Notes and the absence of the commercial paper program at
lower rates. Net interest expense increased in 2000 primarily due to a full
year of interest expense on acquired Cyprus Amax debt. The debt acquired with
the purchase of Cyprus Amax totaled $1.6 billion, which was reduced by $15.2
million to reflect the fair value of the obligations at the acquisition date.
Interest paid by the Company in 2001 was $233.1 million, compared with $200.6
million in 2000 and $121.0 million in 1999.

Miscellaneous Income and Expense, Net

Miscellaneous income and expense, net was $8.1 million in 2001, compared
with $30.0 million in 2000 and $9.1 million in 1999. (Refer to Note 5 to the
consolidated financial statements for a schedule of the components.)

Provision for Taxes on Income

The effective tax rate changed from a 39.0 percent benefit in 1999 to a
35.8 percent expense in 2000 and to a 2.2 percent expense in 2001. The
effective tax rate in 2001 is due to the Companys 2001 estimated income tax
expense resulting principally from taxes on earnings at international
operations that could not be offset by losses at domestic operations. The
change in 2000 was primarily due to a significant increase in the U.S. tax
benefit from percentage depletion that was substantially offset by valuation
allowances against U.S. and foreign net operating losses.

In December of 1999, we received and accepted Notices of Tax Due for the
years 1992 and 1993. The Internal Revenue Service audit of the year 1994 (also
settled in 1999) resulted in a refund. Issues settled in the years 1992
through 1994 also impacted the years 1990 and 1991 and enabled us to enter a
closing agreement with the Internal Revenue Service for the years 1990 and
1991. As a result of these settlements, we recorded a $30 million reduction in
our tax provision in 1999 and a $6 million reduction in 2000.

During the year 2000, we reached agreement with the Internal Revenue
Service for the Cyprus Amax tax years 1994 through 1996 and paid the final
assessments applicable to those years. In March 2001, we reached agreement
with the Internal Revenue Service for the Phelps Dodge Corporation tax years
1995 through 1997 and paid the final assessments applicable to those years.

The Cyprus Amax federal income tax returns for the years 1997 through 1999
and the Phelps Dodge Corporation federal income tax returns for the years 1998
and 1999 are currently under examination by the Internal Revenue Service. Our
management believes that 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 Change

On January 1, 2001, we adopted Statement of Financial Accounting Standards
(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. The implementation
resulted in a cumulative reduction to income of $2.0 million (before and after
taxes), or 3 cents per share, and a cumulative reduction to Other Comprehensive
Income of $7.1 million before and after taxes. (For further discussion on the
cumulative effect of accounting changes, refer to Note 1 to the consolidated
financial statements.)

In the 1999 first quarter, we adopted Statement of Position 98-5,
Reporting on the Costs of Start-Up Activities. The implementation resulted
in a $3.5 million after-tax charge, or 6 cents per common share, representing
the write-off of previously unamortized start-up costs at our Candelaria mining
operation in Chile and our magnet wire operation in Monterrey, Mexico.

Discount Rate  Pensions and Other Postretirement
Benefits

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 7.25 percent at December 31, 2001, compared
with 7.75 percent at December 31, 2000 and 1999. (For further discussion
of pension and other postretirement benefits, refer to Notes 15 and 16 to the
consolidated financial statements.)




CHANGES IN FINANCIAL CONDITION; CAPITALIZATION

Cash and Cash Equivalents

Cash and cash equivalents at the end of 2001 were $386.9 million, compared
with $250.0 million at the beginning of the year. Operating activities
provided $302.7 million of cash during the year. Cash provided by operating
activities together with proceeds from asset dispositions of $45.8 million and
a net increase in debt of $149.4 million were used to fund capital outlays
($262.9 million), invest-
Table of Contents- 40 -ments in subsidiaries ($48.1 million) and dividend
payments on common shares ($59.1 million).($in millions)

|                                          |                       |                                      |                             |       |        |      |      |        |        |       |      |        |        |       | 
|----------------------------------------- | --------------------- | ------------------------------------ | --------------------------- | ----- | ------ | ---- | ---- | ------ | ------ | ----- | ---- | ------ | ------ | ----- | 
|                                          |                       |                                      |                             |       | 2001   |      | 2000 |        | 1999  
|                                          |                       |                                      |                             |       |        |      |      |        |       
|Cash provided by (used in):               |                       |                                      |                             |       |        |      |      |        |        |       |      |       
|                                         
|                                         
|                                         
|                                         
|                                          | Operating activities  |                                      | $                           | 302.7 |        |      |      | 511.2  |        |       |      | 204.5  |       
|                                         
|                                         
|                                         
|                                         
|                                          | Investing activities: |                                      |                             |       |        |      |      |        |        |       |      |        |       
|                                         
|                                         
|                                         
|                                         
|                                          |                       | Capital expenditures and investments |                             |       | (311.0 | )    |      |        | (422.3 | )     |      |        | (240.4 | )    
|                                         
|                                         
|                                         
|                                         
|                                          |                       | Cyprus Amax acquisition              |                             |       |       |      |      |        |       |       |      |        | 35.7   |      
|                                         
|                                         
|                                         
|                                         
|                                          |                       | Proceeds:                            |                             |       |        |      |      |        |        |       |      |        |        |      
|                                         
|                                         
|                                         
|                                         
|                                          |                       |                                      | Kinross sale                |       |        |     |      |        |        |      |      |        |        | 233.3 | 
|                                         
|                                         
|                                         
|                                         
|                                          |                       |                                      | Cyprus Australian coal sale |       |        |     |      |        |        | 150.0 |      |        |        |      | 
|                                         
|                                         
|                                         
|                                         
|                                          |                       |                                      | Sossego project sale        |       |        | 42.5 |      |        |        |      |      |        |        |      | 
|                                         
|                                         
|                                         
|                                         
|                                          |                       | Other investing activities           |                             |       | 1.7    |      |      |        | (1.9   | )     |      |        | (22.6  | )    
|                                         
|                                         
|                                         
|                                         
|                                          | Financing activities  |                                      |                             | 101.0 |        |      |      | (221.2 | )      |       |      | (198.0 | )     
|                                          |                       |                                      |                             |       |        |      |      |        |        |       |      |        |       
|Net increase in cash and cash equivalents |                       | $                                    | 136.9                       |       |        |      | 15.8 |        |        |       | 12.5 |       
|                                         
|                                         
|                                         
|                                         
|                                          |                       |                                      |                             |       |        |      |      |        |        |       |      |        |       

Working Capital

During 2001, net working capital (excluding cash and cash equivalents and
debt) decreased by $132.3 million. This net decrease resulted principally from
a $129.9 million decrease in accounts receivable primarily due to lower copper
prices and the sale of $79.7 million of receivables.

On November 30, 2001, the Company entered into a receivable securitization
program that will provide for the sale of accounts receivable up to $85.0
million. The trade receivable securitization program expires on November 29,
2002, although it may be extended for two successive one-year periods, subject
to mutual agreement. At December 31, 2001, $79.7 million of accounts
receivable had been sold through this program. (Refer to Note 1 to the
consolidated financial statements for further discussion.)

Investing Activities

Capital expenditures and investments for 2001 totaled $311.0 million
including $200.6 million for PD Mining, $86.5 million for PD Industries
(including $44.8 million for the acquisition of the remaining 40 percent share
of the Companys wire and cable manufacturing operation in Brazil) and $23.9
million for other corporate-related activities.

Capital expenditures and investments in 2000 totaled $422.3 million
including $311.6 million for PD Mining, $90.6 million for PD Industries
(including $19.0 million for the acquisition of the remaining 40 percent share
of the Companys carbon black manufacturing facility in Hungary) and $20.1
million for other corporate-related activities.

The $1,858 million purchase price for the 1999 acquisition of Cyprus Amax
comprised $1,125 million for the issuance of 20.6 million shares of Phelps
Dodge common stock, $10 million for the conversion of Cyprus Amax stock
options, cash of $693 million and acquisition costs of $30 million (financial
advisory, legal, accounting and printing costs). In addition, $1.6 billion of
Cyprus Amax debt was assumed by the Company.

Capital expenditures and investments for 2002 are expected to be
approximately $185 million including $125 million for PD Mining, approximately
$50 million for PD Industries and $10 million for other corporate-related
activities. 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, 2001, was $2,851.0 million,
compared with $2,687.7 million at year-end 2000. The increase in debt
primarily was attributable to the issuance of $900 million in 10- and 30-year
notes partially offset by the defeasance in December 2001 of $100 million of
7.75 percent notes due in January 2002, and other net debt payments of $651
million. The Companys ratio of debt to total capitalization was 50.8 percent
at December 31, 2001, compared with 45.7 percent at December 31, 2000.

In May 2001, the Company closed its offering of $625 million of 8.75
percent notes due 2011, and $275 million of 9.5 percent notes due 2031. The
net proceeds were approximately $891 million and were used to repay corporate
short-term borrowings and current maturities of long-term debt. The entire
amount of this fixed-rate debt was converted to floating-rate debt with the use
of interest rate swap agreements to take advantage of then current market
conditions. In August 2001, we unwound these interest rate swap agreements,
resulting in a positive cash flow of $23.2 million of which $4.7 million
related to reduced interest expense in 2001. The remaining $18.5 million is
being amortized into earnings over the remaining life of the respective notes.

In December 2001, we entered into several interest rate swap contracts to
convert a total of $400 million of existing notes to floating-rate debt in
order to take advantage of lower short-term interest rates then available. The
existing notes swapped to floating-rate debt included a portion of our 7.375
percent notes maturing in 2007 and a portion of our 6.625 percent notes
maturing in 2005.

In 2000, a new revolving credit agreement between the Company and several
lenders became effective. 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 requires us
to maintain a minimum consolidated





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##### Table of Contents



- 41 -

tangible net worth of $1.5 billion and
limits indebtedness to 60 percent of total consolidated capitalization. There
were no borrowings under this agreement at December 31, 2001 or 2000. (Refer
to Note 12 to the consolidated financial statements for further discussion and
terms of the agreement.)

On September 17, 2001, the Companys universal shelf registration
statement filed with the SEC in August 2001 became effective. Under the
registration statement, up to $750 million 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 new shelf registration replaced the Companys prior $750 million
shelf registration, which was filed in 2000 and fully utilized in May 2001.
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.

We established a commercial paper program on August 15, 1997, under a
private placement agency agreement with 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 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. Borrowings under
this commercial paper program were zero at December 31, 2001, compared with
$467.9 million at December 31, 2000.

Short-term borrowings other than borrowings under our Corporate commercial
paper program were $59.3 million, all by our international operations, at
December 31, 2001, compared with $50.3 million at December 31, 2000. The
increase was primarily due to an increase in net short-term borrowings at our
El Abra mine ($20.3 million) primarily offset by decreased short-term
borrowings due to repayments at our wire and cable plants in Honduras and Chile
($9.8 million).

The current portion of our long-term debt, scheduled for payment in 2002,
is $269.7 million including $14.3 million for our international manufacturing
operations, $100.3 million primarily for our international mining operations
project financed debt and $155.1 million for Corporate debt repayments.

Dividend payments on our common shares decreased to $59.1 million in 2001
from $157.5 million in 2000 reflecting the reduction in the quarterly dividend
by 75 percent beginning in the second quarter 2001 followed by the elimination
of the quarterly dividend in the fourth quarter of 2001.

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, 2001, 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 Than |       |  |  | 
|                                  |  | Total |         | 1 Year |  | 1-3 Years
|                                  |  |       |         |        |  |          
|Short-term debt                   |  | $     | 59.3    |        |  |           | 59.3  |  |  |  |      | 
|                                 
|                                 
|                                 
|                                 
|Long-term debt                    |  |       | 2,791.7 |        |  |           | 269.7 |  |  |  | 375.1 | 
|                                 
|                                 
|                                 
|                                 
|Take-or-pay contracts             |  |       | 551.2   |        |  |           | 126.9 |  |  |  | 240.5 | 
|                                 
|                                 
|                                 
|                                 
|Operating lease obligations       |  |       | 106.1   |        |  |           | 15.3  |  |  |  | 25.8  | 
|                                 
|                                 
|                                 
|                                 
|Capital lease obligations         |  |       | 18.0    |        |  |           | 4.9   |  |  |  | 9.1   | 
|                                 
|                                 
|                                 
|                                 
|Mineral royalty obligations       |  |       | 20.3    |        |  |           | 1.2   |  |  |  | 2.4   | 
|                                  |  |       |         |        |  |           |       |  |  |  |       | 
|Total contractual cash obligation |  | $     | 3,546.6 |        |  |           | 477.3 |  |  |  | 652.9 | 
|                                  |  |       |         |        |  |           |       |  |  |  |       | 

|                                  |  |           |       |         |  |       |         | 
|--------------------------------- |  | --------- | ----- | ------- |  | ----- | ------- | 
|                                  |  |           |       |         |  | After
|                                  |  | 4-5 Years |       | 5 Years
|                                  |  |           |       |        
|Short-term debt                   |  | $         |      |         |  |       |        | 
|                                 
|                                 
|                                 
|                                 
|Long-term debt                    |  |           | 431.0 |         |  |       | 1,715.9 | 
|                                 
|                                 
|                                 
|                                 
|Take-or-pay contracts             |  |           | 114.2 |         |  |       | 69.6    | 
|                                 
|                                 
|                                 
|                                 
|Operating lease obligations       |  |           | 19.8  |         |  |       | 45.2    | 
|                                 
|                                 
|                                 
|                                 
|Capital lease obligations         |  |           | 4.0   |         |  |       |        | 
|                                 
|                                 
|                                 
|                                 
|Mineral royalty obligations       |  |           | 2.4   |         |  |       | 14.3    | 
|                                  |  |           |       |         |  |       |         | 
|Total contractual cash obligation |  | $         | 571.4 |         |  |       | 1,845.0 | 
|                                  |  |           |       |         |  |       |         | 





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Commercial Commitments:
($ in millions)

|                             |  |       |       |        |  |           |      |  |  |  |      | 
|---------------------------- |  | ----- | ----- | ------ |  | --------- | ---- |  |  |  | ---- | 
|                             |  |       |       |        |  | Less Than |      |  |  | 
|                             |  | Total |       | 1 Year |  | 1-3 Years
|                             |  |       |       |        |  |          
|Standby letters of credit    |  | $     | 103.9 |        |  |           | 91.9 |  |  |  | 12.0 | 
|                            
|                            
|                            
|                            
|Guarantees                   |  |       | 56.7  |        |  |           |     |  |  |  |     | 
|                             |  |       |       |        |  |           |      |  |  |  |      | 
|Total commercial commitments |  | $     | 160.6 |        |  |           | 91.9 |  |  |  | 12.0 | 
|                             |  |       |       |        |  |           |      |  |  |  |      | 

|                             |  |           |      |         |  |       |   | 
|---------------------------- |  | --------- | ---- | ------- |  | ----- | - | 
|                             |  |           |      |         |  | After
|                             |  | 4-5 Years |      | 5 Years
|                             |  |           |      |        
|Standby letters of credit    |  | $         |     |         |  |       |  | 
|                            
|                            
|                            
|                            
|Guarantees                   |  |           | 56.7 |         |  |       |  | 
|                             |  |           |      |         |  |       |   | 
|Total commercial commitments |  | $         | 56.7 |         |  |       |  | 
|                             |  |           |      |         |  |       |   | 

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 the
10.125 percent Notes due in 2002, the 8.375 percent Debentures due in 2023, and
the 6.625 percent Notes due in 2005, may require the Company to redeem the
holders 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. Phelps Dodge 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.

New Mexicos mined land reclamation law requires financial assurance
covering reclamation cost from all companies. In contrast, Arizonas Mine Land
Reclamation Act permits a company to satisfy financial assurance requirements
by demonstrating it has financial strength to fund 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 presently has a
credit rating one level above non-investment grade; however, it has been placed
on Negative Outlook. If a downgrade occurs, the Company will need to provide
financial assurance in Arizona.

The costs of surety bonds (the traditional source of financial assurance)
has increased significantly during the past six months. Also, many surety
companies are now requiring an increased level of collateral supporting the
bonds. If surety bonds are unavailable, the Company could be required to post
cash or other collateral directly in support of financial assurance
obligations.

Our earnings and cash flows primarily are determined by the results of our
copper mining business. Based on expected 2002 annual production of
approximately 2.0 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 $20 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
occur when there is an improved worldwide balance of copper supply and demand,
and copper warehouse stocks begin to reduce.

Several copper producers have announced planned curtailments of copper
production. These reductions are expected to improve the worldwide supply
imbalance, but it is not assured that such cutbacks can or will be sustained to
achieve market balance. Further, consumption of copper is dependent on general
economic conditions and expectations. Although copper consumption is expected
to improve and grow, it is not assured that underlying drivers of consumption
will improve in 2002. Should copper prices and costs approximate 2001 realizations, the Company would
project losses in 2002 of similar magnitude to those realized in 2001. In this
circumstance, 2002 cash flow from operations, existing cash balances and other
sources of cash would be expected to generally meet current projected 2002
capital expenditures and investments and debt payment obligations. (Refer to
risk factors in Managements Discussion and Analysis on page 31.)

Hedging
Programs

We do not purchase, hold or sell derivative financial contracts unless we
have an existing asset, obligation or 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.
On January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, (as amended by SFAS No.





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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. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income (loss). (Refer to Notes 1 and 19 in our consolidated financial
statements for additional information on our protection programs and the
associated accounting standards and their implementation.)

Our copper hedging programs consist primarily of copper swaps and futures.
These programs are designed to hedge our exposure on certain 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. During 2001, 2000 and 1999, we had hedge programs in place for
approximately 487 million, 575 million and 444 million pounds of copper sales,
respectively. All realized gains or losses from hedge transactions were
virtually offset by a similar amount of gain or loss on the related customer
sales contracts at maturity. At December 31, 2001, we had outstanding copper
futures and swaps for approximately 72 million pounds of copper sales maturing
through December 2002.

At December 31, 2001, 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 2001, we would have had a
net loss from our copper futures contracts of approximately $5 million. All
realized losses would virtually be offset by a similar amount of gain on the
related customer sales contracts at maturity.

In prior years, we have entered into a copper price protection program.
The copper price protection program uses copper options to hedge a portion of
our expected future mine production 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 2001.

For 2000 production, we had a total of 110 million pounds of copper
cathode production protected through contracts that effectively ensured minimum
(approximately 72 cents) and maximum (approximately 95 cents) prices per pound.
The minimum and maximum prices were based upon average LME prices for the
protection period. These contracts expired without payment on December 31,
2000. For 1999 production, we had fourth quarter protection contracts that
gave us a minimum monthly average LME price of 69 cents per pound for
approximately 200 million pounds of copper cathode that expired without payment
on December 31, 1999. We did not have any outstanding copper price protection
contracts at the end of 1999 and 2000.

Our aluminum hedging program consists of using aluminum swaps to hedge our
aluminum raw material purchase price exposure on fixed-price sales contracts to
allow us to lock in the cost of aluminum ingot used in fixed-price aluminum
cable sold to customers. During 2001, 2000 and 1999, we had aluminum hedge
programs in place for approximately 17 million, 5 million and 6 million pounds,
respectively. At December 31, 2001, we had outstanding swaps of 13 million
pounds of aluminum sales maturing through May 2002.

At December 31, 2001, we prepared an analysis to determine the sensitivity
of our aluminum swap contracts to changes in aluminum prices. If aluminum
prices had dropped a hypothetical 10 percent at the end of 2001, we would have
had a net loss from our aluminum swap contracts of approximately $1 million.
All losses on these hedge transactions would have been virtually offset by a
similar amount of gain on the underlying aluminum purchases.

Our energy price protection programs consist of diesel fuel swaps and
option contracts and natural gas option contracts and collars. The swaps allow
us to establish a fixed diesel fuel purchase price while the option contracts
consist primarily of out-of-the-money call options which effectively allow us
to establish a ceiling for these costs. The collars used for natural gas
consumption allow us to establish both a ceiling and a floor for these costs.
During 2001, we had hedge programs in place for 37 million gallons of diesel
fuel and 7 million decatherms of natural gas. Gains and losses on these hedge
transactions were virtually
offset by a similar amount of gain or loss on the underlying energy
purchases. At December 31, 2001, we had outstanding diesel fuel swaps and
option contracts to hedge approximately 9 million and 24 million gallons,
respectively, of diesel fuel consumption representing approximately 82 percent
of our forecasted 2002 consumption. At year-end 2001, we also had outstanding
natural gas option contracts to hedge approximately 2 million decatherms (80
percent of forecasted first quarter 2002 natural gas consumption). The diesel
and natural gas energy programs have hedge positions maturing through December
2002 and March 2002, respectively.

At December 31, 2001, 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 2001, it would
have resulted in a potential net loss of approximately $1 million. That loss
would have been virtually offset by a similar gain on the related diesel fuel
purchases.

Our interest rate hedge programs consist of both fixed-to-floating and
floating-to-fixed interest rate swaps. The purpose of these hedges is to both
protect against significant fluctuations in the fair value of our debt, as well
as





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to reduce the variability in interest payments. At December 31, 2001, we
had hedge programs in place to convert $400 million of our fixed-rate debt to
floating and $364 million of our floating-rate debt to fixed. 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. These interest rate swaps have maturity
dates through May 2007 and December 2008, respectively. 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, 2001, we prepared an analysis to determine the sensitivity
of our interest rate swap contracts to changes in interest rates. A
hypothetical interest rate movement of 1 percent (or 100 basis points) would
have resulted in a potential gain or loss of approximately $15 million for the
fixed-to-floating swaps and $7 million for the floating-to-fixed swaps over the
term of the respective arrangements.

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
2001, we had outstanding forward exchange contracts in place for $13 million.

At December 31, 2001, we prepared an analysis to determine the sensitivity
of our forward foreign exchange contracts to changes in exchange rates. A
hypothetical exchange rate movement of 10 percent would have resulted in a
potential gain or loss of approximately $1 million. The loss would have been
virtually offset by a gain on the related underlying transactions.

In addition, during January 2002, we entered into out-of-the-money
feedstock oil call options. The purpose of these hedges was to protect us
against the variability in cash flows associated with feedstock oil (a
derivative of petroleum) used in the manufacturing of carbon black. We have
entered into options for approximately 75 percent of our projected February and
March 2002 North American feedstock oil purchases.

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 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 the U.S.
Environmental Protection Agency (EPA), the United States 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 conditions at a
number of sites that have been or are being investigated by EPA, the Forest
Service or states to determine whether releases of hazardous substances have
occurred and, if so, to develop and implement remedial actions.

Phelps Dodge has provided reserves for potential environmental obligations
that management considers probable and for which reasonable estimates of such
obligations 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 $311.2
million and $307.1 million, respectively, were recorded as of December 31, 2001
and 2000. The long-term portion of these reserves is included in other
liabilities and deferred credits on the consolidated balance sheet and amounted
to $264.3 million and $244.9 million at December 31, 2001 and 2000,
respectively.

The sites for which Phelps Dodge has received a notice of potential
liability or an information request that are currently considered to be the
most significant are the Pinal Creek site in Miami, Arizona, the former
American Zinc and Chemical site in Langeloth, Pennsylvania, and the Tohono
Oodham Nation sites.





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- 45 -

At the Pinal Creek site, remediation is being performed by the Pinal Creek
Group, which includes Phelps Dodge Miami Inc. and other companies that have
been determined to have contributed through historic mining activities to the
contaminated groundwater plume in the shallow alluvial aquifers of Pinal Creek.
The remediation work is being conducted in accordance with the requirements of
the Arizona Department of Environmental Qualitys Water Quality Assurance
Revolving Fund program. In addition, the remedial action is consistent with
the National Contingency Plan prepared by EPA as required by CERCLA. Ongoing
remediation efforts have resulted in continued improvement of the water quality
in the area. In November 1997, the Pinal Creek Group joined with the State of
Arizona in requesting the District Court to approve and enter a Consent Decree
resolving all matters related to an enforcement action contemplated by the
State of Arizona with respect to the groundwater matter. On August 13, 1998,
the court approved and entered the Decree that commits the Pinal Creek Group to
complete the remediation work outlined in the remedial action plan that was
submitted to the State in May 1997. Phelps Dodge Miami Inc. is pursuing
contribution litigation against other parties involved in this matter and has
asserted claims against certain of its past insurance carriers. While
significant recoveries are expected, 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 $119 million to $222 million, and, as no point within that range is
more likely than any other, the lower end of the range has been reserved as
required by generally accepted accounting principles.

In June 1999, Cyprus Amax received an information request from the
Pennsylvania Department of Environmental Protection regarding the former
American Zinc and Chemical site in Langeloth, Pennsylvania. The site is
currently being investigated by the State of Pennsylvania. Studies initiated
to determine the nature and extent of remediation work that may be required on
the property indicated a cost range for reasonably expected outcomes estimated
to be from $18 million to $52 million. Phelps Dodge has reserved $20 million
for the possible remediation work at the Langeloth site representing the most
likely point within the range of estimates.

Cyprus Tohono Corporation (Cyprus Tohono), a wholly owned subsidiary of
Cyprus Amax Corporation, holds three leases for lands on the Tohono Oodham
Indian Nation (the Nation). The leased lands include the site of an inactive
mining operation, including an open pit, leach and waste rock stockpiles,
tailing and evaporation ponds, ore roasting and SX/EW operations, and ancillary
facilities. The leases impose certain environmental compliance, closure and
reclamation requirements upon Cyprus Tohono as the lessee. 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. The Nation,
along with several federal agencies who assist the Nation, have notified Cyprus
Tohono of water quality concerns and concerns with other environmental impacts
of historical mining operations. The Nation has requested that Cyprus Tohono
consider accelerating closure and reclamation under the leases, in lieu of or
in addition to interim reclamation and corrective measures being considered by
Cyprus Tohono to protect water quality and mitigate other potential
environmental impacts. We are unable to estimate the total costs of the
corrective, closure and reclamation measures that may be instituted by Cyprus
Tohono as a result of these investigations; however, preliminary studies
indicate that interim reclamation and corrective measures could range from $7
million to $15 million. As a result of meetings and determinations in the 2001
fourth quarter, and based upon our best estimate of activities and costs, an
$11 million reserve was recognized.

In December 2001, the Company entered into a Memorandum of Understanding
with the owner of a Yonkers, New York, property regarding certain environmental
liabilities estimated to range from $6 million to $11 million. The Company
sold that property to the owner in 1984. Based on information supplied by the
property owner, the Company recognized a best estimate $7 million charge
associated with environmental remediation at that site. Also in the 2001
fourth quarter, the Company recognized charges of $13 million for environmental
remediation primarily at closed sites, none of which, individually was more
than $3 million.

At December 31, 2001, the cost range for reasonably possible outcomes for
all reservable environmental remediation sites other than Pinal Creek and
Langeloth was estimated to be from $151 million to $242 million of which $172
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 are presently litigating these disputes. Further,
Phelps Dodge believes that it has other potential claims for recovery from
other third parties, including the United States Government and other PRPs, as
well as liability offsets through lower cost remedial solutions. Neither
insurance recoveries nor other claims or offsets are recognized unless such
offsets are considered probable of realization. In 2001, the Company
recognized proceeds from settlements reached





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- 46 -

with several insurance companies
on historic environmental liability claims of $61.8 million, net of fees and
expenses.

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, 2001, the cost range for reasonably possible outcomes for all such
sites was estimated to be from $3 million to $21 million. The liabilities
arising from potential environmental obligations that have not been reserved
for 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 many years.

The following table summarizes environmental reserve activities for the
years ended December 31:

($ in millions)

|                           |                               |             |       |       |   |      |       |       |     | 
|-------------------------- | ----------------------------- | ----------- | ----- | ----- | - | ---- | ----- | ----- | --- | 
|                           |                               |             |       | 2001  |   | 2000
|                           |                               |             |       |       |   |     
|Balance, beginning of year |                               | $           | 307.1 |       |   |      | 336.1 |      
|                          
|                          
|                          
|                          
|                           | Additions to reserves         |             |       | 31.1  |   |      |       |      |    
|                          
|                          
|                          
|                          
|                           | Spending against reserves     |             |       | (27.0 | ) |      |       | (31.8 | )  
|                          
|                          
|                          
|                          
|                           | Liabilities assumed in Cyprus |             |       |       |   |      |       |       |    
|                          
|                          
|                          
|                          
|                           |                               | acquisition |       |       |  |      |       |       | 2.8 | 
|                           |                               |             |       |       |   |      |       |      
|Balance, end of year       |                               | $           | 311.2 |       |   |      | 307.1 |      
|                           |                               |             |       |       |   |      |       |      

The Company owns property in Maspeth, New York, that formerly was used as
a refinery. In June 1999, the Company entered into an Order on Consent which
requires the Company to perform, among other things, a remedial investigation
and feasibility study at the site. In the Companys original feasibility
study, the Company recommended that the site be remediated through targeted
removal of contaminated soil and capping of the site. In March 2002, following
discussions with the New York State Department of Environmental Conservation,
the Company agreed in its revised feasibility study to address groundwater
contamination at the site. As a result of this additional action, the Company
may increase its $8 million reserve by up to an additional $10 million.

