##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2004 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 Registrants telephone number: (602) 366-8100 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 [  ].




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- i - PHELPS DODGE CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended March 31, 2004 Table of Contents  
 PagePart I. Financial InformationItem 1. Financial Statements (unaudited)Statement of Consolidated Operations
    
    
    1Consolidated Balance Sheet
    
    
    2Consolidated Statement of Cash Flows
    
    
    3Consolidated Statement of Shareholders Equity
    
    
    4Financial Data by Business Segment
    
    
    5Notes to Consolidated Financial Information
    
    
    6Review by Independent Accountants
    
    
    20Report of Independent Accountants
    
    
    21Item 2. Managements Discussion and Analysis of Financial Condition and
Results of OperationsResults of Operations
    
    
    22Results of Phelps Dodge Mining Company
    
    
    24Results of Phelps Dodge Industries
    
    
    41Other Matters Relating to the Statement of Consolidated Operations
    
    
    43Changes in Financial Condition
    
    
    44Item 3. Quantitative and Qualitative Disclosure About Market
Risk
    
    
    48Item 4. Controls and Procedures
    
    
    48Part II. Other InformationItem 1. Legal Proceedings
    
    
    48Item 6. Exhibits and Reports on Form 8-K
    
    
    48Signatures
    
    
    49Index to Exhibits
    
    
    49EX-4.1EX-11EX-12EX-15EX-31EX-32




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##### Table of Contents



- 1 - PHELPS DODGE CORPORATION AND SUBSIDIARIES 
  
 Item 1. Financial Statements 
 STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited; in millions except per share data) First Quarter2004
    
    2003(See Note 4)Sales and other operating revenues
    
    $
    1,597.0
    
    
    
    978.0Operating costs and expensesCost of product sold (exclusive of items shown separately below)
    
    
    1,098.4
    
    
    
    807.3Depreciation, depletion and amortization
    
    
    124.9
    
    
    
    101.6Selling and general administrative expense
    
    
    38.5
    
    
    
    32.7Exploration and research expense
    
    
    13.6
    
    
    
    9.6Special items and provisions, net (see Note 3)
    
    
    6.8
    
    
    
    (1.9
    )1,282.2
    
    
    
    949.3Operating income
    
    
    314.8
    
    
    
    28.7Interest expense
    
    
    (39.0
    )
    
    
    (36.0
    )Capitalized interest
    
    
    0.1
    
    
    
    0.1Early debt extinguishment costs (see Note 11)
    
    
    (22.4
    )
    
    
    Miscellaneous income and expense, net
    
    
    2.2
    
    
    
    0.9Income (loss) before taxes, minority interests, equity in net earnings (losses) of
affiliated companies and cumulative effect of accounting change
    
    
    255.7
    
    
    
    (6.3
    )Provision for taxes on income (see Note 8)
    
    
    (6.2
    )
    
    
    (15.4
    )Minority interests in consolidated subsidiaries
    
    
    (63.6
    )
    
    
    (2.1
    )Equity in net earnings (losses) of affiliated companies
    
    
    (0.2
    )
    
    
    0.4Income (loss) before cumulative effect of accounting change
    
    
    185.7
    
    
    
    (23.4
    )Cumulative effect of accounting change, net of tax of $(1.3) in 2003 (see Note 4)
    
    
    
    
    
    
    8.4Net income (loss)
    
    
    185.7
    
    
    
    (15.0
    )Preferred stock dividends
    
    
    (3.4
    )
    
    
    (3.4
    )Net income (loss) applicable to common shares
    
    $
    182.3
    
    
    
    (18.4
    )Weighted average number of common shares outstanding  basic
    
    
    91.7
    
    
    
    88.6Basic earnings (loss) per common share before cumulative effect of accounting change
    
    $
    1.99
    
    
    
    (0.30
    )Cumulative effect of accounting change
    
    
    
    
    
    
    0.09Basic earnings (loss) per common share
    
    $
    1.99
    
    
    
    (0.21
    )Weighted average number of common shares outstanding  diluted*
    
    
    97.9
    
    
    
    88.6Diluted earnings (loss) per common share before cumulative effect of accounting change
    
    $
    1.90
    
    
    
    (0.30
    )Cumulative effect of accounting change
    
    
    
    
    
    
    0.09Diluted earnings (loss) per common share
    
    $
    1.90
    
    
    
    (0.21
    )
  *
    
    Diluted earnings (loss) per common share would have been anti-dilutive for the quarter ended March 31, 2003, if based on fully
diluted shares adjusted to reflect the conversion of mandatory convertible preferred shares to common shares and stock option exercises. See Notes to Consolidated Financial Information.




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##### Table of Contents



- 2 - 
 CONSOLIDATED BALANCE SHEET
(Unaudited; in millions except per share prices) March 31,
    
    December 31,2004
    
    2003(see Note 4)AssetsCurrent assets:Cash and cash equivalents
    
    $
    685.1
    
    
    
    683.8Accounts receivable, less allowance for doubtful
accounts (2004 - $13.4; 2003 - $10.1)
    
    
    687.7
    
    
    
    461.3Mill and leach stockpiles
    
    
    22.1
    
    
    
    22.4Inventories
    
    
    381.3
    
    
    
    379.7Supplies
    
    
    169.5
    
    
    
    150.7Prepaid expenses and other current
assets
    
    
    56.5
    
    
    
    31.0Deferred income taxes
    
    
    54.4
    
    
    
    61.1Current assets
    
    
    2,056.6
    
    
    
    1,790.0Investments and long-term receivables
    
    
    111.3
    
    
    
    150.3Property, plant and equipment, net
    
    
    4,983.7
    
    
    
    4,646.5Long-term mill and leach stockpiles
    
    
    126.5
    
    
    
    89.2Deferred income taxes
    
    
    46.2
    
    
    
    7.6Goodwill
    
    
    98.3
    
    
    
    98.4Intangible assets, net (see Note 13)
    
    
    418.9
    
    
    
    321.3Other assets and deferred charges
    
    
    173.7
    
    
    
    169.6$
    8,015.2
    
    
    
    7,272.9LiabilitiesCurrent liabilities:Short-term debt
    
    $
    27.3
    
    
    
    50.5Current portion of long-term debt
    
    
    258.2
    
    
    
    204.6Accounts payable and accrued expenses
    
    
    796.7
    
    
    
    700.7Dividends payable
    
    
    3.4
    
    
    
    3.4Accrued income taxes
    
    
    88.7
    
    
    
    56.1Current liabilities
    
    
    1,174.3
    
    
    
    1,015.3Long-term debt
    
    
    1,586.1
    
    
    
    1,703.9Deferred income taxes
    
    
    427.9
    
    
    
    410.2Other liabilities and deferred credits
    
    
    1,026.5
    
    
    
    1,009.54,214.8
    
    
    
    4,138.9Commitments and contingencies (see Notes 5, 6 and 8)Minority interests in consolidated subsidiaries
    
    
    417.9
    
    
    
    70.2Shareholders equityCommon shares, par value $6.25; 200.0 shares authorized;
93.5 outstanding in 2004 and 91.0 outstanding in 2003 after
deducting 17.1 shares (2004 and 2003) held in treasury
    
    
    584.1
    
    
    
    568.5Preferred shares, par value $1.00; 6.0 shares authorized;
2.0 outstanding in 2004 and 2003
    
    
    2.0
    
    
    
    2.0Capital in excess of par value
    
    
    1,778.9
    
    
    
    1,642.5Retained earnings
    
    
    1,436.9
    
    
    
    1,254.6Accumulated other comprehensive loss
    
    
    (392.1
    )
    
    
    (393.5
    )Other
    
    
    (27.3
    )
    
    
    (10.3
    )3,382.5
    
    
    
    3,063.8$
    8,015.2
    
    
    
    7,272.9
 See Notes to Consolidated Financial Information.




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- 3 - 
 CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; in millions) Three Months EndedMarch 31,2004
    
    2003(see Note 4)Operating activitiesNet income (loss)
    
    $
    185.7
    
    
    
    (15.0
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    124.9
    
    
    
    101.6Deferred income tax provision (benefit)
    
    
    (32.3
    )
    
    
    1.2Equity earnings, net of dividends received
    
    
    1.3
    
    
    
    0.2Special items and provisions
    
    
    11.3
    
    
    
    (1.9
    )Early debt extinguishment costs
    
    
    22.4
    
    
    
    Minority interests in consolidated subsidiaries
    
    
    63.6
    
    
    
    2.1Cumulative effect of accounting change
    
    
    
    
    
    
    (9.7
    )Changes in current assets and liabilities:Accounts receivable
    
    
    (216.3
    )
    
    
    (65.1
    )Repayment from sale of accounts receivable
    
    
    
    
    
    
    (2.4
    )Mill and leach stockpiles
    
    
    5.1
    
    
    
    Inventories
    
    
    9.4
    
    
    
    8.1Supplies
    
    
    (1.3
    )
    
    
    1.7Prepaid expenses
    
    
    (25.3
    )
    
    
    (4.5
    )Interest payable
    
    
    20.0
    
    
    
    25.7Other accounts payable
    
    
    67.5
    
    
    
    13.3Accrued income taxes
    
    
    29.2
    
    
    
    12.9Other accrued expenses
    
    
    (8.1
    )
    
    
    (69.5
    )Other operating, net
    
    
    (0.5
    )
    
    
    7.3Net cash provided by operating activities
    
    
    256.6
    
    
    
    6.0Investing activitiesCapital outlays
    
    
    (46.5
    )
    
    
    (26.9
    )Capitalized interest
    
    
    (0.1
    )
    
    
    (0.1
    )Investment in subsidiaries
    
    
    (0.2
    )
    
    
    (0.4
    )Proceeds from asset dispositions
    
    
    1.1
    
    
    
    0.1Other investing, net
    
    
    3.3
    
    
    
    (0.7
    )Net cash used in investing activities
    
    
    (42.4
    )
    
    
    (28.0
    )Financing activitiesProceeds from issuance of debt
    
    
    149.8
    
    
    
    8.8Payment of debt
    
    
    (499.2
    )
    
    
    (20.3
    )Preferred dividends
    
    
    (3.4
    )
    
    
    (3.4
    )Issuance of shares
    
    
    151.6
    
    
    
    Other financing, net
    
    
    (40.0
    )
    
    
    (0.2
    )Net cash used in financing activities
    
    
    (241.2
    )
    
    
    (15.1
    )Decrease in cash and cash equivalents
    
    
    (27.0
    )
    
    
    (37.1
    )Increase at beginning of period from consolidating
El Abra and Candelaria
    
    
    28.3
    
    
    
    Cash and cash equivalents at beginning of period
    
    
    683.8
    
    
    
    349.8Cash and cash equivalents at end of period
    
    $
    685.1
    
    
    
    312.7
 See Notes to Consolidated Financial Information.




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##### Table of Contents



- 4 - 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(Unaudited; in millions) Common Shares
    
    Preferred Shares
    
    
    
    
    
    
    
    
    
    AccumulatedCapital in
    
    
    
    
    
    OtherNumber
    
    At Par
    
    Number
    
    At Par
    
    Excess of
    
    Retained
    
    Comprehensive
    
    
    
    
    
    Shareholdersof Shares
    
    Value
    
    of Shares
    
    Value
    
    Par Value
    
    Earnings
    
    Income (Loss)
    
    Other
    
    EquityBalance at December 31, 2003
    
    
    91.0
    
    
    $
    568.5
    
    
    
    2.0
    
    
    $
    2.0
    
    
    $
    1,642.5
    
    
    $
    1,254.6
    
    

    $
    (393.5
    )
    
    $
    (10.3
    )
    
    $
    3,063.8Stock options exercised
    
    
    2.2
    
    
    
    14.0
    
    
    
    
    
    
    
    
    
    
    
    119.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133.2Restricted shares issued/cancelled, net
    
    
    0.3
    
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    17.3
    
    
    
    
    
    
    
    
    
    
    
    (17.0
    )
    
    
    1.9Common shares purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Dividends on preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.4
    )
    
    
    
    
    
    
    
    
    
    
    (3.4
    )Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185.7
    
    
    
    
    
    
    
    
    
    
    
    185.7Other comprehensive income (loss), net of tax:Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.2
    )Net gain on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    0.6Other investment adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Unrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    0.9Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    1.4Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187.1Balance at March 31, 2004
    
    
    93.5
    
    
    $
    584.1
    
    
    
    2.0
    
    
    $
    2.0
    
    
    $
    1,778.9
    
    
    $
    1,436.9
    
    
    $
    (392.1

    )
    
    $
    (27.3
    )
    
    $
    3,382.5
 See Notes to Consolidated Financial Information.




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##### Table of Contents



- 5 - 
 FINANCIAL DATA BY BUSINESS SEGMENT
(Unaudited; in millions) U.S. Mines
    
    South American MinesCandelaria/Bagdad/
    
    Miami/
    
    Chino/
    
    
    
    
    
    Ojos del
    
    Cerro
    
    
    
    
    
    PrimaryMorenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    Salado*
    
    Verde
    
    El Abra*
    
    MolybdenumFirst Quarter 2004Sales & other operating revenues:Unaffiliated customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    86.3
    
    
    
    16.6
    
    
    
    99.2
    
    
    
    150.0Intersegment
    
    
    210.9
    
    
    
    170.8
    
    
    
    8.8
    
    
    
    36.7
    
    
    
    27.5
    
    
    
    72.4
    
    
    
    51.6
    
    
    
    74.3
    
    
    
    Depreciation, depletion and amortization
    
    
    18.1
    
    
    
    9.2
    
    
    
    1.2
    
    
    
    2.5
    
    
    
    3.0
    
    
    
    13.1
    
    
    
    8.2
    
    
    
    31.6
    
    
    
    7.3Operating income (loss) before special
items and provisions
    
    
    77.9
    
    
    
    54.9
    
    
    
    (0.7
    )
    
    
    15.0
    
    
    
    2.4
    
    
    
    68.8
    
    
    
    37.8
    
    
    
    74.6
    
    
    
    15.6Special items and provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    77.9
    
    
    
    54.9
    
    
    
    (0.7
    )
    
    
    15.0
    
    
    
    2.4
    
    
    
    68.8
    
    
    
    37.8
    
    
    
    74.6
    
    
    
    15.6Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8.9
    )
    
    
    
    
    
    
    (49.5
    )
    
    
    Assets at March 31
    
    
    990.9
    
    
    
    731.2
    
    
    
    108.1
    
    
    
    422.2
    
    
    
    162.3
    
    
    
    922.9
    
    
    
    464.5
    
    
    
    1,070.4
    
    
    
    795.3Expenditures for segment assets
    
    
    3.6
    
    
    
    4.5
    
    
    
    
    
    
    
    0.9
    
    
    
    0.3
    
    
    
    5.0
    
    
    
    0.9
    
    
    
    1.4
    
    
    
    2.3First Quarter 2003Sales & other operating revenues:Unaffiliated customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    59.2
    
    
    
    9.9
    
    
    
    31.5
    
    
    
    75.9Intersegment
    
    
    136.2
    
    
    
    95.4
    
    
    
    9.0
    
    
    
    9.4
    
    
    
    26.7
    
    
    
    23.5
    
    
    
    27.2
    
    
    
    21.0
    
    
    
    Depreciation, depletion and amortization
    
    
    18.7
    
    
    
    7.3
    
    
    
    1.9
    
    
    
    2.0
    
    
    
    3.3
    
    
    
    10.8
    
    
    
    7.3
    
    
    
    14.5
    
    
    
    6.1Operating income (loss) before special
items and provisions
    
    
    12.4
    
    
    
    6.7
    
    
    
    (0.7
    )
    
    
    (2.1
    )
    
    
    (4.4
    )
    
    
    23.1
    
    
    
    7.5
    
    
    
    5.6
    
    
    
    0.1Special items and provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    12.4
    
    
    
    6.7
    
    
    
    (0.7
    )
    
    
    (2.1
    )
    
    
    (4.4
    )
    
    
    23.1
    
    
    
    7.5
    
    
    
    5.6
    
    
    
    0.1Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting change
    
    
    3.6
    
    
    
    2.6
    
    
    
    (2.7
    )
    
    
    (4.3
    )
    
    
    2.7
    
    
    
    
    
    
    
    0.9
    
    
    
    (0.4
    )
    
    
    1.4Assets at March 31
    
    
    1,076.5
    
    
    
    762.7
    
    
    
    119.8
    
    
    
    292.2
    
    
    
    149.8
    
    
    
    660.4
    
    
    
    432.6
    
    
    
    549.7
    
    
    
    787.2Expenditures for segment assets
    
    
    6.1
    
    
    
    6.2
    
    
    
    
    
    
    
    1.0
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    1.0
    
    
    
    0.2
    
    
    
    2.5
 Corporate,Manufac-
    
    
    
    
    
    PDMC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other &turing and
    
    Other
    
    Elimi-
    
    PDMC
    
    Specialty
    
    Wire &
    
    PDI
    
    Elimi-Sales
    
    Mining
    
    nations
    
    Subtotal
    
    Chemicals
    
    Cable
    
    Subtotal
    
    nations
    
    TotalsFirst Quarter 2004Sales & other operating revenues:Unaffiliated customers
    
    
    857.2
    
    
    
    5.1
    
    
    
    
    