Reclamation

The following table summarizes reclamation and closure reserve activities
for the years ended December 31:

($ in millions)

|                           |                         |   |       |       |      |  |       |      |  
|-------------------------- | ----------------------- | - | ----- | ----- | ---- |  | ----- | ---- | -
|                           |                         |   | 2001  |       | 2000
|                           |                         |   |       |       |     
|Balance, beginning of year |                         | $ | 135.0 |       |      |  | 131.1 |     
|                          
|                          
|                          
|                          
|                           | Additions to reserves   |   |       | 9.6   |      |  |       | 10.6 |  
|                          
|                          
|                          
|                          
|                           | Payments and deductions |   |       | (14.5 | )    |  |       | (6.7 | )
|                           |                         |   |       |       |      |  |       |     
|Balance, end of year       |                         | $ | 130.1 |       |      |  | 135.0 |     
|                           |                         |   |       |       |      |  |       |     

Our mining operations are subject to laws and regulations establishing new
requirements for mined land reclamation and financial assurance. Colorado
passed a mined land reclamation law in the early 1970s establishing a Mined
Land Reclamation Board that adopted regulations in 1977. Significant changes
were made in 1993. Our Colorado mining operations have had approved mined land
reclamation plans and financial assurance under these laws for several years.
Arizona enacted its mined land reclamation law in 1994. Our Arizona mining
operations submitted proposed reclamation plans and financial assurance
following the adoption of implementing rules in 1997, and all of our Arizona
operations have approved plans and financial assurance totaling approximately
$70 million. New Mexico passed a mined land reclamation law in 1993
authorizing regulations that were adopted in 1994. The permitting process for
New Mexico mining operations commenced in December 1994. Approval of closeout
plans describing the reclamation planned for the Chino, Tyrone and Cobre mines
currently is due by October 1, 2002. Two New Mexico State agencies currently
are reviewing the permit applications for facility closure and reclamation, and
one public hearing was held on Chinos plan to protect water quality in August
2001. A second public hearing was held in February 2002 on the Chino plan to
discuss a draft permit proposed jointly by Chino and the New Mexico
Environmental Department (NMED). The Company is awaiting the hearing officers
decision. The cost estimate to carry out this plan, including water treatment
for 100 years, if needed, is $386 million in current dollars. This figure
compares to Chinos previous estimate of approximately $100 million. The final
cost estimate is subject to the results of the hearing and any subsequent
judicial appeals. Actual reclamation costs may differ significantly from the
cost estimate based on a variety of factors including possible changes in legal
standards over time and potential cost savings from use of the Companys own
personnel and equipment at each site versus third-party contractor costs (under
New Mexico law, financial assurance requirements are calculated based on
estimated third-party costs), advances in technology and reclamation
techniques, and opportunities to prepare each site for more effi-





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cient
reclamation through careful development of the site over time. The plan also
calls for studies over the next four to five years to refine the plan.

The Company is continuing to negotiate with the State regarding the amount
of financial assurance required to cover the $386 million cost estimate. When
adjusted to reflect net present value based upon appropriate escalation and
discount rates, the amount required for financial assurance would be reduced.
The final permits are subject to the public hearing process and consideration
of public comments, and a portion of the plan will require the issuance of a
waiver of certain standards as authorized by the New Mexico Mining Act.

The Company expects the next hearing on the Tyrone plan in May 2002. The
anticipated cost estimate, financial assurance requirement, and actual
reclamation costs for the Tyrone plan are expected to be comparable to the
Chino plan. The initial hearing for the Cobre plan will likely occur in summer
2002. The Company expects the cost estimate for the Cobre plan to be
approximately $40 million.

Refer to discussion of Contractual Obligations, Commercial Commitments and
Other Items that May Affect Liquidity for related financial assurance issues.

The federal Bureau of Land Management adopted amended regulations
governing mined land reclamation for mining on federal lands in January 2001.
New financial assurance requirements for existing operations took effect in
June 2001, although the new reclamation requirements took effect only for new
mining and certain modifications to existing mining activities. Mined land
reclamation is an ongoing activity and we recognize estimated reclamation costs
using a units-of-production basis calculation. These laws and regulations and
the associated plan approval and permitting requirements will likely increase
our regulatory obligations and compliance costs over time with respect to mine
closure and reclamation.

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 $26 million in 2002 and approximately $45 million in
2003; $15 million was spent on such programs in 2001. We also anticipate
making significant capital and other expenditures beyond 2003 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 potentially material.

We do not expect that the 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.

Other Matters

In 1995, legislation was introduced in both the U.S. House of
Representatives and the U.S. Senate to amend the Mining Law of 1872. None of
the bills were enacted into law. Also, mining law amendments were added to the
1996 budget reconciliation bill, which was vetoed by the President. Among
other things, the amendments contained in the 1996 bill would have imposed a 5
percent net proceeds royalty on minerals extracted from federal lands, required
payment of fair market value for patenting federal lands, and required that
patented lands used for non-mining purposes revert to the federal government.
Several of these same concepts likely will continue to be pursued legislatively
in the future.

In August 2001, the Financial Accounting Standards Board (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 ARB No. 51. This Statement
will require 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 is required to be adopted by the Company
on January 1, 2002. We are in the process of evaluating the effect that SFAS
No. 144 will have on our financial reporting and disclosures and are developing
procedures to effect its implementation.

In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. With the adoption of this Statement, retirement obligations will
be recognized when they are incurred and displayed as liabilities and the
initial measurement will be at fair value. In addition, the





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##### Table of Contents



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asset retirement
cost will be capitalized as part of the assets carrying value and subsequently
allocated to expense over the assets useful life. This Statement is required
to be adopted by the Company on January 1, 2003. We are in the process of
evaluating the effect that SFAS No. 143 will have on our financial reporting
and disclosures and are developing procedures to effect its implementation.

In addition, in June 2001, FASB issued SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 was adopted on June 30, 2001, and any business combinations initiated
after that date require the purchase method of accounting. Under SFAS No. 142,
goodwill and intangible assets that have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment.
Intangible assets that have finite useful lives will continue to be amortized
over their useful lives, but without the constraint of the 40-year ceiling.
SFAS No. 142 is required to be adopted by the Company on January 1, 2002. We
are in the process of evaluating the effect that SFAS No. 142 will have on our
financial reporting and disclosures and are developing procedures to effect its
implementation. As of December 31, 2001, we had goodwill of $115.2 million
less accumulated amortization of $26.7 million for Columbian Chemicals and
goodwill of $70.8 million less accumulated amortization of $16.2 million for
Wire and Cable, for a total of $186.0 million less accumulated amortization of
$42.9 million ($143.1 million, net).

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.




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)

|                             |                        |   |       |       |      |  |       |       |  |  |       |      | 
|---------------------------- | ---------------------- | - | ----- | ----- | ---- |  | ----- | ----- |  |  | ----- | ---- | 
|                             |                        |   | 2001  |       | 2000 |  | 1999 
|                             |                        |   |       |       |      |  |      
|Phelps Dodge Mining Company: |                        |   |       |       |      |  |       |       |  |  |       |     
|                            
|                            
|                            
|                            
|                             | Copper  United States |   | $     | 128.6 |      |  |       | 272.0 |  |  |       | 95.9 | 
|                            
|                            
|                            
|                            
|                             | Copper  International |   |       | 61.9  |      |  |       | 29.9  |  |  |       | 4.3  | 
|                            
|                            
|                            
|                            
|                             | Molybdenum             |   |       | 8.7   |      |  |       | 8.9   |  |  |       | 20.4 | 
|                            
|                            
|                            
|                            
|                             | Other                  |   |       | 1.0   |      |  |       | 0.8   |  |  |       | 0.8  | 
|                             |                        |   |       |       |      |  |       |       |  |  |       |      | 
|                             |                        |   | 200.2 |       |      |  | 311.6 |       |  |  | 121.4 |     
|                             |                        |   |       |       |      |  |       |       |  |  |       |      | 
|Phelps Dodge Industries:     |                        |   |       |       |      |  |       |       |  |  |       |     
|                            
|                            
|                            
|                            
|                             | Specialty chemicals    |   |       | 28.9  |      |  |       | 55.7  |  |  |       | 45.0 | 
|                            
|                            
|                            
|                            
|                             | Wire and cable         |   |       | 12.8  |      |  |       | 16.9  |  |  |       | 28.4 | 
|                             |                        |   |       |       |      |  |       |       |  |  |       |      | 
|                             |                        |   | 41.7  |       |      |  | 72.6  |       |  |  | 73.4  |     
|                             |                        |   |       |       |      |  |       |       |  |  |       |      | 
|Corporate and other          |                        |   | 21.0  |       |      |  | 13.0  |       |  |  | 6.1   |     
|                             |                        |   |       |       |      |  |       |       |  |  |       |      | 
|                             |                        | $ | 262.9 |       |      |  | 397.2 |       |  |  | 200.9 |     
|                             |                        |   |       |       |      |  |       |       |  |  |       |      | 

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 March 7, 2002, there were 28,853 holders of record of our common shares.
During 1999 and 2000, the quarterly dividend rate was 50 cents on each common
share. Beginning in the second quarter of 2001, the dividend was reduced to
12.5 cents on each common share. It was eliminated in the fourth quarter of
2001. Additional information required for this item is provided in the
Quarterly Financial Data table.





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##### Table of Contents



- 49 -




QUARTERLY FINANCIAL DATA
($ in millions except per common share amounts)

|                                                            |       |   |         |       |         |  |         |       |         |  |         |       |  |  |         |       | 
|----------------------------------------------------------- | ----- | - | ------- | ----- | ------- |  | ------- | ----- | ------- |  | ------- | ----- |  |  | ------- | ----- | 
|                                                            |       |   | First   |       | Second  |  | Third   |       | Fourth 
|                                                            |       |   | Quarter |       | Quarter |  | Quarter |       | Quarter
|                                                            |       |   |         |       |         |  |         |       |        
|2001                                                        |       |   |         |       |         |  |         |       |         |  |         |       |  |  |         |      
|                                                           
|                                                           
|                                                           
|                                                           
|Sales and other operating revenues                          |       | $ | 1,100.7 |       |         |  | 1,063.5 |       |         |  | 937.0   |       |  |  | 901.2   |      
|                                                           
|                                                           
|                                                           
|                                                           
|Operating income (loss) before special items                |       |   | 3.5     |       |         |  | (3.9    | )     |         |  | (53.1   | )     |  |  | (23.0   | )    
|                                                           
|                                                           
|                                                           
|                                                           
|Operating income (loss)                                     |       |   | 34.4    |       |         |  | (17.2   | )     |         |  | (52.9   | )     |  |  | (9.2    | )    
|                                                           
|                                                           
|                                                           
|                                                           
|Income (loss) before cumulative effect of accounting change |       |   | 16.2    |       |         |  | (110.5  | )     |         |  | (100.4  | )     |  |  | (78.3   | )    
|                                                           
|                                                           
|                                                           
|                                                           
|Net income (loss) before special items                      |       |   | (14.7   | )     |         |  | (103.0  | )     |         |  | (100.6  | )     |  |  | (79.2   | )    
|                                                           
|                                                           
|                                                           
|                                                           
|Net income (loss)                                           |       |   | 14.2    |       |         |  | (110.5  | )     |         |  | (100.4  | )     |  |  | (78.3   | )    
|                                                           
|                                                           
|                                                           
|                                                           
|Net income (loss) per common share  basic                  |       |   | 0.18    |       |         |  | (1.41   | )     |         |  | (1.28   | )     |  |  | (1.00   | )    
|                                                           
|                                                           
|                                                           
|                                                           
|Net income (loss) per common share  diluted                |       |   | 0.18    |       |         |  | (1.41   | )     |         |  | (1.28   | )     |  |  | (1.00   | )    
|                                                           
|                                                           
|                                                           
|                                                           
|Stock prices *                                             
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | High  |   | 55.69   |       |         |  | 51.00   |       |         |  | 41.84   |       |  |  | 37.25   |      
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Low   |   |         | 39.55 |         |  |         | 37.82 |         |  |         | 25.74 |  |  |         | 26.30 | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Close |   |         | 40.18 |         |  |         | 41.50 |         |  |         | 27.50 |  |  |         | 32.40 | 
|                                                           
|                                                           
|                                                           
|                                                           
|2000                                                        |       |   |         |       |         |  |         |       |         |  |         |       |  |  |         |      
|                                                           
|                                                           
|                                                           
|                                                           
|Sales and other operating revenues                          |       | $ | 1,119.7 |       |         |  | 1,112.9 |       |         |  | 1,193.4 |       |  |  | 1,099.1 |      
|                                                           
|                                                           
|                                                           
|                                                           
|Operating income before special items                       |       |   | 81.9    |       |         |  | 55.8    |       |         |  | 104.6   |       |  |  | 52.1    |      
|                                                           
|                                                           
|                                                           
|                                                           
|Operating income                                            |       |   | 79.8    |       |         |  | 5.2     |       |         |  | 101.3   |       |  |  | 50.7    |      
|                                                           
|                                                           
|                                                           
|                                                           
|Net income before special items                             |       |   | 20.7    |       |         |  | 4.5     |       |         |  | 41.5    |       |  |  | 5.6     |      
|                                                           
|                                                           
|                                                           
|                                                           
|Net income (loss)                                           |       |   | 19.4    |       |         |  | (37.8   | )     |         |  | 39.3    |       |  |  | 8.1     |      
|                                                           
|                                                           
|                                                           
|                                                           
|Net income (loss) per common share  basic                  |       |   | 0.25    |       |         |  | (0.48   | )     |         |  | 0.50    |       |  |  | 0.10    |      
|                                                           
|                                                           
|                                                           
|                                                           
|Net income (loss) per common share  diluted                |       |   | 0.25    |       |         |  | (0.48   | )     |         |  | 0.50    |       |  |  | 0.10    |      
|                                                           
|                                                           
|                                                           
|                                                           
|Stock prices *                                              |       |   |         |       |         |  |         |       |         |  |         |       |  |  |         |       | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | High  |   | 73.00   |       |         |  | 53.00   |       |         |  | 46.75   |       |  |  | 57.00   |      
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Low   |   |         | 44.25 |         |  |         | 36.06 |         |  |         | 36.50 |  |  |         | 40.00 | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Close |   |         | 47.38 |         |  |         | 37.19 |         |  |         | 41.75 |  |  |         | 55.81 | 



---

|* |  | As reported in the Wall Street Journal.
|- |  | ---------------------------------------





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##### Table of Contents



- 50 -




PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

The consolidated balance sheet at December 31, 2001 and 2000, and the
related consolidated statements of operations, of cash flows and of common
shareholders equity for each of the three years in the period ended December
31, 2001, and notes thereto, together with the report thereon of
PricewaterhouseCoopers LLP dated January 28, 2002, appear on pages 51 to 84 of
this report. The financial statement schedule which appears on page 90 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, 2001. 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, 2001, 2000 and
1999.
| |  | ----------------------------------------------------------------------------------

II  Valuation and qualifying accounts and reserves on page 90.




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 three times a year 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
accountants to review the adequacy and reliability of our accounting, financial
reporting and internal controls.

PricewaterhouseCoopers LLP, our independent accountants, have audited the
annual financial statements in accordance with auditing standards generally
accepted in the United States. The independent accountants 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. 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



- 51 -




REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Phelps Dodge Corporation

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of common
shareholders equity present fairly, in all material respects, the financial
position of Phelps Dodge Corporation and its subsidiaries at December 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Corporations
management; our responsibility is to express an opinion on these financial
statements 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 to the consolidated financial statements, the
Corporation changed its method of accounting for derivative instruments and
hedging activities effective January 1, 2001, and its method of accounting for
start-up costs effective January 1, 1999.

/ s/ PricewaterhouseCoopers LLP

Phoenix, Arizona
January 28, 2002




REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders of Phelps Dodge Corporation

Our audits of the consolidated financial statements referred to in our report
dated January 28, 2002, appearing in this Annual Report on Form 10-K of Phelps
Dodge Corporation also included an audit of the financial statement schedule
listed in item 14(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.

/s/ PricewaterhouseCoopers LLP

Phoenix, Arizona
January 28, 2002





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##### Table of Contents



- 52 -




STATEMENT OF CONSOLIDATED OPERATIONS
(in millions except per share data)

|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------- | ------- | -------------------------------- | ------- | ---- | ------- | ---- | ------- | - | ------- | - | ------- | -
|                                                                                                                                                   |  |                                                         |         | For the years ended December 31,
|                                                                                                                                                   |  |                                                         |         |                                 
|                                                                                                                                                   |  |                                                         |         | 2001                             |         | 2000 |         | 1999
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |     
|Sales and other operating revenues                                                                                                                 |  | $                                                       | 4,002.4 |                                  |         |      | 4,525.1 |      |         |   | 3,114.4 |  
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|Operating costs and expenses                                                                                                                       |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Cost of products sold                                   |         |                                  | 3,440.8 |      |         |      | 3,580.2 |   |         |   | 2,477.8 |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Depreciation, depletion and amortization                |         |                                  | 465.3   |      |         |      | 464.2   |   |         |   | 329.1   |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Selling and general administrative expense              |         |                                  | 116.5   |      |         |      | 135.1   |   |         |   | 115.5   |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Exploration and research expense                        |         |                                  | 56.3    |      |         |      | 56.8    |   |         |   | 52.2    |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Special items and provisions                            |         |                                  | (31.6   | )    |         |      | 51.8    |   |         |   | 455.4   |  
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|                                                                                                                                                   |  |                                                         | 4,047.3 |                                  |         |      | 4,288.1 |      |         |   | 3,430.0 |  
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|Operating income (loss)                                                                                                                            |  |                                                         | (44.9   | )                                |         |      | 237.0   |      |         |   | (315.6  | )
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Interest expense                                        |         |                                  | (227.5  | )    |         |      | (217.8  | ) |         |   | (120.4  | )
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Capitalized interest                                    |         |                                  | 1.6     |      |         |      | 4.5     |   |         |   | 0.2     |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Miscellaneous income and expense, net                   |         |                                  | 8.1     |      |         |      | 30.0    |   |         |   | 9.1     |  
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|Income (loss) before taxes, minority interests, equity in net earnings (losses) of affiliated companies and cumulative effect of accounting change |  |                                                         | (262.7  | )                                |         |      | 53.7    |      |         |   | (426.7  | )
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Provision for taxes on income                           |         |                                  | (5.9    | )    |         |      | (19.2   | ) |         |   | 165.2   |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Minority interests in consolidated subsidiaries         |         |                                  | (4.1    | )    |         |      | (7.0    | ) |         |   | 2.1     |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Equity in net earnings (losses) of affiliated companies |         |                                  | (0.3    | )    |         |      | 1.5     |   |         |   | 5.1     |  
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|Income (loss) before cumulative effect of accounting change                                                                                        |  |                                                         | (273.0  | )                                |         |      | 29.0    |      |         |   | (254.3  | )
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Cumulative effect of accounting change                  |         |                                  | (2.0    | )    |         |      |        |   |         |   | (3.5    | )
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|Net income (loss)                                                                                                                                  |  | $                                                       | (275.0  | )                                |         |      | 29.0    |      |         |   | (257.8  | )
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|Average number of shares outstanding  basic                                                                                                       |  |                                                         | 78.5    |                                  |         |      | 78.4    |      |         |   | 61.6    |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Basic earnings (loss) per share before cumulative effect of accounting change                                                                      |  | $                                                       | (3.47   | )                                |         |      | 0.37    |      |         |   | (4.13   | )
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Cumulative effect of accounting change                  |         |                                  | (0.03   | )    |         |      |        |   |         |   | (0.06   | )
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|Basic earnings (loss) per share                                                                                                                    |  | $                                                       | (3.50   | )                                |         |      | 0.37    |      |         |   | (4.19   | )
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|Average number of shares outstanding  diluted                                                                                                     |  |                                                         | 78.5    |                                  |         |      | 78.8    |      |         |   | 61.6    |  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|Diluted earnings (loss) per share before cumulative effect of accounting change                                                                    |  | $                                                       | (3.47   | )                                |         |      | 0.37    |      |         |   | (4.13   | )
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                  
|                                                                                                                                                   |  | Cumulative effect of accounting change                  |         |                                  | (0.03   | )    |         |      |        |   |         |   | (0.06   | )
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  
|Diluted earnings (loss) per share                                                                                                                  |  | $                                                       | (3.50   | )                                |         |      | 0.37    |      |         |   | (4.19   | )
|                                                                                                                                                   |  |                                                         |         |                                  |         |      |         |      |         |   |         |  

See Notes to Consolidated Financial Statements





---



##### Table of Contents



- 53 -




CONSOLIDATED BALANCE SHEET
(in millions except per share values)

|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |         | 
|------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------- | ------- | ------------ | ------- | ------------ | ------- | ----- | ------- | 
|                                                       |                                                                                                                        |                                                                                        |                     |         | December 31, |         | December 31,
|                                                       |                                                                                                                        |                                                                                        |                     |         | 2001         |         | 2000        
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |             
|Assets                                                 |                                                                                                                        |                                                                                        |                     |         |              |         |              |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current assets:                                                                                                        |                                                                                        |                     |         |              |         |              |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                        | Cash and cash equivalents                                                              |                     | $       | 386.9        |         |              |         | 250.0 |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                        | Accounts receivable, less allowance for doubtful accounts (2001 - $14.2; 2000 - $17.6) |                     |         | 398.8        |         |              |         | 528.7 |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                        | Inventories                                                                            |                     |         | 451.8        |         |              |         | 451.5 |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                        | Supplies                                                                               |                     |         | 150.3        |         |              |         | 151.2 |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                        | Prepaid expenses                                                                       |                     |         | 27.0         |         |              |         | 36.7  |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                        | Deferred income taxes                                                                  |                     |         | 89.4         |         |              |         | 89.5  |        
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |        
|                                                       |                                                                                                                        |                                                                                        | Current assets      |         |              | 1,504.2 |              |         |       | 1,507.6 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Investments and long-term receivables                                                                                  |                                                                                        |                     | 105.3   |              |         |              | 110.1   |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Property, plant and equipment, net                                                                                     |                                                                                        |                     | 5,665.6 |              |         |              | 5,894.6 |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Deferred income taxes                                                                                                  |                                                                                        |                     | 56.3    |              |         |              | 45.1    |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other assets and deferred charges                                                                                      |                                                                                        |                     | 287.4   |              |         |              | 273.4   |      
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |        
|                                                       |                                                                                                                        | $                                                                                      | 7,618.8             |         |              |         | 7,830.8      |        
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |        
|Liabilities                                            |                                                                                                                        |                                                                                        |                     |         |              |         |              |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current liabilities:                                                                                                   |                                                                                        |                     |         |              |         |              |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                        | Short-term debt                                                                        |                     | $       | 59.3         |         |              |         | 518.2 |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                        | Current portion of long-term debt                                                      |                     |         | 269.7        |         |              |         | 206.5 |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                        | Accounts payable and accrued expenses                                                  |                     |         | 673.7        |         |              |         | 669.8 |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                        | Accrued income taxes                                                                   |                     |         | 11.5         |         |              |         | 23.4  |        
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |        
|                                                       |                                                                                                                        |                                                                                        | Current liabilities |         |              | 1,014.2 |              |         |       | 1,417.9 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Long-term debt                                                                                                         |                                                                                        |                     | 2,522.0 |              |         |              | 1,963.0 |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Deferred income taxes                                                                                                  |                                                                                        |                     | 441.8   |              |         |              | 439.0   |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other liabilities and deferred credits                                                                                 |                                                                                        |                     | 874.2   |              |         |              | 814.2   |      
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |        
|                                                       |                                                                                                                        |                                                                                        | 4,852.2             |         |              |         | 4,634.1      |        
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |        
|Commitments and contingencies (see Notes 6, 17 and 18) |                                                                                                                        |                                                                                        |                     |         |              |         |              |        
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interests in consolidated subsidiaries        |                                                                                                                        |                                                                                        | 59.4                |         |              |         | 91.7         |        
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |        
|Common shareholders equity                            |                                                                                                                        |                                                                                        |                     |         |              |         |              |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Common shares, par value $6.25; 200.0 shares authorized;
78.7 outstanding after deducting 17.1 shares held in treasury |                                                                                        |                     | 491.9   |              |         |              | 491.9   |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Capital in excess of par value                                                                                         |                                                                                        |                     | 1,016.8 |              |         |              | 1,017.7 |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Retained earnings                                                                                                      |                                                                                        |                     | 1,497.6 |              |         |              | 1,831.7 |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accumulated other comprehensive income (loss)                                                                          |                                                                                        |                     | (292.7  | )            |         |              | (226.4  | )    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other                                                                                                                  |                                                                                        |                     | (6.4    | )            |         |              | (9.9    | )    
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |        
|                                                       |                                                                                                                        |                                                                                        | 2,707.2             |         |              |         | 3,105.0      |        
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |        
|                                                       |                                                                                                                        | $                                                                                      | 7,618.8             |         |              |         | 7,830.8      |        
|                                                       |                                                                                                                        |                                                                                        |                     |         |              |         |              |         |       |        