    
    
    1,214.5
    
    
    
    163.9
    
    
    
    218.6
    
    
    
    382.5
    
    
    
    
    
    
    
    1,597.0Intersegment
    
    
    107.5
    
    
    
    16.1
    
    
    
    (721.2
    )
    
    
    55.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55.4
    )
    
    
    Depreciation, depletion and amortization
    
    
    5.2
    
    
    
    1.1
    
    
    
    
    
    
    
    100.5
    
    
    
    13.1
    
    
    
    9.0
    
    
    
    22.1
    
    
    
    2.3
    
    
    
    124.9Operating income (loss) before special
items and provisions
    
    
    3.8
    
    
    
    (19.9
    )
    
    
    
    
    
    
    330.2
    
    
    
    11.2
    
    
    
    4.1
    
    
    
    15.3
    
    
    
    (23.9
    )
    
    
    321.6Special items and provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.8
    )
    
    
    (1.8
    )
    
    
    (5.0
    )
    
    
    (6.8
    )Operating income (loss)
    
    
    3.8
    
    
    
    (19.9
    )
    
    
    
    
    
    
    330.2
    
    
    
    11.2
    
    
    
    2.3
    
    
    
    13.5
    
    
    
    (28.9
    )
    
    
    314.8Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    0.2
    
    
    
    (4.9
    )
    
    
    (63.1
    )
    
    
    (0.1
    )
    
    
    (0.4
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    (63.6
    )Assets at March 31
    
    
    542.1
    
    
    
    1,267.6
    
    
    
    (1,445.0
    )
    
    
    6,032.5
    
    
    
    759.8
    
    
    
    574.4
    
    
    
    1,334.2
    
    
    
    648.5
    
    
    
    8,015.2Expenditures for segment assets
    
    
    3.1
    
    
    
    6.5
    
    
    
    (0.5
    )
    
    
    28.0
    
    
    
    2.3
    
    
    
    6.6
    
    
    
    8.9
    
    
    
    9.8
    
    
    
    46.7First Quarter 2003Sales & other operating revenues:Unaffiliated customers
    
    
    473.4
    
    
    
    5.0
    
    
    
    
    
    
    
    655.0
    
    
    
    162.1
    
    
    
    160.9
    
    
    
    323.0
    
    
    
    
    
    
    
    978.0Intersegment
    
    
    85.3
    
    
    
    16.3
    
    
    
    (420.0
    )
    
    
    30.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30.0
    )
    
    
    Depreciation, depletion and amortization
    
    
    4.2
    
    
    
    1.1
    
    
    
    
    
    
    
    77.2
    
    
    
    11.0
    
    
    
    8.9
    
    
    
    19.9
    
    
    
    4.5
    
    
    
    101.6Operating income (loss) before special
items and provisions
    
    
    8.5
    
    
    
    (21.0
    )
    
    
    
    
    
    
    35.7
    
    
    
    10.9
    
    
    
    3.4
    
    
    
    14.3
    
    
    
    (23.2
    )
    
    
    26.8Special items and provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.2
    
    
    
    
    
    
    
    3.2
    
    
    
    (1.3
    )
    
    
    1.9Operating income (loss)
    
    
    8.5
    
    
    
    (21.0
    )
    
    
    
    
    
    
    35.7
    
    
    
    14.1
    
    
    
    3.4
    
    
    
    17.5
    
    
    
    (24.5
    )
    
    
    28.7Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    (1.0
    )
    
    
    (0.1
    )
    
    
    (1.0
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    (2.1
    )Cumulative effect of accounting change
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    8.5
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5
    
    
    
    (0.6
    )
    
    
    8.4Assets at March 31
    
    
    486.3
    
    
    
    1,511.2
    
    
    
    (1,617.6
    )
    
    
    5,210.8
    
    
    
    708.3
    
    
    
    525.1
    
    
    
    1,233.4
    
    
    
    551.9
    
    
    
    6,996.1Expenditures for segment assets
    
    
    1.6
    
    
    
    0.5
    
    
    
    
    
    
    
    19.9
    
    
    
    3.8
    
    
    
    2.6
    
    
    
    6.4
    
    
    
    1.0
    
    
    
    27.3
  *
    
    First quarter 2004 reflects full consolidation of El Abra and Candelaria; first quarter 2003 reflects El Abra and Candelaria on a pro-rata basis (51 percent and
80 percent, respectively).




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##### Table of Contents



- 6 -   
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)  1.
    
    General InformationThe unaudited consolidated financial information of Phelps Dodge
Corporation (the Company, which may be referred to as Phelps Dodge, PD,
we, us or ours) presented herein has been prepared in accordance with the
instructions to Form 10-Q and does not include all of the information and
note disclosures required by U.S. generally accepted accounting principles
(GAAP). Therefore, this information should be read in conjunction with
the consolidated financial statements and notes thereto included in our
Form 10-K for the year ended December 31, 2003. This information reflects
all adjustments that are, in the opinion of management, necessary to a
fair statement of the results for the interim periods reported. The
unaudited Consolidated Financial Statements as of March 31, 2004, include
the accounts of the Company and the full consolidation of El Abra and
Candelaria, which have historically been accounted for using the
proportional consolidation method of accounting (refer to Note 4,
Accounting Standards, for additional discussion). On December 19, 2003,
we acquired the one-third partnership interest in Chino Mines Company held
by Heisei Minerals Corporation (Heisei). Prior to the acquisition, we
owned a two-thirds partnership interest in Chino and applied the
proportional consolidation method of accounting. Refer to Note 2,
Acquisitions and Divestitures, in the consolidated financial statements
included in the Companys Form 10-K for the year ended December 31, 2003,
for additional discussion. Our business consists of two divisions, Phelps
Dodge Mining Company (PDMC) and Phelps Dodge Industries (PDI).The results of operations for the three-month period ended March 31, 2004,
are not necessarily indicative of the results to be expected for the full
year.2.
    
    Stock CompensationWe account for our stock option plans by measuring compensation cost using
the intrinsic-value-based method presented by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No compensation cost has been reflected in
consolidated net income (loss), as all options granted under the plans had
an exercise price equal to the market value of the underlying common stock
on the date of the grant. The following table presents the effect on net
income (loss) and earnings (loss) per common share as if we had applied
the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to compensation cost. (Unaudited; $ in millions except per share data) First Quarter2004
    
    2003Net income (loss) as reported
    
    $
    185.7
    
    
    
    (15.0
    )Deduct:Total compensation cost
determined under fair value
based method for all awards,
net of tax
    
    
    (1.7
    )
    
    
    (3.2
    )Pro forma net income (loss)
    
    $
    184.0
    
    
    
    (18.2
    )Earnings (loss) per common shareBasic  as reported
    
    $
    1.99
    
    
    
    (0.21
    )Basic  pro forma
    
    $
    1.97
    
    
    
    (0.24
    )Earnings (loss) per common shareDiluted  as reported
    
    $
    1.90
    
    
    
    (0.21
    )Diluted  pro forma
    
    $
    1.88
    
    
    
    (0.24
    )
  3.
    
    Special Items and ProvisionsSpecial items and provisions are unpredictable and atypical of the
Companys operations in a given period. This supplemental information is
not a substitute for any U.S. GAAP measure and should be evaluated within
the context of our U.S. GAAP results.




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##### Table of Contents



- 7 -   Note: Supplemental Data  The following schedule summarizes the special items and provisions for the
quarter ended March 31, 2004: (Unaudited; gains (losses) in millions except per share amounts) Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDI Restructuring
program
    
    $
    (1.7
    )
    
    
    (1.1
    )
    
    
    (0.01
    )Environmental provisions,
net
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (1.8
    )
    
    
    (1.2
    )
    
    
    (0.01
    )Corporate and Other Environmental provisions,
net
    
    
    (4.6
    )
    
    
    (3.5
    )
    
    
    (0.04
    )Historic legal matters
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (5.0
    )
    
    
    (3.9
    )
    
    
    (0.04
    )(6.8
    )
    
    
    (5.1
    )
    
    
    (0.05
    )Interest expense:Texas franchise tax matter
    
    
    (0.9
    )
    
    
    (0.7
    )
    
    
    (0.01
    )Early debt extinguishment
costs
    
    
    (22.4
    )
    
    
    (17.6
    )
    
    
    (0.18
    )Miscellaneous income and
expense, net:Cost-basis investment
write-down
    
    
    (3.6
    )
    
    
    (2.7
    )
    
    
    (0.03
    )Provision for taxes on income:Reversal of El Abra deferred
tax valuation allowance
    
    
    
    
    
    
    30.8
    
    
    
    0.31Minority interests in
consolidated subsidiaries:Reversal of El Abra deferred
tax valuation allowance
    
    
    
    
    
    
    (15.1
    )
    
    
    (0.15
    )Total
    
    $
    (33.7
    )
    
    
    (10.4
    )
    
    
    (0.11
    )
 Note: Supplemental Data  The following schedule summarizes the special items and provisions for the
quarter ended March 31, 2003: (Unaudited; gains (losses) in millions except per share amounts) Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDI Termination of a foreign
postretirement benefit
plan
    
    $
    3.2
    
    
    
    2.4
    
    
    
    0.03Corporate and Other Environmental provisions,
net
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (0.01
    )1.9
    
    
    
    1.1
    
    
    
    0.02Cumulative effect of
accounting change
(see Note 4)
    
    
    9.7
    
    
    
    8.4
    
    
    
    0.09Total
    
    $
    11.6
    
    
    
    9.5
    
    
    
    0.11
  In January 2004, Phelps Dodge Magnet Wire announced plans to consolidate
its North American manufacturing operations to reduce costs and strengthen
its competitiveness in the global marketplace. This action will result in
the closure of the manufacturing plant in El Paso, Texas, which will
affect approximately 100 employees. Our magnet wire customers are moving
their operations to China, Mexico and other offshore locations, leaving us
with excess capacity in our North American plants. To remain competitive
as a global provider of magnet wire, it is critical that we operate close
to our customer base. Production capacity began transferring to our other
North American locations in the 2004 first quarter. The transition will
take place over a 12-month period, and we anticipate closing the El Paso
facility by the end of 2004.




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##### Table of Contents



- 8 -  The following schedule presents a roll-forward of the liabilities incurred
in connection with this restructuring program, which were reflected as
current liabilities in our Consolidated Balance Sheet: (Unaudited; $ in millions) 2004Provision
    
    Payments
    
    3/31/04PDI Wire and CableEmployee severance
    
    $
    0.3
    
    
    
    
    
    
    
    0.3Plant removal and
dismantling*
    
    
    1.4
    
    
    
    (1.2
    )
    
    
    0.21.7
    
    
    
    (1.2
    )
    
    
    0.5
  *
    
    Costs were charged to expense as incurred.  In September 2002, we announced the temporary closure of two U.S. wire and
cable plants and other actions to improve efficiencies and consolidate
certain wire and cable operations. Refer to the Companys Form 10-K for
the year ended December 31, 2003, for additional discussion.As of December 31, 2003, there were no liabilities incurred in connection
with the September 2002 restructuring program. The following schedule
presents a roll-forward from December 31, 2002, of the liabilities
incurred in connection with the September 2002 restructuring program,
which were reflected as current liabilities in our Consolidated Balance
Sheet as of March 31, 2003: (Unaudited; $ in millions) 12/31/02
    
    Payments
    
    3/31/03PDI Wire and CableEmployee severance
    
    $
    1.3
    
    
    
    (0.9
    )
    
    
    0.4
  In the second quarter of 2001, we announced a restructuring of our
professional, administrative and operational support functions, as well as
various other operational improvement initiatives. Additionally, in the
second quarter of 2000 and 1999, we announced plans to reduce operating
costs and restructure operations at our PDMC division and our Wire and
Cable segment. Refer to the Companys Form 10-K for the year ended
December 31, 2003, for additional discussion.As of December 31, 2003, there were no liabilities incurred in connection
with the 2001 restructuring programs. The following schedule presents a
roll-forward from December 31, 2002, of the liabilities incurred in
connection with the 2001 restructuring programs, which were reflected as
current liabilities in our Consolidated Balance Sheet as of March 31,
2003: (Unaudited; $ in millions) 12/31/02
    
    Payments
    
    3/31/03PDMC U.S. MinesMorenciEmployee
severance
    
    $
    0.1
    
    
    
    (0.1
    )
    
    
    Bagdad/SierritaMothballing/take-or-pay contracts
    
    
    0.2
    
    
    
    (0.2
    )
    
    
    Miami/BisbeeMothballing/take-or-pay
contracts
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    Chino/CobreEmployee
severance
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    0.5
    
    
    
    (0.5
    )
    
    
    Manufacturing and SalesEmployee
severance
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    $
    0.6
    
    
    
    (0.6
    )
    
    
    
  The following schedules present a roll-forward from December 31, 2003 and
2002, of the liabilities incurred in connection with the June 2000
restructuring program, which were reflected as current liabilities in our
Consolidated Balance Sheet: (Unaudited; $ in millions) 12/31/03
    
    Payments
    
    3/31/04
    
    
    
    PDI Wire and CablePlant removal and
dismantling
    
    $
    0.5
    
    
    
    
    
    
    
    0.5




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##### Table of Contents



- 9 - (Unaudited; $ in millions) 12/31/02
    
    Payments
    
    3/31/03PDI Wire and CablePlant removal and
dismantling
    
    $
    0.5
    
    
    
    
    
    
    
    0.5
  The following schedules present a roll-forward from December 31, 2003 and
2002, of the liabilities incurred in connection with the June 1999
restructuring program, which were reflected as current liabilities in our
Consolidated Balance Sheet: (Unaudited; $ in millions) 12/31/03
    
    Payments
    
    3/31/04
    
    
    
    PDMC Other MiningMothballing/take-or-pay
contracts
    
    $
    0.6
    
    
    
    
    
    
    
    0.6PDI Wire and CableTake-or-pay
contracts
    
    
    1.0
    
    
    
    
    
    
    
    1.0$
    1.6
    
    
    
    
    
    
    
    1.6
 (Unaudited; $ in millions) 12/31/02
    
    Payments
    
    3/31/03
    
    
    
    PDMC Other MiningMothballing/take-or-pay
contracts
    
    $
    0.6
    
    
    
    
    
    
    
    0.6PDI Wire and CableTake-or-pay
contracts
    
    
    1.0
    
    
    
    
    
    
    
    1.0$
    1.6
    
    
    
    
    
    
    
    1.6
  4.
    
    Accounting Standards  In January 2003, FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). In
December 2003, FASB issued a revised interpretation of FIN 46 (FIN 46-R),
which supercedes FIN 46 and clarifies and expands current accounting
guidance for variable interest entities (VIEs). FIN 46 clarifies when a
company should consolidate in its financial statements the assets,
liabilities and activities of a VIE. FIN 46 provides general guidance as
to the definition of a VIE and requires it to be consolidated if a party
with an ownership, contractual or other financial interest absorbs the
majority of the VIEs expected losses, or is entitled to receive a
majority of the residual returns, or both. A variable interest holder
that consolidates the VIE is the primary beneficiary, and is required to
consolidate the VIEs assets, liabilities and non-controlling interests at
fair value at the date the interest holder first becomes the primary
beneficiary of the VIE. FIN 46 and FIN 46-R are effective immediately for
all variable interest entities created after January 31, 2003, and for
variable interest entities created prior to February 1, 2003, no later
than the end of the first reporting period after March 15, 2004. We have
performed a review of entities created subsequent to January 31, 2003, and
determined the adoption of FIN 46 and FIN 46-R did not have a material
impact on the Companys financial reporting and disclosures. With respect
to entities created prior to February 1, 2003, we determined that our El
Abra and Candelaria copper mining operations in Chile met the VIE criteria
and that we are the primary beneficiary of these entities. Historically,
PD has accounted for its partnership interests in the 51 percent-owned El
Abra and the 80 percent-owned Candelaria copper mines using the
proportional consolidation method of accounting. In accordance with FIN
46-R, we fully consolidated the results of operations for El Abra and
Candelaria with the interests held by our minority shareholders reported
as minority interests in consolidated subsidiaries in our Consolidated
Balance Sheet and Statement of Consolidated Operations beginning January
1, 2004. The impact of fully consolidating El Abra and Candelaria on our
Consolidated Balance Sheet at March 31, 2004, was an increase in total
assets of $649.5 million, total liabilities of $305.1 million and minority
interests in consolidated subsidiaries of $344.4 million. There was no
impact on consolidated shareholders equity. The impact on our Statement
of Consolidated Operations for the quarter ended March 31, 2004, comprised
increases (decreases) in sales and other operating revenues of $65.9
million, operating expenses of $17.7 million, op-




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##### Table of Contents



- 10 -    erating income of $48.2 million, net interest expense of $2.4 million, net
miscellaneous income and expense of $(0.6) million, provision for taxes on
income of $(12.9) million and minority interests in consolidated
subsidiaries of $58.1 million. There was no impact on consolidated net
income.On January 1, 2003, we adopted Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset Retirement Obligations. With the
adoption of this Statement, we recognize asset retirement obligations
(AROs) as liabilities when incurred, with the initial measurement at fair
value. These liabilities are accreted to full value over time through
charges to income. In addition, asset retirement costs are capitalized as
part of the related assets carrying value and are depreciated on a
units-of-production basis over the assets respective useful life. Our
AROs consist primarily of costs associated with mine reclamation and
closure activities. These activities, which tend to be site specific,
generally include costs for earthwork, revegetation, water treatment and
demolition. Upon adoption, we recorded a cumulative effect gain of $8.4
million, net of deferred income taxes. In the first quarter 2003, the
effect of adopting SFAS No. 143 decreased loss before cumulative effect of
accounting change by approximately $3 million, or 4 cents per common
share.In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 changes the accounting for certain financial instruments that,
under previous guidance, could be classified as equity or mezzanine
equity, by now requiring those instruments to be classified as liabilities
(or assets in some circumstances) in the statement of financial position.
Further, SFAS No. 150 requires disclosure regarding the terms of those
instruments and settlement alternatives. The guidance in SFAS No. 150
generally is effective for all financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning
of the first interim period beginning after June 15, 2003. We have
evaluated SFAS No. 150 and determined that it does not have an impact on
our financial reporting and disclosures.In December 2003, FASB issued SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This Statement revises
employers disclosures about pension plans and other postretirement
benefit plans. It requires additional disclosures to those in the original
SFAS No. 132 about the assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The required information should be provided
separately for pension plans and for other postretirement benefit plans.
This Statement, which also requires new disclosures for interim periods
beginning after December 15, 2003, is effective for fiscal years ending
after December 15, 2003. The Company adopted this Statement for the year
ended December 31, 2003, and has provided the interim disclosures in Note
10, Pension and Postretirement Benefits.5.
    
    Environmental, and Reclamation and Closure MattersAs of December 31, 2003, we had a reserve balance of $317.2 million for
estimated future costs associated with environmental matters at closed
facilities and closed portions of certain operating facilities. During
the first quarter of 2004, we had a $4.7 million net increase in the
reserve estimate ($6.1 million of additions and $1.4 million of
reductions), offset by $6.2 million of spending against the reserve. As
of March 31, 2004, the reserve balance was $315.7 million.The site for which Phelps Dodge has received a notice of potential
liability or an information request that currently is considered to be
significant is the Pinal Creek site near Miami, Arizona. At March 31,
2004, the cost range for reasonably possible outcomes for all reservable
remediation sites was estimated to be from $269.6 million to $620.5
million (of which approximately $315.7 million has been reserved).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




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##### Table of Contents



- 11 -  Company for those sites, but for which there is a reasonably possible
likelihood of an environmental remediation liability. As of March 31,
2004, the cost range for reasonably possible outcomes for all such sites
was estimated to be from $3 million to $17 million. The liabilities
arising from potential environmental obligations that have not been
reserved at this time may be material to the operating results of a 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.The following tables summarize our asset retirement obligations/closure
and reclamation accrual and asset retirement cost activities for the first
quarter of 2004: Asset Retirement Obligations
(Unaudited; $ in millions) Balance, beginning of period
    
    $
    225.3New liabilities during the period
    
    
    0.5Additional liabilities from fully consolidating
El Abra and Candelaria
    
    
    5.6Accretion expense
    
    
    4.8Payments
    
    
    (3.1
    )Revisions in estimated cash flows
    
    
    0.4Balance, end of period
    
    $
    233.5
 Asset Retirement Cost
(Unaudited; $ in millions) Gross balance, beginning of period
    
    $
    83.7Additional assets from fully consolidating
El Abra and Candelaria
    
    
    2.4New assets during the period
    
    
    0.5Revisions in estimated cash flows
    
    
    0.4Gross balance, end of period
    
    
    87.0Less accumulated depreciation,
depletion and amortization
    
    
    7.3Net balance, end of period
    
    $
    79.7
  We have estimated the total cost of our asset retirement obligations,
including anticipated future disturbances, at approximately $1.2 billion
(unescalated, undiscounted and on a third-party cost basis), leaving
approximately $1.0 billion remaining to be accreted over time. These
aggregate costs may increase or decrease materially in the future as a
result of changes in regulations, technology, mine plans or other factors.
Asset retirement obligation activities and expenditures generally are
made over an extended period of time commencing near the end of the mine
life.6.
    
    ContingenciesSignificant New Mexico Closure and Reclamation ProgramsBackgroundThe Companys New Mexico operations, Chino Mines Company (Chino), Phelps
Dodge Tyrone, Inc. (Tyrone), Cobre Mining Company (Cobre) and Phelps Dodge
Hidalgo, Inc. (Hidalgo), each is subject to regulation under the New
Mexico Water Quality Act and the Water Quality Control Commission (WQCC)
regulations adopted under that Act. Each of these operations holds one or
more discharge permits issued by NMED under WQCC regulations. The
discharge permits specify operational and monitoring requirements to
protect groundwater quality. Under the discharge permits for Chino,
Tyrone, Cobre and Hidalgo, NMED has required each of these operations to
submit closure plans for approval. The closure plans must describe the
measures to be taken to prevent groundwater quality standards from being
exceeded following closure of the discharging facilities and to abate any
groundwater or surface water contamination. Each discharge permit is
issued for a period of no more than five years and the permit is reviewed
each time it is renewed. Under certain circumstances, NMED may require
submission and approval of abatement plans to address the exceedance of
applicable water quality standards.In addition, Chino, Tyrone and Cobre are subject to regulation under the
New Mexico Mining Act (the Mining Act), which was enacted in 1993, and the
Mining Act Rules, which were adopted by the New Mexico Mining Commission
(the Mining Commission) in their original form in 1994. Chino, Tyrone and
Cobre hold permits issued by MMD of the Energy, Minerals and Natural
Resources Department under the Mining Act. Under the Mining Act, Chino,
Tyrone and Cobre are required to submit and obtain approval of closeout
plans describing the reclamation to be performed following closure of the
mines. The rec-




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##### Table of Contents



- 12 -  lamation must be designed to achieve a self-sustaining ecosystem or a
post-mining land use, unless MMD approves a waiver of this requirement
because achieving this requirement is technically or economically
infeasible or would be environmentally unsound. Regardless of whether a
waiver is issued, however, reclamation must be performed to achieve all
applicable air, water quality and other environmental standards.Financial assurance is required to ensure that funding will be available
to perform both the closure plans and the closeout plans. The amount of
the financial assurance is based upon a cost estimate to complete the
closure and/or closeout plan. The cost estimate is based upon the
assumption that the operator will default at the point in time when
closure and reclamation will be most expensive and that the state will use
the financial assurance to hire and oversee a third-party contractor to
perform the closure and/or closeout plan. The cost estimates are subject
to approval by NMED and MMD. When an operation is subject to both a
closure plan and a closeout plan, the plans typically overlap. In that
case, the financial assurance typically is provided jointly to NMED and to
MMD. Both NMED and MMD calculate the required amount of financial
assurance based upon a net present value (NPV) method when the closure
plan and/or closeout plan require performance over a long period of time.
Use of the NPV method requires NMED and/or MMD approval of appropriate
discount and escalation rates.The Companys cost estimates to perform the work itself generally are
substantially lower than the cost estimates used for financial assurance
due to the Companys historical cost advantages, savings from the use of
the Companys own personnel and equipment as opposed to third-party
contractor costs, opportunities to prepare the site for more efficient
reclamation and the omission of agency oversight costs.The process of obtaining approved closure plans and closeout plans has
been long and difficult, particularly for the operations subject to both
WQCC regulations and the Mining Act. The plans must be site-specific.
Detailed scientific studies have been required for each site. The sites
are very large and complex, involving many different types of facilities
such as open pits, mine stockpiles, tailing impoundments and smelter
facilities. Many of the regulatory requirements, as well as closure and
reclamation technologies, are relatively new and have been evolving while
the plans have been developed, including recent rule changes. Some of the
closure and reclamation measures are unproven over long periods of time at
these or similar sites; so this performance is not easily predicted. NMED
and MMD have separate procedures for review of closure and closeout plans,
including consideration of waiver requests, approval of plans, issuance of
permits and approval of financial assurance. These procedures include
public notice, comment, and hearing requirements, opportunities for
appeals, and reviews of NMED and MMD actions by WQCC and the Mining
Commission.Chino Mines CompanyChino submitted its first proposed site-wide combined closure/closeout
plan (CCP) at the end of 1997, the original deadline for approval of
closeout plans under the Mining Act, and obtained an extension for
closeout plan approval until December 31, 1999. The closure and closeout
plans were combined into one plan due to the overlapping requirements of
WQCC regulations and the Mining Act. In 1999, NMED required Chino to
provide interim financial assurance, pending approval of the closure plan,
and Chino complied by providing a surety bond for approximately $56
million. Also in 1999, the Mining Commission extended the closeout plan
approval deadline until December 31, 2001.Chino submitted a comprehensive CCP incorporating the results of the
scientific studies performed by Chino in March 2001. That CCP requested a
waiver of requirements to reclaim the open pit and steep stockpile slopes
and included a cost estimate for approximately $100 million, which
included the estimated cost of 30 years of water treatment. In July 2001,
NMED published a draft site-wide closure permit and set a public hearing
for August 2001. NMEDs draft closure permit required that all stockpiles
be regraded, required thicker soil covers than proposed




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- 13 -  by Chino, required 100 years of water treatment and more stringent water
treatment requirements, and proposed additional permit conditions not
proposed by Chino. A two-week public hearing was held in August 2001
concerning NMEDs draft closure permit. Following that hearing, Chino,
NMED and MMD conducted negotiations concerning a possible compromise on
the CCP. Agreement was reached on a compromise closure permit in December
2001. In December 2001, the Mining Commission again extended the closeout
plan approval deadline until October 1, 2002.Another public hearing was held in February 2002 on the compromise closure
permit supported by both Chino and NMED. The estimated cost of the
compromise CCP was approximately $391 million over 100 years on an
undiscounted and unescalated basis. The conditions of the compromise
permit required additional studies and submission of a revised closure
plan reflecting the outcome of those studies prior to expiration of the
five-year period of the closure permit.As of October 1, 2002, NMED had not finalized its decision on the
compromise permit, and, consequently, MMD was unable to approve the
closeout plan. MMD then issued a Notice of Violation (NOV) to Chino for
failing to meet the October 1, 2002 deadline. The NOV did not
impose penalties, but ordered Chino to obtain approval by a new deadline and
reserved the right to assess penalties for noncompliance. Chino appealed
the NOV to the Mining Commission, which held a public hearing on the NOV
in December 2002. The Mining Commission upheld the NOV, but modified the
deadline for closeout plan approval until seven months after NMED issued
Chinos closure permit, subject to extension by MMD for good cause.On February 24, 2003, NMED issued Chinos closure permit consistent with
the compromise permit. Under the closure permit, the amount of financial
assurance was established at approximately $191 million on an NPV basis.
In May 2003, Chino and Phelps Dodge reached an agreement with NMED and MMD
on a framework for financial assurance providing for a cash trust fund,
collateral and a third-party performance guarantee from Phelps Dodge. In
June 2003, MMD filed a petition with the Mining Commission to amend the
Mining Act Rules to allow a trust fund to be used as financial assurance.
In July 2003, the Company announced that a Phelps Dodge subsidiary would
acquire Heiseis one-third partnership interest in Chino. As part of the
terms of that acquisition, Heisei agreed to provide cash funding for
one-third of the financial assurance amount.To reflect the agreement with Heisei, in September 2003 the financial
assurance agreement was modified to provide for one-third of the financial
assurance in the form of a trust fund and the remainder in the form of a
third-party performance guarantee by Phelps Dodge. The September 2003
agreement also included a schedule for accelerated reclamation at Chino.
MMD extended the deadline for Chino to obtain approval of its closeout
plan pending the conclusion of the Mining Commission hearings on the
proposed rule changes and to allow time to hold a public hearing on the
closeout plan and financial assurance. The Mining Commission finalized
the rule changes at a public hearing on November 17, 2003.In October 2003, WQCC dismissed an appeal of Chinos closure permit filed
by a third party. WQCCs action has since been appealed to the New Mexico
Court of Appeals.MMD held a public hearing on Chinos closeout plan and financial assurance
proposal on December 13, 2003. Following consideration of the public
comments and finalization of the permit and financial assurance
documentation, MMD approved the closeout plan and financial assurance on
December 18, 2003, meeting the December 19, 2003, deadline for closeout
plan approval set by MMD and satisfying the requirements of the NOV.The closeout plan approved by MMD incorporates the requirements of the
NMED closure permit and includes a waiver from the requirement to achieve
a self-sustaining ecosystem or post-mining land use for the open pit and a
portion of the mine stockpiles, consistent with the terms of the NMED
closure permit. It also incorporates a schedule for reclamation of
inactive portions of the Chino operations




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- 14 -  and for reclamation following closure of active operations. Based upon
minor adjustments to reflect additional requirements, the approved
third-party cost estimate is approximately $395 million, and the approved
financial assurance requirement is approximately $192 million on an NPV
basis. Heisei provided funding of approximately $64 million on behalf of
Chino for the Chino trust fund. Phelps Dodge issued a third-party
performance guarantee for approximately $128 million for the balance of
the financial assurance. Following NMEDs and MMDs acceptance of the
financial assurance, NMED released Chinos $56 million interim surety bond
as of December 31, 2003.The Company estimates its cost to perform the requirements of the approved
Chino closure permit and closeout plan to be approximately $287 million
(undiscounted and unescalated) over the 100-year period of the CCP. That
estimate is lower than the estimated cost used as the basis for the
financial assurance amount due to the factors discussed above and reflects
our internal cost estimate. Our cost estimate used to determine the fair
value of our reclamation accrual was approximately $389 million
(undiscounted, unescalated and on a third-party cost basis), as required
by SFAS No. 143, and excludes approximately $6 million of environmental
costs from the financial assurance cost estimate, which are recognized in
environmental reserves (they are not within the scope of SFAS No. 143).
At both March 31, 2004, and December 31, 2003, we had accrued
approximately $39 million for reclamation at Chino.In December 1994, Chino entered into an Administrative Order on Consent
(AOC) with NMED. The AOC requires Chino to perform a CERCLA quality
investigation of environmental impacts and potential risks to human health
and the environment associated with portions of the Chino property
affected by historical mining operations. The remedial investigations
began in 1995 and are still under way, although substantial portions of
the remedial investigations are near completion. While some remediation
is expected to be required, no feasibility studies have yet been
completed, and NMED has not yet issued a record of decision regarding any
remediation that may be required under the AOC. The Companys estimated
cost is $23.6 million. In addition to work under the AOC, Chino is
continuing ongoing projects to control blowing dust at an estimated cost
of $4.8 million and to excavate and remove copper-bearing sediments from
an area known as Lake One for copper recovery in existing leach
stockpiles at the mine. The Companys estimated cost for Lake One is $4.7
million. The Companys aggregate reserve for liability under the Chino
AOC and for the interim work on the tailing ponds and Lake One is $33.1
million.Phelps Dodge Tyrone, Inc.Tyrone submitted its first proposed site-wide combined CCP at the end of
1997, the original deadline for approval of closeout plans under the
Mining Act, and obtained an extension for closeout plan approval until
December 31, 1999. The closure and closeout plans were combined into one
plan due to the overlapping requirements of WQCC regulations and the
Mining Act. In 1999, NMED required Tyrone to provide interim financial
assurance, pending approval of the closure plan, and Tyrone complied by
providing a surety bond for approximately $58 million. Also in 1999, the
Mining Commission extended the closeout plan approval deadline until
December 31, 2001.Tyrone submitted a comprehensive CCP in May 2001 incorporating the results
of the scientific studies performed by Tyrone. That CCP requested a
waiver of requirements to reclaim the open pit and steep stockpile slopes
and included a cost estimate for approximately $121 million, which
included the estimated cost of 30 years of water treatment. In late 2001,
the Mining Commission again extended the closeout plan approval deadline
until October 1, 2002.In April 2002, NMED published a draft site-wide closure permit and set a
public hearing for May 2002. NMEDs draft closure permit required that all
stockpiles be regraded, required thicker soil covers than proposed by
Tyrone, required 100 years of water treatment and more stringent water
treatment requirements, and proposed additional permit conditions opposed
by Tyrone. NMED estimated the cost of its proposed permit at
approximately $440