See Notes to Consolidated Financial Statements





---



##### Table of Contents



- 54 -




CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)

|                                               |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |        |   |        |        |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------- | - | --------------------------------------------------- | ----------------------------------------- | - | -------------------------------- | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ------ | -
|                                               |                                                                                             |   |                                                     |                                           |   | For the years ended December 31,
|                                               |                                                                                             |   |                                                     |                                           |   |                                 
|                                               |                                                                                             |   |                                                     |                                           |   | 2001                             |       | 2000   |   | 1999  
|                                               |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |       
|Operating
activities                           |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |       
|                                              
|                                              
|                                              
|                                              
|                                               | Net income (loss)                                                                           |   | $                                                   | (275.0                                    | ) |                                  |       | 29.0   |   |        |       | (257.8 | )
|                                              
|                                              
|                                              
|                                              
|                                               | Adjustments
to reconcile net income (loss) to net cash 
  provided by operating activities: |   |                                                     |                                           |   |                                  |       |        |   |        |       |        |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   | Depreciation, depletion and amortization            |                                           |   | 465.3                            |       |        |   | 464.2  |       |        |   | 329.1  |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   | Deferred income taxes                               |                                           |   | (8.2                             | )     |        |   | 12.8   |       |        |   | (191.7 | )     
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   | Equity earnings (losses) net of dividends received  |                                           |   | 1.7                              |       |        |   | 0.9    |       |        |   | (4.4   | )     
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   | Changes in current assets and liabilities:          |                                           |   |                                  |       |        |   |        |       |        |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   |                                                     | Accounts receivable                       |   |                                  | 34.5  |        |   |        | 9.7   |        |   |        | (144.5 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   |                                                     | Proceeds from sale of accounts receivable |   |                                  | 79.7  |        |   |        |      |        |   |        |       |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   |                                                     | Inventories                               |   |                                  | (6.0  | )      |   |        | 39.3  |        |   |        | 31.2   |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   |                                                     | Supplies                                  |   |                                  |      |        |   |        | (5.3  | )      |   |        | 1.7    |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   |                                                     | Prepaid expenses                          |   |                                  | 9.8   |        |   |        | 2.3   |        |   |        | 9.8    |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   |                                                     | Deferred income taxes                     |   |                                  |      |        |   |        | (0.3  | )      |   |        | (5.3   | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   |                                                     | Interest payable                          |   |                                  |      |        |   |        | (16.3 | )      |   |        | 2.2    |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   |                                                     | Other accounts payable                    |   |                                  | 24.5  |        |   |        | (12.4 | )      |   |        | (2.2   | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   |                                                     | Accrued income taxes                      |   |                                  | (12.0 | )      |   |        | (24.9 | )      |   |        | 7.2    |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   |                                                     | Other accrued expenses                    |   |                                  | (5.0  | )      |   |        | (68.8 | )      |   |        | (27.4  | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   | Special items and provisions                        |                                           |   | (22.5                            | )     |        |   | 54.3   |       |        |   | 471.9  |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                             |   | Other adjustments, net                              |                                           |   | 15.9                             |       |        |   | 26.7   |       |        |   | (15.3  | )     
|                                               |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |        |  
|                                               |                                                                                             |   |                                                     | Net cash provided by operating activities |   |                                  | 302.7 |        |   |        | 511.2 |        |   |        | 204.5  |  
|                                               |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |        |  
|Investing activities                           |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |       
|                                              
|                                              
|                                              
|                                              
|                                               | Capital outlays                                                                             |   |                                                     | (262.9                                    | ) |                                  |       | (397.2 | ) |        |       | (200.9 | )
|                                              
|                                              
|                                              
|                                              
|                                               | Capitalized interest                                                                        |   |                                                     | (1.6                                      | ) |                                  |       | (4.5   | ) |        |       | (0.2   | )
|                                              
|                                              
|                                              
|                                              
|                                               | Investment in subsidiaries, net of cash received                                            |   |                                                     | (48.1                                     | ) |                                  |       | (25.1  | ) |        |       | (39.5  | )
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from asset dispositions and other                                                  |   |                                                     | 45.8                                      |   |                                  |       | 152.6  |   |        |       | 246.6  |  
|                                               |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |        |  
|                                               |                                                                                             |   | Net cash provided by (used in) investing activities |                                           |   | (266.8                           | )     |        |   | (274.2 | )     |        |   | 6.0    |       
|                                               |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |        |  
|Financing
activities                          
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from issuance of debt                                                              |   |                                                     | 1,203.3                                   |   |                                  |       | 114.6  |   |        |       | 348.8  |  
|                                              
|                                              
|                                              
|                                              
|                                               | Payment of debt                                                                             |   |                                                     | (1,053.9                                  | ) |                                  |       | (178.3 | ) |        |       | (209.1 | )
|                                              
|                                              
|                                              
|                                              
|                                               | Common dividends                                                                            |   |                                                     | (59.1                                     | ) |                                  |       | (157.5 | ) |        |       | (124.3 | )
|                                              
|                                              
|                                              
|                                              
|                                               | Debt issue costs                                                                            |   |                                                     | (7.3                                      | ) |                                  |       |       |   |        |       |       |  
|                                              
|                                              
|                                              
|                                              
|                                               | Other, net                                                                                  |   |                                                     | 18.0                                      |   |                                  |       |       |   |        |       | (213.4 | )
|                                               |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |        |  
|                                               |                                                                                             |   | Net cash provided by (used in) financing activities |                                           |   | 101.0                            |       |        |   | (221.2 | )     |        |   | (198.0 | )     
|                                               |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |        |  
|Increase
in cash and cash equivalents          |                                                                                             |   | 136.9                                               |                                           |   |                                  | 15.8  |        |   |        | 12.5  |       
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents at beginning of year |                                                                                             |   | 250.0                                               |                                           |   |                                  | 234.2 |        |   |        | 221.7 |       
|                                               |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |        |  
|Cash and cash equivalents at end of year       |                                                                                             | $ | 386.9                                               |                                           |   |                                  | 250.0 |        |   |        | 234.2 |       
|                                               |                                                                                             |   |                                                     |                                           |   |                                  |       |        |   |        |       |        |  

Supplemental schedule of noncash investing and financing activities:



| |  | In 1999, as partial consideration for the acquisition of Cyprus Amax,
the Company issued 20.6 million common shares valued at $1,125 million.
(See Note 2.)
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

See Notes to Consolidated Financial Statements





---



##### Table of Contents



- 55 -




CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS EQUITY
(in millions)

|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |         |        |       |  
|---------------------------- | --------------------------------------- | ---------------------------------------------- | --------------------------------------- | ---- | ------------- | - | ---------- | ----- | --------- | - | -------- | ------- | ------------- | - | ----------- | ------ | ------ | - | ------------- | - |  | ----- | ----- | ---- | - | - | ------- | ------- | ------ | ----- | -
|                             |                                         |                                                |                                         |      | Common Shares |   |            |       |           |   |          |         |               |   | Accumulated |        |        |   |               |   |  |       |      
|                             |                                         |                                                |                                         |      |               |   | Capital in |       |           |   |          |         | Other         |   |             |        |        |   | Common       
|                             |                                         |                                                |                                         |      | Number        |   | At Par     |       | Excess of |   | Retained |         | Comprehensive |   |             |        |        |   | Shareholders'
|                             |                                         |                                                |                                         |      | of Shares     |   | Value      |       | Par Value |   | Earnings |         | Income (loss) |   | Other       |        | Equity
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |       
|Balance
at December 31, 1998 |                                         |                                                | 57.9                                    |      |               | $ | 362.1      |       |           | $ | 1.8      |         |               | $ | 2,345.0     |        |        | $ | (113.9        | ) |  | $     | (7.6  | )    |   | $ | 2,587.4 |        
|                            
|                            
|                            
|                            
|                             | Stock options exercised                 |                                                |                                         | 0.1  |               |   |            | 0.4   |           |   |          | 2.4     |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         | 2.8     |       
|                            
|                            
|                            
|                            
|                             | Tax benefit from stock options          |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             | 0.4    |        |   |               |   |  |       |       |      |   |   |         | 0.4     |       
|                            
|                            
|                            
|                            
|                             | Restricted shares issued/cancelled, net |                                                |                                         | 0.1  |               |   |            | 0.6   |           |   |          | 4.6     |               |   |             |        |        |   |               |   |  |       |       | (3.1 | ) |   |         | 2.1     |       
|                            
|                            
|                            
|                            
|                             | Other investment adjustments            |                                                |                                         |      |               |   |            |       |           |   |          | 1.0     |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         | 1.0     |       
|                            
|                            
|                            
|                            
|                             | Dividends on common shares              |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             | (127.8 | )      |   |               |   |  |       |       |      |   |   |         | (127.8  | )     
|                            
|                            
|                            
|                            
|                             | Cyprus Amax acquisition                 |                                                |                                         | 20.6 |               |   |            | 128.5 |           |   |          | 1,006.6 |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         | 1,135.1 |       
|                            
|                            
|                            
|                            
|                             | Comprehensive income (loss):            |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |         |       
|                            
|                            
|                            
|                            
|                             |                                         | Net loss                                       |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        | (257.8 | ) |               |   |  |       |       |      |   |   |         |         | (257.8 | )    
|                            
|                            
|                            
|                            
|                             |                                         | Other comprehensive income (loss), net of tax: |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |         |        |      
|                            
|                            
|                            
|                            
|                             |                                         |                                                | Reclassification adjustment*            |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | 11.8  |       |      |   |   |         |         |        | 11.8  |  
|                            
|                            
|                            
|                            
|                             |                                         |                                                | Translation adjustment                  |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | (81.0 | )     |      |   |   |         |         |        | (81.0 | )
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        
|                             |                                         |                                                | Translation, net of reclass adjustments |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | (69.2 | )     |      |   |   |         |         |        | (69.2 | )
|                            
|                            
|                            
|                            
|                             |                                         |                                                | Unrealized losses on securities         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | (0.2  | )     |      |   |   |         |         |        | (0.2  | )
|                            
|                            
|                            
|                            
|                             |                                         |                                                | Minimum pension liability               |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | 3.0   |       |      |   |   |         |         |        | 3.0   |  
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        
|                             |                                         |                                                | Other comprehensive loss                |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | (66.4 | )     |      |   |   |         |         |        | (66.4 | )
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        
|                             |                                         | Comprehensive loss                             |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |         | (324.2 | )    
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        
|Balance at December 31, 1999 |                                         |                                                | 78.7                                    |      |               |   | 491.6      |       |           |   | 1,016.4  |         |               |   | 1,959.8     |        |        |   | (180.3        | ) |  |       | (10.7 | )    |   |   | 3,276.8 |        
|                            
|                            
|                            
|                            
|                             | Stock options exercised                 |                                                |                                         |      |               |   |            | 0.2   |           |   |          | 1.4     |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         | 1.6     |       
|                            
|                            
|                            
|                            
|                             | Tax benefit from stock options          |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             | 0.4    |        |   |               |   |  |       |       |      |   |   |         | 0.4     |       
|                            
|                            
|                            
|                            
|                             | Restricted shares issued/cancelled, net |                                                |                                         |      |               |   |            | 0.1   |           |   |          | 0.5     |               |   |             |        |        |   |               |   |  |       |       | 0.8  |   |   |         | 1.4     |       
|                            
|                            
|                            
|                            
|                             | Other investment adjustments            |                                                |                                         |      |               |   |            |       |           |   |          | (0.6    | )             |   |             |        |        |   |               |   |  |       |       |      |   |   |         | (0.6    | )     
|                            
|                            
|                            
|                            
|                             | Dividends on common shares              |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             | (157.5 | )      |   |               |   |  |       |       |      |   |   |         | (157.5  | )     
|                            
|                            
|                            
|                            
|                             | Comprehensive income (loss):            |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |         |       
|                            
|                            
|                            
|                            
|                             |                                         | Net income                                     |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        | 29.0   |   |               |   |  |       |       |      |   |   |         |         | 29.0   |      
|                            
|                            
|                            
|                            
|                             |                                         | Other comprehensive income (loss), net of tax: |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |         |        |      
|                            
|                            
|                            
|                            
|                             |                                         |                                                | Translation adjustment                  |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | (45.9 | )     |      |   |   |         |         |        | (45.9 | )
|                            
|                            
|                            
|                            
|                             |                                         |                                                | Unrealized gains on securities          |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | 0.8   |       |      |   |   |         |         |        | 0.8   |  
|                            
|                            
|                            
|                            
|                             |                                         |                                                | Minimum pension liability               |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | (1.0  | )     |      |   |   |         |         |        | (1.0  | )
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        
|                             |                                         |                                                | Other comprehensive loss                |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | (46.1 | )     |      |   |   |         |         |        | (46.1 | )
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        
|                             |                                         | Comprehensive loss                             |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |         | (17.1  | )    
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        
|Balance at December 31, 2000 |                                         |                                                | 78.7                                    |      |               |   | 491.9      |       |           |   | 1,017.7  |         |               |   | 1,831.7     |        |        |   | (226.4        | ) |  |       | (9.9  | )    |   |   | 3,105.0 |        
|                            
|                            
|                            
|                            
|                             | Stock options exercised                 |                                                |                                         |      |               |   |            |       |           |   |          | 0.5     |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         | 0.5     |       
|                            
|                            
|                            
|                            
|                             | Restricted shares issued/cancelled, net |                                                |                                         |      |               |   |            |       |           |   |          | (1.4    | )             |   |             |        |        |   |               |   |  |       |       | 3.5  |   |   |         | 2.1     |       
|                            
|                            
|                            
|                            
|                             | Dividends on common shares              |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             | (59.1  | )      |   |               |   |  |       |       |      |   |   |         | (59.1   | )     
|                            
|                            
|                            
|                            
|                             | Comprehensive income (loss):            |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |         |       
|                            
|                            
|                            
|                            
|                             |                                         | Net loss                                       |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        | (275.0 | ) |               |   |  |       |       |      |   |   |         |         | (275.0 | )    
|                            
|                            
|                            
|                            
|                             |                                         | 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   |       |      |   |   |         |         |        | 0.3   |  
|                            
|                            
|                            
|                            
|                             |                                         |                                                | Minimum pension liability               |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | (3.0  | )     |      |   |   |         |         |        | (3.0  | )
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        
|                             |                                         |                                                | Other comprehensive loss                |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  | (66.3 | )     |      |   |   |         |         |        | (66.3 | )
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        
|                             |                                         | Comprehensive loss                             |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |         | (341.3 | )    
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        
|Balance at December 31, 2001 |                                         |                                                | 78.7                                    |      |               | $ | 491.9      |       |           | $ | 1,016.8  |         |               | $ | 1,497.6     |        |        | $ | (292.7        | ) |  | $     | (6.4  | )    |   | $ | 2,707.2 |        
|                             |                                         |                                                |                                         |      |               |   |            |       |           |   |          |         |               |   |             |        |        |   |               |   |  |       |       |      |   |   |         |        

Disclosure of reclassification amount:



---

|* |  | The 1999 reclassification adjustment represents the write-off of cumulative translation
adjustments as a result of the sale of PD Mining Ltd.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

See Notes to Consolidated Financial Statements





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##### Table of Contents



-56-




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 ours), and its majority-owned subsidiaries.
Interests in mining joint ventures in which we own more than a 50 percent
participation are reported using the proportional consolidation method.
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 of America 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 amortization determination;
environmental, reclamation and closure obligations; asset impairments
(including estimates of future cash flows); postemployment, postretirement and
other employee benefit liabilities; bad debts; restructuring; valuation
allowances for deferred tax assets; contingencies and litigation; and fair
value of financial instruments. Phelps Dodge bases its estimates on 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 common 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.

Inventories and Supplies.Inventories and supplies are stated at the lower of
cost or market. Cost for metal inventories is determined by the last-in,
first-out method (LIFO), and cost for substantially all other inventories is
determined by the first-in, first-out method (FIFO) or a moving average method.
Cost for substantially all supplies is determined by a moving average method.

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 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.
Buildings, machinery and equipment for other operations are depreciated using
the straight-line method over estimated lives of five 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 or
pre-1932 engineering valuations. Depletion of mines is computed on the basis
of an overall unit rate applied to the pounds of principal products sold from
mine production.

Mine exploration costs and development 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
that are expected to benefit future production are capitalized and amortized on
the units-of-production method over the estimated commercially recoverable
minerals.



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-57-

Our policy for repair and maintenance costs incurred in connection with
planned major maintenance activities at our copper smelters and molybdenum
roasters is to charge to operations such costs equally over the subsequent
periods (generally 12 months).

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 reasonably can be 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.

Mine Closure Costs.Reclamation is an ongoing activity and we recognize
estimated final reclamation costs over the life of active mining properties on
a units-of-production basis. Non-operating sites that are currently on
care-and-maintenance status suspend accruing mine closure costs until the site
resumes production. When management determines a mine should be permanently
closed, any unrecognized closure obligation is recognized. (Refer to further
discussion in this note under New Accounting Standards  Statement of
Financial Accounting Standards (SFAS) No. 143.)

Goodwill. Included in Other assets and deferred charges are costs in excess
of the net assets of businesses acquired. These amounts are 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.)

Impairments.We evaluate our long-term assets to be held and used, our
identifiable intangible assets and goodwill for impairment when events or
changes in economic circumstances indicate the carrying amount of such assets
may not be recoverable. 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.)

Revenue Recognition.Revenue is recognized when title passes to the customer.
The passing of title is based on terms of the contract, generally upon
shipment. Copper revenue is determined based on the monthly average of
prevailing commodity prices according to the terms of the contracts.

Due to the market risk arising from the volatility of copper prices, our
objective is to sell copper cathode and rod at the New York Commodity Exchange
(COMEX) or London Metal Exchange (LME) average price in the month of delivery,
and copper concentrate at the LME average price in the month of settlement with
our customers. We initially record certain copper sales at a provisional price
at the time of sale, and adjust the pricing for all outstanding shipments to
reflect spot prices at the end of each month until a final adjustment is made
to the price of the shipments upon settlement with our customers pursuant to
the terms of the contract. Historically, these final settlement adjustments
have been insignificant.

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, obligation or 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 position and related financial
results, refer to Note 19.

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, aluminum swap
contracts, floating-to-fixed interest rate swaps, diesel fuel swaps and call
options, and natural gas call options and collars), the effective portions of
changes in fair value of the derivative are recorded in other comprehensive
income, and are recog-



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##### Table of Contents



-58-

nized in the statement of 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 reported 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. The 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 and certain
currency swaps) are recognized currently in earnings.

Stock Compensation.In accordance with the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, we measure 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 to account for our stock option plans. Note 14 contains a
summary of the disclosures of pro forma net income and earnings per share as if
the fair value based method of accounting as defined in SFAS No. 123 had been
applied.

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. 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 benefits are based on, in the case of certain plans, final
average salary and years of service and, in the case of other plans, a fixed
amount for each year of service. Our funding policy provides that payments to
the pension trusts shall be at least equal to the minimum funding requirements
of the Employee Retirement Income Security Act of 1974 for U.S. plans or, in
the case of international subsidiaries, the minimum legal requirements in that
particular country. Additional payments may also be provided from time to
time.

Postretirement Benefits Other Than Pensions.We have postretirement health
care 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 payments 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, disability,
supplemental health care, life insurance or other welfare benefits. 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. Additional
amounts may also be provided from time to time.



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##### Table of Contents



-59-

Earnings Per Share.Basic earnings per share are computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings 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.



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|                                              |                                   |                                                        |   |       |        |      |  |      |      |  |  |       |        |  
|--------------------------------------------- | --------------------------------- | ------------------------------------------------------ | - | ----- | ------ | ---- |  | ---- | ---- |  |  | ----- | ------ | -
|                                              |                                   |                                                        |   | 2001  |        | 2000 |  | 1999
|                                              |                                   |                                                        |   |       |        |      |  |     
|Basic Earnings (Loss) Per Share               |                                   |                                                        |   |       |        |      |  |      |      |  |  |      
|                                             
|                                             
|                                             
|                                             
|                                              | Computation                       |                                                        |   |       |        |      |  |      |      |  |  |       |       
|                                             
|                                             
|                                             
|                                             
|                                              | Numerator:                        |                                                        |   |       |        |      |  |      |      |  |  |       |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                   | Net income (loss)                                      |   | $     | (275.0 | )    |  |      | 29.0 |  |  |       | (257.8 | )
|                                             
|                                             
|                                             
|                                             
|                                              | Denominator:                      |                                                        |   |       |        |      |  |      |      |  |  |       |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                   | Weighted average common
shares outstanding             |   |       | 78.5   |      |  |      | 78.4 |  |  |       | 61.6   |  
|                                              |                                   |                                                        |   |       |        |      |  |      |      |  |  |       |        |  
|                                              | Basic earnings (loss) per share   |                                                        | $ | (3.50 | )      |      |  | 0.37 |      |  |  | (4.19 | )     
|                                              |                                   |                                                        |   |       |        |      |  |      |      |  |  |       |        |  
|Diluted Earnings (Loss) Per Share Computation |                                   |                                                        |   |       |        |      |  |      |      |  |  |      
|                                             
|                                             
|                                             
|                                             
|                                              | Numerator:                        |                                                        |   |       |        |      |  |      |      |  |  |       |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                   | Net income (loss)                                      |   | $     | (275.0 | )    |  |      | 29.0 |  |  |       | (257.8 | )
|                                             
|                                             
|                                             
|                                             
|                                              | Denominator:                      |                                                        |   |       |        |      |  |      |      |  |  |       |       
|                                             
|                                             
|                                             
|                                             
|                                              |                                   | Weighted average common
shares outstanding             |   |       | 78.5   |      |  |      | 78.4 |  |  |       | 61.6   |  
|                                             
|                                             
|                                             
|                                             
|                                              |                                   | Weighted average employee
stock options*               |   |       |       |      |  |      | 0.1  |  |  |       |       |  
|                                              |                                   | Weighted average restricted
stock issued to employees* |   |       |       |      |  |      | 0.3  |  |  |       |       |  
|                                              |                                   |                                                        |   |       |        |      |  |      |      |  |  |       |        |  
|                                              |                                   | Total weighted average common
shares outstanding       |   |       | 78.5   |      |  |      | 78.8 |  |  |       | 61.6   |  
|                                              |                                   |                                                        |   |       |        |      |  |      |      |  |  |       |        |  
|                                              | Diluted earnings (loss) per share |                                                        | $ | (3.50 | )      |      |  | 0.37 |      |  |  | (4.19 | )     
|                                              |                                   |                                                        |   |       |        |      |  |      |      |  |  |       |        |  



---

|* |  | Additional common shares were anti-dilutive in 2001 and 1999.
|- |  | -------------------------------------------------------------

Stock options excluded from the computation of diluted earnings per share
because option prices exceeded fair market value were as follows:

|                    |  |      |       |      |  |      |       |  |  |  |       | 
|------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                    |  | 2001 |       | 2000 |  | 1999
|                    |  |      |       |      |  |     
|Outstanding options |  |      | 7.7   |      |  |      | 4.4   |  |  |  | 3.1   | 
|                   
|                   
|                   
|                   
|Option price        |  | $    | 39.84 |      |  |      | 56.34 |  |  |  | 65.88 | 



---

New Accounting Standards.In August 2001, the Financial Accounting Standards
Board (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 ARB No. 51.
This Statement will require 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 is required to be adopted
by the Company on January 1, 2002. We are in the process of evaluating the
effect that SFAS No. 144 will have on our financial reporting and disclosures
and are developing procedures to effect its implementation.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. With the adoption of this Statement, retirement
obligations will be recognized when they are incurred and displayed as
liabilities and the initial measurement will be at fair value. In addition,
the asset retirement cost will be capitalized as part of the assets carrying
value and subsequently allocated to expense over the assets useful life. This
Statement is required to be adopted by the Company on January 1, 2003. We are
in the process of evaluating the effect that SFAS No. 143 will have on our
financial reporting and disclosures and are developing procedures to effect its
implementation.

In addition, in June 2001, the FASB issued SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 was effective on June 30, 2001, and any business combinations initiated
after that date require the purchase method of accounting. Under SFAS No. 142,
goodwill and intangible assets that have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment.
Intangible assets that have finite useful lives will continue to be amortized
over their useful lives, but without the constraint of the 40-year ceiling.
SFAS No. 142 is required to be adopted by the Company on January 1, 2002. We
will adopt the provisions of SFAS No. 142 in our first quarter ended March 31,
2002. The Company is in the process of preparing for our adoption of SFAS
No. 142 and is making the determinations as to what our reporting units are and
what amounts of goodwill, intangible assets, other assets and liabilities
should be allocated to those reporting units. In preparation for the adoption
of SFAS No. 142, the Company is in the process of evaluating what amounts, if any,
will require reclassification between goodwill and intangible assets. Any
impairment loss resulting from the transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter 2002. We have not yet determined what effect these impairment
tests will have on our earnings and financial position. As of December 31,
2001, we had goodwill of $186.0 million less accumulated amortization of $42.9
million ($143.1 million, net). Amortization expense was approximately $7
million in 2001 and approximately $8 million in 2000 and 1999, respectively.

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,



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##### Table of Contents



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the Company formed PD Receivables LLC (PD 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 expires on November 29,
2002, although it may be extended for two successive one-year periods, subject
to mutual agreement.

The transaction is accounted for as a sale of receivables under the
provisions of SFAS No. 140. There was $79.7 million advanced under the
Receivables Facility at December 31, 2001. Costs associated with the sales of
receivables, primarily related to funding and service costs charged by the
finance group, were $0.3 million during 2001 and are included in cost of
products sold in the statement of consolidated operations.

On January 1, 2001, we 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 or other comprehensive income (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 reduction to income of $2.0 million (before and after taxes), or 3
cents per share, and a cumulative reduction to OCI of $7.1 million (before and
after taxes).

In 1999, we adopted Statement of Position (SOP) 98-5, Reporting on the
Costs of Start-Up Activities. The implementation resulted in a $3.5 million
after-tax charge, or 6 cents per common share, representing the write off of
previously unamortized start-up costs at our Candelaria mining operation in
Chile and our magnet wire operation in Monterrey, Mexico.

Reclassification. For comparative purposes, certain prior year amounts have
been reclassified to conform with the current year presentation.

2. Acquisitions and Divestitures

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 has 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 January 2001, Alcoa Aluminio,
S.A. exercised a put option that required Phelps Dodge to acquire an additional
40 percent interest in Alcoa Fios e Cabos Electricos, S.A., our wire and cable
facility in Brazil, in which we already held a 60 percent interest. The
transaction closed in March 2001. 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).

Columbian Hungary Acquisition.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, bringing our total interest to 100
percent. The final settlement price of $19.0 million was allocated to minority
interests in consolidated subsidiaries ($11.4 million) and other assets and
liabilities ($7.6 million), which was primarily fixed assets.

Cyprus Amax Acquisition. In the 1999 fourth quarter, Phelps Dodge acquired all
the issued and outstanding shares of Cyprus Amax Minerals Company (Cyprus
Amax). The acquisition of Cyprus Amax was accounted for using the purchase
method and accordingly, the results of Cyprus Amax operations have been
included in the accompanying consolidated financial statements from the date of
the acquisition, October 16, 1999.

The total purchase price for Cyprus Amax was $1,858 million including
$1,125 million for the issuance of 20.6 million shares of Phelps Dodge common
stock, $10 million for the conversion of Cyprus Amax stock options, cash of
$693 million and acquisition costs of $30 million (financial, advisory, legal,
accounting and printing costs). In addition, certain acquisition-related stock
compensation and the resulting tax obligations of Cyprus Amax of $29 million
were recorded in purchase accounting and paid by Phelps Dodge.



---



##### Table of Contents



-61-

Allocation of the purchase price was based on an estimate of the fair
value for the assets acquired and liabilities assumed at October 16, 1999.
Assets acquired were $4.6 billion and liabilities assumed were $2.8 billion
(including $1.6 billion of assumed debt).

On March 30, 2000, we sold Cyprus Australia Coal Company, acquired in the
Cyprus Amax acquisition, to Glencore Coal Australia Pty. Ltd., a subsidiary of
Switzerland-based Glencore International AG, for approximately $150 million in
cash with no gain or loss being realized.

The unaudited pro forma information set forth below is presented to show
the estimated effect of the acquisition on the consolidated operations of
Phelps Dodge had it been consummated at the beginning of the period, after
giving effect to certain adjustments, including additional depreciation and
amortization of assets acquired. The pro forma financial information gives
effect to Cyprus Amaxs disposition of its coal segment in 1999, prior to the
merger. Accordingly, the operating results and resulting loss of this segment
have been excluded from income (loss) from continuing operations and included
in net income (loss).

Pro Forma

|                                |                                                |   |                              |       |  
|------------------------------- | ---------------------------------------------- | - | ---------------------------- | ----- | -
|                                |                                                |   | Year ended December 31, 1999
|                                |                                                |   |                             
|                                |                                                |   | (Unaudited)                 
|Revenue                         |                                                | $ | 4,018                        |      
|                               
|                               
|                               
|                               
|Loss from continuing operations |                                                | $ | (419                         | )    
|                               
|                               
|                               
|                               
|Net loss                        |                                                | $ | (449                         | )    
|                               
|                               
|                               
|                               
|                                | Loss
per share
Loss from continuing operations |   | $                            | (5.32 | )
|                               
|                               
|                               
|                               
|                                | Net loss                                       |   | $                            | (5.71 | )



---

The unaudited pro forma financial information is provided for illustrative
purposes only and does not purport to represent what the actual consolidated
results of operations of Phelps Dodge would have been had the acquisition of
Cyprus Amax occurred on the date presented, nor is it necessarily indicative of
future consolidated operating results. The pro forma adjustments do not
include operating efficiencies or cost savings.

KKPC Acquisition. In January 1999, we acquired an 85 percent interest in the
Korean carbon black manufacturing business of Korea Kumho Petrochemical Co.,
Ltd. Our Columbian Chemicals Company subsidiary manages and operates the
business, including the 110,000 metric-ton-per-year manufacturing plant located
in Yosu, South Korea. The final settlement price of $76.1 million was
allocated to net assets ($97.7 million), which included $6.5 million of
goodwill, partially offset by liabilities ($8.2 million) and minority interests
in consolidated subsidiaries ($13.4 million).