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##### Table of Contents



- 15 -  million on an unescalated and undiscounted basis over a 100-year closure
period. Tyrone submitted a revised plan in response to NMEDs draft
permit, including concepts for regrading and covering the mine stockpiles
modeled after the Chino compromise permit and proposing upgraded water
treatment technology. Tyrone estimated the cost of its proposal at
approximately $328 million on the same basis. A two-week public hearing
was held in May 2002.As of October 1, 2002, NMED had not reached a decision on Tyrones permit,
and, consequently, MMD was unable to approve the closeout plan. MMD then
issued an NOV to Tyrone for failing to meet the October 1, 2002 deadline.
The NOV did not impose any penalties, but ordered Tyrone to obtain
closeout plan approval by a new deadline and reserved the right to impose
penalties for noncompliance. Tyrone appealed the NOV to the Mining
Commission, which held a public hearing on the NOV in December 2002. The
Mining Commission upheld the NOV, but modified the deadline for closeout
plan approval until 12 months after NMED issued Tyrones closure permit,
subject to extension by MMD for good cause.NMEDs Hearing Officer issued a decision concerning the contested permit
conditions on March 7, 2003. The Hearing Officer adopted many of Tyrones
proposed changes to NMEDs draft permit, but sided with the NMED staff on
requirements for regrading and covers. NMED issued Tyrones closure
permit on April 8, 2003, in accordance with the Hearing Officers
decision. The estimated third-party cost under the closure permit is
approximately $433 million. Tyrone appealed the closure permit to WQCC,
which held a public hearing to take evidence concluding on November 13,
2003. WQCC heard closing arguments on the appeal and voted to uphold the
closure permit as issued by NMED during a meeting held on April 13 and 14,
2004.In
May 2003, Tyrone and Phelps Dodge reached an agreement with NMED and MMD
on a framework for financial assurance providing for a cash trust fund,
collateral and a third-party guarantee from Phelps Dodge. The agreement
also requires Chino, Tyrone and Cobre to expend a combined minimum of $30
million on accelerated reclamation over 10 years. In September 2003, the
financial assurance agreement was modified to include additional details.
Tyrone agreed to establish a trust fund in the initial amount of $17
million, and to contribute $500,000 per quarter over a five-year period to
increase the cash funding to a total of $27 million. Tyrone also agreed
to provide collateral to NMED and MMD so that at least 30 percent of the
financial assurance is in the form of a trust fund or collateral. Once
the trust fund and collateral are in place, NMED will release the $58
million interim surety bond. NMED and MMD agreed that the balance, or 70
percent of the financial assurance, may be provided in the form of a
third-party performance guarantee issued by Phelps Dodge. The September
2003 agreement also included a schedule for accelerated reclamation at
Tyrone. Financial assurance under this agreement is subject to completion
of the permitting process, including consideration of public comments.On October 15, 2003, Tyrone and NMED finalized a settlement agreement
establishing a detailed schedule for reclamation of the inactive tailing
impoundments at Tyrone over an eight-year period. As reclamation is
completed on portions of the facilities, the closure cost estimate and,
accordingly, the required amount of financial assurance, may be reduced.The deadline for Tyrone to obtain MMDs approval of its closeout plan was
April 8, 2004, subject to extension by MMD for good cause. On April 6,
2004, MMD held a public hearing on Tyrones proposed closeout plan. On
April 12, 2004, MMD issued a permit revision with conditions for approval
of Tyrones closeout plan. The permit revision includes approval of a
waiver of the requirement to achieve a self-sustaining ecosystem or
post-mining land use for four open pits and requirements for reclamation
of two small pits for which the waiver was denied. The financial
assurance amount was set at approximately $270.7 million (NPV basis). The
financial assurance initially accepted by both MMD and NMED includes
initial funding of $17 million in a trust fund, retention of the existing surety
bond of approximately $58 million, a letter of credit for approximately
$6.2 million, and a third-




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##### Table of Contents



- 16 -  party performance guarantee issued by Phelps
Dodge for approximately $189.5 million. Tyrone expects to replace both
the surety bond and the letter of credit with collateral as the collateral
is approved by MMD and NMED over the next nine months.Managements internal cost estimate for performance of reclamation at
Tyrone is approximately $257 million (undiscounted and unescalated) over
the 100-year period of the CCP. That estimate is lower than the estimated
cost used as the basis for the financial assurance amount due to the
factors discussed above and reflects our internal cost estimate. Our cost
estimate used to determine the fair value of our reclamation accrual was
approximately $427 million (undiscounted, unescalated and on a third-party
cost basis), as required by SFAS No. 143, and excludes approximately $6
million of environmental costs from the financial assurance cost estimate,
which are recognized in environmental reserves (they are not within the
scope of SFAS No. 143). At both March 31, 2004, and December 31, 2003, we
had accrued approximately $81 million for reclamation at Tyrone.Cobre Mining CompanyAt the time of our acquisition of Cobre in 1998, Cobre had submitted
proposed closure and closeout plans and had posted a surety bond for
approximately $2 million with both MMD and NMED. Cobre submitted a
comprehensive proposed CCP in May 2001 incorporating the results of the
scientific studies completed by Cobre to both NMED and MMD.As of October 1, 2002, NMED had not issued a closure permit to Cobre, and,
consequently, MMD was unable to approve the proposed closeout plan. MMD
then issued an NOV to Cobre for failing to meet the October 1, 2002
deadline. The NOV did not impose any penalties, but ordered Cobre to
obtain closeout plan approval by a new deadline. Cobre appealed the NOV
to the Mining Commission, which held a public hearing on the NOV in
December 2002. The Mining Commission upheld the NOV, but modified the
deadline for closeout plan approval until nine months after NMED issues
Cobres closure discharge plan, subject to extension by MMD for good
cause. Cobre is currently awaiting a draft closure permit from NMED.In May 2003, Cobre and Phelps Dodge reached an agreement with NMED and MMD
on a framework for financial assurance providing for a cash trust fund,
collateral and a third-party performance guarantee from Phelps Dodge. The
agreement also requires Chino, Tyrone and Cobre to expend a combined
minimum of $30 million on accelerated reclamation over 10 years. In
September 2003, the financial assurance agreement was modified to include
additional details. Cobre agreed to establish a trust fund in the initial
amount of $1 million, and to contribute $100,000 per quarter over a
five-year period to increase the cash funding to a total of $3 million.
Cobre also agreed to provide collateral to NMED and MMD so that at least
30 percent of the financial assurance is in the form of a trust fund or
collateral. NMED and MMD agreed that the balance, or 70 percent of the
financial assurance, may be provided in the form of a third-party
performance guarantee issued by Phelps Dodge. The September 2003
agreement also included a schedule for accelerated reclamation at Cobre.
Financial assurance under this agreement is subject to completion of the
permitting process, including consideration of public comments.Based upon the proposed CCP for Cobre submitted in 2001, the current cost
estimate for reclamation at Cobre is approximately $9 million. Our cost
estimate used to determine the fair value of our reclamation accrual was
approximately $41 million (undiscounted, unescalated and on a third-party
cost basis), as required by SFAS No. 143. Both of these estimates will be
updated when NMED issues the closure permit. At both March 31, 2004, and
December 31, 2003, we had accrued approximately $7 million for reclamation
at Cobre.




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##### Table of Contents



- 17 -  Phelps Dodge Hidalgo, Inc.Hidalgo obtained approval of a closure plan under a discharge permit
issued by NMED in 2000. In accordance with the permit, Hidalgo provided
financial assurance to NMED in the form of surety bonds for approximately
$11 million. Since obtaining approval of the closure plan, Hidalgo has
completed the closure of a former wastewater evaporation pond by
construction of a soil cap approved by NMED. The discharge permit under
which the closure plan was approved also requires corrective action for
contaminated groundwater near the smelters closed former wastewater
evaporation pond. Impacted groundwater is pumped from a series of wells,
treated in a neutralization facility, and discharged to a series of lined
impoundments or to an irrigation system. The discharge permit requires a
comprehensive groundwater study to characterize groundwater at the site.
The discharge permit requires updates of the closure plan, and NMED could
require future enhancement of the system based upon the results of the
ongoing study when the permit expires in 2005 or, in certain
circumstances, earlier. Hidalgo is not subject to the Mining Act and,
consequently, does not require a closeout plan. Our cost estimate used to
determine the fair value of our reclamation accrual was approximately $7
million (undiscounted, unescalated and on a third-party cost basis), as
required by SFAS No. 143. At both March 31, 2004, and December 31, 2003,
we had accrued approximately $4 million for reclamation at Hidalgo.7.
    
    Earnings (Loss) Per ShareBasic earnings (loss) per share is computed by dividing net income (loss)
available to common shares by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share is computed
in a similar manner except that the denominator is increased to include
the incremental number of common shares that would have been outstanding
assuming the conversion of mandatory convertible preferred shares, the
exercise of stock options where the exercise prices were less than the
average market price of the Companys common shares during the period, and
the number of unvested restricted shares, but all of the foregoing only to
the extent that the related impacts are not anti-dilutive. Additionally,
dividends on mandatory convertible preferred shares that were deducted in
arriving at net income (loss) available to common shares are added back to
the numerator as a result of the assumed conversion of such preferred
shares.As a result of the net loss experienced during the quarter ended March 31,
2003, the number of incremental common shares relating to the assumed
conversion of the mandatory convertible preferred shares (5.0 million),
and unvested restricted stock (0.4 million) were excluded from the
calculation as the related impacts were anti-dilutive.




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- 18 -  Finally, common shares relating to stock options where the exercise prices
exceeded the average market price of the Companys common shares during
the period were also excluded from the diluted earnings per share
calculation as the related impact was anti-dilutive. Incremental shares
relating to these options totaled 0.1 million shares at an average
exercise price of $82.74 for the first quarter of 2004 and 8.6 million shares
at an average exercise price of $55.48 for the first quarter of
2003. (Unaudited; $ in millions except per share data) First Quarter2004
    
    2003Basic Earnings (Loss) Per Share
ComputationNumerator:Net income (loss)
    
    $
    185.7
    
    
    
    (15.0
    )Preferred stock dividends
    
    
    (3.4
    )
    
    
    (3.4
    )Net income (loss) applicable
to common shares
    
    $
    182.3
    
    
    
    (18.4
    )Denominator:Weighted average common
shares outstanding
    
    
    91.7
    
    
    
    88.6Basic earnings (loss) per
common share
    
    $
    1.99
    
    
    
    (0.21
    )Diluted Earnings (Loss) Per Share
ComputationNumerator:Net income (loss)
    
    $
    185.7
    
    
    
    (15.0
    )Preferred stock dividends
    
    
    
    
    
    
    (3.4
    )Net income (loss) applicable
to common shares
    
    $
    185.7
    
    
    
    (18.4
    )Denominator:Weighted average common
shares outstanding*
    
    
    97.9
    
    
    
    88.6Diluted earnings (loss) per
common share
    
    $
    1.90
    
    
    
    (0.21
    )
  *
    
    2003 first quarter excluded restricted stock and the assumed conversion
of the mandatory convertible preferred shares to common shares due to the
anti-dilutive impact.  8.
    
    Provision for Taxes on IncomeThe Companys income tax provision for the 2004 first quarter principally
resulted from taxes on earnings at international operations ($36.9
million) including benefit from release of valuation allowance ($24.5
million) and taxes on earnings at U.S. operations ($0.1 million) including
benefit from release of valuation allowance ($24.3 million); partially
offset by the reversal of the valuation allowance associated with deferred
tax assets that are expected to be realized after 2004 at our 51
percent-owned El Abra copper mine ($30.8 million).The Companys income tax provision for the 2003 first quarter principally
resulted from taxes on earnings at international operations ($14.9
million) that could not be offset by losses at domestic operations.9.
    
    Accounting for Derivative Instruments and Hedging ActivitiesThe Company does 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 expose us to market risk. We do not enter into
any contracts for speculative purposes. We 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 period end. Refer to
Managements Discussion and Analysis of Financial Condition and Results of
Operation and Note 22, Derivative Financial Instruments and Fair Value of
Financial Instruments, to the Consolidated Financial Statements included
in the Companys Form 10-K for the year ended December 31, 2003, for a
discussion on our derivative instruments.During the quarters ended March 31, 2004 and 2003, we reclassified
approximately $1.6 million and $2.4 million, respectively, of other
comprehensive losses to the statement of consolidated operations,
principally as a result of our floating-to-fixed interest rate swaps.




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- 19 -  10.
    
    Pension and Postretirement BenefitsThe following tables present the components of net periodic benefit cost
for pension benefits and postretirement benefits for the quarters ended
March 31: Pension Benefits
(Unaudited; $ in millions) First Quarter2004
    
    2003Service cost
    
    $
    5.9
    
    
    
    5.3Interest cost
    
    
    17.9
    
    
    
    18.0Expected return on plan assets
    
    
    (20.9
    )
    
    
    (21.6
    )Amortization of prior service cost
    
    
    0.9
    
    
    
    0.9Amortization of actuarial loss
    
    
    0.8
    
    
    
    0.5Curtailment and special
retirement benefits
    
    
    0.5
    
    
    
    1.4Net periodic benefit cost
    
    $
    5.1
    
    
    
    4.5
 Postretirement Benefits
(Unaudited; $in millions) First Quarter2004
    
    2003Service cost
    
    $
    1.4
    
    
    
    1.1Interest cost
    
    
    5.8
    
    
    
    5.8Expected return on plan assets
    
    
    (0.1
    )
    
    
    (0.1
    )Amortization of prior service cost
    
    
    0.3
    
    
    
    0.3Amortization of actuarial gain
    
    
    (0.1
    )
    
    
    (0.1
    )Curtailment and special
retirement benefits
    
    
    
    
    
    
    (2.5
    )Net periodic benefit cost
    
    $
    7.3
    
    
    
    4.5
  11.
    
    Debt and Other FinancingIn March 2004, Phelps Dodge completed tender offers for its 6.625 percent
Notes due in 2005 and its 7.375 percent Notes due in 2007. The tender
offers resulted in the retirement of long-term debt with a book value
of approximately
$305 million, which resulted in a 2004 first quarter pre-tax loss of $18.5
million, including purchase premiums and certain book adjustments.Additionally, in March 2004, Phelps Dodge completed the issuance of $150
million in 30-year senior notes pursuant to the Companys $750 million
universal shelf registration statement. The notes were issued at a coupon
of 6.125 percent and sold at a price of 99.874 for a yield of 6.134
percent. The proceeds from the offering were used to redeem the Companys
8.375 percent debentures due in 2023. These debentures had a book value
of approximately $149 million and were redeemed for a total of $152.7
million, plus accrued interest, resulting in a 2004 first quarter pre-tax
loss of $3.9 million.On February 27, 2004, Phelps Dodge deposited with the Trustee an amount
sufficient to redeem its 7.25 percent Industrial Revenue Bonds and
Pollution Control Bonds (Amax Nickel Refining Company, Inc.) Series 1979,
which were due in 2009. These bonds had an aggregate book value of
approximately $6 million and were purchased at 100 percent of their face
value, plus accrued interest.A new unsecured revolving credit agreement between the Company and several
lenders became effective on April 20, 2004. The facility is to be used
for general corporate purposes. The agreement permits borrowings of up to
$1.1 billion, with a $300 million sub-limit for letters of credit, until
its maturity on April 20, 2009. This agreement provides for a facility
fee (currently 25 basis points (0.25 percent)) ranging from 12.5 basis
points to 50 basis points (depending on the Companys public debt rating)
on total commitments. 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 LIBOR or fixed rates offered independently by the several
lenders, for maturities of up to 360 days. In addition, if utilization
exceeds one-third of total commitments there is a utilization fee ranging
from 12.5 basis points to 25 basis points (depending on the Companys
public debt rating). Fees for letters of credit (currently 87.5 basis
points) range from 47.5 basis points to 100 basis points (depending on the
Companys public debt rating) on letters of credit issued, plus a 12.5
basis point issuance fee. The agreement requires the Company to maintain
a minimum EBITDA (as defined in the agreement) to interest ratio of 2.25
on a rolling four-quarter basis, and limits consolidated indebtedness to
55 percent of total consolidated capitalization. This agreement replaced
an earlier five-year, $1 billion revolving credit agreement that was
scheduled to mature on May 10, 2005.




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##### Table of Contents



- 20 -  12.
    
    Shareholders EquitySeries A Mandatory Convertible Preferred StockEach share of Series A Mandatory Convertible Preferred Stock (Series A
Stock) is convertible into 2.083 shares of Common Stock, subject to
certain adjustments, at any time prior to August 15, 2005, and is entitled
to an annual dividend of $6.75, paid quarterly. On August 15, 2005, each
Series A Stock will automatically convert, subject to certain adjustments,
into between 2.083 and 2.5 shares of Common Stock depending on the
then-current market price of our Common Stock. Each share of Series A
Stock is non-voting and entitled to a liquidation preference of $100 plus
any accrued but unpaid dividends. There were 6 million authorized shares
and 2 million outstanding shares of Series A Stock at March 31, 2004.Stock Options ExercisedDuring the 2004 first quarter, 2.2 million stock options were exercised
for Phelps Dodge shares. Phelps Dodge received approximately $151.6
million in the 2004 first quarter including approximately $18.6 million of
cash associated with stock option exercises in the 2003 fourth quarter.13.
    
    Intangible Assets, NetThe Emerging Issues Task Force of the FASB reached consensus in March 2004
that mineral rights should be removed as examples of intangible assets in
SFAS Nos. 141 and 142. FASB is expected to ratify that consensus. At
March 31, 2004, if
ratified, approximately $413 million associated with mineral rights
primarily relating to our South American mining concessions would be
reclassified from intangible assets to property, plant and equipment,
net. This reclassification would have no impact on total assets, total
liabilities and shareholders equity or consolidated net income. 
 REVIEW BY INDEPENDENT ACCOUNTANTS The financial information as of March 31, 2004, and for the three-month
periods ended March 31, 2004 and 2003, included in Part I pursuant to Rule
10-01 of Regulation S-X has been reviewed by PricewaterhouseCoopers LLP
(PricewaterhouseCoopers), the Companys independent accountants, in accordance
with standards established by the American Institute of Certified Public
Accountants. PricewaterhouseCoopers report is included in this quarterly
report. PricewaterhouseCoopers does not carry out any significant or additional
procedures beyond those that would have been necessary if its report had not
been included in this quarterly report. Accordingly, such report is not a
report or part of a registration statement within the meaning of Sections 7
and 11 of the Securities Act of 1933 and the liability provisions of Section 11
of such Act do not apply.




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##### Table of Contents



- 21 - 
 Report of Independent Accountants To the Board of Directors and Shareholders
of Phelps Dodge Corporation We have reviewed the accompanying consolidated balance sheet of Phelps Dodge
Corporation and its subsidiaries as of March 31, 2004, the related consolidated
statements of operations and of cash flows for each of the three-month periods
ended March 31, 2004 and 2003 and the consolidated statement of shareholders
equity for the three-month period ended March 31, 2004. This interim financial
information is the responsibility of the Companys management. We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion. Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial information for it
to be in conformity with accounting principles generally accepted in the United
States of America. We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2003, and the related consolidated statements of operations, of cash flows
and of shareholders equity for the year then ended (not presented herein), and
in our report dated February 25, 2004 we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet information as of December
31, 2003, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
April 27, 2004




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##### Table of Contents



- 22 - 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The United States securities laws provide a safe harbor for certain
forward-looking statements. This quarterly report contains forward-looking
statements that express expectations of future events or results. All
statements based on future expectations rather than historical facts are
forward-looking statements that involve a number of risks and uncertainties,
and Phelps Dodge Corporation (the Company, which may be referred to as Phelps
Dodge, PD, we, us or ours) cannot give assurance that such statements will
prove to be correct. Please refer to Managements Discussion and Analysis of
Financial Condition and Results of Operation in the Companys report on Form
10-K for the year ended December 31, 2003, for a further discussion of such
risks and uncertainties, our operations, and our critical accounting policies.
Additionally, refer to Note 4, Accounting Standards, to our unaudited March 31,
2004, Consolidated Financial Information for a discussion on the adoption of
Statement of Financial Accounting (SFAS) No. 143 and FASB Interpretation No. 46
(FIN 46). As discussed in Note 4, Accounting Standards, in the accompanying consolidated
financial statements for the quarter ended March 31, 2004, in accordance with
FIN 46, we determined that our Candelaria and El Abra copper mining operations
in Chile, which have historically been consolidated on a proportional basis,
should be fully consolidated. Therefore, these entities have been fully
consolidated beginning January 1, 2004. As a result, at March 31, 2004, our
Consolidated Balance Sheet included increases in total assets of $649.5
million, total liabilities of $305.1 million and minority interests in
consolidated subsidiaries of $344.4 million. There was no impact on
consolidated shareholders equity. The impact for the quarter ended March 31,
2004, on our Statement of Consolidated Operations comprised increases
(decreases) in sales and other operating revenues of $65.9 million, operating
expenses of $17.7 million, operating income of $48.2 million, net interest
expense of $2.4 million, net miscellaneous income and expense of
$(0.6)
million, provision for taxes on income of $(12.9) million and minority
interests in consolidated subsidiaries of $58.1 million. There
was no consolidated impact
on consolidated net income. As discussed in Note 2, Acquisitions and Divestitures, in our consolidated
financial statements included in the Companys Form 10-K for the year ended
December 31, 2003, we acquired, through a wholly owned subsidiary, the
one-third partnership interest in Chino Mines Company held by Heisei Minerals
Corporation (Heisei) on December 19, 2003. Prior to the acquisition, we owned
a two-thirds partnership interest in Chino and applied the proportional
consolidation method of accounting. The results of operations for Chino Mines
Company have been included in the consolidated financial results for the
quarter ended March 31, 2004. 
 RESULTS OF OPERATIONS Consolidated Financial Results (Unaudited; $ in millions except per share amounts) First Quarter2004
    
    2003(see Note 4)Sales and other operating revenues
    
    $
    1,597.0
    
    
    
    978.0Operating income
    
    $
    314.8
    
    
    
    28.7Income (loss) before cumulative effect
of accounting change
    
    $
    185.7
    
    
    
    (23.4
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    8.4Net income (loss)
    
    $
    185.7
    
    
    
    (15.0
    )Basic earnings (loss) per common
share before cumulative effect
of accounting change
    
    $
    1.99
    
    
    
    (0.30
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    0.09Basic net earnings (loss) per
common share
    
    $
    1.99
    
    
    
    (0.21
    )Diluted earnings (loss) per common
share before cumulative effect
of accounting change
    
    $
    1.90
    
    
    
    (0.30
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    0.09Diluted net earnings (loss) per
common share
    
    $
    1.90
    
    
    
    (0.21
    )
 The Company had consolidated earnings in the 2004 first quarter of $185.7
million, or $1.90 per common share, including a special, net charge of $10.4
million, or 11 cents per common share, after taxes. (All references to per
share earnings or losses are based on diluted earnings or losses per share.)
In the 2003 first quarter, the consolidated loss was $15.0 million, or 21 cents
per common share, including a special, net gain of $9.5 million, or 11 cents
per common share, after taxes. The $200.7 million increase in consolidated earnings in the 2004 first
quarter compared with the corresponding 2003 period primarily was due to higher
copper prices (approximately $258




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##### Table of Contents



- 23 - million), the impact of fully consolidating El Abra and Candelaria
(approximately $48 million), and a lower tax provision ($9.2 million);
partially offset by higher minority interests primarily due to consolidating El
Abra and Candelaria ($61.5 million), early debt extinguishment costs in 2004
($22.4 million), a slightly higher implied unit cost of copper production as
defined on page 27 (approximately $12 million) and a lower cumulative income
effect of accounting change ($8.4 million). Special Items Throughout Managements Discussion and Analysis there is disclosure and
discussion of what management believes to be special items. We view special
items as unpredictable and atypical of our operations in the period. We
believe consistent identification, disclosure and discussion of such items,
both favorable and unfavorable, provide additional information to assess the
quality of our performance and our earnings or losses. In addition, management
measures the performance of its reportable segments excluding special items.
This supplemental information is not a substitute for any U.S. generally
accepted accounting principles (GAAP) measure and should be evaluated within
the context of our U.S. GAAP results. Any supplemental information references
to earnings, losses or results excluding special items or before special items,
our non-GAAP measure of items, may not be comparable to similarly titled
measures reported by other companies. Note: Supplemental Data (Unaudited; $ in millions) First Quarter2004
    
    2003Special items, net of taxes
    
    $
    (10.4
    )
    
    
    9.5Earnings (losses) excluding
special items (after taxes)
    
    $
    196.1
    
    
    
    (24.5
    )




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##### Table of Contents



- 24 - Note: Supplemental Data The following schedules summarize the special items and provisions for the
quarters ended March 31, 2004 and 2003: (Unaudited; gains (losses) in millions except per share amounts) 2004 First Quarter
    
    2003 First QuarterPre-tax
    
    After-tax
    
    $/share
    
    Pre-tax
    
    After-tax
    
    $/shareEarnings
    
    Earnings
    
    After-tax
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDI (see Business Segment disclosure)
    
    $
    (1.8
    )
    
    
    (1.2
    )
    
    
    (0.01
    )
    
    
    3.2
    
    
    
    2.4
    
    
    
    0.03Corporate and Other Environmental provisions, net
    
    
    (4.6
    )
    
    
    (3.5
    )
    
    
    (0.04
    )
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (0.01
    )Historic legal matters
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5.0
    )
    
    
    (3.9
    )
    
    
    (0.04
    )
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (0.01
    )(6.8
    )
    
    
    (5.1
    )
    
    
    (0.05
    )
    
    
    1.9
    
    
    
    1.1
    
    
    
    0.02Interest expense:Texas franchise tax matter
    
    
    (0.9
    )
    
    
    (0.7
    )
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    Early debt extinguishment costs
    
    
    (22.4
    )
    
    
    (17.6
    )
    
    
    (0.18
    )
    
    
    
    
    
    
    
    
    
    
    Miscellaneous income and expense, net:Cost-basis investment write-down
    
    
    (3.6
    )
    
    
    (2.7
    )
    
    
    (0.03
    )
    
    
    
    
    
    
    
    
    
    
    Benefit for taxes on income:Reversal of El Abra deferred tax valuation allowance
    
    
    
    
    
    
    30.8
    
    
    
    0.31
    
    
    
    
    
    
    
    
    
    
    
    Minority interests in consolidated subsidiaries:Reversal of El Abra deferred tax valuation allowance
    
    
    
    
    
    
    (15.1
    )
    
    
    (0.15
    )
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting change (see Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.7
    
    
    
    8.4
    
    
    
    0.09Total
    
    $
    (33.7
    )
    
    
    (10.4
    )
    
    
    (0.11
    )
    
    
    11.6
    
    
    
    9.5
    
    
    
    0.11
 Business Divisions Results for 2004 and 2003 can be meaningfully compared by separate
reference to our reporting divisions, Phelps Dodge Mining Company (PDMC) and
Phelps Dodge Industries (PDI). PDMC is a business division that includes our
worldwide copper operations from mining through rod production, marketing and
sales; molybdenum operations from mining through manufacturing, marketing and
sales; other mining operations and investments; and worldwide mineral
exploration and development programs. PDI, our manufacturing division,
produces engineered products principally for the global energy,
telecommunications, transportation and specialty chemicals sector. PDI
includes our Specialty Chemicals segment and our Wire and Cable segment.
Significant events and transactions have occurred within each segment which, as
indicated in the separate discussions presented below, are material to an
understanding of the particular years results and to a comparison with results
of the other periods. 
 RESULTS OF PHELPS DODGE MINING COMPANY PDMC is our international business division that comprises our vertically
integrated copper operations from mining through rod production, primary
molybdenum operations through conversion, marketing and sales, and worldwide
exploration. PDMC comprises 11 reportable segments. Our copper mines comprise five reportable segments in the United States
(Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre and Tyrone) and three
reportable segments in South America (Candelaria/Ojos del Salado, Cerro Verde
and El Abra). These segments include open-pit mining, underground mining,
sulfide ore concentrating and electrowinning. In addition, some of these
produce gold and silver, and the Bagdad and Sierrita mines also produce
molybdenum and rhenium as by-products.




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##### Table of Contents



- 25 - The Manufacturing and Sales segment consists of conversion facilities
including our smelters, refineries and rod mills, as well as sales and
marketing. The Manufacturing and Sales segment sells copper to others
primarily as rod, cathode or concentrate, and as rod to our Wire and Cable
segment. In addition, at times it smelts and refines copper and produces
copper rod for customers on a toll basis. Toll arrangements require the
tolling customer to deliver appropriate copper-bearing material to our
facilities, which we then process into a product that is returned to the
customer. The customer pays PDMC for processing its material into the
specified products. The Primary Molybdenum segment consists of the Henderson and Climax mines
and related conversion facilities. This segment is an integrated producer of
molybdenum, with mining, roasting and processing facilities producing
high-purity, molybdenum-based chemical and metallurgical products. In
addition, at times it roasts and/or processes material on a toll basis. Toll
arrangements require the tolling customer to deliver appropriate
molybdenum-bearing material to our facilities, which we then process into a
product that is returned to the customer. The customer pays PDMC for
processing its material into the specified products. Other Mining includes our worldwide mineral exploration and development
programs, a process technology center that directs its activities at improving
existing processes and developing new cost-competitive technologies, and other
ancillary operations. Major operating and financial results of PDMC for the quarters ended March
31, 2004 and 2003, are illustrated in the following table: (Unaudited; $ in millions except per pound amounts) First Quarter2004
    
    2003(see Note 4)Sales and other operating revenues
to unaffiliated customers
    
    $
    1,214.5
    
    
    
    655.0Operating income
    
    
    330.2
    
    
    
    35.7Minority interests
    
    
    (63.1
    )
    
    
    (0.9
    )Copper production (thousand short tons):Total copper production
    
    
    317.6
    
    
    
    317.2Less undivided interest (A)
    
    
    15.4
    
    
    
    15.5Copper production on a
consolidated basis
    
    
    302.2
    
    
    
    301.7Less minority participants shares
previously accounted for on a
pro-rata basis (B)
    
    
    41.9
    
    
    
    41.3Copper production on a pro-rata basis
    
    
    260.3
    
    
    
    260.4Copper sales (thousand short tons):Total copper sales from own mines
    
    
    323.3
    
    
    
    321.3Less undivided interest (A)
    
    
    15.4
    
    
    
    15.5Copper sales from own mines on
a consolidated basis
    
    
    307.9
    
    
    
    305.8Less minority participants shares
previously accounted for on a
pro-rata basis (B)
    
    
    41.8
    
    
    
    42.0Copper sales from own mines on
a pro-rata basis
    
    
    266.1
    
    
    
    263.8Purchased copper (thousand short tons):Total purchased copper
    
    
    115.1
    
    
    
    93.7Total copper sales on a
consolidated basis
    
    
    423.0
    
    
    
    N/ATotal copper sales on a
pro-rata basis
    
    
    N/A
    
    
    
    357.5LME average spot copper price
per pound  cathodes
    
    $
    1.239
    
    
    
    0.755COMEX average spot copper price
per pound  cathodes
    
    $
    1.231
    
    
    
    0.760Implied full unit cost of
copper production per pound
    
    $
    0.703
    
    
    
    0.687Implied cash unit cost of
copper production per pound
    
    $
    0.532
    
    
    
    0.536Molybdenum production (million pounds)
    
    
    13.5
    
    
    
    11.5Molybdenum sales (million pounds):Net Phelps Dodge share
from own mines
    
    
    15.2
    
    
    
    13.8Purchased molybdenum
    
    
    3.4
    
    
    
    1.5Total molybdenum sales
    
    
    18.6
    
    
    
    15.3Metals Week:Molybdenum oxide price per pound
    
    $
    8.27
    
    
    
    4.06




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##### Table of Contents



- 26 - (A)
    
    Represents a 15 percent undivided interest in Morenci, Arizona, copper
mining complex held by Sumitomo Metal Mining Arizona, Inc.(B)
    
    Minority participant interests include (i) a one-third partnership
interest in Chino Mines Company in New Mexico held by Heisei Minerals
Corporation through December 18, 2003 (mining interest acquired by Phelps
Dodge on December 19, 2003), (ii) a 20 percent partnership interest in
Candelaria in Chile held by SMMA Candelaria, Inc., a jointly owned,
indirect subsidiary of Sumitomo Metal Mining Co., Ltd., and Sumitomo
Corporation, and (iii) a 49 percent partnership interest in the El Abra
copper mining operation in Chile held by Corporacion Nacional del Cobre de
Chile (CODELCO). (thousand tons) First Quarter2004
    
    2003Excluded copper production:Chino Mine and Smelter
    
    
    
    
    
    
    3.3Candelaria
    
    
    11.1
    
    
    
    12.0El Abra
    
    
    30.8
    
    
    
    26.041.9
    
    
    
    41.3
 Note: Supplemental Data Implied unit cost of copper production measures the all-in cost of
each pound of copper produced by PDMC. As the title indicates, this measure is
the cost implied by the market price of copper (i.e., London Metal Exchange
(LME) average spot) for a given period versus PDMCs operating income (loss)
excluding special items for the same period. There is no established common standard for calculating unit production
costs in the copper industry. PDMCs implied unit production costs indicator
(which is based on readily accessible, publicly disclosed data) acts as a proxy
to enable investors to follow and interpret cost trends over historical
periods. PDMC calculates its implied full unit cost of copper production by
dividing its operating income (loss) excluding special items by the total
pounds of copper sold from its own mines for its own account (as disclosed in
the table above). This results in an all-in operating margin (i.e., inclusive
of cost of products sold; depreciation, depletion, amortization and closure
accretion/accrual; selling and general administrative expense; and exploration
and research expense for the divisions operations) that is compared with the
LME market price of copper to render an implied cost of copper production.
Cash implied unit cost of copper production is calculated by deducting PDMCs
segment depreciation, depletion, amortization and closure accretion/accrual
from the implied full unit cost of copper production. Following is the
calculation of implied unit cost of copper production for the quarters ended
March 31, 2004 and 2003: (Unaudited; $ in millions except per pound amounts) First Quarter2004
    
    2003(see Note 4)PDMC implied unit cost of
copper productionOperating income
    
    $
    330.2
    
    
    
    35.7Less special operating items
    
    
    
    
    
    
    Operating income excluding
special items
    
    $
    330.2
    
    
    
    35.7Copper sales from own mines on a
consolidated basis  million pounds
    
    
    615.8
    
    
    
    N/ACopper sales from own mines on a
pro-rata basis  million pounds
    
    
    N/A
    
    
    
    527.6Operating margin 
per pound copper sold
    
    $
    0.536
    
    
    
    0.068LME average spot copper price
per pound  cathodes
    
    $
    1.239
    
    
    
    0.755Implied full unit cost of
copper production per pound
    
    $
    0.703
    
    
    
    0.687
 Note: Our measure of implied unit cost of copper production may not be
comparable to similarly titled measures reported by other companies. Total PDMC Division  Sales PDMCs sales and other operating revenues to unaffiliated customers
increased $559.5 million, or 85 percent, in the 2004 first quarter compared
with the 2003 first quarter. The increase reflected higher average copper
prices (approximately $363 million), the impact of fully consolidating El Abra
and Candelaria (approximately $66 million), higher average molybdenum prices
(approximately $59 million), higher copper