3. Special Items and Provisions

The following schedule summarizes special items and provisions for the
year ended December 31, 2001:

Statement of Consolidated Operations Line Item

|                                       |                                         |   |      |       |          |      |           |       |      |      |  
|-------------------------------------- | --------------------------------------- | - | ---- | ----- | -------- | ---- | --------- | ----- | ---- | ---- | -
|                                       |                                         |   |      |       | Pre-tax  |      | After-tax
|                                       |                                         |   |      |       | Earnings |      | Earnings 
|                                       |                                         |   |      |       |          |      |          
|Special items and provisions, net:     |                                         |   |      |       |          |      |           |      
|                                      
|                                      
|                                      
|                                      
|PD Mining -                            |                                         |   |      |       |          |      |           |      
|                                      
|                                      
|                                      
|                                      
|                                       | Restructuring programs                  |   | $    | (27.1 | )        |      |           | (27.1 | )   
|                                      
|                                      
|                                      
|                                      
|                                       | Environmental provisions                |   |      | (14.9 | )        |      |           | (14.9 | )   
|                                      
|                                      
|                                      
|                                      
|                                       | Gain on sale of Sossego                 |   |      | 39.9  |          |      |           | 39.9  |     
|                                       |                                         |   |      |       |          |      |           |       |     
|                                       |                                         |   |      |       |          | (2.1 | )         |       |      | (2.1 | )
|                                       |                                         |   |      |       |          |      |           |       |     
|PD Industries -                        |                                         |   |      |       |          |      |           |      
|                                      
|                                      
|                                      
|                                      
|                                       | Restructuring programs                  |   |      | (1.4  | )        |      |           | (1.4  | )   
|                                      
|                                      
|                                      
|                                      
|                                       | Hopkinsville facility write-down        |   |      | (3.3  | )        |      |           | (3.3  | )   
|                                       |                                         |   |      |       |          |      |           |       |     
|                                       |                                         |   |      |       | (4.7     | )    |           |       | (4.7 | )   
|                                       |                                         |   |      |       |          |      |           |       |     
|Corporate and other -                  |                                         |   |      |       |          |      |           |      
|                                      
|                                      
|                                      
|                                      
|                                       | Restructuring programs                  |   |      | (1.3  | )        |      |           | (1.3  | )   
|                                      
|                                      
|                                      
|                                      
|                                       | Environmental provisions                |   |      | (16.2 | )        |      |           | (16.2 | )   
|                                      
|                                      
|                                      
|                                      
|                                       | Environmental insurance
recoveries, net |   |      | 61.8  |          |      |           | 61.8  |     
|                                      
|                                      
|                                      
|                                      
|                                       | Other                                   |   |      | (5.9  | )        |      |           | (5.9  | )   
|                                       |                                         |   |      |       |          |      |           |       |     
|                                       |                                         |   |      |       |          | 38.4 |           |       |      | 38.4 |  
|                                       |                                         |   |      |       |          |      |           |       |     
|                                       |                                         |   |      |       |          | 31.6 |           |       |      | 31.6 |  
|                                       |                                         |   |      |       |          |      |           |       |     
|Miscellaneous income and expense, net: |                                         |   |      |       |          |      |           |      
|                                      
|                                      
|                                      
|                                      
|                                       | Impairment loss on investments          |   |      | (12.9 | )        |      |           | (12.9 | )   
|                                      
|                                      
|                                      
|                                      
|                                       | Other                                   |   |      | 5.8   |          |      |           | 5.8   |     
|                                       |                                         |   |      |       |          |      |           |       |     
|                                       |                                         |   |      |       |          | (7.1 | )         |       |      | (7.1 | )
|                                       |                                         |   |      |       |          |      |           |       |     
|Cumulative effect of accounting change |                                         |   | (2.0 | )     |          |      | (2.0      | )    
|                                       |                                         |   |      |       |          |      |           |       |     
|Total                                  |                                         | $ | 22.5 |       |          |      | 22.5      |      
|                                       |                                         |   |      |       |          |      |           |       |     



---

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
PD Mining, $1.4 million (before and after taxes) at PD Industries and $1.3
million (before and after taxes) at Corporate. These charges comprised an
$11.3 million charge primarily for employee severance and benefit costs
associated with restructuring of our professional, administrative and
operations support functions, as well as various other operational improvement
initiatives, and an $18.5 million net charge for employee reductions and
facility closures associated with announced production curtailments resulting
from the economic environment. The restructuring programs consist of changes
in copper operations that will lead to curtailment of approximately 220,000
metric tons of copper production annually (including our partners share) and
curtailment of 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



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##### Table of Contents



-62-

Bagdad and Sierrita mines are operating at one-half capacity, the
Chino smelter and the Miami refinery were temporarily closed, and Columbian
Chemicals Company temporarily closed its El Dorado, Arkansas, facility.

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 18 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.

A $3.3 million (before and after taxes) charge was taken to write down the
closed Hopkinsville, Kentucky, magnet wire facility to its net realizable
value.

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.

Special charges in miscellaneous income and expense in 2001 included a
$12.9 million (before and after taxes) charge to recognize the impairment of
our investment in Compañia San Ignacio de Morococha S.A. (SIMSA), a Peruvian
zinc mine, and the Piedres Verdes project in Sonora, Mexico. Additionally, a
$5.8 million (before and after taxes) charge 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 (before and after taxes) charge was recorded for the
cumulative effect of accounting change arising from the implementation of SFAS
Nos. 133 and 138. (Refer to Note 1 under New Accounting Standards for further
discussion.)

The following schedule presents a roll-forward of the current liabilities
incurred in connection with the 2001 restructuring programs.



---

|                    |                                   |       |   |            |      |               |  |              |      |   |  |     |      | 
|------------------- | --------------------------------- | ----- | - | ---------- | ---- | ------------- |  | ------------ | ---- | - |  | --- | ---- | 
|                    |                                   |       |   | 2001       |      | (Payments/    |  | December 31,
|                    |                                   |       |   | Provision* |      | Deductions)** |  | 2001        
|                    |                                   |       |   |            |      |               |  |             
|PD Mining:          |                                   |       |   |            |      |               |  |              |      |   |  |    
|                   
|                   
|                   
|                   
|                    | Employee severance
and relocation |       | $ | 13.3       |      |               |  | (3.9         | )    |   |  | 9.4 |     
|                   
|                   
|                   
|                   
|                    | Mothballing/take or
pay contracts |       |   | 8.7        |      |               |  | (0.4         | )    |   |  | 8.3 |     
|                    |                                   |       |   |            |      |               |  |              |      |   |  |     |     
|                    |                                   |       |   |            | 22.0 |               |  |              | (4.3 | ) |  |     | 17.7 | 
|                    |                                   |       |   |            |      |               |  |              |      |   |  |     |     
|PD Industries:      |                                   |       |   |            |      |               |  |              |      |   |  |    
|                   
|                   
|                   
|                   
|Specialty Chemicals |                                   |       |   |            |      |               |  |              |      |   |  |    
|                   
|                   
|                   
|                   
|                    | Disposal &
dismantling            |       |   | 0.6        |      |               |  | (0.1         | )    |   |  | 0.5 |     
|                   
|                   
|                   
|                   
|                    | Employee severance
and relocation |       |   | 0.8        |      |               |  |             |      |   |  | 0.8 |     
|                    |                                   |       |   |            |      |               |  |              |      |   |  |     |     
|                    |                                   |       |   |            | 1.4  |               |  |              | (0.1 | ) |  |     | 1.3  | 
|                    |                                   |       |   |            |      |               |  |              |      |   |  |     |     
|Corporate & Other:  |                                   |       |   |            |      |               |  |              |      |   |  |    
|                   
|                   
|                   
|                   
|                    | Employee severance
and relocation |       |   | 0.9        |      |               |  | (0.9         | )    |   |  |    |     
|                    |                                   |       |   |            |      |               |  |              |      |   |  |     |     
|                    |                                   | Total |   | $          | 24.3 |               |  |              | (5.3 | ) |  |     | 19.0 | 
|                    |                                   |       |   |            |      |               |  |              |      |   |  |     |     



---

|*  |  | Additions exclude $6.3 million of pension and other postretirement
charges for the second quarter 2001 restructuring, included in long-term
liabilities.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | Of the $5.3 million in payments, $4.1 million relates to payments for the
second quarter 2001 restructuring.                                            



---



---



##### Table of Contents



-63-

The following schedule summarizes special items and provisions for the
year ended December 31, 2000:

Statement of Consolidated Operations Line Item

|                                       |                                             |   |       |       |          |       |           |       |   |       |  
|-------------------------------------- | ------------------------------------------- | - | ----- | ----- | -------- | ----- | --------- | ----- | - | ----- | -
|                                       |                                             |   |       |       | Pre-tax  |       | After-tax
|                                       |                                             |   |       |       | Earnings |       | Earnings 
|                                       |                                             |   |       |       |          |       |          
|Special items and provisions, net:     |                                             |   |       |       |          |       |           |      
|                                      
|                                      
|                                      
|                                      
|PD Mining -                            |                                             |   |       |       |          |       |           |      
|                                      
|                                      
|                                      
|                                      
|                                       | Mining curtailments                         |   | $     | (5.8  | )        |       |           | (3.8  | )
|                                       |                                             |   |       |       |          |       |           |       |  
|PD Industries -                        |                                             |   |       |       |          |       |           |      
|                                      
|                                      
|                                      
|                                      
|                                       | Wire & cable closure/impairments            |   |       | (38.7 | )        |       |           | (35.3 | )
|                                      
|                                      
|                                      
|                                      
|                                       | Restructuring programs                      |   |       | (7.3  | )        |       |           | (4.5  | )
|                                       |                                             |   |       |       |          |       |           |       |  
|                                       |                                             |   |       |       |          | (46.0 | )         |       |   | (39.8 | )
|                                       |                                             |   |       |       |          |       |           |       |  
|                                       |                                             |   |       |       |          | (51.8 | )         |       |   | (43.6 | )
|                                       |                                             |   |       |       |          |       |           |       |  
|Cost of products sold:                 |                                             |   |       |       |          |       |           |      
|                                      
|                                      
|                                      
|                                      
|PD Industries -                        |                                             |   |       |       |          |       |           |      
|                                      
|                                      
|                                      
|                                      
|                                       | Wire & cable working capital
write-downs    |   |       | (5.6  | )        |       |           | (5.6  | )
|                                       |                                             |   |       |       |          |       |           |       |  
|Miscellaneous income and expense, net: |                                             |   |       |       |          |       |           |      
|                                      
|                                      
|                                      
|                                      
|                                       | Interest income on prior years tax refunds |   |       | 5.8   |          |       |           | 3.6   |  
|                                      
|                                      
|                                      
|                                      
|                                       | Philippines investment impairment           |   |       | (7.2  | )        |       |           | (7.2  | )
|                                      
|                                      
|                                      
|                                      
|                                       | Settlement of insurance claim               |   |       | 4.5   |          |       |           | 3.0   |  
|                                       |                                             |   |       |       |          |       |           |       |  
|                                       |                                             |   |       |       |          | 3.1   |           |       |   | (0.6  | )
|                                       |                                             |   |       |       |          |       |           |       |  
|Provision for taxes on income:         |                                             |   |       |       |          |       |           |      
|                                      
|                                      
|                                      
|                                      
|                                       | Income tax refund                           |   |       |      |          |       |           | 6.5   |  
|                                       |                                             |   |       |       |          |       |           |       |  
|Total                                  |                                             | $ | (54.3 | )     |          |       | (43.3     | )    
|                                       |                                             |   |       |       |          |       |           |       |  



---

As a result of a plan to reduce operating costs and restructure operations
at our mining and wire and cable segments during 2000, the Company recognized a
special, pre-tax charge of $57.4 million ($49.2 million after-tax). This plan
comprised the following actions: (i) curtailing higher-cost production at the
Miami mine and reducing production at the Henderson molybdenum mine; (ii)
ceasing production at two wire and cable plants in Venezuela; (iii) initiating
the closure of a telephone cable operation in El Salvador; and (iv) an
impairment of assets at our wire and cable operations in Austria.

We received a tax refund of $6.5 million and related pre-tax interest
income of $5.8 million ($3.6 million after-tax) resulting from the settlement
of the Companys 1990 and 1991 income tax audits. Additionally, we recognized
a $7.2 million (before and after taxes) impairment charge related to our wire
and cable operations in the Philippines.

A pre-tax $4.5 million ($3.0 million after-tax) settlement of a business
interruption insurance claim by a former Cyprus Amax property was recognized as
miscellaneous income.

The following schedule summarizes special items and provisions for the
year ended December 31, 1999:

Statement of Consolidated Operations Line Item

|                                                  |                                |   |          |        |           |  |        |        |  
|------------------------------------------------- | ------------------------------ | - | -------- | ------ | --------- |  | ------ | ------ | -
|                                                  |                                |   | Pre-tax  |        | After-tax
|                                                  |                                |   | Earnings |        | Earnings 
|                                                  |                                |   |          |        |          
|Special items and provisions, net:                |                                |   |          |        |           |  |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|PD Mining -                                       |                                |   |          |        |           |  |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Asset impairments              |   | $        | (320.4 | )         |  |        | (202.3 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Environmental provisions       |   |          | (28.2  | )         |  |        | (17.8  | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Restructuring programs         |   |          | (36.6  | )         |  |        | (26.7  | )
|                                                  |                                |   |          |        |           |  |        |        |  
|                                                  |                                |   | (385.2   | )      |           |  | (246.8 | )     
|                                                  |                                |   |          |        |           |  |        |        |  
|PD Industries -                                   |                                |   |          |        |           |  |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Asset impairments              |   |          | (11.9  | )         |  |        | (11.9  | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Restructuring programs         |   |          | (58.1  | )         |  |        | (39.6  | )
|                                                  |                                |   |          |        |           |  |        |        |  
|                                                  |                                |   | (70.0    | )      |           |  | (51.5  | )     
|                                                  |                                |   |          |        |           |  |        |        |  
|Corporate -                                       |                                |   |          |        |           |  |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Restructuring programs         |   |          | (0.2   | )         |  |        |       |  
|                                                  |                                |   |          |        |           |  |        |        |  
|                                                  |                                |   | (455.4   | )      |           |  | (298.3 | )     
|                                                  |                                |   |          |        |           |  |        |        |  
|Miscellaneous income and expense, net:            |                                |   |          |        |           |  |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Impairment loss on investments |   |          | (11.6  | )         |  |        | (11.6  | )
|                                                  |                                |   |          |        |           |  |        |        |  
|Provision for taxes on income*                    |                                |   |         |        |           |  | 30.0   |       
|                                                  |                                |   |          |        |           |  |        |        |  
|Minority interests in
consolidated subsidiaries** |                                |   | 3.9      |        |           |  | 3.9    |       
|                                                  |                                |   |          |        |           |  |        |        |  
|Cumulative effect of accounting change            |                                |   | (4.9     | )      |           |  | (3.5   | )     
|                                                  |                                |   |          |        |           |  |        |        |  
|Total                                             |                                | $ | (468.0   | )      |           |  | (279.5 | )     
|                                                  |                                |   |          |        |           |  |        |        |  



---

|*  |  | Reflects adjustment to prior years taxes.                                              
|-- |  | ----------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | Reflects $1.5 million for asset impairments and $2.4 million for
restructuring programs.



---

During 1999, we recorded special, pre-tax charges for asset impairments of
$320.4 million at PD Mining and $11.9 million at PD Industries. The PD Mining
impairments included the writedown of the Hidalgo smelter ($201.5 million) and
the Metcalf concentrator at the Morenci operations ($88.0 million). As a
result of the successful acquisition of Cyprus Amax and the planned conversion
of Morenci to a mine-for-leach operation, the Hidalgo smelter is expected to be
reconfigured to allow it to continue to be a reliable source of acid.
Management also determined that the Metcalf concentrator, which was on
care-and-maintenance status, would thereafter be permanently closed and the
Morenci concentrator, which will be required through the mine-for-leach
start-up, subsequently will be placed on care-and-maintenance status to provide
alternative processing capability.



---



##### Table of Contents



-64-

The acquisition of Cyprus Amax necessitated a review of the combined
Companys resources, particularly those in the southwestern United States where
the acquisition added 2.1 billion tons of proven and probable copper ore
reserves to the existing 4.8 billion tons. This review of the combined
Companys mineral resources included an assessment of the capital requirements
to develop individual resources, the investment returns associated with the
exploitation of individual resources and the optimal utilization of smelting
and refining facilities. The resulting analysis indicated that the mineral
resources at the Copper Basin property and a portion of the Tyrone property had
been marginalized by the acquisition of the Cyprus Amax mineral resources.
Managements assessment of the combined mineral resources in the southwestern
United States indicated that it would be unlikely that the Copper Basin mine
project and a portion of the Tyrone mine project would ever be fully exploited
given the low investment returns available at these projects relative to the
other mineral resources controlled by the Company. As a result of this
decision, the Company recorded impairment charges of $18.7 million.

The Companys review of its combined assets and strategic focus resulted
in an in-depth review of all significant assets and the related business plans.
In conjunction with this review, senior management decided that the
development of real estate venues on Company-owned land was not considered to
be a core business. Accordingly, also in the fourth quarter of 1999, the
entire carrying value of $12.2 million for such properties was considered to be
impaired.

PD Industries impairment charge of $11.9 million was for the impairment of
the wire and cable business international telecommunications assets. The
minority interest add-back against the impairment totaled $1.5 million.

The Company also recognized a special, pre-tax charge of $28.2 million for
estimated future costs associated with environmental matters applicable to PD
Mining. (Refer to Note 18 for further discussion of environmental matters.)

Earlier in 1999, we initiated a plan to reduce costs and improve operating
performance at all of our business segments by (i) curtailing higher cost
copper production by temporarily closing our Hidalgo smelter and the Metcalf
concentrator, as well as
curtailing production by 50 percent at our copper refinery in El Paso;
(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 Companys
carbon black plant in the Philippines. These actions resulted in a total
restructuring, pre-tax charge of $94.9 million ($66.3 million after-tax) in
1999.

Miscellaneous income and expense in 1999 included an $11.6 million charge
to recognize the impairment of our investments in China ($6.7 million), the
Philippines ($3.1 million) and Cobre Colada ($1.8 million).

The following schedule presents a roll-forward from December 31, 2000, of
the liabilities incurred in connection with the 2000 and 1999 restructuring
programs, which were reflected as current liabilities in our consolidated
balance sheet.



---

|                    |                                   |   |      |              |     |             |      |              |      |   |     |     |     | 
|------------------- | --------------------------------- | - | ---- | ------------ | --- | ----------- | ---- | ------------ | ---- | - | --- | --- | --- | 
|                    |                                   |   |      | December 31, |     | (Payments/  |      | December 31,
|                    |                                   |   |      | 2000         |     | Deductions) |      | 2001        
|                    |                                   |   |      |              |     |             |      |             
|PD Mining:          |                                   |   |      |              |     |             |      |              |      |   |     |    
|                   
|                   
|                   
|                   
|                    | Employee severance                |   | $    | 2.0          |     |             |      | (1.8         | )    |   |     | 0.2 |    
|                   
|                   
|                   
|                   
|                    | Mothballing/take or
pay contracts |   |      | 2.5          |     |             |      | (1.1         | )    |   |     | 1.4 |    
|                    |                                   |   |      |              |     |             |      |              |      |   |     |     |    
|                    |                                   |   |      |              | 4.5 |             |      |              | (2.9 | ) |     |     | 1.6 | 
|                    |                                   |   |      |              |     |             |      |              |      |   |     |     |    
|PD Industries:      |                                   |   |      |              |     |             |      |              |      |   |     |    
|                   
|                   
|                   
|                   
|Wire and Cable      |                                   |   |      |              |     |             |      |              |      |   |     |    
|                   
|                   
|                   
|                   
|                    | Employee severance
and relocation |   |      | 0.4          |     |             |      | (0.4         | )    |   |     |    |    
|                   
|                   
|                   
|                   
|                    | Take or pay contracts             |   |      | 2.0          |     |             |      | (0.9         | )    |   |     | 1.1 |    
|                   
|                   
|                   
|                   
|                    | Plant removal
and dismantling     |   |      | 3.8          |     |             |      | (1.7         | )    |   |     | 2.1 |    
|                    |                                   |   |      |              |     |             |      |              |      |   |     |     |    
|                    |                                   |   |      |              | 6.2 |             |      |              | (3.0 | ) |     |     | 3.2 | 
|                    |                                   |   |      |              |     |             |      |              |      |   |     |     |    
|Specialty Chemicals |                                   |   |      |              |     |             |      |              |      |   |     |    
|                   
|                   
|                   
|                   
|                    | Disposal &
dismantling            |   |      | 1.3          |     |             |      | (1.0         | )    |   |     | 0.3 |    
|                   
|                   
|                   
|                   
|                    | Environmental                     |   |      | 0.7          |     |             |      | (0.1         | )    |   |     | 0.6 |    
|                    |                                   |   |      |              |     |             |      |              |      |   |     |     |    
|                    |                                   |   |      |              | 2.0 |             |      |              | (1.1 | ) |     |     | 0.9 | 
|                    |                                   |   |      |              |     |             |      |              |      |   |     |     |    
|                    |                                   |   |      |              | 8.2 |             |      |              | (4.1 | ) |     |     | 4.1 | 
|                    |                                   |   |      |              |     |             |      |              |      |   |     |     |    
|Total               |                                   | $ | 12.7 |              |     |             | (7.0 | )            |      |   | 5.7 |    
|                    |                                   |   |      |              |     |             |      |              |      |   |     |     |    



---



---



##### Table of Contents



-65-

4. Investments and Long-Term Receivables

Investments and long-term receivables at December 31 were as follows:



---

|                                 |                                                 |   |       |      |      |  |       |      | 
|-------------------------------- | ----------------------------------------------- | - | ----- | ---- | ---- |  | ----- | ---- | 
|                                 |                                                 |   | 2001  |      | 2000
|                                 |                                                 |   |       |      |     
|Equity basis:                    |                                                 |   |       |      |      |  |       |     
|                                
|                                
|                                
|                                
|                                 | International wire & cable manufacturers        |   | $     | 4.9  |      |  |       | 4.8  | 
|                                
|                                
|                                
|                                
|                                 | SIMSA 26.6% (Peruvian zinc mining company)*     |   |       |     |      |  |       | 11.3 | 
|                                
|                                
|                                
|                                
|                                 | Port Carteret (50%)                             |   |       | 23.0 |      |  |       | 21.7 | 
|                                
|                                
|                                
|                                
|                                 | Other                                           |   |       | 6.2  |      |  |       | 7.7  | 
|                                
|                                
|                                
|                                
|Cost basis and notes receivable: |                                                 |   |       |      |      |  |       |     
|                                
|                                
|                                
|                                
|                                 | Southern Peru Copper Corporation (14.0 percent) |   |       | 13.2 |      |  |       | 13.2 | 
|                                
|                                
|                                
|                                
|                                 | Long-term bond investments                      |   |       | 20.7 |      |  |       | 16.9 | 
|                                
|                                
|                                
|                                
|                                 | Other cost basis investments                    |   |       | 21.0 |      |  |       | 16.8 | 
|                                
|                                
|                                
|                                
|                                 | Notes receivable and other                      |   |       | 16.3 |      |  |       | 17.7 | 
|                                 |                                                 |   |       |      |      |  |       |      | 
|                                 |                                                 | $ | 105.3 |      |      |  | 110.1 |     
|                                 |                                                 |   |       |      |      |  |       |      | 



---

|* |  | Refer to Note 5, Miscellaneous Income and Expense, Net, for further
discussion.
|- |  | -------------------------------------------------------------------------------



---

Equity earnings (losses) were as follows (in millions): 2001  ($0.3);
2000  $1.5; 1999  $5.1.

Dividends from equity basis investments were received as follows (in
millions): 2001  $1.4; 2000  $2.5; 1999  $0.7.

Our retained earnings include undistributed earnings of equity basis
investments of (in millions): 2001  $65.2; 2000  $66.9; 1999  $67.9.

Condensed financial information for our equity basis investments at
December 31, for the years noted, was as follows:



---

|                  |  |      |       |      |  |      |       |   |  |  |       | 
|----------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | 
|                  |  | 2001 |       | 2000 |  | 1999
|                  |  |      |       |      |  |     
|Sales             |  | $    | 109.7 |      |  |      | 119.2 |   |  |  | 162.8 | 
|                 
|                 
|                 
|                 
|Net income (loss) |  | $    | 3.1   |      |  |      | (7.8  | ) |  |  | 1.1   | 



---

|                                  |  |      |      |      |  |      |       |   |  |  |       |  
|--------------------------------- |  | ---- | ---- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                  |  | 2001 |      | 2000 |  | 1999
|                                  |  |      |      |      |  |     
|Net current assets                |  | $    | 14.8 |      |  |      | 3.2   |   |  |  | 49.7  |  
|                                 
|                                 
|                                 
|                                 
|Fixed assets, net                 |  |      | 62.9 |      |  |      | 90.5  |   |  |  | 152.2 |  
|                                 
|                                 
|                                 
|                                 
|Long-term debt                    |  |      | (7.3 | )    |  |      | (11.6 | ) |  |  | (37.9 | )
|                                 
|                                 
|                                 
|                                 
|Other assets and liabilities, net |  |      | (1.0 | )    |  |      | 21.8  |   |  |  | (4.3  | )
|                                  |  |      |      |      |  |      |       |   |  |  |       |  
|Net assets                        |  | $    | 69.4 |      |  |      | 103.9 |   |  |  | 159.7 |  
|                                  |  |      |      |      |  |      |       |   |  |  |       |  



---

5. Miscellaneous Income and Expense, Net

Miscellaneous income and expense, net for the years ended December 31 were
as follows:



---

|                                                                    |  |      |       |      |  |      |      |   |  |  |       |  
|------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ---- | - |  |  | ----- | -
|                                                                    |  | 2001 |       | 2000 |  | 1999
|                                                                    |  |      |       |      |  |     
|Interest income                                                     |  | $    | 23.3  |      |  |      | 19.5 |   |  |  | 17.9  |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Investment impairments *                                            |  |      | (12.9 | )    |  |      | (7.2 | ) |  |  | (11.6 | )
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Asarco merger termination (net of
related expenses)                 |  |      |      |      |  |      |     |   |  |  | 14.0  |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Southern Peru Copper Corporation
dividend (14.0% minority interest) |  |      | 4.0   |      |  |      | 3.8  |   |  |  | 1.7   |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Interest on IRS refund                                              |  |      | 4.3   |      |  |      | 5.8  |   |  |  |      |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Gain on sale of Australian iron ore royalties                       |  |      |      |      |  |      | 4.7  |   |  |  |      |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Willow Creek insurance settlement                                   |  |      | 1.5   |      |  |      | 4.5  |   |  |  |      |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Foreign currency exchange loss                                      |  |      | (1.2  | )    |  |      | (1.5 | ) |  |  | (13.0 | )
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Rabbi trust mark-to-market                                          |  |      | (3.3  | )    |  |      | (0.2 | ) |  |  |      |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Miscellaneous non-operating expenses                                |  |      | (7.7  | )    |  |      | (3.6 | ) |  |  | (0.8  | )
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Royalties and rental income                                         |  |      | 2.7   |      |  |      | 1.3  |   |  |  | 0.8   |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Other                                                               |  |      | (2.6  | )    |  |      | 2.9  |   |  |  | 0.1   |  
|                                                                    |  |      |       |      |  |      |      |   |  |  |       |  
|                                                                    |  | $    | 8.1   |      |  |      | 30.0 |   |  |  | 9.1   |  
|                                                                    |  |      |       |      |  |      |      |   |  |  |       |  



---

|* |  | Impairment of investment in SIMSA ($9.1 million) and Equatorial Mining
($3.8 million) during 2001, PD Philippines ($7.2 million) during 2000,
and Cobre Colada ($1.8 million), PD Philippines ($3.1million) and PD
Yantai ($6.7 million) during 1999.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

6. Income Taxes

We use the balance sheet approach for accounting and reporting income
taxes, whereby the classification of deferred income taxes is determined by the
balance sheet classification of the related asset or liability.