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##### Table of Contents



- 27 - sales volumes (approximately $44 million) and higher molybdenum sales
volumes (approximately $15 million). Total PDMC  Operating Income PDMC reported operating income of $330.2 million in the 2004 first
quarter, compared with operating income of $35.7 million in the 2003 first
quarter. The increase in operating income primarily reflected higher copper
prices (approximately $258 million) and the impact of consolidating El Abra and
Candelaria (approximately $48 million); partially offset by a higher implied
unit cost of copper production (approximately $12 million). The New York Commodity Exchange (COMEX) spot price per pound of copper
cathode, primarily upon which we base our U.S. sales, averaged $1.231 and 76.0
cents in the first quarters of 2004 and 2003, respectively. The LME spot price
per pound of copper cathode, primarily upon which we base our international
sales, averaged $1.239 and 75.5 cents in the first quarters of 2004 and 2003,
respectively. Management monitors the implied unit cost of copper production on a
regular basis. Following is a schedule of significant components of the
implied unit cost of copper production for the quarters ended March 31, 2004
and 2003: First Quarter2004
    
    2003Reconciliation of Implied Unit Cost (per lb.)*Cash implied unit cost of copper
production  base operations
    
    $
    0.486
    
    
    
    0.485Exploration, technology and project
development
    
    
    0.024
    
    
    
    0.017Shutdown and curtailment expenses
    
    
    0.022
    
    
    
    0.034Implied cash unit cost of
copper production
    
    $
    0.532
    
    
    
    0.536Non-cash (depreciation, depletion,
amortization and closure accrual)
    
    
    0.171
    
    
    
    0.151Implied full unit cost of copper
production
    
    $
    0.703
    
    
    
    0.687
   *
    
    The implied full unit cost of copper production is based on PDMCs
operating margin per pound of copper sold (i.e., PDMC operating income
(loss) excluding special items, divided by the total pounds of copper sold
from its own mines for its own account, deducted from the LME copper
price). Implied cash unit cost of copper production excludes PDMCs
depreciation, depletion and amortization and closure accretion/accrual
from its operating margin in the above calculation. Cash unit cost of
copper production-base operations excludes PDMCs exploration, technology
and project development, and shutdown and curtailed expenses. Exploration,
technology and project development include expenses related to
exploration, pre-feasibility and feasibility studies and process
technology. Shutdown and curtailment expenses include costs related to
idled facilities at operating properties, care-and-maintenance properties
and discontinued operations. Note: Our measures of implied unit cost of
copper may not be comparable to similarly titled measures reported by
other companies. The implied full unit cost of copper production for the 2004 first quarter
increased by 1.6 cents per pound compared with the corresponding 2003 period
despite a benefit of approximately 6 cents per pound from higher molybdenum
prices. That benefit was offset by several factors including the impact of
costs that vary with copper prices, higher production costs at Sierrita
(primarily higher mining rates, lower ore grades and lower SX/EW cathode
production), costs associated with ramping up production at formerly curtailed
sites, the impact of slope slippage at Bagdad, lower Candelaria ore grade, and
higher energy and non-cash costs. The implied cash unit cost of copper
production for the 2004 first quarter decreased slightly compared with the
corresponding 2003 period primarily due to lower shutdown and curtailment
expenses.




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##### Table of Contents



- 28 - PDMC RESULTS BY REPORTABLE SEGMENTS  The
following tables summarize, on a segment basis, production and sales
statistics, operating income (loss), and special items and provisions
for the first quarter of 2004 and 2003. U.S. MinesBagdad/
    
    Miami/
    
    Chino/Morenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    SubtotalFirst Quarter 2004Copper production (thousand short tons):Total production
    
    
    102.3
    
    
    
    42.7
    
    
    
    2.3
    
    
    
    15.2
    
    
    
    11.2
    
    
    
    173.7Less undivided interest
    
    
    15.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.4Copper production on a consolidated basis
    
    
    86.9
    
    
    
    42.7
    
    
    
    2.3
    
    
    
    15.2
    
    
    
    11.2
    
    
    
    158.3Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper production on a pro-rata basis
    
    
    86.9
    
    
    
    42.7
    
    
    
    2.3
    
    
    
    15.2
    
    
    
    11.2
    
    
    
    158.3Copper sales (thousand short tons):Total copper sales from own mines
    
    
    102.3
    
    
    
    47.1
    
    
    
    3.7
    
    
    
    15.2
    
    
    
    11.2
    
    
    
    179.5Less undivided interest
    
    
    15.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.4Copper sales from own mines on a consolidated basis
    
    
    86.9
    
    
    
    47.1
    
    
    
    3.7
    
    
    
    15.2
    
    
    
    11.2
    
    
    
    164.1Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper sales from own mines on a pro-rata basis
    
    
    86.9
    
    
    
    47.1
    
    
    
    3.7
    
    
    
    15.2
    
    
    
    11.2
    
    
    
    164.1Purchased copper (thousand short tons):Total purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total copper sales on a consolidated basis
    
    
    86.9
    
    
    
    47.1
    
    
    
    3.7
    
    
    
    15.2
    
    
    
    11.2
    
    
    
    164.1($ in millions)Operating income (loss)
    
    $
    77.9
    
    
    
    54.9
    
    
    
    (0.7
    )
    
    
    15.0
    
    
    
    2.4
    
    
    
    149.5Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    First Quarter 2003Copper production (thousand short tons):Total production
    
    
    103.5
    
    
    

    42.7
    
    
    
    5.4
    
    
    
    8.4
    
    
    
    17.1
    
    
    
    177.1Less minority participants shares
    
    
    15.5
    
    
    
    
    
    
    
    
    
    
    
    2.8
    
    
    
    
    
    
    
    18.3Copper production on a pro-rata basis
    
    
    88.0
    
    
    
    42.7
    
    
    
    5.4
    
    
    
    5.6
    
    
    
    17.1
    
    
    
    158.8Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    88.0
    
    
    
    44.1
    
    
    
    5.8
    
    
    
    5.6
    
    
    
    17.1
    
    
    
    160.6Purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total copper sales on a pro-rata basis
    
    
    88.0
    
    
    
    44.1
    
    
    
    5.8
    
    
    
    5.6
    
    
    
    17.1
    
    
    
    160.6($ in millions)Operating income (loss)
    
    $
    12.4
    
    
    
    6.7
    
    
    
    (0.7
    )
    
    
    (2.1
    )
    
    
    (4.4
    )
    
    
    11.9Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Refer to segment discussion on pages 33 through 35. Revenues, operating costs and expenses of PDMCs segments include allocations that may not be reflective of market conditions. Additionally, certain costs are not allocated to the reportable segments. (Refer to pages 32 and 33 for further discussion.)




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##### Table of Contents



- 29 - PDMC RESULTS BY REPORTABLE SEGMENTS  South American MinesCandelaria/Ojos delSalado*
    
    Cerro Verde
    
    El Abra*
    
    SubtotalFirst Quarter 2004Copper production (thousand short tons):Total production
    
    
    55.5
    
    
    
    25.2
    
    
    
    62.9
    
    
    
    143.6Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper production on a consolidated basis
    
    
    55.5
    
    
    
    25.2
    
    
    
    62.9
    
    
    
    143.6Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    11.1
    
    
    
    
    
    
    
    30.8
    
    
    
    41.9Copper production on a pro-rata basis
    
    
    44.4
    
    
    
    25.2
    
    
    
    32.1
    
    
    
    101.7Copper sales (thousand short tons):Total copper sales from own mines
    
    
    54.8
    
    
    
    25.6
    
    
    
    63.1
    
    
    
    143.5Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper sales from own mines on a consolidated basis
    
    
    54.8
    
    
    
    25.6
    
    
    
    63.1
    
    
    
    143.5Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    10.9
    
    
    
    
    
    
    
    30.9
    
    
    
    41.8Copper sales from own mines on a pro-rata basis
    
    
    43.9
    
    
    
    25.6
    
    
    
    32.2
    
    
    
    101.7Purchased copper (thousand short tons):Total purchased copper
    
    
    10.9
    
    
    
    
    
    
    
    
    
    
    
    10.9Total copper sales on a consolidated basis
    
    
    65.7
    
    
    
    25.6
    
    
    
    63.1
    
    
    
    154.4($ in millions)Operating income (loss)
    
    $
    68.8
    
    
    
    37.8
    
    
    
    74.6
    
    
    
    181.2Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    First Quarter 2003Copper production (thousand short tons):Total production
    
    
    60.0
    
    
    
    24.6
    
    
    
    53.1
    
    
    
    137.7Less minority participants shares
    
    
    12.0
    
    
    
    
    
    
    
    26.0
    
    
    
    38.0Copper production on a pro-rata basis
    
    
    48.0
    
    
    
    24.6
    
    
    
    27.1
    
    
    
    99.7Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    49.1
    
    
    
    24.6
    
    
    
    27.5
    
    
    
    101.2Purchased copper
    
    
    9.7
    
    
    
    
    
    
    
    5.8
    
    
    
    15.5Total copper sales on a pro-rata basis
    
    
    58.8
    
    
    
    24.6
    
    
    
    33.3
    
    
    
    116.7($ in millions)Operating income (loss)
    
    $
    23.1
    
    
    
    7.5
    
    
    
    5.6
    
    
    
    36.2Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
 Refer to segment discussion on pages 33 through 35. Revenues, operating costs and expenses of PDMCs segments include allocations that may not be reflective of market conditions. Additionally, certain costs are not allocated to the reportable segments. (Refer to pages 32 and 33 for further discussion.)  *
    
    First quarter 2004 reflects full consolidation of El Abra and Candelaria; first quarter 2003 reflects El Abra and Candelaria
on a pro-rata basis (51 percent and 80 percent,
respectively).




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##### Table of Contents



- 30 -   PDMC RESULTS BY REPORTABLE SEGMENTS  Primary
    
    Manufacturing
    
    
    
    
    
    TotalMolybdenum
    
    and Sales
    
    Other Mining
    
    PDMCFirst Quarter 2004Copper production (thousand short tons):Total production
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    317.6Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.4Copper production on a consolidated basis
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    302.2Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41.9Copper production on a pro-rata basis
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    260.3Copper sales (thousand short tons):Phelps Dodge share from own mines
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    323.3Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.4Copper sales from own mines on a consolidated basis
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    307.9Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41.8Net Phelps Dodge share
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    266.1Purchased copper (thousand short tons):Total purchased copper
    
    
    
    
    
    
    104.2
    
    
    
    
    
    
    
    115.1Total copper sales on a consolidated basis
    
    
    
    
    
    
    104.5
    
    
    
    
    
    
    
    423.0Molybdenum production (thousand pounds):Primary - Henderson
    
    
    6,456
    
    
    
    
    
    
    
    
    
    
    
    6,456By-product
    
    
    7,019
    
    
    
    
    
    
    
    
    
    
    
    7,019Total production
    
    
    13,475
    
    
    
    
    
    
    
    
    
    
    
    13,475Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    15,157
    
    
    
    
    
    
    
    
    
    
    
    15,157Purchased molybdenum
    
    
    3,424
    
    
    
    
    
    
    
    
    
    
    
    3,424Total molybdenum sales
    
    
    18,581
    
    
    
    
    
    
    
    
    
    
    
    18,581($ in millions)Operating income (loss)
    
    $
    15.6
    
    
    
    3.8
    
    
    
    (19.9
    )
    
    
    330.2Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
 Refer to segment discussion on pages 33 through 35. Revenues, operating costs and expenses of PDMCs segments include allocations that may not be reflective of market conditions. Additionally, certain costs are not allocated to the reportable segments. (Refer to pages 32 and 33 for further discussion.)




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##### Table of Contents



- 31 - PDMC RESULTS BY REPORTABLE SEGMENTS  Primary
    
    Manufacturing
    
    
    
    
    
    TotalMolybdenum
    
    and Sales
    
    Other Mining
    
    PDMCFirst Quarter 2003Copper production (thousand short tons):Total production
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    317.2Less minority participants shares
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    56.8Copper production on a pro-rata basis
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    260.4Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    263.8Purchased copper
    
    
    
    
    
    
    78.2
    
    
    
    
    
    
    
    93.7Total copper sales on a pro-rata basis
    
    
    
    
    
    
    80.2
    
    
    
    
    
    
    
    357.5Molybdenum production (thousand pounds):Primary - Henderson
    
    
    4,839
    
    
    
    
    
    
    
    
    
    
    
    4,839By-product
    
    
    6,664
    
    
    
    
    
    
    
    
    
    
    
    6,664Total production
    
    
    11,503
    
    
    
    
    
    
    
    
    
    
    
    11,503Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    13,782
    
    
    
    
    
    
    
    
    
    
    
    13,782Purchased molybdenum
    
    
    1,480
    
    
    
    
    
    
    
    
    
    
    
    1,480Total molybdenum sales
    
    
    15,262
    
    
    
    
    
    
    
    
    
    
    
    15,262($ in millions)Operating income (loss)
    
    $
    0.1
    
    
    
    8.5
    
    
    
    (21.0
    )
    
    
    35.7Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
 Refer to segment discussion on pages 33 through 35. Revenues, operating costs and expenses of PDMCs segments include allocations that may not be reflective of market conditions.
Additionally, certain costs are not allocated to the reportable segments. (Refer to pages 32 and 33 for further discussion.)




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##### Table of Contents



- 32 - Sales of Copper (U.S. and South America) and Molybdenum The Manufacturing and Sales segment is responsible for selling all copper
produced at the U.S. mines. Intersegment revenues of the individual U.S. mines
represent an internal allocation based on PDMCs sales to unaffiliated
customers. Therefore, the following discussion and analysis combines the U.S.
Mines and Other Mining segments with the Manufacturing and Sales segment.
Additionally, the South American Mines sold approximately 50 percent of their
copper to the Manufacturing and Sales segment in the 2004 first quarter and
approximately 42 percent in the 2003 first quarter. Intersegment sales by the
South American Mines are based upon arms-length prices at the time of the sale.
Intersegment sales of any individual mine may not be reflective of the actual
prices PDMC ultimately receives due to a variety of factors including
additional processing, timing of sales to unaffiliated customers and
transportation premiums. These sales are reflected in the Manufacturing and
Sales segment. (Unaudited; $ in millions) First Quarter2004
    
    2003(see Note 4)U.S. Mining Operations*Unaffiliated customers
    
    $
    862.4
    
    
    
    478.5Intersegment elimination
    
    
    (198.3
    )
    
    
    (71.7
    )664.1
    
    
    
    406.8South American Mines**Unaffiliated customers
    
    
    202.1
    
    
    
    100.6Intersegment
    
    
    198.3
    
    
    
    71.7400.4
    
    
    
    172.3Primary MolybdenumUnaffiliated customers
    
    
    150.0
    
    
    
    75.9Intersegment
    
    
    
    
    
    
    150.0
    
    
    
    75.9Total PDMCUnaffiliated customers
    
    $
    1,214.5
    
    
    
    655.0
  *
    
    U.S. Mining Operations combines the following segments: Morenci,
Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and
Sales, and Other Mining.**
    
    South American Mines combines the following segments: Candelaria/Ojos del
Salado, Cerro Verde and El Abra.U.S. Mines, Other Mines and
Manufacturing and Sales Segments  Sales Sales and other operating revenues to unaffiliated customers by U.S.
Mines, Other Mining and Manufacturing and Sales increased $383.9 million, or 80
percent, in the 2004 first quarter compared with the 2003 first quarter. This
increase was primarily due to higher average copper prices (approximately $303
million), higher copper sales volumes (approximately $71 million), higher
precious metals sales (approximately $4 million) and higher copper rod sales
(approximately $4 million). South American Mines Segments  Sales South American Mines sales and other operating revenues to unaffiliated
customers increased $101.5 million, or 101 percent, in the 2004 first quarter
compared with the 2003 first quarter. This increase was primarily due to
higher realized copper prices (approximately $65 million) and the impact of
fully consolidating El Abra and Candelaria (approximately $66 million);
partially offset by lower sales volumes of copper (approximately $27 million). Primary Molybdenum Segment  Sales Primary Molybdenum sales and other operating revenues to unaffiliated
customers increased $74.1 million, or 98 percent, in the 2004 first quarter
compared with the 2003 first quarter. This increase primarily was due to
higher average molybdenum prices (approximately $59 million) and higher sales
volumes of molybdenum (approximately $15 million).




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##### Table of Contents



- 33 - Operating Income (Loss) for Copper (U.S. and South America) and Molybdenum In addition to the allocation of revenues, management allocates certain
operating costs, expenses and capital to PDMCs segments that may not
necessarily be reflective of market conditions. We also do not allocate all
costs and expenses applicable to a mine or operation from the division or
corporate offices. Accordingly, the segment information reflects management
determinations that may not be indicative of actual financial performance of
each segment as if it was an independent entity. (Unaudited; $ in millions) First Quarter2004
    
    2003(see Note 4)U.S. Mining Operations*
    
    $
    133.4
    
    
    
    (0.6
    )South American Mines**
    
    
    181.2
    
    
    
    36.2Primary Molybdenum
    
    
    15.6
    
    
    
    0.1Total PDMC
    
    $
    330.2
    
    
    
    35.7
  *
    
    U.S. Mining Operations combines the following segments: Morenci,
Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and
Sales, and Other Mining.  **
    
    South American Mines combines the following segments: Candelaria/Ojos del
Salado, Cerro Verde and El Abra. U.S. Mining Operations  Operating Income (Loss) U.S. Mining Operations reported operating income of $133.4 million in the
2004 first quarter, compared with an operating loss of $0.6 million in the 2003
first quarter. (Refer to the separate discussion of PDMCs segments below for
further detail.) Morenci Segment  Operating Income The Morenci open-pit mine, located in southeastern Arizona, primarily
produces electrowon copper cathodes. We own an 85 percent undivided interest
in Morenci and apply the proportional consolidation method of accounting.
Operating income of $77.9 million in the 2004 first quarter increased $65.5
million compared with the 2003 first quarter primarily due to higher average
copper prices (approximately $76 million); partially offset by higher operator
fees (approximately $9 million). Bagdad/Sierrita Segment  Operating Income Our wholly owned Bagdad and Sierrita open-pit mines, located in northwest
Arizona and near Green Valley, Arizona, respectively, mine copper sulfide and
oxide ores. They produce copper and molybdenum concentrates and copper
cathodes. The 2004 first quarter operating income of $54.9 million increased
$48.2 million compared with the 2003 first quarter primarily due to higher
average copper prices (approximately $41 million) and lower cost of copper
production (approximately $8 million). Lower cost of copper production was
primarily due to higher molybdenum by-product credits resulting from higher
prices and volumes (approximately $27 million); partially offset by higher
mining and milling costs (approximately $15 million) and higher energy costs
(approximately $4 million). Miami/Bisbee Segment  Operating
Loss Our wholly owned Miami open-pit mine, located in Miami, Arizona, produces
electrowon copper cathode. The Bisbee precipitation operation is located in
southern Arizona. The 2004 first quarter operating loss of $0.7 million was
comparable with the 2003 first quarter. Higher average copper prices
(approximately $3 million) were offset by lower sales volumes (approximately $1
million) and higher cost of copper production (approximately $2 million)
resulting from lower production. Chino/Cobre Segment  Operating Income (Loss) The Chino open-pit mine, located near Silver City, New Mexico, primarily
mines copper sulfide and oxide ores and produces electrowon copper cathode and
copper concentrates. On December 19, 2003, we completed the acquisition of
Heiseis one-third partnership interest in Chino Mines Company, which is now
wholly owned by subsidiaries of Phelps Dodge. Prior to the acquisition, we
owned a two-thirds partnership interest in Chino and applied the proportional
consolidation method of accounting. Our wholly owned Cobre mine, which is
adjacent to the Chino mine, is on care-and-maintenance status, with
the exception of limited mining activities. The 2004 first
quarter operating income of $15.0 million increased $17.1 million compared with
the 2003 first quarter primarily due to higher average copper prices
(approximately $13 million) and lower cost of copper production (approximately
$2 million). Lower cost of copper production included a favorable change




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##### Table of Contents



- 34 - in heap-leach and work-in-process inventories (approximately
$4 million),
partially offset by higher operating costs primarily due to increased
production (approximately $1 million). Tyrone Segment  Operating Income (Loss) Our wholly owned Tyrone open-pit mine, located near Tyrone, New Mexico,
primarily mines copper oxide ore. It produces electrowon copper cathode. The
2004 first quarter operating income of $2.4 million increased $6.8 million
compared with the 2003 first quarter due to higher average copper prices
(approximately $10 million) and higher copper sales volumes (approximately $2
million); partially offset by higher cost of copper production (approximately
$5 million). Higher cost of copper production included lower production due to
lower grade and recovery (approximately $9 million); partially offset by lower
costs associated with mine plan changes and lower production (approximately $4
million). South American Mines  Operating Income South American Mines reported operating income in the 2004 first quarter
of $181.2 million, compared with operating income of $36.2 million in the 2003
first quarter. (Refer to the separate discussion of PDMCs segments below for
further detail.) Candelaria/Ojos del Salado Segment  Operating Income The Candelaria open-pit mine is located near Copiapó in northern Chile and
produces copper concentrates. The segment also includes the nearby Ojos del
Salado underground mines that produce concentrates. We own an 80 percent
partnership interest in Candelaria, a Chilean contractual mining company, which
we fully consolidate (and show the minority interest) as of January 1, 2004.
Prior to that date, we applied the proportional consolidation method of
accounting. Operating income of $68.8 million in the 2004 first quarter
increased $45.7 million compared with the 2003 first quarter primarily due to
higher average copper prices (approximately $54 million) and higher copper
sales volumes (approximately $3 million); partially offset by higher cost of
copper production (approximately $11 million). Higher cost of copper
production included higher downstream charges (approximately $3 million), lower
copper ore grade and recovery (approximately $2 million), higher mine operating
costs (approximately $6 million) and an unfavorable change in work-in-process
inventories (approximately $1 million). Cerro Verde Segment  Operating
Income The Cerro Verde open-pit mine, located near Arequipa, Peru, produces
copper cathode. We own approximately 82 percent of the common stock of Cerro
Verde, which we fully consolidate (and show the minority interest). The 2004
first quarter operating income of $37.8 million increased $30.3 million from
the 2003 first quarter primarily due to higher average copper prices
(approximately $30 million). El Abra Segment  Operating Income The El Abra open-pit mine is located in northern Chile and produces copper
cathodes. We own a 51 percent partnership interest in El Abra, a Chilean
contractual mining company, and the remaining 49 percent interest is owned by
Corporación Nacional del Cobre de Chile (CODELCO), a Chilean state-owned
company. We fully consolidate El Abra (and show the minority interest) as of
January 1, 2004. Prior to this date we applied the proportional consolidation
method of accounting. The 2004 first quarter operating income of $74.6 million
increased $69.0 million from the 2003 first quarter primarily due to higher
average copper prices (approximately $77 million) and higher copper sales
volumes (approximately $7 million); partially offset by higher cost of copper
production (approximately $16 million). Higher cost of copper production
included an unfavorable change in heap-leach and work-in-process inventories
(approximately $21 million) and higher operating costs (approximately $8
million); partially offset by higher ore grade and recovery (approximately $9
million), the impact of full consolidation (approximately $2 million) and lower
depreciation (approximately $2 million). Primary Molybdenum  Operating Income Primary Molybdenum includes our wholly owned Henderson and Climax
molybdenum mines in Colorado and conversion facilities in the United States and
Europe. Henderson produces high-purity, chemical-grade molybdenum
concentrates, which are further processed into value-added molybdenum chemical
products. Climax is currently on care-and-maintenance status. We expect to
bring Climax into production concurrent with the exhaustion of the Henderson
molybdenum mine reserves for continued long-term primary molybdenum supply for
the chemicals business.




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- 35 - Primary Molybdenum operations reported operating income in the 2004 first
quarter of $15.6 million, compared with operating income of $0.1 million in the
first quarter of 2003. The 2004 first quarter increase of $15.5 million
primarily was due to higher average molybdenum prices (approximately $59
million) and higher sales volumes (approximately $15 million); partially offset
by higher cost of molybdenum purchased from third parties as well as by-product
molybdenum purchased from certain of our U.S. copper operations (approximately
$52 million) and higher production costs (approximately $7 million). Higher
production costs resulted from increased volumes and included higher conversion
costs (approximately $2 million), maintenance costs (approximately $2 million),
energy costs (approximately $1 million), depreciation (approximately $1
million) and increased freight and warehousing costs (approximately $1
million). Manufacturing and Sales Segment  Operating Income Manufacturing and Sales reported operating income of $3.8 million in the
2004 first quarter, compared with operating income of $8.5 million in the 2003
first quarter. The 2004 first quarter decrease of $4.7 million compared with
the 2003 first quarter, primarily was due to lower smelter production
(approximately $2 million), higher amortization expense (approximately $1
million) and higher refinery operating expenses (approximately $1 million). Other Mining Segment  Operating Loss Other Mining reported an operating loss of $19.9 million in the 2004 first
quarter, compared with an operating loss of $21.0 million in the 2003 first
quarter. The 2004 first quarter decrease in operating loss of $1.1 million
compared with the 2003 first quarter primarily was due to higher operator fees
paid by Morenci (approximately $9 million) and a 2003 first quarter disposal of
a non-mining asset (approximately $3 million); offset by higher incentive
compensation (approximately $5 million), exploration expense (approximately $4
million) and profit sharing cost (approximately $2 million). PDMC  Other Matters In January 2004, we decided to resume production over the first nine
months of 2004 at certain of our previously curtailed properties. This
decision was based on the rapid increase in copper prices, our view of market
fundamentals for copper and molybdenum over the next several years, and our
internal concentrate and sulfuric acid balance. The planned production
ramp-ups and timing are as follows:  
    
    Our Sierrita and Bagdad mines in Arizona began increasing
production in January 2004 with an expectation that Bagdad will be
producing at full capacity in the 2004 second quarter and Sierrita in
the 2004 fourth quarter.  
    
    Our Chino mine in New Mexico began increasing production in the
2003 fourth quarter as it resumes full mine-for-leach operations. We
currently are planning to increase the Chino milling operation
beginning in the 2004 third quarter to approximately 80 percent of
capacity, which will better balance our concentrate and acid
production in the southwest.  
    
    Our Ojos del Salado mine in Chile, which has been curtailed
since 1998, is expected to resume underground mining and milling
operations by the 2004 second quarter.  
    
    Our Miami smelter in Arizona should resume operating at full
capacity by the 2004 third quarter.  
    
    We recently decided to keep our Cobre mine in New Mexico
largely
curtailed as we are increasing the amount ramped-up at Chinos
milling operations. However, limited mining activities are being
conducted at Cobre in order to facilitate options for resuming full
scale production. These recommencements, in conjunction with the one-third share of Chino
acquired in December 2003, will increase our copper production by approximately
240 million pounds in 2004 and approximately 370 million pounds in 2005, as
compared with 2003 production. This will bring our pro-rata share of
production to 2.3 billion pounds (2.8 billion pounds on a 100 percent basis)
and 2.5 billion pounds (3.0 billion pounds on a 100 percent basis),
respectively. Additionally, capital expenditures will increase by
approximately $25 million as a result of the ramp-up in production. Annual
copper capacity, excluding Morenci, that will remain curtailed after these
recommencements is approximately 200 million to 250 million pounds (both our
share and 100 percent basis).




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- 36 - Even though we remain very optimistic about the copper upturn, we will
remain disciplined about our production profile. We will continue to
configure our operations so that we can quickly respond to both positive
and negative market swings. Any material change in the price we receive for copper, or in PDMCs
implied unit cost of copper production, has a significant effect on our
results. Based on our pro-rata share of expected 2004 annual copper
production, 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 net income of approximately $18 million, or 18 cents per common share. Our current annual molybdenum production is approximately 57 million
pounds (approximately 27 million pounds from primary mines and 30 million
pounds from by-product mines). Approximately 70 percent of our molybdenum
contracts are priced based on the average of the previous 30 days of published
prices (i.e., Platts Metals Week, Ryans Notes, or Metal Bulletin), plus
premiums. Accordingly, at recent prices each $1.00 per pound change in our
average annual realized molybdenum price causes a variation in annual operating
income before taxes of approximately $40 million (subject to any negotiated
limitations in outstanding customer agreements). 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 on March 31, 2004. Significant New Mexico Environmental and Reclamation Programs The Companys New Mexico operations, Chino Mines Company (Chino), Phelps
Dodge Tyrone, Inc. (Tyrone), Cobre Mining Company (Cobre) and Phelps Dodge
Hidalgo, Inc. (Hidalgo), each are subject to regulation under the New Mexico
Water Quality Act and the Water Quality Control Commission (WQCC) regulations
adopted under that Act. Each of these operations holds one or more discharge
permits issued by NMED under WQCC regulations. The discharge permits specify
operational and monitoring requirements to protect groundwater quality. Under
the discharge permits for Chino, Tyrone, Cobre and Hidalgo, NMED has required
each of these operations to submit closure plans for approval. The closure
plans must describe the measures to be taken to prevent groundwater quality
standards from being exceeded following closure of the discharging facilities
and to abate any groundwater or surface water contamination. Each discharge
permit is issued for a period of no more than five years and the permit is
reviewed each time it is renewed. Under certain circumstances, NMED may
require submission and approval of abatement plans to address the exceedance of
applicable water quality standards. In addition, Chino, Tyrone and Cobre are subject to regulation under the
New Mexico Mining Act (the Mining Act), which was enacted in 1993, and the
Mining Act Rules, which were adopted by the New Mexico Mining Commission (the
Mining Commission) in their original form in 1994. Chino, Tyrone and Cobre
hold permits issued by MMD of the Energy, Minerals and Natural Resources
Department under the Mining Act. Under the Mining Act, Chino, Tyrone and Cobre
are required to submit and obtain approval of closeout plans describing the
reclamation to be performed following closure of the mines. The reclamation
must be designed to achieve a self-sustaining ecosystem or a post-mining land
use, unless MMD approves a waiver of this requirement because achieving this
requirement is technically or economically infeasible or would be
environmentally unsound. Regardless of whether a waiver is issued, however,
reclamation must be performed to achieve all applicable air, water quality and
other environmental standards. Financial assurance is required to ensure that funding will be available
to perform both the closure plans and the closeout plans. The amount of the
financial assurance is based upon a cost estimate to complete the closure
and/or closeout plan. The cost estimate is based upon the assumption that the
operator will default at the point in time when closure and reclamation will be
most expensive and that the state will use the financial assurance to hire and
oversee a third-party contractor to perform the closure and/or closeout plan.
The cost estimates are subject to approval by NMED and MMD. When an operation
is subject to both a closure plan and a closeout plan, the plans typically
overlap. In that case, the financial assurance typically is provided jointly
to NMED and to MMD. Both NMED and MMD calculate the required amount of
financial assurance based upon a net present value (NPV) method when the
closure plan and/or closeout plan require performance over a long period of
time. Use of the NPV method requires NMED and/or MMD approval of appropriate
discount and escalation rates.




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- 37 - The Companys cost estimates to perform the work itself generally are
substantially lower than the cost estimates used for financial assurance due to
the Companys historical cost advantages, savings from the use of the Companys
own personnel and equipment as opposed to third-party contractor costs,
opportunities to prepare the site for more efficient reclamation and the
omission of agency oversight costs. The process of obtaining approved closure plans and closeout plans has
been long and difficult, particularly for the operations subject to both WQCC
regulations and the Mining Act. The plans must be site-specific. Detailed
scientific studies have been required for each site. The sites are very large
and complex, involving many different types of facilities such as open pits,
mine stockpiles, tailing impoundments and smelter facilities. Many of the
regulatory requirements, as well as closure and reclamation technologies, are
relatively new and have been evolving while the plans have been developed,
including recent rule changes. Some of the closure and reclamation measures
are unproven over long periods of time at these or similar sites; so this
performance is not easily predicted. NMED and MMD have separate procedures for
review of closure and closeout plans, including consideration of waiver
requests, approval of plans, issuance of permits and approval of financial
assurance. These procedures include public notice, comment, and hearing
requirements, opportunities for appeals, and reviews of NMED and MMD actions by
WQCC and the Mining Commission. Chino Mines Company Chino submitted its first proposed site-wide combined closure/closeout
plan (CCP) at the end of 1997, the original deadline for approval of closeout
plans under the Mining Act, and obtained an extension for closeout plan
approval until December 31, 1999. The closure and closeout plans were combined
into one plan due to the overlapping requirements of WQCC regulations and the
Mining Act. In 1999, NMED required Chino to provide interim financial
assurance, pending approval of the closure plan, and Chino complied by
providing a surety bond for approximately $56 million. Also in 1999, the
Mining Commission extended the closeout plan approval deadline until December
31, 2001. Chino submitted a comprehensive CCP incorporating the results of the
scientific studies performed by Chino in March 2001. That CCP requested a
waiver of requirements to reclaim the open pit and steep stockpile slopes and
included a cost estimate for approximately $100 million, which included the
estimated cost of 30 years of water treatment. In July 2001, NMED published a
draft site-wide closure permit and set a public hearing for August 2001.
NMEDs draft closure permit required that all stockpiles be regraded, required
thicker soil covers than proposed by Chino, required 100 years of water
treatment and more stringent water treatment requirements, and proposed
additional permit conditions not proposed by Chino. A two-week public hearing
was held in August 2001 concerning NMEDs draft closure permit. Following that
hearing, Chino, NMED and MMD conducted negotiations concerning a possible
compromise on the CCP. Agreement was reached on a compromise closure permit in
December 2001. In December 2001, the Mining Commission again extended the
closeout plan approval deadline until October 1, 2002. Another public hearing was held in February 2002 on the compromise closure
permit supported by both Chino and NMED. The estimated cost of the compromise
CCP was approximately $391 million over 100 years on an undiscounted and
unescalated basis. The conditions of the compromise permit required additional
studies and submission of a revised closure plan reflecting the outcome of
those studies prior to expiration of the five-year period of the closure
permit. As of October 1, 2002, NMED had not finalized its decision on the
compromise permit, and, consequently, MMD was unable to approve the closeout
plan. MMD then issued a Notice of Violation (NOV) to Chino for failing to meet
the October 1, 2002 deadline. The NOV did not impose any penalties, but
ordered Chino to obtain approval by a new deadline and reserved the right to
assess penalties for noncompliance. Chino appealed the NOV to the Mining
Commission, which held a public hearing on the NOV in December 2002. The
Mining Commission upheld the NOV, but modified the deadline for closeout plan
approval until seven months after NMED issued Chinos closure permit, subject
to extension by MMD for good cause. On February 24, 2003, NMED issued Chinos closure permit consistent with
the compromise permit. Under the closure permit, the amount of financial
assurance was established at approximately $191 million on an NPV basis. In
May 2003, Chino and Phelps Dodge reached an agreement with NMED and MMD on a
framework for financial assurance providing for a cash trust fund, collateral
and a third-party performance guarantee from Phelps Dodge. In June 2003, MMD
filed a petition with the Mining Commission