Geographic sources of income (loss) before taxes, minority interests and
equity in net earnings (losses) of
affiliated companies for the years ended December 31 were as follows:



---

|              |  |      |        |      |  |      |      |  |  |  |        |  
|------------- |  | ---- | ------ | ---- |  | ---- | ---- |  |  |  | ------ | -
|              |  | 2001 |        | 2000 |  | 1999
|              |  |      |        |      |  |     
|United States |  | $    | (305.2 | )    |  |      | 42.4 |  |  |  | (408.4 | )
|             
|             
|             
|             
|Foreign       |  |      | 42.5   |      |  |      | 11.3 |  |  |  | (18.3  | )
|              |  |      |        |      |  |      |      |  |  |  |        |  
|              |  | $    | (262.7 | )    |  |      | 53.7 |  |  |  | (426.7 | )
|              |  |      |        |      |  |      |      |  |  |  |        |  



---



---



##### Table of Contents



-66-

The provision (benefit) for income taxes for the years ended December 31 were as follows:



---

|          |                                  |  |   |       |      |      |      |       |      |      |  |        |        |        |  
|--------- | -------------------------------- |  | - | ----- | ---- | ---- | ---- | ----- | ---- | ---- |  | ------ | ------ | ------ | -
|          |                                  |  |   |       | 2001 |      | 2000 |       | 1999
|          |                                  |  |   |       |      |      |      |       |     
|Current:  |                                  |  |   |       |      |      |      |       |      |      |  |       
|         
|         
|         
|         
|          | Federal                          |  | $ | 6.0   |      |      |      | (12.8 | )    |      |  | 1.3    |       
|         
|         
|         
|         
|          | State                            |  |   | (6.2  | )    |      |      | 2.3   |      |      |  | 0.2    |       
|         
|         
|         
|         
|          | Foreign                          |  |   | 14.3  |      |      |      | 16.9  |      |      |  | 23.8   |       
|          |                                  |  |   |       |      |      |      |       |      |      |  |        |       
|          |                                  |  |   |       |      | 14.1 |      |       |      | 6.4  |  |        |        | 25.3   |  
|          |                                  |  |   |       |      |      |      |       |      |      |  |        |       
|Deferred: |                                  |  |   |       |      |      |      |       |      |      |  |       
|         
|         
|         
|         
|          | Federal                          |  |   | (13.4 | )    |      |      | 4.1   |      |      |  | (187.3 | )     
|         
|         
|         
|         
|          | State                            |  |   | (0.5  | )    |      |      | (1.0  | )    |      |  | (8.0   | )     
|         
|         
|         
|         
|          | Foreign                          |  |   | 5.7   |      |      |      | 9.7   |      |      |  | 3.6    |       
|          |                                  |  |   |       |      |      |      |       |      |      |  |        |       
|          |                                  |  |   |       | (8.2 | )    |      |       | 12.8 |      |  |        | (191.7 | )     
|          |                                  |  |   |       |      |      |      |       |      |      |  |        |       
|          | Deferred taxes on start-up costs |  |   |      |      |      |      |      |      |      |  | 1.2    |       
|          |                                  |  |   |       |      |      |      |       |      |      |  |        |       
|          |                                  |  |   |       | $    | 5.9  |      |       |      | 19.2 |  |        |        | (165.2 | )
|          |                                  |  |   |       |      |      |      |       |      |      |  |        |       



---

A reconciliation of the U.S. statutory tax rate to our effective tax rate was as follows:

Expense (benefit)

|                                 |  |      |       |      |  |      |       |   |  |  |       |  
|-------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                 |  | 2001 |       | 2000 |  | 1999
|                                 |  |      |       |      |  |     
|Statutory tax rate               |  |      | (35.0 | )%   |  |      | 35.0  |   |  |  | (35.0 | )
|                                
|                                
|                                
|                                
|Depletion                        |  |      | (1.8  | )    |  |      | (48.4 | ) |  |  | (1.4  | )
|                                
|                                
|                                
|                                
|State and local income taxes     |  |      | (2.6  | )    |  |      | 2.3   |   |  |  | (1.8  | )
|                                
|                                
|                                
|                                
|Effective international tax rate |  |      | 7.6   |      |  |      | 9.0   |   |  |  | 0.8   |  
|                                
|                                
|                                
|                                
|Adjustments to prior years       |  |      | (2.8  | )    |  |      | (12.0 | ) |  |  | (6.8  | )
|                                
|                                
|                                
|                                
|Valuation allowance              |  |      | 37.3  |      |  |      | 42.8  |   |  |  | 4.6   |  
|                                
|                                
|                                
|                                
|Non-deductible goodwill          |  |      | 0.4   |      |  |      | 2.2   |   |  |  | 0.3   |  
|                                
|                                
|                                
|                                
|Other items, net                 |  |      | (0.9  | )    |  |      | 4.9   |   |  |  | 0.3   |  
|                                 |  |      |       |      |  |      |       |   |  |  |       |  
|Effective tax rate               |  |      | 2.2   | %    |  |      | 35.8  |   |  |  | (39.0 | )
|                                 |  |      |       |      |  |      |       |   |  |  |       |  



---

We paid federal, state, local and foreign income taxes of approximately
$43 million in 2001, compared with approximately $75 million in 2000 and $31
million in 1999.

We received refunds of federal, state, local and foreign income taxes of
approximately $36 million in 2001, compared with approximately $78 million in
2000 and $2 million in 1999.

At December 31, 2001, we had alternative minimum tax credits of
approximately $318 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 also has Venezuelan business assets tax credits of
$2 million expiring from 2002 to 2004. The business assets tax is an
alternative tax that is paid when it is greater than the income tax, but may be
carried forward for three years and used as a credit against future income tax
liabilities.

The Company has alternative minimum tax foreign tax credit carryforwards
for federal income tax purposes of approximately $21 million expiring from 2002
to 2005.

The Company has U.S. net operating loss carryforwards for regular tax
purposes of $978 million expiring from 2002 to 2021, Venezuelan net operating
loss carryforwards of $91 million expiring from 2002 to 2004, and Chilean net
operating loss carryforwards of $442 million that do not expire. The Company
also has Peruvian net operating loss carryforwards of $14 million that may be
carried forward and utilized in the first year the Company has taxable profits
following the loss year as well as the subsequent three years. The U.S. losses
include $377 million of Cyprus Amax U.S. net operating loss carryforwards that
are subject to annual limitations on their usage after the October 1999
acquisition. The annual limitation on the utilization of these losses is
approximately $98 million. The Company also has U.S. alternative minimum tax
net operating loss carryforwards of approximately $652 million expiring from
2018 to 2021.

The Company has $218 million of U.S. capital loss carryforwards that
expire in 2004 and 2005. Capital loss carryforwards may only be used to offset
net capital gains in the carryforward periods. These losses include $122
million of Cyprus Amax capital loss carryforwards that are subject to annual
limitations on their usage after the acquisition.

A valuation allowance of $409 million has been recorded against all of
these benefits. The Company has established a valuation allowance for certain
deferred tax assets that management believes, more likely than not, will not be
realized. A full valuation allowance has been provided against U.S. capital
loss carryforwards and Venezuelan tax loss carryforwards because the ultimate
realization of these deferred tax assets depends on our ability to generate
sufficient capital gain and taxable income in the future. The remaining
valuation allowance primarily relates to carryforwards of U.S. tax losses and
alternative minimum tax credits. The increase in the valuation allowance
during 2001 is due primarily to the increase in U.S. tax loss carryforwards and
alternative minimum tax credits.

The Cyprus Amax federal income tax returns for the years 1997 through 1999
and the Phelps Dodge federal income tax returns for the years 1998 and 1999 are
currently under examination by the Internal Revenue Service. Our management
believes that 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.



---



##### Table of Contents



-67-

Deferred income tax assets (liabilities) comprised the following at
December 31:



---

|                                           |  |      |          |      |  |  |          |  
|------------------------------------------ |  | ---- | -------- | ---- |  |  | -------- | -
|                                           |  | 2001 |          | 2000
|                                           |  |      |          |     
|Minimum tax credits                        |  | $    | 317.9    |      |  |  | 288.6    |  
|                                          
|                                          
|                                          
|                                          
|Postretirement and postemployment benefits |  |      | 115.8    |      |  |  | 114.5    |  
|                                          
|                                          
|                                          
|                                          
|Environmental, closure and other reserves  |  |      | 180.6    |      |  |  | 173.7    |  
|                                          
|                                          
|                                          
|                                          
|Mining costs                               |  |      | 89.0     |      |  |  | 81.0     |  
|                                          
|                                          
|                                          
|                                          
|NOL carryovers                             |  |      | 444.6    |      |  |  | 336.0    |  
|                                          
|                                          
|                                          
|                                          
|Capital loss carryovers                    |  |      | 76.5     |      |  |  | 74.1     |  
|                                          
|                                          
|                                          
|                                          
|Other                                      |  |      | 22.8     |      |  |  | 22.6     |  
|                                           |  |      |          |      |  |  |          |  
|Deferred tax assets                        |  |      | 1,247.2  |      |  |  | 1,090.5  |  
|                                          
|                                          
|                                          
|                                          
|Valuation allowance                        |  |      | (409.2   | )    |  |  | (280.2   | )
|                                           |  |      |          |      |  |  |          |  
|Net deferred tax assets                    |  |      | 838.0    |      |  |  | 810.3    |  
|                                           |  |      |          |      |  |  |          |  
|Exploration and mine development costs     |  |      | (97.3    | )    |  |  | (98.4    | )
|                                          
|                                          
|                                          
|                                          
|Depreciation                               |  |      | (943.8   | )    |  |  | (927.0   | )
|                                          
|                                          
|                                          
|                                          
|Mining properties                          |  |      | (70.0    | )    |  |  | (70.0    | )
|                                          
|                                          
|                                          
|                                          
|Pensions                                   |  |      | (23.0    | )    |  |  | (19.3    | )
|                                           |  |      |          |      |  |  |          |  
|Deferred tax liabilities                   |  |      | (1,134.1 | )    |  |  | (1,114.7 | )
|                                           |  |      |          |      |  |  |          |  
|                                           |  | $    | (296.1   | )    |  |  | (304.4   | )
|                                           |  |      |          |      |  |  |          |  



---

Income taxes have not been provided on our share ($571 million) of
undistributed earnings of international manufacturing and mining interests 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 lent 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 $79
million and $8 million, respectively.

7. Inventories and Supplies

Inventories at December 31 were as follows:



---

|                               |  |      |       |      |  |  |       | 
|------------------------------ |  | ---- | ----- | ---- |  |  | ----- | 
|                               |  | 2001 |       | 2000
|                               |  |      |       |     
|Metals and other raw materials |  | $    | 374.9 |      |  |  | 373.8 | 
|                              
|                              
|                              
|                              
|Work in process                |  |      | 11.4  |      |  |  | 10.6  | 
|                              
|                              
|                              
|                              
|Finished manufactured goods    |  |      | 64.5  |      |  |  | 64.4  | 
|                              
|                              
|                              
|                              
|Other                          |  |      | 1.0   |      |  |  | 2.7   | 
|                               |  |      |       |      |  |  |       | 
|                               |  | $    | 451.8 |      |  |  | 451.5 | 
|                               |  |      |       |      |  |  |       | 



---

Inventories valued by the last-in, first-out method would have been
greater if valued at current costs by approximately $112 million and $109
million at December 31, 2001 and 2000, respectively.

Supplies in the amount of $150.3 million and $151.2 million at December
31, 2001 and 2000, respectively, are stated net of a reserve for obsolescence
of $27.2 million and $24.2 million, respectively.

8. Property, Plant and Equipment

Property, plant and equipment at December 31 comprised the following:



---

|                                                          |  |   |         |         |         |      |         |         |         | 
|--------------------------------------------------------- |  | - | ------- | ------- | ------- | ---- | ------- | ------- | ------- | 
|                                                          |  |   |         | 2001    |         | 2000
|                                                          |  |   |         |         |         |     
|Buildings, machinery and equipment                        |  | $ | 7,072.8 |         |         |      | 6,939.0 |        
|                                                         
|                                                         
|                                                         
|                                                         
|Mining properties and capitalized
mine development        |  |   | 1,823.7 |         |         |      | 1,831.0 |        
|                                                         
|                                                         
|                                                         
|                                                         
|Land and water rights                                     |  |   | 158.4   |         |         |      | 156.9   |        
|                                                          |  |   |         |         |         |      |         |        
|                                                          |  |   |         |         | 9,054.9 |      |         |         | 8,926.9 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Less accumulated depreciation, depletion
and amortization |  |   | 3,389.3 |         |         |      | 3,032.3 |        
|                                                          |  |   |         |         |         |      |         |        
|                                                          |  |   | $       | 5,665.6 |         |      |         | 5,894.6 |        
|                                                          |  |   |         |         |         |      |         |        



---

9. Other Assets and Deferred Charges

Other assets and deferred charges at December 31 were as follows:



---

|                                                                     |  |      |       |      |  |  |       | 
|-------------------------------------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | 
|                                                                     |  | 2001 |       | 2000
|                                                                     |  |      |       |     
|Goodwill, less accumulated amortization
(2001 - $42.9; 2000 - $37.1) |  | $    | 143.1 |      |  |  | 154.6 | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Employee benefit plans                                               |  |      | 108.9 |      |  |  | 79.1  | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Debt issue costs                                                     |  |      | 27.6  |      |  |  | 18.5  | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Other                                                                |  |      | 7.8   |      |  |  | 21.2  | 
|                                                                     |  |      |       |      |  |  |       | 
|                                                                     |  | $    | 287.4 |      |  |  | 273.4 | 
|                                                                     |  |      |       |      |  |  |       | 



---



---



##### Table of Contents



-68-

10. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at December 31 were as follows:



---

|                                       |  |      |       |      |  |  |       | 
|-------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | 
|                                       |  | 2001 |       | 2000
|                                       |  |      |       |     
|Accounts payable                       |  | $    | 287.3 |      |  |  | 265.9 | 
|                                      
|                                      
|                                      
|                                      
|Salaries, wages and other compensation |  |      | 54.9  |      |  |  | 44.9  | 
|                                      
|                                      
|                                      
|                                      
|Employee benefit plans                 |  |      | 34.3  |      |  |  | 41.6  | 
|                                      
|                                      
|                                      
|                                      
|Insurance reserves                     |  |      | 24.9  |      |  |  | 14.9  | 
|                                      
|                                      
|                                      
|                                      
|Environmental reserves*                |  |      | 46.9  |      |  |  | 62.2  | 
|                                      
|                                      
|                                      
|                                      
|Smelting, refining and freight         |  |      | 40.1  |      |  |  | 35.7  | 
|                                      
|                                      
|                                      
|                                      
|Other accrued taxes                    |  |      | 31.3  |      |  |  | 34.5  | 
|                                      
|                                      
|                                      
|                                      
|Closure reserves*                      |  |      | 11.2  |      |  |  | 30.9  | 
|                                      
|                                      
|                                      
|                                      
|Accrued utilities                      |  |      | 16.4  |      |  |  | 23.0  | 
|                                      
|                                      
|                                      
|                                      
|Interest**                             |  |      | 32.8  |      |  |  | 32.7  | 
|                                      
|                                      
|                                      
|                                      
|Returnable containers                  |  |      | 5.4   |      |  |  | 8.0   | 
|                                      
|                                      
|                                      
|                                      
|Other                                  |  |      | 88.2  |      |  |  | 75.5  | 
|                                       |  |      |       |      |  |  |       | 
|                                       |  | $    | 673.7 |      |  |  | 669.8 | 
|                                       |  |      |       |      |  |  |       | 



---

|*  |  | Short-term portion of these reserves. Please refer to Note 11 for
long-term portion of reserves and Note 18, Contingencies, for further
discussion.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | Interest paid by the Company in 2001 was $233.1 million compared with
$200.6 million in 2000 and $121.0 million in 1999.                           



---

11. Other Liabilities and Deferred Credits

Other liabilities and deferred credits at December 31 were as follows:



---

|                                                          |  |      |       |      |  |  |       | 
|--------------------------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | 
|                                                          |  | 2001 |       | 2000
|                                                          |  |      |       |     
|Pension, postretirement and
postemployment benefit plans* |  | $    | 412.6 |      |  |  | 412.9 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Environmental reserves**                                  |  |      | 264.3 |      |  |  | 244.9 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Insurance reserves                                        |  |      | 36.6  |      |  |  | 16.9  | 
|                                                         
|                                                         
|                                                         
|                                                         
|Closure reserves**                                        |  |      | 118.9 |      |  |  | 104.1 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Swap contracts  fair value                               |  |      | 20.7  |      |  |  |      | 
|                                                         
|                                                         
|                                                         
|                                                         
|Other                                                     |  |      | 21.1  |      |  |  | 35.4  | 
|                                                          |  |      |       |      |  |  |       | 
|                                                          |  | $    | 874.2 |      |  |  | 814.2 | 
|                                                          |  |      |       |      |  |  |       | 



---

|*  |  | Please refer to Note 15, Pension Plans and Note 16, Postretirement and
Other Employee Benefits Other Than Pensions, for further discussion.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | Please refer to Note 10 for short-term portion of reserves and Note
18, Contingencies, for further discussion.                             



---

12. Debt and Other Financing

Debt at December 31 is summarized below:



---

|                                                                   |                                             |   |         |      |      |  |         |      | 
|------------------------------------------------------------------ | ------------------------------------------- | - | ------- | ---- | ---- |  | ------- | ---- | 
|                                                                   |                                             |   | 2001    |      | 2000
|                                                                   |                                             |   |         |      |     
|10.125% Notes due 2002                                             |                                             | $ | 150.9   |      |      |  | 154.6   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|9.875% Notes due 2001                                              |                                             |   |        |      |      |  | 92.5    |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|9.50% Notes due 2031                                               |                                             |   | 280.1   |      |      |  |        |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|8.75% Notes due 2011                                               |                                             |   | 635.7   |      |      |  |        |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|8.375% Debentures due 2023                                         |                                             |   | 151.2   |      |      |  | 151.2   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|7.75% Notes due 2002                                               |                                             |   |        |      |      |  | 100.0   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|7.375% Notes due 2007                                              |                                             |   | 240.5   |      |      |  | 238.7   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|7.125% Debentures due 2027                                         |                                             |   | 150.0   |      |      |  | 150.0   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|6.625% Notes due 2005                                              |                                             |   | 239.4   |      |      |  | 236.6   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|6.375% Notes due 2004                                              |                                             |   | 100.0   |      |      |  | 100.0   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Air Quality Control Obligations:                                   |                                             |   |         |      |      |  |         |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | 5.45% Notes due 2009                        |   |         | 81.1 |      |  |         | 81.1 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | 6.50% Installment sale obligations due 2013 |   |         | 90.0 |      |  |         | 90.0 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Candelaria Project Financing                                       |                                             |   | 202.9   |      |      |  | 236.8   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Columbian Chemicals Korea                                          |                                             |   | 15.0    |      |      |  |        |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Columbian Tiszai Carbon Ltd. (Hungary)                             |                                             |   | 10.2    |      |      |  | 15.2    |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Columbian Carbon Spain, S.A.                                       |                                             |   |        |      |      |  | 1.6     |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Columbian Chemicals Canada                                         |                                             |   | 2.1     |      |      |  | 4.4     |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Phelps Dodge Wire and Cable Group                                  |                                             |   | 8.0     |      |      |  | 14.5    |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Cyprus Amax Chile Ltd.                                             |                                             |   | 10.0    |      |      |  |        |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Phelps Dodge Dublin                                                |                                             |   | 5.0     |      |      |  | 5.0     |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Capital lease obligations                                          |                                             |   | 13.7    |      |      |  | 16.4    |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|El Abra Project Financing                                          |                                             |   | 295.3   |      |      |  | 348.9   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Cerro Verde Project Financing                                      |                                             |   | 72.0    |      |      |  | 82.0    |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Various Pollution Control and Industrial
Development Revenue Bonds |                                             |   | 36.5    |      |      |  | 41.7    |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Cerro Verde Bank Loan, due 2004                                    |                                             |   | 2.0     |      |      |  | 8.0     |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other                                                              |                                             |   | 0.1     |      |      |  | 0.3     |     
|                                                                   |                                             |   |         |      |      |  |         |     
|Debt and capital lease obligations,
including current portion      |                                             |   | 2,791.7 |      |      |  | 2,169.5 |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Less current portion                                               |                                             |   | (269.7  | )    |      |  | (206.5  | )   
|                                                                   |                                             |   |         |      |      |  |         |     
|Debt excluding current portion                                     |                                             | $ | 2,522.0 |      |      |  | 1,963.0 |     
|                                                                   |                                             |   |         |      |      |  |         |     



---

The amounts included above are shown net of unamortized discounts and
purchase price adjustments of $20.6 million and $17.7 million at December 31,
2001 and 2000, respectively.

The following is a schedule of future maturities of long-term debt at
December 31, 2001:



---

|           |  |           |         |                |  |             |       |  |  |  |         | 
|---------- |  | --------- | ------- | -------------- |  | ----------- | ----- |  |  |  | ------- | 
|           |  |           |         |                |  | Project and |       |  |  | 
|           |  |           |         |                |  | Subsidiary  |       |  |  | 
|           |  | Corporate |         | Debt Financing |  | Total      
|           |  |           |         |                |  |            
|2002       |  | $         | 155.1   |                |  |             | 114.6 |  |  |  | 269.7   | 
|          
|          
|          
|          
|2003       |  |           | 3.0     |                |  |             | 141.4 |  |  |  | 144.4   | 
|          
|          
|          
|          
|2004       |  |           | 111.5   |                |  |             | 119.2 |  |  |  | 230.7   | 
|          
|          
|          
|          
|2005       |  |           | 252.8   |                |  |             | 97.1  |  |  |  | 349.9   | 
|          
|          
|          
|          
|2006       |  |           | 1.5     |                |  |             | 79.6  |  |  |  | 81.1    | 
|          
|          
|          
|          
|Thereafter |  |           | 1,655.2 |                |  |             | 60.7  |  |  |  | 1,715.9 | 
|           |  |           |         |                |  |             |       |  |  |  |         | 
|           |  | $         | 2,179.1 |                |  |             | 612.6 |  |  |  | 2,791.7 | 
|           |  |           |         |                |  |             |       |  |  |  |         | 



---



---



##### Table of Contents



-69-

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 capitalization. There were no borrowings under the current
agreement at December 31, 2001, or at December 31, 2000.

We established a commercial paper program on August 15, 1997, under a
private placement agency agreement between two placement agents and us. 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.
Borrowings under this commercial paper program were zero at December 31, 2001,
and $467.9 million at December 31, 2000.

Short-term borrowings were $59.3 million, all by our international
operations, at December 31, 2001, compared with $518.2 million (including
$467.9 million under our commercial paper program) at December 31, 2000.

The weighted average interest rate on total short-term borrowings at
December 31, 2001, and December 31, 2000, was 5.3 percent and 6.5 percent,
respectively.

On May 24, 2001, we issued $625 million of 8.75 percent notes maturing on
June 1, 2011, and $275 million of 9.5 percent notes maturing on June 1, 2031,
under an indenture dated September 22, 1997 between the Company and First Union
National Bank, as successor trustee. Net proceeds received were approximately
$891 million. Interest on these notes is payable semi-annually on June 1 and
December 1 of each year. 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.

On December 31, 2001, we retired the 7.75 percent Notes due January 1,
2002, in their entirety by depositing cash in an amount equal to all accrued
and unpaid interest through the maturity date plus the outstanding principal
amount with Chase Manhattan Bank and Trust Company, the trustee, and by meeting
all other requirements of defeasance.

The 10.125 percent Notes, due in 2002, bear interest payable semi-annually
on April 1 and October 1. 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 8.375 percent Debentures, due in 2023, bear interest payable
semi-annually on February 1 and August 1. The debentures are not redeemable
prior to February 1, 2003. On or after 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 notes are not redeemable by the Company prior to
maturity.



---



##### Table of Contents



-70-

The 7.375 percent Notes, due May 15, 2007, bear interest payable
semi-annually on May 15 and November 15. 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 7.125 percent Debentures, due in 2027, bear interest payable
semi-annually on May 1 and November 1. The notes are redeemable by the Company
at any time prior to maturity at par plus a yield maintenance premium.

As of December 31, 2001, our 80 percent-owned joint venture interest in
Candelaria mining operation in Chile had project debt outstanding of $202.9
million. The debt comprises $180.2 million of floating-rate,
dollar-denominated debt and $22.7 million of fixed-rate, dollar-denominated
debt. 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 2001,
and prepaid an intercompany loan with the Corporation totaling $85.2 million in
September 2001. The floating-rate debt is tied to six-month LIBOR, but has
been converted to fixed-rate debt with the use of interest rate swap
agreements. At December 31, 2001, the overall weighted average interest rate
including the interest rate swap was 7.76 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.

At year-end 2001, our 51 percent-owned joint venture interest in El Abra
mining operation had outstanding project-financing debt of $295.3 million.
This debt has two components: (i) a syndicated loan facility with two tranches
totaling $251.0 million (Tranche A: $191.9 million; Tranche B: $59.1 million);
and (ii) a trade-related facility with a German institution totaling $44.3
million. The Company currently has guarantees outstanding of $115.8 million
on this project debt (including its share of Tranche B debt, as well as
Corporación Nacional del Cobre de Chiles (CODELCO) share. The debt has a
9.5-year term, due May 15, 2007, and requires semi-annual principal payments
that began on May 15, 1998. A portion of the floating-rate debt has been
converted to fixed-rate debt with the use of interest rate swap agreements.
The weighted average interest rate including the interest rate swaps on this
debt at December 31, 2001, was 5.93 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.

On December 31, 2001, our Cerro Verde mine had a total of $72.0 million in
project debt comprising two tranches, a $42.0 million facility that requires
semi-annual installments of varying amounts through April 1, 2005 (Tranche A),
and a $30.0 million revolving bullet loan due in the year 2003 (Tranche B).
All of this facility is variable rate debt, with LIBOR as a base rate, but a
portion has been converted to fixed-rate debt with the use of interest rate
swap agreements. The weighted average interest rate including the interest
rate swap on this debt at December 31, 2001, was 9.02 percent. The project
debt is backed by proceeds from sales collections, plus a pledge of $45 million
in assets on the bullet loan. In addition, Cerro Verde has a subordinated loan
facility, for up to $34 million, that can be used and repaid whenever it has
excess cash. The amount outstanding on the subordinated loan facility as of
December 31, 2001, was $2.0 million, compared with a balance outstanding of
$8.0 million as of December 31, 2000.

The various pollution control and industrial development revenue bonds are
due from 2003 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, 2001, ranged from 3.16 percent to 9.9 percent.

13. Shareholders Equity

As of December 31, 2001, there were 78.7 million shares outstanding and
1.7 million shares authorized for purchase. During 1999, we issued 20.6
million common shares along with a cash payment to acquire Cyprus Amax.

We have 6,000,000 authorized preferred shares with a par value of $1.00
each; no shares were outstanding at either December 31, 2001, or December 31,
2000.

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 board of
directors ability to represent the stockholders interests fully.



---



##### Table of Contents



-71-

14. Stock Option Plans; Restricted Stock

Executives and other key employees have been granted options to purchase
common shares under stock option plans adopted in 1987, 1993 and 1998. 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.

If an optionee exercises an option under the 1987, 1993 or 1998 plan with
already owned shares of the Company, the optionee receives a reload option
that restores the option opportunity on a number of common shares equal to the
number of shares used to exercise the original option. A reload option has the
same terms as the original option except that it has an exercise price per
share equal to the fair market value of a common share on the date the reload
option is granted and is exercisable six months after the date of grant.

The 1998 plan provides (and the 1993 and 1987 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
189,734 shares of Restricted Stock outstanding and 1,004,091 shares available
for grant at December 31, 2001.

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.

At December 31, 2001, 1,057,605 shares were available for option grants
(including 1,004,091 shares as Restricted Stock awards) under the 1998 plan.
These amounts are subject to future adjustment as described in the plan
agreement. No further options may be granted under the 1993, 1989 or 1987
plans.

During 2001, 2000 and 1999, the Company awarded 11,700, 69,000 and 97,400
shares, respectively, of Restricted Stock under the 1998 plan, with
weighted-average fair values at the date of grant of $40.33, $54.44 and $57.29
per share, respectively. Compensation expense recorded in 2001, 2000 and 1999
for restricted stock was $2.1 million, $3.4 million and $2.2 million,
respectively. Restricted stock generally becomes fully vested in five years.

In addition, former Cyprus Amax stock options were converted to 1,870,804
Phelps Dodge options. These options retain the terms by which they were
originally granted under the Cyprus Amax Management Incentive Program. 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.

Changes during 1999, 2000 and 2001 in options outstanding for the combined
plans were as follows:

|                                 |                               |  |           |           |                  |   |                |       | 
|-------------------------------- | ----------------------------- |  | --------- | --------- | ---------------- | - | -------------- | ----- | 
|                                 |                               |  |           |           |                  |   | Average option
|                                 |                               |  | Shares    |           | prices per share
|                                 |                               |  |           |           |                 
|Outstanding at December 31, 1998 |                               |  | 4,271,520 |           |                  | $ | 63.10          |      
|                                
|                                
|                                
|                                
|                                 | Granted                       |  |           | 1,208,176 |                  |   |                | 52.93 | 
|                                
|                                
|                                
|                                
|                                 | Cyprus Amax options converted |  |           | 1,870,804 |                  |   |                | 68.30 | 
|                                
|                                
|                                
|                                
|                                 | Exercised                     |  |           | (80,517   | )                |   |                | 48.53 | 
|                                
|                                
|                                
|                                
|                                 | Expired or terminated         |  |           | (65,190   | )                |   |                | 64.24 | 
|                                 |                               |  |           |           |                  |   |                |      
|Outstanding at December 31, 1999 |                               |  | 7,204,793 |           |                  |   | 62.89          |      
|                                
|                                
|                                
|                                
|                                 | Granted                       |  |           | 1,450,412 |                  |   |                | 51.81 | 
|                                
|                                
|                                
|                                
|                                 | Exercised                     |  |           | (44,122   | )                |   |                | 42.86 | 
|                                
|                                
|                                
|                                
|                                 | Expired or terminated         |  |           | (431,247  | )                |   |                | 64.65 | 
|                                 |                               |  |           |           |                  |   |                |      
|Outstanding at December 31, 2000 |                               |  | 8,179,836 |           |                  |   | 60.95          |      
|                                
|                                
|                                
|                                
|                                 | Granted                       |  |           | 1,420,090 |                  |   |                | 34.80 | 
|                                
|                                
|                                
|                                
|                                 | Exercised                     |  |           | (12,403   | )                |   |                | 40.30 | 
|                                
|                                
|                                
|                                
|                                 | Expired or terminated         |  |           | (468,670  | )                |   |                | 60.73 | 
|                                 |                               |  |           |           |                  |   |                |      
|Outstanding at December 31, 2001 |                               |  | 9,118,853 |           |                  |   | 56.91          |      
|                                 |                               |  |           |           |                  |   |                |      



---



---



##### Table of Contents



-72-

Options outstanding based on a range of exercise prices at December 31, 2001 were as follows:



---

|            |  |             |           |           |  |         |  |             |        | 
|----------- |  | ----------- | --------- | --------- |  | ------- |  | ----------- | ------ | 
|            |  |             |           |           |  |         |  | Average    
|Range       |  |             |           |           |  | Average |  | Outstanding
|of Exercise |  | Options     |           | Remaining |  | Option 
|Prices      |  | Outstanding |           | Term      |  | Price  
|            |  |             |           |           |  |        
|$27-40      |  |             | 1,650,622 |           |  | 9 years |  | $           | 34.39  | 
|           
|           
|           
|           
|40-60       |  |             | 3,923,565 |           |  | 7 years |  |             | 52.79  | 
|           
|           
|           
|           
|60-80       |  |             | 3,186,439 |           |  | 4 years |  |             | 69.95  | 
|           
|           
|           
|           
|80-100      |  |             | 232,214   |           |  | 2 years |  |             | 83.25  | 
|           
|           
|           
|           
|100-102     |  |             | 126,013   |           |  | 1 year  |  |             | 102.14 | 
|            |  |             |           |           |  |         |  |             |        | 
|            |  |             | 9,118,853 |           |  |         |  |             | 56.91  | 
|            |  |             |           |           |  |         |  |             |        | 



---

Exercisable options by plan and by range of exercise prices at December 31, 2001 were as follows:



---

|                  |           |  |           |           |                 |  |                |       | 
|----------------- | --------- |  | --------- | --------- | --------------- |  | -------------- | ----- | 
|                  |           |  |           |           |                 |  | Average option
|                  |           |  | Shares    |           | price per share
|                  |           |  |           |           |                
|PD Plans          |           |  |           |           |                 |  |                |      
|                 
|                 
|                 
|                 
|                  | 1998 Plan |  |           | 2,177,605 |                 |  | $              | 53.73 | 
|                 
|                 
|                 
|                 
|                  | 1993 Plan |  |           | 2,481,975 |                 |  |                | 66.70 | 
|                 
|                 
|                 
|                 
|                  | 1989 Plan |  |           | 49,364    |                 |  |                | 50.10 | 
|                 
|                 
|                 
|                 
|                  | 1987 Plan |  |           | 53,897    |                 |  |                | 47.14 | 
|                 
|                 
|                 
|                 
|Cyprus Amax Plans |           |  | 1,751,783 |           |                 |  | 68.81          |      
|                  |           |  |           |           |                 |  |                |      
|                  |           |  | 6,514,624 |           |                 |  |                |      
|                  |           |  |           |           |                 |  |                |      

|            |  |             |           |             |  |         |        | 
|----------- |  | ----------- | --------- | ----------- |  | ------- | ------ | 
|            |  |             |           |             |  | Average
|Range       |  | Options     |           | Outstanding
|of Exercise |  | Exercisable |           | Option     
|Prices      |  | at 12/31/01 |           | Price      
|            |  |             |           |            
|$27-40      |  |             | 246,432   |             |  | $       | 32.77  | 
|           
|           
|           
|           
|40-60       |  |             | 2,731,193 |             |  |         | 53.24  | 
|           
|           
|           
|           
|60-80       |  |             | 3,178,772 |             |  |         | 69.96  | 
|           
|           
|           
|           
|80-100      |  |             | 232,214   |             |  |         | 83.25  | 
|           
|           
|           
|           
|100-102     |  |             | 126,013   |             |  |         | 102.14 | 
|            |  |             |           |             |  |         |        | 
|            |  |             | 6,514,624 |             |  |         | 62.64  | 
|            |  |             |           |             |  |         |        | 



---

Changes during 1999, 2000 and 2001 in Restricted Stock were as follows:



---

|                                 |            |  |         |          |  
|-------------------------------- | ---------- |  | ------- | -------- | -
|                                 |            |  | Shares 
|                                 |            |  |        
|Outstanding at December 31, 1998 |            |  | 196,150 |         
|                                
|                                
|                                
|                                
|                                 | Granted    |  |         | 97,400   |  
|                                
|                                
|                                
|                                
|                                 | Terminated |  |         | (4,100   | )
|                                
|                                
|                                
|                                
|                                 | Released   |  |         | (7,600   | )
|                                 |            |  |         |         
|Outstanding at December 31, 1999 |            |  | 281,850 |         
|                                
|                                
|                                
|                                
|                                 | Granted    |  |         | 69,000   |  
|                                
|                                
|                                
|                                
|                                 | Terminated |  |         | (18,000  | )
|                                
|                                
|                                
|                                
|                                 | Released   |  |         | (113,272 | )
|                                 |            |  |         |         
|Outstanding at December 31, 2000 |            |  | 219,578 |         
|                                
|                                
|                                
|                                
|                                 | Granted    |  |         | 11,700   |  
|                                
|                                
|                                
|                                
|                                 | Terminated |  |         | (26,533  | )
|                                
|                                
|                                
|                                
|                                 | Released   |  |         | (15,011  | )
|                                 |            |  |         |         
|Outstanding at December 31, 2001 |            |  | 189,734 |         
|                                 |            |  |         |         



---

In accordance with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, we apply APB Opinion No. 25 and related
interpretations in accounting for our stock option plans and, accordingly, do
not recognize compensation cost. If we had elected to recognize compensation
cost based on the fair value of the options granted at grant date as prescribed
by SFAS No. 123, net income and earnings per share would have been reduced to
the pro forma amounts indicated in the table below:



---

|                                                  |  |      |        |      |  |      |      |  |  |  |        |  
|------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ---- |  |  |  | ------ | -
|                                                  |  | 2001 |        | 2000 |  | 1999
|                                                  |  |      |        |      |  |     
|Net income (loss)  as reported                   |  | $    | (275.0 | )    |  |      | 29.0 |  |  |  | (257.8 | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net income (loss)  pro forma                     |  |      | (287.0 | )    |  |      | 16.5 |  |  |  | (265.5 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |  |      |        |      |  |      |      |  |  |  |        |  
|                                                 
|                                                 
|                                                 
|                                                 
|Earnings (loss) per share
- as reported (basic)   |  |      | (3.50  | )    |  |      | 0.37 |  |  |  | (4.19  | )
|                                                 
|                                                 
|                                                 
|                                                 
|Earnings (loss) per share
- pro forma (basic)     |  |      | (3.66  | )    |  |      | 0.21 |  |  |  | (4.31  | )
|                                                 
|                                                 
|                                                 
|                                                 
|Earnings (loss) per share
- as reported (diluted) |  |      | (3.50  | )    |  |      | 0.37 |  |  |  | (4.19  | )
|                                                 
|                                                 
|                                                 
|                                                 
|Earnings (loss) per share
- pro forma (diluted)   |  | $    | (3.66  | )    |  |      | 0.21 |  |  |  | (4.31  | )



---

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:



---

|                                |  |        |      |        |  |        |      |   |  |  |      |  
|------------------------------- |  | ------ | ---- | ------ |  | ------ | ---- | - |  |  | ---- | -
|                                |  | 2001   |      | 2000   |  | 1999  
|                                |  |        |      |        |  |       
|Expected dividend yield         |  |        | 3.16 | %      |  |        | 3.30 | % |  |  | 3.10 | %
|                               
|                               
|                               
|                               
|Expected stock price volatility |  |        | 40.9 | %      |  |        | 39.0 | % |  |  | 32.0 | %
|                               
|                               
|                               
|                               
|Risk-free interest rate         |  |        | 3.4  | %      |  |        | 5.4  | % |  |  | 6.0  | %
|                               
|                               
|                               
|                               
|Expected life of options        |  | 3years |      | 3years |  | 3years



---



---



##### Table of Contents



-73-

The weighted-average fair value of options per share granted during 2001
was $8.84, compared with $13.47 in 2000 and $12.18 in 1999.

15. Pension Plans

Our pension plans cover substantially all of our U.S. employees and
certain employees of our international subsidiaries. Benefits are based on
years of service and depending on the plan either final average salary or a
fixed amount for each year of service. Participants generally vest in their
benefits after five years of service. In a number of these plans, the plan
assets exceed
the accumulated benefit obligations (overfunded plans) and in the
remainder of the plans, the accumulated benefit obligations exceed the plan
assets (underfunded plans). For the underfunded plans, the aggregate benefit
obligation is $153 million and the aggregate fair value of plan assets is $94
million as of December 31, 2001.

Our pension plans were valued between December 1, 1999, and January 1,
2000, and between December 1, 2000, and January 1, 2001. The obligations were
projected to and the assets were valued as of the end of 2000 and 2001. 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 following table presents the benefit obligation, changes in plan
assets, the funded status of the pension plans and the assumptions used at
December 31:



---

|                                                    |                                                  |  |      |       |      |  |  |       |  
|--------------------------------------------------- | ------------------------------------------------ |  | ---- | ----- | ---- |  |  | ----- | -
|                                                    |                                                  |  | 2001 |       | 2000
|                                                    |                                                  |  |      |       |     
|Assumptions:                                        |                                                  |  |      |       |      |  |  |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Discount rate                                    |  |      | 7.25  | %    |  |  | 7.75  | %
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Rate of increase in salary levels                |  |      | 4.00  | %    |  |  | 4.00  | %
|                                                   
|                                                   
|                                                   
|                                                   
|Change in benefit obligation:                       |                                                  |  |      |       |      |  |  |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Benefit obligation at beginning of year          |  | $    | 969   |      |  |  | 967   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Service cost  benefits earned during
the period |  |      | 19    |      |  |  | 22    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Interest cost on benefit obligation              |  |      | 69    |      |  |  | 70    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Plan amendments                                  |  |      | 1     |      |  |  | 1     |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Actuarial loss (gain)                            |  |      | 19    |      |  |  | (21   | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Benefits paid                                    |  |      | (74   | )    |  |  | (66   | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Curtailments and settlements                     |  |      |      |      |  |  | (1    | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Special termination benefits                     |  |      | 4     |      |  |  |      |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Currency translation adjustments                 |  |      | (1    | )    |  |  | (3    | )
|                                                    |                                                  |  |      |       |      |  |  |       |  
|                                                    | Benefit obligation at end of year                |  | $    | 1,006 |      |  |  | 969   |  
|                                                    |                                                  |  |      |       |      |  |  |       |  
|Change in plan assets:                              |                                                  |  |      |       |      |  |  |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Fair value of plan assets at beginning
of year   |  | $    | 1,050 |      |  |  | 1,076 |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Actual return on plan assets                     |  |      | (42   | )    |  |  | 38    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Employer contributions                           |  |      | 7     |      |  |  | 5     |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Currency translation adjustments                 |  |      | (1    | )    |  |  | (3    | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Benefits paid                                    |  |      | (74   | )    |  |  | (66   | )
|                                                    |                                                  |  |      |       |      |  |  |       |  
|                                                    | Fair value of plan assets at end of year         |  | $    | 940   |      |  |  | 1,050 |  
|                                                    |                                                  |  |      |       |      |  |  |       |  
|                                                    | Funded status                                    |  | $    | (66   | )    |  |  | 81    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Unrecognized actuarial loss (gain)               |  |      | 44    |      |  |  | (118  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Unrecognized prior service cost                  |  |      | 28    |      |  |  | 31    |  
|                                                    |                                                  |  |      |       |      |  |  |       |  
|                                                    | Net amount recognized                            |  | $    | 6     |      |  |  | (6    | )
|                                                    |                                                  |  |      |       |      |  |  |       |  
|Amounts recognized in the balance
sheet consist of: |                                                  |  |      |       |      |  |  |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Prepaid benefit cost                             |  | $    | 53    |      |  |  | 80    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accrued benefit liability                        |  |      | (58   | )    |  |  | (94   | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Intangible asset                                 |  |      | 3     |      |  |  | 2     |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Deferred tax benefit                             |  |      | 2     |      |  |  | 2     |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accumulated other comprehensive income           |  |      | 6     |      |  |  | 4     |  
|                                                    |                                                  |  |      |       |      |  |  |       |  
|                                                    | Net amount recognized                            |  | $    | 6     |      |  |  | (6    | )
|                                                    |                                                  |  |      |       |      |  |  |       |  



---



---



##### Table of Contents



-74-

The assumptions used and the annual cost related to these plans consist of the following:



---

|                                         |                                                  |  |      |       |      |  |      |       |   |  |  |       |  
|---------------------------------------- | ------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                         |                                                  |  | 2001 |       | 2000 |  | 1999
|                                         |                                                  |  |      |       |      |  |     
|Assumptions:                             |                                                  |  |      |       |      |  |      |       |   |  |  |      
|                                        
|                                        
|                                        
|                                        
|                                         | Discount rate                                    |  |      | 7.75  | %    |  |      | 7.75  | % |  |  | 6.75  | %
|                                        
|                                        
|                                        
|                                        
|                                         | Expected long-term rate of return                |  |      | 9.50  | %    |  |      | 9.50  | % |  |  | 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 |  | $    | 18.8  |      |  |      | 22.3  |   |  |  | 19.6  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Interest cost on benefit obligation              |  |      | 69.4  |      |  |      | 70.1  |   |  |  | 54.3  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Expected return on plan assets                   |  |      | (99.0 | )    |  |      | (94.3 | ) |  |  | (70.5 | )
|                                        
|                                        
|                                        
|                                        
|                                         | Amortization of transition
obligation (asset)    |  |      | 0.3   |      |  |      |      |   |  |  | (1.3  | )
|                                        
|                                        
|                                        
|                                        
|                                         | Amortization of prior service cost               |  |      | 3.9   |      |  |      | 4.2   |   |  |  | 4.4   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Recognized actuarial loss (gain)                 |  |      | (6.0  | )    |  |      | (3.1  | ) |  |  | 0.8   |  
|                                         |                                                  |  |      |       |      |  |      |       |   |  |  |       |  
|                                         | Net periodic benefit cost (recoveries)           |  | $    | (12.6 | )    |  |      | (0.8  | ) |  |  | 7.3   |  
|                                         |                                                  |  |      |       |      |  |      |       |   |  |  |       |  



---

We recognize a minimum liability in our financial statements for our
underfunded pension plans. The accrued pension benefit cost for the
underfunded plans is $58 million, which includes an additional minimum
liability of $11 million and is included in Other Liabilities and Deferred
Credits at December 31, 2001, compared with $8 million at December 31, 2000.
The additional minimum liability was offset by a $3 million intangible asset, a
$6 million reduction in Common Shareholders Equity and a $2 million deferred
tax benefit at December 31, 2001, compared with a $2 million intangible asset,
a $4 million reduction in Common Shareholders Equity and a $2 million
deferred tax benefit at December 31, 2000.

16. 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 the 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 insurance benefits for many
employees retiring from active service. The coverage is provided on a
noncontributory basis for certain groups of employees and on a contributory
basis for other groups. The majority of these benefits are paid by the
Company. We also provide life insurance benefits to our U.S. employees who
retire from active service on or after normal retirement age of 65 and to some
of our international employees. Life insurance benefits also are available
under certain early retirement programs or pursuant to the terms of certain
collective bargaining agreements. The majority of the costs of such benefits
were paid out of a previously established fund maintained by an insurance
company.

The following table presents the change in benefit obligation, change in
plan assets and the funded status of the other postretirement benefit plans and
the assumptions used at December 31:



---

|                              |                                                  |  |      |      |      |  |  |      |  
|----------------------------- | ------------------------------------------------ |  | ---- | ---- | ---- |  |  | ---- | -
|                              |                                                  |  | 2001 |      | 2000
|                              |                                                  |  |      |      |     
|Assumptions:                  |                                                  |  |      |      |      |  |  |     
|                             
|                             
|                             
|                             
|                              | Expected long-term rate of return on
plan assets |  |      | 8.00 | %    |  |  | 8.00 | %
|                             
|                             
|                             
|                             
|                              | Weighted average discount rate                   |  |      | 7.25 | %    |  |  | 7.75 | %
|                             
|                             
|                             
|                             
|Change in benefit obligation: |                                                  |  |      |      |      |  |  |     
|                             
|                             
|                             
|                             
|                              | Benefit obligation at beginning of year          |  | $    | 331  |      |  |  | 307  |  
|                             
|                             
|                             
|                             
|                              | Service cost  benefits earned during
the year   |  |      | 4    |      |  |  | 4    |  
|                             
|                             
|                             
|                             
|                              | Interest cost on benefit obligation              |  |      | 23   |      |  |  | 23   |  
|                             
|                             
|                             
|                             
|                              | Amendments                                       |  |      |     |      |  |  | 16   |  
|                             
|                             
|                             
|                             
|                              | Actuarial loss (gain)                            |  |      |     |      |  |  | 2    |  
|                             
|                             
|                             
|                             
|                              | Benefits paid, net of contributions              |  |      | (29  | )    |  |  | (21  | )
|                              |                                                  |  |      |      |      |  |  |      |  
|                              | Benefit obligation at end of year                |  | $    | 329  |      |  |  | 331  |  
|                              |                                                  |  |      |      |      |  |  |      |  
|Change in plan assets:        |                                                  |  |      |      |      |  |  |     
|                             
|                             
|                             
|                             
|                              | Fair value of plan assets at
beginning of year   |  | $    | 10   |      |  |  | 10   |  
|                             
|                             
|                             
|                             
|                              | Actual return on plan assets                     |  |      | (1   | )    |  |  | 1    |  
|                             
|                             
|                             
|                             
|                              | Benefits paid, net of contributions              |  |      | (1   | )    |  |  | (1   | )
|                              |                                                  |  |      |      |      |  |  |      |  
|                              | Fair value of plan assets at end of year         |  | $    | 8    |      |  |  | 10   |  
|                              |                                                  |  |      |      |      |  |  |      |  
|                              | Funded (unfunded) status                         |  | $    | (321 | )    |  |  | (321 | )
|                             
|                             
|                             
|                             
|                              | Unrecognized actuarial gain                      |  |      | (10  | )    |  |  | (13  | )
|                             
|                             
|                             
|                             
|                              | Unrecognized prior service cost                  |  |      | 14   |      |  |  | 15   |  
|                              |                                                  |  |      |      |      |  |  |      |  
|                              | Net amount recognized  accrued liability        |  | $    | (317 | )    |  |  | (319 | )
|                              |                                                  |  |      |      |      |  |  |      |  



---

The assumptions used and components of net periodic postretirement benefit cost were as follows at December 31:



---

|                                         |                                                  |  |      |      |      |  |      |      |   |  |  |      |  
|---------------------------------------- | ------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                         |                                                  |  | 2001 |      | 2000 |  | 1999
|                                         |                                                  |  |      |      |      |  |     
|Assumptions:                             |                                                  |  |      |      |      |  |      |      |   |  |  |     
|                                        
|                                        
|                                        
|                                        
|                                         | Expected long-term rate of
return on plan assets |  |      | 8.00 | %    |  |      | 8.00 | % |  |  | 8.00 | %
|                                        
|                                        
|                                        
|                                        
|                                         | Discount rate                                    |  |      | 7.75 | %    |  |      | 7.75 | % |  |  | 6.75 | %
|                                        
|                                        
|                                        
|                                        
|                                         | 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   |  | $    | 3.9  |      |  |      | 4.4  |   |  |  | 4.8  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Interest cost                                    |  |      | 22.6 |      |  |      | 22.6 |   |  |  | 12.9 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Expected return on plan assets                   |  |      | (0.8 | )    |  |      | (0.8 | ) |  |  | (0.8 | )
|                                         |                                                  |  |      |      |      |  |      |      |   |  |  |      |  
|                                         | Net periodic benefit cost                        |  | $    | 25.7 |      |  |      | 26.2 |   |  |  | 16.9 |  
|                                         |                                                  |  |      |      |      |  |      |      |   |  |  |      |  



---



---



##### Table of Contents



-75-

For 2001 measurement purposes, the annual rate of increase in the cost of
covered health care benefits was assumed to average 14.0 percent for 2002 and
was projected to decrease to 5.5 percent by 2008 and remain at that level.

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A 1 percentage-point change in
assumed health care cost trend rates assumed for postretirement benefits would
have the following effects:



---

|                                                        |  |                    |      |          |  |  |       |  
|------------------------------------------------------- |  | ------------------ | ---- | -------- |  |  | ----- | -
|                                                        |  | 1 Percentage-Point
|                                                        |  |                   
|                                                        |  | Increase           |      | Decrease
|                                                        |  |                    |      |         
|Effect on total of service and interest
cost components |  | $                  | 1.3  |          |  |  | (1.2  | )
|                                                       
|                                                       
|                                                       
|                                                       
|Effect on postretirement benefit
obligation             |  | $                  | 16.2 |          |  |  | (14.7 | )



---

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 401(k) plan for all U.S. salaried and non-bargained hourly employees. Assets
in this plan totaled $462.7 million at December 31, 2001. In this plan,
employees direct the investment of their contributions among several investment
options, including company stock. Employees also may direct their
contributions into a brokerage option through which they can invest in stocks,
bonds and mutual funds. Employees 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
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 $13.3
million in 2001, $6.9 million in 2000, and $5.3 million in 1999.

17. 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, 2001, are future minimum rentals and
royalties under non-cancelable leases:



---

|                                |                                     |   |           |       |           |  |         |      |  |   |      |      | 
|------------------------------- | ----------------------------------- | - | --------- | ----- | --------- |  | ------- | ---- |  | - | ---- | ---- | 
|                                |                                     |   | Operating |       | Mineral   |  | Capital
|                                |                                     |   | Leases    |       | Royalties |  | Leases 
|                                |                                     |   |           |       |           |  |        
|2002                            |                                     | $ | 15.3      |       |           |  | 1.2     |      |  |   | 4.9  |     
|                               
|                               
|                               
|                               
|2003                            |                                     |   | 13.7      |       |           |  | 1.2     |      |  |   | 5.0  |     
|                               
|                               
|                               
|                               
|2004                            |                                     |   | 12.1      |       |           |  | 1.2     |      |  |   | 4.1  |     
|                               
|                               
|                               
|                               
|2005                            |                                     |   | 10.1      |       |           |  | 1.2     |      |  |   | 4.0  |     
|                               
|                               
|                               
|                               
|2006                            |                                     |   | 9.7       |       |           |  | 1.2     |      |  |   |     |     
|                               
|                               
|                               
|                               
|After 2006                      |                                     |   | 45.2      |       |           |  | 14.3    |      |  |   |     |     
|                                |                                     |   |           |       |           |  |         |      |  |   |      |     
|                                | Total payments                      |   | $         | 106.1 |           |  |         | 20.3 |  |   |      | 18.0 | 
|                                |                                     |   |           |       |           |  |         |      |  |   |      |     
|                                |                                     |   |           |       |           |  |         |      |  |   |      |     
|                               
|                               
|                               
|                               
|Present value of lease payments |                                     |   |           |       |           |  |         |      |  | $ | 13.7 |     
|                               
|                               
|                               
|                               
|Less current portion            |                                     |   |           |       |           |  |         |      |  |   | (3.2 | )   
|                                |                                     |   |           |       |           |  |         |      |  |   |      |     
|                                | Present value of
long-term payments |   |           |       |           |  |         |      |  |   | $    | 10.5 | 
|                                |                                     |   |           |       |           |  |         |      |  |   |      |     



---

Summarized below at December 31, 2001, is future sub-lease income:



---

|           |       |   |           |      | 
|---------- | ----- | - | --------- | ---- | 
|           |       |   | Sub-lease
|           |       |   | Income   
|           |       |   |          
|2002       |       | $ | 3.8       |     
|          
|          
|          
|          
|2003       |       |   | 3.0       |     
|          
|          
|          
|          
|2004       |       |   | 2.9       |     
|          
|          
|          
|          
|2005       |       |   | 2.8       |     
|          
|          
|          
|          
|2006       |       |   | 2.8       |     
|          
|          
|          
|          
|After 2006 |       |   | 5.0       |     
|           |       |   |           |     
|           | Total |   | $         | 20.3 | 
|           |       |   |           |     



---

Rent and royalty expense for the years ended December 31 were as follows:



---

|                |  |      |      |      |  |      |      |  |  |  |      | 
|--------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                |  | 2001 |      | 2000 |  | 1999
|                |  |      |      |      |  |     
|Rental expense  |  | $    | 22.4 |      |  |      | 29.1 |  |  |  | 17.5 | 
|               
|               
|               
|               
|Mineral royalty |  |      | 0.6  |      |  |      | 0.8  |  |  |  | 0.1  | 
|                |  |      |      |      |  |      |      |  |  |  |      | 
|Total charges   |  | $    | 23.0 |      |  |      | 29.9 |  |  |  | 17.6 | 
|                |  |      |      |      |  |      |      |  |  |  |      | 



---



---



##### Table of Contents



-76-

18. Contingencies

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 the 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 the U.S.
Environmental Protection Agency (EPA), the United States 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 conditions at a
number of sites that have been or are being investigated by EPA, the Forest
Service or states to determine whether releases of hazardous substances have
occurred and, if so, to develop and implement remedial actions.

Phelps Dodge has provided reserves for potential environmental obligations
that management considers probable and for which reasonable estimates of such
obligations 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 $311.2
million and $307.1 million, respectively, were recorded as of December 31, 2001
and 2000. The long-term portion of these reserves is included in other
liabilities and deferred credits on the consolidated balance sheet and amounted
to $264.3 million and $244.9 million at December 31, 2001 and 2000,
respectively.

The sites for which Phelps Dodge has received a notice of potential
liability or an information request that are currently considered to be the
most significant are the Pinal Creek site in Miami, Arizona, the former
American Zinc and Chemical site in Langeloth, Pennsylvania, and the Tohono
Oodham Nation sites.

At the Pinal Creek site, remediation is being performed by the Pinal Creek
Group, which includes Phelps Dodge Miami Inc. and other companies that have
been determined to have contributed through historic mining activities to the
contaminated groundwater plume in the shallow alluvial aquifers of Pinal Creek.
The remediation work is being conducted in accordance with the requirements of
the Arizona Department of Environmental Qualitys Water Quality Assurance
Revolving Fund program. In addition, the remedial action is consistent with
the National Contingency Plan prepared by EPA as required by CERCLA. Ongoing
remediation efforts have resulted in continued improvement of the water quality
in the area. In November 1997, the Pinal Creek Group joined with the State of
Arizona in requesting the District Court approve and enter a Consent Decree
resolving all matters related to an enforcement action contemplated by the
State of Arizona with respect to the groundwater matter. On August 13, 1998,
the court approved and entered the Decree that commits the Pinal Creek Group to
complete the remediation work outlined in the remedial action plan that was
submitted to the State in May 1997. Phelps Dodge Miami Inc. is pursuing
contribution litigation against other parties involved in this matter and has
asserted claims against certain of its past insurance carriers. While
significant recoveries are expected, 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 $119 million to $222 million, and, as no point within that range is
more likely than any other, the lower end of the range has been reserved as
required by generally accepted accounting principles.

In June 1999, Cyprus Amax received an information request from the
Pennsylvania Department of Environmental Protection regarding the former
American Zinc and Chemical site in Langeloth, Pennsylvania. The site is
currently being investigated by the State of Pennsylvania. Studies initiated
to determine the nature and extent of remediation work that may be required on
the property indicated a cost range for reasonably expected outcomes estimated
to be from $18 million to $52 million. Phelps Dodge has reserved $20 million
for the possible remediation work at the



---



##### Table of Contents



-77-

Langeloth site representing the most
likely point within the range of estimates.

Cyprus Tohono Corporation (Cyprus Tohono), a wholly owned subsidiary of
Cyprus Amax Corporation, holds three leases for lands on the Tohono Oodham
Indian Nation (the Nation). The leased lands include the site of an inactive
mining operation, including an open pit, leach and waste rock stockpiles,
tailing and evaporation ponds, ore roasting and SX/EW operations, and ancillary
facilities. The leases impose certain environmental compliance, closure and
reclamation requirements upon Cyprus Tohono as the lessee. 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. The Nation,
along with several federal agencies who assist the Nation, have notified Cyprus
Tohono of water quality concerns and concerns with other environmental impacts
of historical mining operations. The Nation has requested that Cyprus Tohono
consider accelerating closure and reclamation under the leases, in lieu of or
in addition to interim reclamation and corrective measures being considered by
Cyprus Tohono to protect water quality and mitigate other potential
environmental impacts. We are unable to estimate the total costs of the
corrective, closure and reclamation measures that may be instituted by Cyprus
Tohono as a result of these investigations; however, preliminary studies
indicate that interim reclamation and corrective measures could range from $7
million to $15 million. As a result of meetings and determinations in the 2001
fourth quarter, and based upon our best estimate of activities and costs, an
$11 million reserve was recognized.

In December 2001, the Company entered into a Memorandum of Understanding
with the owner of a Yonkers, New York, property regarding certain environmental
liabilities estimated to range from $6 million to $11 million. The Company
sold that property to the owner in 1984. Based on information supplied by the
property owner, the Company recognized a best estimate $7 million charge
associated with environmental remediation at that site. Also in the 2001
fourth quarter, the Company recognized charges of $13 million for environmental
remediation primarily at closed sites, none of which, individually was more
than $3 million.

At December 31, 2001, the cost range for reasonably possible outcomes for
all reservable environmental remediation sites other than Pinal Creek and
Langeloth was estimated to be from $151 million to $242 million of which $172
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 are presently litigating these disputes. Further,
Phelps Dodge believes that it has other potential claims for recovery from
other third parties, including the United States Government and other PRPs, as
well as liability offsets through lower cost remedial solutions. Neither
insurance recoveries nor other claims or offsets are recognized unless such
offsets are considered probable of realization. In 2001, the Company
recognized proceeds from settlements reached with several insurance companies
on historic environmental liability claims of $61.8 million, net of fees and
expenses.

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, 2001, the cost range for reasonably possible outcomes for all such
sites was estimated to be from $3 million to $21 million. The liabilities
arising from potential environmental obligations that have not been reserved
for 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 many years.

The following table summarizes environmental reserve activities for the
years ended December 31:



---

|                           |                                           |   |       |       |      |  |       |       |  
|-------------------------- | ----------------------------------------- | - | ----- | ----- | ---- |  | ----- | ----- | -
|                           |                                           |   | 2001  |       | 2000
|                           |                                           |   |       |       |     
|Balance, beginning of year |                                           | $ | 307.1 |       |      |  | 336.1 |      
|                          
|                          
|                          
|                          
|                           | Additions to reserves                     |   |       | 31.1  |      |  |       |      |  
|                          
|                          
|                          
|                          
|                           | Spending against reserves                 |   |       | (27.0 | )    |  |       | (31.8 | )
|                          
|                          
|                          
|                          
|                           | Liabilities assumed in Cyprus
acquisition |   |       |      |      |  |       | 2.8   |  
|                           |                                           |   |       |       |      |  |       |      
|Balance, end of year       |                                           | $ | 311.2 |       |      |  | 307.1 |      
|                           |                                           |   |       |       |      |  |       |      



---



---



##### Table of Contents



-78-

Reclamation

The following table summarizes reclamation and closure reserve activities for the years ended December 31:



---

|                           |                         |   |       |       |      |  |       |      |  
|-------------------------- | ----------------------- | - | ----- | ----- | ---- |  | ----- | ---- | -
|                           |                         |   | 2001  |       | 2000
|                           |                         |   |       |       |     
|Balance, beginning of year |                         | $ | 135.0 |       |      |  | 131.1 |     
|                          
|                          
|                          
|                          
|                           | Additions to reserves   |   |       | 9.6   |      |  |       | 10.6 |  
|                          
|                          
|                          
|                          
|                           | Payments and deductions |   |       | (14.5 | )    |  |       | (6.7 | )
|                           |                         |   |       |       |      |  |       |     
|Balance, end of year       |                         | $ | 130.1 |       |      |  | 135.0 |     
|                           |                         |   |       |       |      |  |       |     



---

Our mining operations are subject to laws and regulations establishing new
requirements for mined land reclamation and financial assurance. Colorado
passed a mined land reclamation law in the early 1970s establishing a Mined
Land Reclamation Board that adopted regulations in 1977. Significant changes
were made in 1993. Our Colorado mining operations have had approved mined land
reclamation plans and financial assurance under these laws for several years.
Arizona enacted its mined land reclamation law in 1994. Our Arizona mining
operations submitted proposed reclamation plans and financial assurance
following the adoption of implementing rules in 1997, and all of our Arizona
operations have approved plans and financial assurance totaling approximately
$70 million. New Mexico passed a mined land reclamation law in 1993
authorizing regulations that were adopted in 1994. The permitting process for
New Mexico mining operations commenced in December 1994. Approval of closeout
plans describing the reclamation planned for the Chino, Tyrone and Cobre mines
currently is due by October 1, 2002. Two New Mexico State agencies currently
are reviewing the permit applications for facility closure and reclamation, and
one public hearing was held on Chinos plan to protect water quality in August
2001. A second public hearing was held in February 2002 on the Chino plan to
discuss a draft permit proposed jointly by Chino and the New Mexico
Environmental Department (NMED). The Company is awaiting the hearing officers
decision. The cost estimate to carry out this plan, including water treatment
for 100 years, if needed, is $386 million in current dollars. This figure
compares to Chinos previous estimate of approximately $100 million. The final
cost estimate is subject to the results of the hearing and any subsequent
judicial appeals. Actual reclamation costs may differ significantly from the
cost estimate based on a variety of factors including possible changes in legal
standards over time and potential cost savings from use of the Companys own
personnel and equipment at each site versus third-party contractor costs (under
New Mexico law, financial assurance requirements are calculated based on
estimated third-party costs), advances in technology and reclamation
techniques, and opportunities to prepare each site for more efficient
reclamation through careful development of the site over time. The plan also
calls for studies over the next four to five years to refine the plan.

The Company is continuing to negotiate with the State regarding the amount
of financial assurance required to cover the $386 million cost estimate. When
adjusted to reflect net present value based upon appropriate escalation and
discount rates, the amount required for financial assurance would be reduced.
The final permits are subject to the public hearing process and consideration
of public comments, and a portion of the plan will require the issuance of a
waiver of certain standards as authorized by the New Mexico Mining Act.

The Company expects the next hearing on the Tyrone plan in May 2002. The
anticipated cost estimate, financial assurance requirement, and actual
reclamation costs for the Tyrone plan are expected to be comparable to the
Chino plan. The initial hearing for the Cobre plan will likely occur in summer
2002. The Company expects the cost estimate for the Cobre plan to be
approximately $40 million.

The federal Bureau of Land Management adopted amended regulations
governing mined land reclamation for mining on federal lands in January 2001.
New financial assurance requirements for existing operations took effect in
June 2001, although the new reclamation requirements took effect only for new
mining and certain modifications to existing mining activities. Mined land
reclamation is an ongoing activity and we recognize estimated reclamation costs
using a units-of-production basis calculation. These laws and regulations and
the associated plan approval and permitting requirements will likely increase
our regulatory obligations and compliance costs over time with respect to mine
closure and reclamation.

Legal

In 1997, issues of dispute arose between Phelps Dodge and the San Carlos
Apache Tribe (the Tribe) regarding our use and occupancy of the Black River
Pump Station which delivers water to the Morenci operation. On May 12, 1997,
the Tribe filed
suit against us in San Carlos Apache Court, seeking our eviction from the
Tribes Reservation and claiming substantial compensatory and punitive damages,
among other relief. In May 1997, we reached an agreement with the Tribe, and
subsequently federal legislation (Pub. L. No. 105-18, 5003, 111 stat. 158,
181-87) was adopted which mandated dismissal of the tribal court suit. The
legislation prescribes arrangements intended to ensure a future supply of water
for the Morenci mining complex in exchange for certain payments by us. The
legislation does not address any potential claims by the Tribe relating to our
historical occupancy and operation of our facilities on the Tribes
Reservation, but does require that any such claims be brought, if



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at all,
exclusively in federal district court. By order dated October 13, 1997, the
tribal court dismissed the lawsuit with prejudice, as contemplated by the
legislation.

The 1997 legislation required that the Company and the Tribe enter into a
lease for the delivery of Central Arizona Project 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 in accordance with the
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 that will allow the delivery of Central Arizona
Project water to Morenci.

In September 2000, RAG American Coal Company (RAG) filed a complaint
against Cyprus Amax and Amax Energy Inc. The complaint alleges claims relating
to breach of contract, fraud, negligent misrepresentation, and negligence
arising from alleged inaccuracies in financial statements relating to the sale
by Cyprus Amax of its coal subsidiary to RAG in June 1999. The complaint seeks
damages in the amount of $115 million under four different legal theories
(breach of contract, fraud, negligent misrepresentation and negligence).
Cyprus Amax has filed a motion to dismiss, which has been fully briefed and
remains pending.

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 believes that 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.

19. Derivative Financial Instruments Held for Purposes Other Than Trading and Fair Value of Financial Instruments

We do not purchase, hold or sell derivative contracts unless we have an
existing asset, obligation or 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 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 listed as follows:

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 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, 2001, we had net futures and swap contracts for
approximately 25 million pounds of copper maturing through December 2002. We
did not have any significant gains or losses during the year resulting from
ineffectiveness.

Cash Flow Hedges

Copper Price Protection Program.From time to time, we may purchase or sell
copper price protection contracts for a portion of our expected future 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 in place during 2001.

Copper Scrap Purchase Hedging.From time to time, we may purchase copper scrap
as a raw material to be processed eventually into rod for sale to customers.
The copper scrap is purchased from third parties at a copper price different
from the price contracted with eventual rod customers. To



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-80-

mitigate the copper
price risk resulting from the difference between the scrap purchase and rod
sales price and shipment month, Phelps Dodge enters into a copper swap hedge
program to hedge our exposure in a manner that will allow us to receive the
COMEX average price in the month of rod shipment to our customers. At December
31, 2001, we did not have any outstanding copper scrap purchase hedge
contracts. We did not have any significant gains or losses during the year
resulting from ineffectiveness.

Aluminum Purchase Hedging

From time to time, our South American wire and cable operations may enter
into aluminum swap contracts to hedge our aluminum raw material purchase price
exposure on fixed-price sales contracts to allow us to lock in the cost of
aluminum ingot used in fixed-price aluminum 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, 2001, we had outstanding swap contracts for approximately
13 million pounds of aluminum, with no material amounts recorded in other
comprehensive income. Our swap positions will mature through May 2002.

Foreign Currency Hedging

Fair Value Hedges

We are a global company and we transact business in many countries and in
many currencies. Foreign currency transactions increase our risks because
exchange rates can change between the time agreements are made and the time
foreign currencies transactions are settled. We manage these exposures by
entering into forward exchange and currency option 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 transactions for which we have a firm legal obligation or when
anticipated transactions are likely to occur. We do not enter into foreign
exchange contracts for speculative purposes.

At December 31, 2001, we had foreign exchange contracts in place with a
total face value of approximately $13 million to hedge our exposure. 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 December 2001, we entered into several interest rate
swap contracts to hedge $400 million of fixed-rate debt. The interest rate
swaps have maturities through May 2007. We did not recognize any significant
gains or losses during the year resulting from ineffectiveness.

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.

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 December 31, 2001, we had
entered into interest rate swap contracts to hedge $364 million of
floating-rate debt. At year-end 2001, we had approximately $21 million in
unrealized losses recorded in other comprehensive income related to the swap
contracts. At current interest rates at December 31, 2001, approximately $15
million of this amount would be charged to earnings in 2002. The interest rate
swaps have maturities through 2008. Hedge ineffectiveness did not have a
material impact during the year ended December 31, 2001.

Energy Price Protection Programs

Cash Flow Hedges

Diesel Fuel Price Protection Program. We purchase large quantities of diesel
fuel to operate our mine sites as an input to the manufacturing process. Price
volatility of diesel fuel impacts the cost of producing copper cathode and
other copper products for our customers. 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.



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-81-

To implement these objectives, we may purchase out-of-the-money (OTM)
diesel fuel call options and/or fixed priced 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
priced swaps create certainty of the diesel fuel purchase price during the
hedge period.

At December 31, 2001, we had option and fixed-price swap contracts to
price protect approximately 9 million and 24 million gallons, respectively, or
82 percent of our forecasted 2002 diesel fuel consumption. At December 31,
2001, we did not have any material hedge losses in other comprehensive income
related to the swap contracts. The options and fixed-price swap contracts have
maturities through September and December 2002, respectively. Effectiveness is
assessed using an intrinsic value method with the time value of money component
recognized immediately in earnings. During 2001, 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 substantial quantities of
natural gas to supply our operations primarily as an input for electricity
generation and copper refining. Price volatility of natural gas impacts the
cost of producing copper cathode and other copper products for our customers.
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 or OTM
collars (simultaneous purchase call option and sell put option) 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. Purchase of collars also provides us with
protection against significant upward movement in natural gas prices; but
limits participation in downward price movements.

At December 31, 2001, we had outstanding call option contracts to protect
approximately 2 million decatherms or 80 percent of our planned natural gas
consumption for domestic mining operations through first quarter 2002.
Effectiveness is assessed using an intrinsic value method with the time value
of money component recognized immediately in earnings. During 2001,
approximately $3 million of option premiums were reflected in cost of products
sold associated with amounts excluded from the hedge effectiveness assessment.

Other Protection Programs

Certain protection programs did not meet all of the criteria to qualify
under SFAS Nos. 133 and 138 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 December 31, 2001, we had net futures and swap contracts for
approximately 47 million pounds of copper. At year-end 2001, the unrealized
loss of approximately $1.6 million associated with the rod price protection
program was recorded to cost of products sold.

Currency Swap Transactions.In some situations, we may enter into structured
transactions using currency swaps to reduce our exposure to foreign exchange
risk in order to maintain the value of our investment. At December 31, 2001,
we had in place $15 million in currency swap contracts with an unrealized loss
of approximately $0.5 million, which was recorded to miscellaneous expense.

Credit Risk

We are exposed to credit loss in cases when the financial and 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 have dealt with
will default on their obligations.

Other Financial Instruments

The methods and assumptions we used to estimate the fair value of each
group of financial instrument for which we can reasonably determine a value are
as follows:



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-82-

Cash and cash equivalents. The financial statement amount is a reasonable
estimate of the fair value because of the short maturity of these instruments.

Accounts receivable. The financial statement amount is a reasonable estimate
of the fair value because of the short-term nature 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.

Accounts payable and accrued expenses. The financial statement amount is a
reasonable estimate of the fair value because of the short-term nature of these
instruments.

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.

Financial guarantees and standby letters of credit. As a whole, we have
various guarantees and letters of credit totaling $160.6 million. There is no
market for our guarantees or standby letters of credit. Therefore, it is not
practicable to establish their fair value.

The estimated fair values of our financial instruments at December 31,
2001, were as follows:



---

|                                                                                                                                  |  |          |         |       |  |  |         | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------- | ----- |  |  | ------- | 
|                                                                                                                                  |  | Carrying |         | Fair 
|                                                                                                                                  |  | Amount   |         | Value
|                                                                                                                                  |  |          |         |      
|Cash and short-term investments                                                                                                   |  | $        | 386.9   |       |  |  | 386.9   | 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|Accounts receivable, net                                                                                                          |  |          | 398.8   |       |  |  | 398.8   | 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|Investments and long-term receivables
(including amounts due within one year)
for which it is practicable to estimate
fair value* |  |          | 71.2    |       |  |  | 143.7   | 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|Accounts payable and accrued expenses                                                                                             |  |          | 673.7   |       |  |  | 673.7   | 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|Long-term debt
(including amounts due within one year)                                                                            |  |          | 2,791.7 |       |  |  | 2,708.0 | 



---

|* |  | Our largest cost basis investment is our minority interest in SPCC, which
is carried at a book value of $13.2 million. Based on the New York Stock
Exchange closing market price of listed SPCC shares on December 31, 2001,
the estimated fair value of our investment is approximately $134 million
at December 31, 2001. 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

20. Business Segment Data

Our business consists of two divisions, PD Mining and PD Industries. 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.

PD Mining is our international business segment that comprises a group of
companies involved in vertically integrated copper operations including mining,
concentrating, electrowinning, smelting, refining, rod production, marketing
and sales, and related activities. PD Mining sells copper to others primarily
as rod, cathode or concentrate, and as rod to our wire and cable segment. In
addition, PD Mining at times smelts and refines copper and produces copper rod
for customers on a toll basis. It is also an integrated producer of
molybdenum, with mining, roasting and processing facilities producing
molybdenum concentrate as well as metallurgical and chemical products. In
addition, it produces gold, silver, molybdenum, copper sulfate, rhenium and
copper chemicals as by-products, and sulfuric acid from its air quality control
facilities. This business segment also includes worldwide mineral exploration
and development programs, and a process technology center that directs its
activities at improving existing processes and developing new cost-competitive
technologies.

PD Industries is our manufacturing division comprising two business
segments that produce engineered products principally for the global energy,
telecommunications, transportation and specialty chemicals sectors. The two
business segments are specialty chemicals, which comprises Columbian Chemicals
Company and its subsidiaries, and wire and cable, which comprises three
worldwide product line businesses and a shared support services operation. The
three product line businesses in the wire and cable segment are magnet wire,
energy and telecommunications cables, and specialty conductors.

Intersegment sales reflect the transfer of copper from PD Mining to PD
Industries at the same prices charged to outside customers.



---



##### Table of Contents



-83-




FINANCIAL DATA BY GEOGRAPHIC AREA

The following tables give a summary of financial data by geographic area
and business segments for the years 1999 through 2001. (Refer to Notes 1, 2
and 3 to the consolidated financial statements for a discussion of major
unusual items during the three-year period.)

|                                    |                        |                |         |      |         |      |         |      |         |  |         |  |         | 
|----------------------------------- | ---------------------- | -------------- | ------- | ---- | ------- | ---- | ------- | ---- | ------- |  | ------- |  | ------- | 
|                                    |                        |                |         | 2001 |         | 2000 |         | 1999
|                                    |                        |                |         |      |         |      |         |     
|Sales and other operating revenues: |                        |                |         |      |         |      |         |      |         |  |         | 
|                                   
|                                   
|                                   
|                                   
|                                    | Unaffiliated customers |                |         |      |         |      |         |      |         |  |         |  |        
|                                   
|                                   
|                                   
|                                   
|                                    |                        | United States  |         | $    | 2,900.0 |      |         |      | 3,373.6 |  |         |  | 2,093.8 | 
|                                   
|                                   
|                                   
|                                   
|                                    |                        | Latin America  |         |      | 696.1   |      |         |      | 758.0   |  |         |  | 660.2   | 
|                                   
|                                   
|                                   
|                                   
|                                    |                        | Other          |         |      | 406.3   |      |         |      | 393.5   |  |         |  | 360.4   | 
|                                    |                        |                |         |      |         |      |         |      |         |  |         |  |         | 
|                                    |                        | $              | 4,002.4 |      |         |      | 4,525.1 |      |         |  | 3,114.4 | 
|                                    |                        |                |         |      |         |      |         |      |         |  |         |  |         | 
|Long-lived assets at December 31:   |                        |                |         |      |         |      |         |      |         |  |         | 
|                                   
|                                   
|                                   
|                                   
|                                    |                        | United States  |         | $    | 3,942.9 |      |         |      | 4,031.0 |  |         |  | 4,200.3 | 
|                                   
|                                   
|                                   
|                                   
|                                    |                        | Latin America* |         |      | 1,813.7 |      |         |      | 1,938.0 |  |         |  | 2,093.3 | 
|                                   
|                                   
|                                   
|                                   
|                                    |                        | Other          |         |      | 301.7   |      |         |      | 309.1   |  |         |  | 225.1   | 
|                                    |                        |                |         |      |         |      |         |      |         |  |         |  |         | 
|                                    |                        | $              | 6,058.3 |      |         |      | 6,278.1 |      |         |  | 6,518.7 | 
|                                    |                        |                |         |      |         |      |         |      |         |  |         |  |         | 

|                                |  |   |         |  |  |  |         |  |  |  |         |  |  | 
|------------------------------- |  | - | ------- |  |  |  | ------- |  |  |  | ------- |  |  | 
|*    Long-lived assets in Chile |  | $ | 1,137.9 |  |  |  | 1,201.1 |  |  |  | 1,261.5 | 



---

Revenue is attributed to countries based on the location where the sale
originated.



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##### Table of Contents



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FINANCIAL DATA BY BUSINESS SEGMENT

|                                         |                        |  |           |         |           |  |        |       |               |  |          |       |              |  |         |         |  |  |         |         |  |  |       |        |   |  |         |         | 
|---------------------------------------- | ---------------------- |  | --------- | ------- | --------- |  | ------ | ----- | ------------- |  | -------- | ----- | ------------ |  | ------- | ------- |  |  | ------- | ------- |  |  | ----- | ------ | - |  | ------- | ------- | 
|                                         |                        |  | PD Mining |         | Specialty |  | Wire & |       | PD Industries |  | Segment  |       | Corporate    |  |         |         | 
|                                         |                        |  | Company   |         | Chemicals |  | Cable  |       | Subtotal      |  | Subtotal |       | Eliminations |  | Totals 
|                                        
|2001                                     |                        |  |           |         |           |  |        |       |               |  |          |       |              |  |         |         |  |  |         |         |  |  |       |        |   |  |         |        
|                                        
|                                        
|                                        
|                                        
|Sales & other operating revenues:        |                        |  |           |         |           |  |        |       |               |  |          |       |              |  |         |         |  |  |         |         |  |  |       |        |   |  |         |        
|                                        
|                                        
|                                        
|                                        
|                                         | Unaffiliated customers |  | $         | 2,649.5 |           |  |        | 582.0 |               |  |          | 770.9 |              |  |         | 1,352.9 |  |  |         | 4,002.4 |  |  |       |       |   |  |         | 4,002.4 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Intersegment           |  |           | 153.0   |           |  |        |      |               |  |          | 0.2   |              |  |         | 0.2     |  |  |         | 153.2   |  |  |       | (153.2 | ) |  |         |        | 
|                                        
|                                        
|                                        
|                                        
|Depreciation, depletion and
amortization |                        |  | 369.5     |         |           |  | 43.7   |       |               |  | 47.0     |       |              |  | 90.7    |         |  |  | 460.2   |         |  |  | 5.1   |        |   |  | 465.3   |        
|                                        
|                                        
|                                        
|                                        
|Special items
and provisions             |                        |  | (2.1      | )       |           |  | (1.4   | )     |               |  | (3.3     | )     |              |  | (4.7    | )       |  |  | (6.8    | )       |  |  | 38.4  |        |   |  | 31.6    |        
|                                        
|                                        
|                                        
|                                        
|Operating income (loss)                  |                        |  | (92.2     | )       |           |  | 61.8   |       |               |  | 12.2     |       |              |  | 74.0    |         |  |  | (18.2   | )       |  |  | (26.7 | )      |   |  | (44.9   | )      
|                                        
|                                        
|                                        
|                                        
|Interest income                          |                        |  | 8.0       |         |           |  | 4.3    |       |               |  | 1.3      |       |              |  | 5.6     |         |  |  | 13.6    |         |  |  | 9.7   |        |   |  | 23.3    |        
|                                        
|                                        
|                                        
|                                        
|Interest expense                         |                        |  | 56.3      |         |           |  | 42.4   |       |               |  | 5.7      |       |              |  | 48.1    |         |  |  | 104.4   |         |  |  | 123.1 |        |   |  | 227.5   |        
|                                        
|                                        
|                                        
|                                        
|Equity earnings (losses)                 |                        |  | (3.0      | )       |           |  |       |       |               |  | 0.9      |       |              |  | 0.9     |         |  |  | (2.1    | )       |  |  | 1.8   |        |   |  | (0.3    | )      
|                                        
|                                        
|                                        
|                                        
|Income tax expense (benefit)             |                        |  | (5.4      | )       |           |  | 9.4    |       |               |  | 2.9      |       |              |  | 12.3    |         |  |  | 6.9     |         |  |  | (1.0  | )      |   |  | 5.9     |        
|                                        
|                                        
|                                        
|                                        
|Equity basis investments                 |                        |  | 0.8       |         |           |  |       |       |               |  | 4.9      |       |              |  | 4.9     |         |  |  | 5.7     |         |  |  | 28.4  |        |   |  | 34.1    |        
|                                        
|                                        
|                                        
|                                        
|Assets at December 31                    |                        |  | 5,620.9   |         |           |  | 709.0  |       |               |  | 638.1    |       |              |  | 1,347.1 |         |  |  | 6,968.0 |         |  |  | 650.8 |        |   |  | 7,618.8 |        
|                                        
|                                        
|                                        
|                                        
|Expenditures for segment assets          |                        |  | 200.6     |         |           |  | 28.9   |       |               |  | 57.6     |       |              |  | 86.5    |         |  |  | 287.1   |         |  |  | 23.9  |        |   |  | 311.0   |        
|                                        
|2000                                     |                        |  |           |         |           |  |        |       |               |  |          |       |              |  |         |         |  |  |         |         |  |  |       |        |   |  |         |        
|                                        
|                                        
|                                        
|                                        
|Sales & other operating revenues:        |                        |  |           |         |           |  |        |       |               |  |          |       |              |  |         |         |  |  |         |         |  |  |       |        |   |  |         |        
|                                        
|                                        
|                                        
|                                        
|                                         | Unaffiliated customers |  | $         | 3,073.7 |           |  |        | 598.4 |               |  |          | 853.0 |              |  |         | 1,451.4 |  |  |         | 4,525.1 |  |  |       |       |   |  |         | 4,525.1 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Intersegment           |  |           | 242.6   |           |  |        |      |               |  |          | 1.5   |              |  |         | 1.5     |  |  |         | 244.1   |  |  |       | (244.1 | ) |  |         |        | 
|                                        
|                                        
|                                        
|                                        
|Depreciation, depletion and
amortization |                        |  | 359.4     |         |           |  | 45.9   |       |               |  | 53.9     |       |              |  | 99.8    |         |  |  | 459.2   |         |  |  | 5.0   |        |   |  | 464.2   |        
|                                        
|                                        
|                                        
|                                        
|Special items
and provisions             |                        |  | (5.8      | )       |           |  |       |       |               |  | (46.0    | )     |              |  | (46.0   | )       |  |  | (51.8   | )       |  |  |      |        |   |  | (51.8   | )      
|                                        
|                                        
|                                        
|                                        
|Operating income (loss)                  |                        |  | 243.3     |         |           |  | 88.1   |       |               |  | (17.8    | )     |              |  | 70.3    |         |  |  | 313.6   |         |  |  | (76.6 | )      |   |  | 237.0   |        
|                                        
|                                        
|                                        
|                                        
|Interest income                          |                        |  | 12.1      |         |           |  | 4.3    |       |               |  | 1.3      |       |              |  | 5.6     |         |  |  | 17.7    |         |  |  | 1.8   |        |   |  | 19.5    |        
|                                        
|                                        
|                                        
|                                        
|Interest expense                         |                        |  | 64.6      |         |           |  | 38.2   |       |               |  | 11.1     |       |              |  | 49.3    |         |  |  | 113.9   |         |  |  | 103.9 |        |   |  | 217.8   |        
|                                        
|                                        
|                                        
|                                        
|Equity earnings (losses)                 |                        |  | (2.8      | )       |           |  |       |       |               |  | 2.7      |       |              |  | 2.7     |         |  |  | (0.1    | )       |  |  | 1.6   |        |   |  | 1.5     |        
|                                        
|                                        
|                                        
|                                        
|Income tax expense (benefit)             |                        |  | 55.3      |         |           |  | 12.4   |       |               |  | 8.4      |       |              |  | 20.8    |         |  |  | 76.1    |         |  |  | (56.9 | )      |   |  | 19.2    |        
|                                        
|                                        
|                                        
|                                        
|Equity basis investments                 |                        |  | 18.4      |         |           |  |       |       |               |  | 4.8      |       |              |  | 4.8     |         |  |  | 23.2    |         |  |  | 22.3  |        |   |  | 45.5    |        
|                                        
|                                        
|                                        
|                                        
|Assets at December 31                    |                        |  | 6,036.7   |         |           |  | 768.6  |       |               |  | 683.5    |       |              |  | 1,452.1 |         |  |  | 7,488.8 |         |  |  | 342.0 |        |   |  | 7,830.8 |        
|                                        
|                                        
|                                        
|                                        
|Expenditures for segment assets          |                        |  | 311.6     |         |           |  | 73.7   |       |               |  | 16.9     |       |              |  | 90.6    |         |  |  | 402.2   |         |  |  | 20.1  |        |   |  | 422.3   |        
|                                        
|1999                                     |                        |  |           |         |           |  |        |       |               |  |          |       |              |  |         |         |  |  |         |         |  |  |       |        |   |  |         |        
|                                        
|                                        
|                                        
|                                        
|Sales & other operating revenues:        |                        |  |           |         |           |  |        |       |               |  |          |       |              |  |         |         |  |  |         |         |  |  |       |        |   |  |         |        
|                                        
|                                        
|                                        
|                                        
|                                         | Unaffiliated customers |  | $         | 1,786.6 |           |  |        | 543.0 |               |  |          | 784.8 |              |  |         | 1,327.8 |  |  |         | 3,114.4 |  |  |       |       |   |  |         | 3,114.4 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Intersegment           |  |           | 224.4   |           |  |        |      |               |  |          | 0.9   |              |  |         | 0.9     |  |  |         | 225.3   |  |  |       | (225.3 | ) |  |         |        | 
|                                        
|                                        
|                                        
|                                        
|Depreciation, depletion and
amortization |                        |  | 222.6     |         |           |  | 45.2   |       |               |  | 58.5     |       |              |  | 103.7   |         |  |  | 326.3   |         |  |  | 2.8   |        |   |  | 329.1   |        
|                                        
|                                        
|                                        
|                                        
|Special items
and provisions             |                        |  | (385.2    | )       |           |  | (17.7  | )     |               |  | (52.3    | )     |              |  | (70.0   | )       |  |  | (455.2  | )       |  |  | (0.2  | )      |   |  | (455.4  | )      
|                                        
|                                        
|                                        
|                                        
|Operating income (loss)                  |                        |  | (301.0    | )       |           |  | 92.5   |       |               |  | (42.8    | )     |              |  | 49.7    |         |  |  | (251.3  | )       |  |  | (64.3 | )      |   |  | (315.6  | )      
|                                        
|                                        
|                                        
|                                        
|Interest income                          |                        |  | 6.9       |         |           |  | 4.4    |       |               |  | 2.4      |       |              |  | 6.8     |         |  |  | 13.7    |         |  |  | 4.2   |        |   |  | 17.9    |        
|                                        
|                                        
|                                        
|                                        
|Interest expense                         |                        |  | 36.1      |         |           |  | 40.5   |       |               |  | 16.0     |       |              |  | 56.5    |         |  |  | 92.6    |         |  |  | 27.8  |        |   |  | 120.4   |        
|                                        
|                                        
|                                        
|                                        
|Equity earnings (losses)                 |                        |  | (0.9      | )       |           |  | 0.1    |       |               |  | 4.2      |       |              |  | 4.3     |         |  |  | 3.4     |         |  |  | 1.7   |        |   |  | 5.1     |        
|                                        
|                                        
|                                        
|                                        
|Income tax expense (benefit)             |                        |  | (126.9    | )       |           |  | 9.4    |       |               |  | (13.5    | )     |              |  | (4.1    | )       |  |  | (131.0  | )       |  |  | (34.2 | )      |   |  | (165.2  | )      
|                                        
|                                        
|                                        
|                                        
|Equity basis investments                 |                        |  | 26.8      |         |           |  | 0.3    |       |               |  | 10.8     |       |              |  | 11.1    |         |  |  | 37.9    |         |  |  | 16.1  |        |   |  | 54.0    |        
|                                        
|                                        
|                                        
|                                        
|Assets at December 31                    |                        |  | 6,345.1   |         |           |  | 772.6  |       |               |  | 748.3    |       |              |  | 1,520.9 |         |  |  | 7,866.0 |         |  |  | 363.0 |        |   |  | 8,229.0 |        
|                                        
|                                        
|                                        
|                                        
|Expenditures for segment assets          |                        |  | 148.7     |         |           |  | 121.1  |       |               |  | 28.5     |       |              |  | 149.6   |         |  |  | 298.3   |         |  |  | (57.9 | )      |   |  | 240.4   |        
|                                        

|      |  |                                                                                                                                      
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------
|Note: |  | Refer to Notes 2 and 3 to the consolidated financial statements for a
discussion of major unusual items during the three-year
period.



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##### Table of Contents



- 85 -




Part III




Items 10, 11, 12 and 13.

The information called for by Part III (Items 10, 11, 12 and 13) is
incorporated herein by reference from the material included under the captions
Election of Directors, Beneficial Ownership of Securities, Executive
Compensation and Other Matters in Phelps Dodge Corporations definitive
proxy statement (to be filed pursuant to Regulation 14A) for its Annual Meeting
of Shareholders to be held April 30, 2002 (the 2002 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 2002 Proxy Statement
is being prepared and will be filed with the Securities and Exchange Commission
and furnished to shareholders on or about April 1, 2002.




Part IV




Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K

|    |  |  |     |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  |  | --- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  |  | 1.  |  |  | Financial Statements: Index on page 50.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|   
|   
|   
|    |  |  | 2.  |  |  | Financial Statement Schedule: Index on page 50.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|   
|   
|   
|    |  |  | 3.  |  |  | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|   
|   
|   
|    |  |  | 3.1 |  |  | Complete composite copy of the Certificate of
Incorporation of the Corporation as amended to date
(incorporated by reference to Exhibit 3.1 to the Corporations
Form 10-Q for the quarter ended June 30, 1999 (SEC File No.
1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|    |  |  | 3.2 |  |  | Amended and Restated By-Laws of the Corporation, effective
as of September 5, 2001 (incorporated by reference to Exhibit
3.2 to the Corporation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
Corporation, 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 Corporation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
Corporation 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 Corporation), 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 Right
Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Shares as Exhibit C (incorporated by reference to
Exhibit 1 to the Corporations Current Report on Form 8-K and
in the Corporation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 Corporation 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 Corporation and its subsidiaries on a consolidated basis.
The Corporation 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 Corporation and The Chase Manhattan Bank, as Trustee
(incorporated by reference to the Corporation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 Com-                                                                                                                                                                                                                                                                                                                                                                                                                                     



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-86-

| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |  |      |  |  | mission on September 25, 1997
(incorporated by reference to Exhibit 4.3 to the Corporation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
Corporation issued on November 5, 1997, pursuant to the
Indenture, dated as of September 22, 1997, between the
Corporation and The Chase Manhattan Bank, as Trustee
(incorporated by reference to the Corporation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 Corporation issued on November 5, 1997, pursuant to the
Indenture, dated as of September 22, 1997, between the
Corporation and The Chase Manhattan Bank, as Trustee
(incorporated by reference to the Corporations Current Report
on Form 8-K filed with the Securities and Exchange Commission
on November 3, 1997 and Exhibit 4.5 of the Corporation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 Chase Manhattan Bank and First Union National
Bank, and acknowledged by the Corporation, pursuant to which
First Union National Bank succeeded Chase Manhattan Bank as
trustee under the Indenture dated as of September 22, 1997
(incorporated by reference to the Corporation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
Corporation 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
Corporation 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)).                                                                                                                                                                                                                                                          
|
|
|
|
| |  |  | 10.  |  |  | Management contracts and compensatory plans and
agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
|
|
|
| |  |  | 10.1 |  |  | The Corporations 1987 Stock Option and Restricted Stock
Plan (the 1987 Plan), as amended to and including June 3,
1992, and form of Stock Option Agreement and form of Reload
Option Agreement, both as modified through June 3, 1992
(incorporated by reference to Exhibit 10.2 of the
Corporations Form 10-Q for the quarter ended June 30, 1992
(SEC File No. 1-82)). Form of Restricted Stock letter under
the 1987 Plan (incorporated by reference to Exhibit 10.1 to
the Corporations 1990 10-K (SEC File No. 1-82)) and the
amendment thereto dated June 25, 1992 (incorporated by
reference to Exhibit 10.2 to the



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##### Table of Contents



-87-

| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |  |      |  |  | Corporations 1992 Form 10-K
(SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
|
|
|
| |  |  | 10.2 |  |  | The Corporation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 to the Corporation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 Corporations Registration
Statement on Form S-8 (Reg. No. 33-34363)).                                                                                                                                                                                                                                                                                                                                                                                   
|
|
|
|
| |  |  | 10.3 |  |  | The Corporation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 to the
Corporation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 to the Corporation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 Corporations 1997 Form 10-K (SEC File No. 1-82)). Form
of Reload Option Agreement, amended through November 2, 1994,
under the 1993 Plan (incorporated by reference to Exhibit 10.3
to the Corporations 1994 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
Corporation and certain officers, under the 1987 Plan and the
1993 Plan,
and certain Directors, under the 1989 Directors Plan, which
contain substantially similar provisions to Exhibits 10.1,
10.2 and 10.3 above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
|
|
|
| |  |  | 10.4 |  |  | Description of the Corporations Incentive Compensation
Plan (incorporated by reference to Exhibit 10.5 to the
Corporations 1993 Form 10-K (SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
|
|
|
| |  |  | 10.5 |  |  | Amended and restated Deferred Compensation Plan for the
Directors of the Corporation, dated as of December 3, 1998,
effective January 1, 1999 (incorporated by reference to
Exhibit 10.5 to the Corporations 1998 Form 10-K (SEC File No.
1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
|
|
|
| |  |  | 10.6 |  |  | Modified form of Change-of-Control Agreement between the
Corporation and certain executives, including all of the
current executive officers to be listed in the summary
compensation table to the 2001 Proxy Statement (incorporated
by reference to Exhibit 10.6 to the Corporations 1998 Form
10-K (SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
|
|
|
| |  |  | 10.7 |  |  | Amended and restated form of Severance Agreement between
the Corporation and certain executives, including all of the
current executive officers to be listed in the summary
compensation table to the 2001 Proxy Statement (incorporated
by reference to Exhibit 10.7 of the Corporations 1997 Form
10-K (SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
|
|
|
| |  |  | 10.8 |  |  | The Corporations Retirement Plan for Directors, effective
January 1, 1988, terminated for active directors effective
December 31, 1997 (incorporated by reference to Exhibit 10.13
to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



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##### Table of Contents



-88-

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| |  |  | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |  |       |  |  | the Corporations 1987 Form 10-K (SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
|
|
|
| |  |  | 10.9  |  |  | The Corporations Supplemental Retirement Plan (which
amends, restates and re-names the provisions of the
Corporations Comprehensive Executive Nonqualified Retirement
and Savings Plan other than the supplemental savings
provisions of such plan), effective (except as otherwise noted
therein) as of January 1, 1997 (incorporated by reference to
Exhibit 10.9 to the Corporations 1997 Form 10-K (SEC File No.
1-82)). First Amendment to Plan, effective January 1, 1998
(incorporated by reference to Exhibit 10.9 to the
Corporations 1998 Form 10-K (SEC File No. 1-82)). Second
Amendment to Plan, effective January 1, 1999 (incorporated by
reference to Exhibit 10.9 to the Corporations Form 10-Q for
the quarter ended June 30, 1999 (SEC File No. 1-82)). Third
Amendment to Plan, effective as of January 1, 2000
(incorporated by reference to Exhibit 10.9 of the
Corporations Form 10-Q for the quarter ended June 30, 2000
(SEC File No. 1-82)).
|
|
|
|
| |  |  | 10.10 |  |  | The Corporations Supplemental Savings Plan (SSP) (which
amends, restates, and replaces the supplemental savings
provisions of the Corporations Comprehensive Executive
Nonqualified Retirement and Savings Plan), effective (except
as otherwise noted therein) as of January 1, 1997
(incorporated by reference to Exhibit 10.10 of the
Corporations 1997 Form 10-K (SEC File No. 1-82)); as amended
by the First Amendment to such SSP, effective as of January 1,
1999 (incorporated by reference to Exhibit 10.10 of the
Corporations Form 10-Q for the quarter ended September 30,
1999 (SEC File No. 1-82)). Second Amendment to SSP, effective
as of January 1, 2000 (incorporated by reference to Exhibit
10.10 to the Corporations Form 10-Q for the quarter ended
June 30, 2000 (SEC File No. 1-82)).                                                                                                                                                        
|
|
|
|
| |  |  | 10.11 |  |  | The Corporations Directors Stock Unit Plan effective
January 1, 1997 (incorporated by reference to Exhibit 10.10 to
the Corporation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 Corporation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 Corporations Form 10-Q for the quarter ended
June 30, 2000 (SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
|
|
|
| |  |  | 10.12 |  |  | The Corporations 1998 Stock Option and Restricted Stock
Plan (the 1998 Plan) and forms of Reload Option Agreement and
of Restricted Stock Agreement under the 1998 Plan, effective
March 4, 1998 (incorporated by reference to Exhibit 10.12 to
the Corporation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 Corporations Form
10-Q for the quarter ended June 30, 1999 (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
Corporations Form 10-Q for the quarter ended June 30, 2000
(SEC File No. 1-82)).                                                                                                                                                                                                                                           



---



##### Table of Contents



-89-

|    |  |  |       |  |  |                                                                                                                                                                                                                                                      
|--- |  |  | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|    |  |  |       |  |  | Note: Omitted from filing pursuant to the Instruction to Item
601(b) (10) are actual Stock Option Agreements between the
Corporation and certain officers under the 1998 Plan, which
contain substantially similar provisions to Exhibit 10.12
above.
|   
|   
|   
|   
|    |  |  | 10.13 |  |  | Advisory Services Agreement, dated as of May 3, 2000,
between the Corporation and Douglas C. Yearley (incorporated
by reference to Exhibit 10.13 of the Corporations Form 10-Q
for the quarter ended March 31, 2000 (SEC File No. 1-82)).           
|   
|   
|   
|   
|    |  |  | 12    |  |  | Statement regarding 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.                                                                          
|   
|   
|   
|   
|(b) |  |  |       |  |  | Reports on Form 8-K:                                                                                                                                                                                                                                 
|   
|   
|   
|   
|    |  |  |       |  |  | No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2001.                                                                                                                                                         





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##### Table of Contents



- 90 -

Schedule II




PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In millions)

|                                                                      |                      |                   |  |            |       |            |  |           |      |            |  |           |       |     |  |         |     |  |  |  |       | 
|--------------------------------------------------------------------- | -------------------- | ----------------- |  | ---------- | ----- | ---------- |  | --------- | ---- | ---------- |  | --------- | ----- | --- |  | ------- | --- |  |  |  | ----- | 
|                                                                      |                      |                   |  |            |       |            |  | Additions |      |            |  |           |       |     |  |        
|                                                                      |                      |                   |  |            |       |            |  |           |      |            |  |           |       |     |  |        
|                                                                      |                      |                   |  | Balance at |       | Charged to |  |           |      |            |  |           |       |     |  | Balance
|                                                                      |                      |                   |  | beginning  |       | costs and  |  |           |      |            |  |           |       |     |  | at end 
|                                                                      |                      |                   |  | of period  |       | expenses   |  | Other     |      | Deductions |  | of period
|                                                                      |                      |                   |  |            |       |            |  |           |      |            |  |          
|Reserve deducted in balance sheet from the asset to which applicable: |                      |                   |  |            |       |            |  |           |      |            |  |           |       |     |  |         |     |  |  | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accounts Receivable: |                   |  |            |       |            |  |           |      |            |  |           |       |     |  |         |     |  |  |  |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                      | December 31, 2001 |  |            | 17.6  |            |  |           | 1.9  |            |  |           | 0.6   |     |  |         | 5.9 |  |  |  | 14.2  | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                      | December 31, 2000 |  |            | 17.5  |            |  |           | 0.3  |            |  |           | (0.2  | )   |  |         |    |  |  |  | 17.6  | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                      | December 31, 1999 |  |            | 14.9  |            |  |           | 4.1  |            |  |           | (0.6  | )   |  |         | 0.9 |  |  |  | 17.5  | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Supplies:            |                   |  |            |       |            |  |           |      |            |  |           |       |     |  |         |     |  |  |  |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                      | December 31, 2001 |  |            | 24.2  |            |  |           | 4.0  |            |  |           | 0.5   |     |  |         | 1.5 |  |  |  | 27.2  | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                      | December 31, 2000 |  |            | 25.0  |            |  |           | 1.8  |            |  |           | (1.0  | )   |  |         | 1.6 |  |  |  | 24.2  | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                      | December 31, 1999 |  |            | 6.7   |            |  |           | 3.4  |            |  |           | 16.8  |     |  |         | 1.9 |  |  |  | 25.0  | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Deferred Tax Asset:  |                   |  |            |       |            |  |           |      |            |  |           |       |     |  |         |     |  |  |  |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                      | December 31, 2001 |  |            | 280.2 |            |  |           |     |            |  |           | 129.0 |     |  |         |    |  |  |  | 409.2 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                      | December 31, 2000 |  |            | 165.3 |            |  |           | 23.0 |            |  |           | 91.9  | (A) |  |         |    |  |  |  | 280.2 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                      | December 31, 1999 |  |            | 27.6  |            |  |           |     |            |  |           | 137.7 | (A) |  |         |    |  |  |  | 165.3 | 



---

|(A) |  | Deferred Tax Assets recorded
in conjunction with the acquisition of Cyprus Amax
|--- |  | -------------------------------------------------------------------------------





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##### Table of Contents



- 91 -




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)
|             
|             
|             
|             
|              |  |                                       |  |                                                                                     
|             
|             
|             
|             
|March 8, 2002 |  | By:                                   |  | /s/ Ramiro G. Peru

Ramiro 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

J. Steven Whisler   |  | Chairman, President, Chief Executive Officer
and Director
(Principal Executive Officer) |  | March 8, 2002
|                                          
|                                          
|                                          
|                                          
|                                           |  |                                                                                         |  |              
|                                          
|                                          
|                                          
|                                          
|/s/ Ramiro G. Peru

Ramiro G. Peru         |  | Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)         |  | March 8, 2002
|                                          
|                                          
|                                          
|                                          
|                                           |  |                                                                                         |  |              
|                                          
|                                          
|                                          
|                                          
|/s/ Stanton K. Rideout

Stanton K. Rideout |  | Vice President and Controller
(Principal Accounting Officer)                            |  | March 8, 2002

|                                                                                                                                                                                           |  |              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------
|(Robert N. Burt, Archie W. Dunham, William A. Franke, Paul Hazen, Manuel J. Iraola,
Marie L. Knowles, Robert D. Krebs, Southwood J. Morcott, Gordon R. Parker, William J. Post, Directors) |  | March 8, 2002

|    |  |                                                   
|--- |  | --------------------------------------------------
|By: |  | /s/ Ramiro G. Peru
Ramiro G. Peru
Attorney-in-fact





---



##### Table of Contents



EXHIBIT INDEX

| |  |  |     |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |  | --- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 3.1 |  |  | Complete composite copy of the Certificate of
Incorporation of the Corporation as amended to date
(incorporated by reference to Exhibit 3.1 to the Corporations
Form 10-Q for the quarter ended June 30, 1999 (SEC File No.
1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
|
|
|
| |  |  | 3.2 |  |  | Amended and Restated By-Laws of the Corporation, effective
as of September 5, 2001 (incorporated by reference to Exhibit
3.2 to the Corporation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
Corporation, 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 Corporation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
Corporation 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 Corporation), 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 Right
Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Shares as Exhibit C (incorporated by reference to
Exhibit 1 to the Corporations Current Report on Form 8-K and
in the Corporation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 Corporation 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 Corporation and its subsidiaries on a consolidated basis.
The Corporation 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 Corporation and The Chase Manhattan Bank, as Trustee
(incorporated by reference to the Corporation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 to the Corporations
Form 10-Q for the quarter ended September 30, 1997 (SEC File
No. 1-82)).                                                                                                                                                                                                                                                                 



---



##### Table of Contents



| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | ---- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |  | 4.4  |  |  | Form of 6.375 percent Note, due November 1, 2004, of the
Corporation issued on November 5, 1997, pursuant to the
Indenture, dated as of September 22, 1997, between the
Corporation and The Chase Manhattan Bank, as Trustee
(incorporated by reference to the Corporation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 Corporation issued on November 5, 1997, pursuant to the
Indenture, dated as of September 22, 1997, between the
Corporation and The Chase Manhattan Bank, as Trustee
(incorporated by reference to the Corporations Current Report
on Form 8-K filed with the Securities and Exchange Commission
on November 3, 1997 and Exhibit 4.5 of the Corporation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 Chase Manhattan Bank and First Union National
Bank, and acknowledged by the Corporation, pursuant to which
First Union National Bank succeeded Chase Manhattan Bank as
trustee under the Indenture dated as of September 22, 1997
(incorporated by reference to the Corporation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
Corporation 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
Corporation 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)).                                                                                                                                                                                                                                                                                                             
|
|
|
|
| |  |  | 10.  |  |  | Management contracts and compensatory plans and
agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
|
|
|
| |  |  | 10.1 |  |  | The Corporations 1987 Stock Option and Restricted Stock
Plan (the 1987 Plan), as amended to and including June 3,
1992, and form of Stock Option Agreement and form of Reload
Option Agreement, both as modified through June 3, 1992
(incorporated by reference to Exhibit 10.2 of the
Corporations Form 10-Q for the quarter ended June 30, 1992
(SEC File No. 1-82)). Form of Restricted Stock letter under
the 1987 Plan (incorporated by reference to Exhibit 10.1 to
the Corporations 1990 10-K (SEC File No. 1-82)) and the
amendment thereto dated June 25, 1992 (incorporated by
reference to Exhibit 10.2 to the Corporations 1992 Form 10-K
(SEC File No. 1-82)).



---



##### Table of Contents



| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |  | 10.2 |  |  | The Corporation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 to the Corporation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 Corporations Registration
Statement on Form S-8 (Reg. No. 33-34363)).                                                                                                                                                                                                                                                                                                                                                                                   
|
|
|
|
| |  |  | 10.3 |  |  | The Corporation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 to the
Corporation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 to the Corporation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 Corporations 1997 Form 10-K (SEC File No. 1-82)). Form
of Reload Option Agreement, amended through November 2, 1994,
under the 1993 Plan (incorporated by reference to Exhibit 10.3
to the Corporations 1994 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
Corporation and certain officers, under the 1987 Plan and the
1993 Plan,
and certain Directors, under the 1989 Directors Plan, which
contain substantially similar provisions to Exhibits 10.1,
10.2 and 10.3 above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
|
|
|
| |  |  | 10.4 |  |  | Description of the Corporations Incentive Compensation
Plan (incorporated by reference to Exhibit 10.5 to the
Corporations 1993 Form 10-K (SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
|
|
|
| |  |  | 10.5 |  |  | Amended and restated Deferred Compensation Plan for the
Directors of the Corporation, dated as of December 3, 1998,
effective January 1, 1999 (incorporated by reference to
Exhibit 10.5 to the Corporations 1998 Form 10-K (SEC File No.
1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
|
|
|
| |  |  | 10.6 |  |  | Modified form of Change-of-Control Agreement between the
Corporation and certain executives, including all of the
current executive officers to be listed in the summary
compensation table to the 2001 Proxy Statement (incorporated
by reference to Exhibit 10.6 to the Corporations 1998 Form
10-K (SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
|
|
|
| |  |  | 10.7 |  |  | Amended and restated form of Severance Agreement between
the Corporation and certain executives, including all of the
current executive officers to be listed in the summary
compensation table to the 2001 Proxy Statement (incorporated
by reference to Exhibit 10.7 of the Corporations 1997 Form
10-K (SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
|
|
|
| |  |  | 10.8 |  |  | The Corporations Retirement Plan for Directors, effective
January 1, 1988, terminated for active directors effective
December 31, 1997 (incorporated by reference to Exhibit 10.13
to the Corporations 1987 Form 10-K (SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



---



##### Table of Contents



| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |  | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |  | 10.9  |  |  | The Corporations Supplemental Retirement Plan (which
amends, restates and re-names the provisions of the
Corporations Comprehensive Executive Nonqualified Retirement
and Savings Plan other than the supplemental savings
provisions of such plan), effective (except as otherwise noted
therein) as of January 1, 1997 (incorporated by reference to
Exhibit 10.9 to the Corporations 1997 Form 10-K (SEC File No.
1-82)). First Amendment to Plan, effective January 1, 1998
(incorporated by reference to Exhibit 10.9 to the
Corporations 1998 Form 10-K (SEC File No. 1-82)). Second
Amendment to Plan, effective January 1, 1999 (incorporated by
reference to Exhibit 10.9 to the Corporations Form 10-Q for
the quarter ended June 30, 1999 (SEC File No. 1-82)). Third
Amendment to Plan, effective as of January 1, 2000
(incorporated by reference to Exhibit 10.9 of the
Corporations Form 10-Q for the quarter ended June 30, 2000
(SEC File No. 1-82)).
|
|
|
|
| |  |  | 10.10 |  |  | The Corporations Supplemental Savings Plan (SSP) (which
amends, restates, and replaces the supplemental savings
provisions of the Corporations Comprehensive Executive
Nonqualified Retirement and Savings Plan), effective (except
as otherwise noted therein) as of January 1, 1997
(incorporated by reference to Exhibit 10.10 of the
Corporations 1997 Form 10-K (SEC File No. 1-82)); as amended
by the First Amendment to such SSP, effective as of January 1,
1999 (incorporated by reference to Exhibit 10.10 of the
Corporations Form 10-Q for the quarter ended September 30,
1999 (SEC File No. 1-82)). Second Amendment to SSP, effective
as of January 1, 2000 (incorporated by reference to Exhibit
10.10 to the Corporations Form 10-Q for the quarter ended
June 30, 2000 (SEC File No. 1-82)).                                                                                                                                                        
|
|
|
|
| |  |  | 10.11 |  |  | The Corporations Directors Stock Unit Plan effective
January 1, 1997 (incorporated by reference to Exhibit 10.10 to
the Corporation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 Corporation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 Corporations Form 10-Q for the quarter ended
June 30, 2000 (SEC File No. 1-82)).                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
|
|
|
| |  |  | 10.12 |  |  | The Corporations 1998 Stock Option and Restricted Stock
Plan (the 1998 Plan) and forms of Reload Option Agreement and
of Restricted Stock Agreement under the 1998 Plan, effective
March 4, 1998 (incorporated by reference to Exhibit 10.12 to
the Corporation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 Corporations Form
10-Q for the quarter ended June 30, 1999 (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
Corporations Form 10-Q for the quarter ended June 30, 2000
(SEC File No. 1-82)).                                                                                                                                                                                                                                           



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##### Table of Contents



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| |  |  |       |  |  | Note: Omitted from filing pursuant to the Instruction to Item
601(b) (10) are actual Stock Option Agreements between the
Corporation and certain officers under the 1998 Plan, which
contain substantially similar provisions to Exhibit 10.12
above.
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| |  |  | 10.13 |  |  | Advisory Services Agreement, dated as of May 3, 2000,
between the Corporation and Douglas C. Yearley (incorporated
by reference to Exhibit 10.13 of the Corporations Form 10-Q
for the quarter ended March 31, 2000 (SEC File No. 1-82)).           
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| |  |  | 12    |  |  | Statement regarding computation of ratios of total debt to total capitalization.                                                                                                                                                                     
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| |  |  | 21    |  |  | List of Subsidiaries and Investments.                                                                                                                                                                                                                
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| |  |  | 23    |  |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                               
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| |  |  | 24    |  |  | Powers of Attorney executed by certain officers and directors who signed this Annual Report on Form 10-K.                                                                                                                                            
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