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##### Table of Contents



- 38 - to amend the Mining Act Rules to allow a trust fund to be used as
financial assurance. In July 2003, the Company announced that a Phelps Dodge
subsidiary would acquire Heiseis one-third partnership interest in Chino. As
part of the terms of that acquisition, Heisei agreed to provide cash funding
for one-third of the financial assurance amount. To reflect the agreement with Heisei, in September 2003 the financial
assurance agreement was modified to provide for one-third of the financial
assurance in the form of a trust fund and the remainder in the form of a
third-party performance guarantee by Phelps Dodge. The September 2003
agreement also included a schedule for accelerated reclamation at Chino. MMD
extended the deadline for Chino to obtain approval of its closeout plan pending
the conclusion of the Mining Commission hearings on the proposed rule changes
and to allow time to hold a public hearing on the closeout plan and financial
assurance. The Mining Commission finalized the rule changes at a public
hearing on November 17, 2003. In October 2003, WQCC dismissed an appeal of Chinos closure permit filed
by a third party. WQCCs action has since been appealed to the New Mexico
Court of Appeals. MMD held a public hearing on Chinos closeout plan and financial assurance
proposal on December 13, 2003. Following consideration of the public comments
and finalization of the permit and financial assurance documentation, MMD
approved the closeout plan and financial assurance on December 18, 2003,
meeting the December 19, 2003, deadline for closeout plan approval set by MMD
and satisfying the requirements of the NOV. The closeout plan approved by MMD incorporates the requirements of the
NMED closure permit and includes a waiver from the requirement to achieve a
self-sustaining ecosystem or post-mining land use for the open pit and a
portion of the mine stockpiles, consistent with the terms of the NMED closure
permit. It also incorporates a schedule for reclamation of inactive portions
of the Chino operations and for reclamation following closure of active
operations. Based upon minor adjustments to reflect additional requirements,
the approved third-party cost estimate is approximately $395 million, and the
approved financial assurance requirement is approximately $192 million on an
NPV basis. Heisei provided funding of approximately $64 million on behalf of
Chino for the Chino trust fund. Phelps Dodge issued a third-party performance
guarantee for approximately $128 million for the balance of the financial
assurance. Following NMEDs and MMDs acceptance of the financial assurance,
NMED released Chinos $56 million interim surety bond as of December 31, 2003. The Company estimates its cost to perform the requirements of the approved
Chino closure permit and closeout plan to be approximately $287 million
(undiscounted and unescalated) over the 100-year period of the CCP. That
estimate is lower than the estimated cost used as the basis for the financial
assurance amount due to the factors discussed above and reflects our internal
cost estimate. Our cost estimate used to determine the fair value of our
reclamation accrual was approximately $389 million (undiscounted, unescalated
and on a third-party cost basis), as required by SFAS No. 143, and excludes
approximately $6 million of environmental costs from the financial assurance
cost estimate, which are recognized in environmental reserves (they are not
within the scope of SFAS No. 143). At both March 31, 2004, and December 31,
2003, we had accrued approximately $39 million for reclamation at Chino. In December 1994, Chino entered into an Administrative Order on Consent
(AOC) with NMED. The AOC requires Chino to perform a CERCLA quality
investigation of environmental impacts and potential risks to human health and
the environment associated with portions of the Chino property affected by
historical mining operations. The remedial investigations began in 1995 and
are still under way, although substantial portions of the remedial
investigations are near completion. While some remediation is expected to be
required, no feasibility studies have yet been completed, and NMED has not yet
issued a record of decision regarding any remediation that may be required
under the AOC. The Companys estimated cost is $23.6 million. In addition to
work under the AOC, Chino is continuing ongoing projects to control blowing
dust at an estimated cost of $4.8 million and to excavate and remove
copper-bearing sediments from an area known as Lake One for copper recovery
in existing leach stockpiles at the mine. The Companys estimated cost for
Lake One is $4.7 million. The Companys aggregate reserve for liability under
the Chino AOC and for the interim work on the tailing ponds and Lake One is
$33.1 million. Phelps Dodge Tyrone, Inc. Tyrone submitted its first proposed site-wide combined CCP at the end of
1997, the original deadline for approval of closeout plans under the Mining
Act, and obtained an extension for




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- 39 - closeout plan approval until December 31, 1999. The closure and closeout
plans were combined into one plan due to the overlapping requirements of WQCC
regulations and the Mining Act. In 1999, NMED required Tyrone to provide
interim financial assurance, pending approval of the closure plan, and Tyrone
complied by providing a surety bond for approximately $58 million. Also in
1999, the Mining Commission extended the closeout plan approval deadline until
December 31, 2001. Tyrone submitted a comprehensive CCP in May 2001 incorporating the results
of the scientific studies performed by Tyrone. That CCP requested a waiver of
requirements to reclaim the open pit and steep stockpile slopes and included a
cost estimate for approximately $121 million, which included the estimated cost
of 30 years of water treatment. In late 2001, the Mining Commission again
extended the closeout plan approval deadline until October 1, 2002. In April 2002, NMED published a draft site-wide closure permit and set a
public hearing for May 2002. NMEDs draft closure permit required that all
stockpiles be regraded, required thicker soil covers than proposed by Tyrone,
required 100 years of water treatment and more stringent water treatment
requirements, and proposed additional permit conditions opposed by Tyrone.
NMED estimated the cost of its proposed permit at approximately $440 million on
an unescalated and undiscounted basis over a 100-year closure period. Tyrone
submitted a revised plan in response to NMEDs draft permit, including concepts
for regrading and covering the mine stockpiles modeled after the Chino
compromise permit and proposing upgraded water treatment technology. Tyrone
estimated the cost of its proposal at approximately $328 million on the same
basis. A two-week public hearing was held in May 2002. As of October 1, 2002, NMED had not reached a decision on Tyrones permit,
and, consequently, MMD was unable to approve the closeout plan. MMD then issued
an NOV to Tyrone for failing to meet the October 1, 2002 deadline. The NOV did
not impose any penalties, but ordered Tyrone to obtain closeout plan approval
by a new deadline and reserved the right to impose penalties for noncompliance.
Tyrone appealed the NOV to the Mining Commission, which held a public hearing
on the NOV in December 2002. The Mining Commission upheld the NOV, but
modified the deadline for closeout plan approval until 12 months after NMED
issued Tyrones closure permit, subject to extension by MMD for good cause. NMEDs Hearing Officer issued a decision concerning the contested permit
conditions on March 7, 2003. The Hearing Officer adopted many of Tyrones
proposed changes to NMEDs draft permit, but sided with the NMED staff on
requirements for regrading and covers. NMED issued Tyrones closure permit on
April 8, 2003, in accordance with the Hearing Officers decision. The
estimated third-party cost under the closure permit is approximately $433
million. Tyrone appealed the closure permit to WQCC, which held a public
hearing to take evidence concluding on November 13, 2003. WQCC heard closing
arguments on the appeal and voted to uphold the closure permit as issued by
NMED during a meeting held on April 13 and 14, 2004. In May
2003, Tyrone and Phelps Dodge reached an agreement with NMED and MMD on a
framework for financial assurance providing for a cash trust fund, collateral
and a third-party performance guarantee from Phelps Dodge. The agreement also
requires Chino, Tyrone and Cobre to expend a combined minimum of $30 million on
accelerated reclamation over 10 years. In September 2003, the financial
assurance agreement was modified to include additional details. Tyrone agreed
to establish a trust fund in the initial amount of $17 million, and to
contribute $500,000 per quarter over a five-year period to increase the cash
funding to a total of $27 million. Tyrone also agreed to provide collateral to
NMED and MMD so that at least 30 percent of the financial assurance is in the
form of a trust fund or collateral. Once the trust fund and collateral are in
place, NMED will release the $58 million interim surety bond. NMED and MMD
agreed that the balance, or 70 percent of the financial assurance, may be
provided in the form of a third-party performance guarantee issued by Phelps
Dodge. The September 2003 agreement also included a schedule for accelerated
reclamation at Tyrone. Financial assurance under this agreement is subject to
completion of the permitting process, including consideration of public
comments. On October 15, 2003, Tyrone and NMED finalized a settlement agreement
establishing a detailed schedule for reclamation of the inactive tailing
impoundments at Tyrone over an eight-year period. As reclamation is completed
on portions of the facilities, the closure cost estimate and, accordingly, the
required amount of financial assurance, may be reduced. The deadline for Tyrone to obtain MMDs approval of its closeout plan was
April 8, 2004, subject to extension by MMD for good cause. On April 6, 2004,
MMD held a public hearing on




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- 40 - Tyrones proposed closeout plan. On April 12,
2004, MMD issued a permit revision with conditions for approval of Tyrones
closeout plan. The permit revision includes approval of a waiver of the
requirement to achieve a self-sustaining ecosystem or post-mining land use for
four open pits and requirements for reclamation of two small pits for which the
waiver was denied. The financial assurance amount was set at approximately
$270.7 million (NPV basis). The financial assurance initially accepted by both
MMD and NMED includes initial funding of $17 million in a trust fund, retention
of the existing surety bond of approximately $58 million, a letter of credit
for approximately $6.2 million, and a third-party performance guarantee issued
by Phelps Dodge for approximately $189.5 million. Tyrone expects to replace
both the surety bond and the letter of credit with collateral as the collateral
is approved by MMD and NMED over the next nine months. Managements internal cost estimate for performance of reclamation at
Tyrone is approximately $257 million (undiscounted and unescalated) over the
100-year period of the CCP. That estimate is lower than the estimated cost
used as the basis for the financial assurance amount due to the factors
discussed above and reflects our internal cost estimate. Our cost estimate
used to determine the fair value of our reclamation accrual was approximately
$427 million (undiscounted, unescalated and on a third-party cost basis), as
required by SFAS No. 143, and excludes approximately $6 million of
environmental costs from the financial assurance cost estimate, which are
recognized in environmental reserves (they are not within the scope of SFAS No.
143). At both March 31, 2004, and December 31, 2003, we had accrued
approximately $81 million for reclamation at Tyrone. Cobre Mining Company At the time of our acquisition of Cobre in 1998, Cobre had submitted
proposed closure and closeout plans and had posted a surety bond for
approximately $2 million with both MMD and NMED. Cobre submitted a
comprehensive proposed CCP in May 2001 incorporating the results of the
scientific studies completed by Cobre to both NMED and MMD. As of October 1, 2002, NMED had not issued a closure permit to Cobre, and,
consequently, MMD was unable to approve the proposed closeout plan. MMD then
issued an NOV to Cobre for failing to meet the October 1, 2002 deadline. The
NOV did not impose any penalties, but ordered Cobre to obtain closeout plan
approval by a new deadline. Cobre appealed the NOV to the Mining Commission,
which held a public hearing on the NOV in December 2002. The Mining Commission
upheld the NOV, but modified the deadline for closeout plan approval until nine
months after NMED issues Cobres closure discharge plan, subject to extension
by MMD for good cause. Cobre is currently awaiting a draft closure permit from
NMED. In May 2003, Cobre and Phelps Dodge reached an agreement with NMED and MMD
on a framework for financial assurance providing for a cash trust fund,
collateral and a third-party performance guarantee from Phelps Dodge. The
agreement also requires Chino, Tyrone and Cobre to expend a combined minimum of
$30 million on accelerated reclamation over 10 years. In September 2003, the
financial assurance agreement was modified to include additional details.
Cobre agreed to establish a trust fund in the initial amount of $1 million, and
to contribute $100,000 per quarter over a five-year period to increase the cash
funding to a total of $3 million. Cobre also agreed to provide collateral to
NMED and MMD so that at least 30 percent of the financial assurance is in the
form of a trust fund or collateral. NMED and MMD agreed that the balance, or
70 percent of the financial assurance, may be provided in the form of a
third-party performance guarantee issued by Phelps Dodge. The September 2003
agreement also included a schedule for accelerated reclamation at Cobre.
Financial assurance under this agreement is subject to completion of the
permitting process, including consideration of public comments. Based upon the proposed CCP for Cobre submitted in 2001, the current cost
estimate for reclamation at Cobre is approximately $9 million. Our cost
estimate used to determine the fair value of our reclamation accrual was
approximately $41 million (undiscounted, unescalated and on a third-party cost
basis), as required by SFAS No. 143. Both of these estimates will be updated
when NMED issues the closure permit. At both March 31, 2004, and December 31,
2003, we had accrued approximately $7 million for reclamation at Cobre. Phelps Dodge Hidalgo, Inc. Hidalgo obtained approval of a closure plan under a discharge permit
issued by NMED in 2000. In accordance with the permit, Hidalgo
provided financial assurance to NMED in the form of surety bonds for
approximately $11 million. Since obtaining approval of the closure plan,
Hidalgo has completed the closure of a former wastewater




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- 41 - evaporation pond by
construction of a soil cap approved by NMED. The discharge permit under which
the closure plan was approved also requires corrective action for contaminated
groundwater near the smelters closed former wastewater evaporation pond.
Impacted groundwater is pumped from a series of wells, treated in a
neutralization facility, and discharged to a series of lined impoundments or to
an irrigation system. The discharge permit requires a comprehensive
groundwater study to characterize groundwater at the site. The discharge
permit requires updates of the closure plan, and NMED could require future
enhancement of the system based upon the results of the ongoing study when the
permit expires in 2005 or, in certain circumstances, earlier. Hidalgo is not
subject to the Mining Act and, consequently, does not require a closeout plan.
Our cost estimate used to determine the fair value of our reclamation accrual
was approximately $7 million (undiscounted, unescalated and on a third-party
cost basis), as required by SFAS No. 143. At both March 31, 2004, and December
31, 2003, we had accrued approximately $4 million for reclamation at Hidalgo. 
 RESULTS OF PHELPS DODGE INDUSTRIES PDI, our manufacturing division, produces engineered products principally
for the global energy, telecommunications, transportation and specialty
chemicals sectors. Its operations are characterized by products with
significant market share, internationally competitive cost and quality, and
specialized engineering capabilities. The manufacturing division includes our
Specialty Chemicals segment and our Wire and Cable segment. Our Specialty
Chemicals segment includes Columbian Chemicals Company and its subsidiaries
(Columbian Chemicals or Columbian). Our Wire and Cable segment consists of
three worldwide product line businesses including magnet wire, energy and
telecommunications cables, and specialty conductors. (Unaudited; $ in millions) First Quarter2004
    
    2003Sales and other operating revenues
to unaffiliated customers:Specialty Chemicals
    
    $
    163.9
    
    
    
    162.1Wire and Cable
    
    
    218.6
    
    
    
    160.9$
    382.5
    
    
    
    323.0Operating income:Specialty Chemicals
    
    $
    11.2
    
    
    
    14.1Wire and Cable
    
    
    2.3
    
    
    
    3.4$
    13.5
    
    
    
    17.5
 PDI  Sales PDI reported sales to unaffiliated customers of $382.5 million in the 2004
first quarter, compared with sales of $323.0 million in the 2003 first quarter.
The increase of $59.5 million was due to higher Wire and Cable sales that
increased $57.7 million, or 36 percent, primarily as a result of increased
demand and metal prices for energy cables and building wire in the
international markets (approximately $34 million), higher magnet wire sales in
North America (approximately $18 million) primarily due to higher copper
prices, and increased sales of specialty metal products in North America due to
higher metal prices and slightly higher volumes (approximately $6 million).
Specialty Chemicals 2004 first quarter sales of $163.9 million remained
essentially unchanged from the 2003 first quarter as the strengthening of the
Euro more than offset worldwide volume reductions.




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##### Table of Contents



- 42 - PDI  Operating Income PDI reported operating income of $13.5 million in the 2004 first quarter,
including a special, net pre-tax charge of $1.8 million, compared with
operating income of $17.5 million in the 2003 first quarter, including a
special, net pre-tax gain of $3.2 million. (Refer to the separate discussion
of PDIs Specialty Chemicals and Wire and Cable segments below for further
detail.) Note: Supplemental Data The following table summarizes PDIs special items for the first quarters
of 2004 and 2003 and the resultant earnings excluding these special items: (Unaudited; $ in millions) First Quarter2004
    
    2003Operating income
    
    $
    13.5
    
    
    
    17.5Special, pre-tax items
    
    
    (1.8
    )
    
    
    3.2Segment operating earnings
excluding special items
    
    $
    15.3
    
    
    
    14.3
 Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. Special items and provisions in operating income were as follows: (Unaudited; $ in millions) First Quarter2004
    
    2003Restructuring program
    
    $
    (1.7
    )
    
    
    Environmental provisions, net
    
    
    (0.1
    )
    
    
    Termination of a foreign
postretirement benefit plan
    
    
    
    
    
    
    3.2$
    (1.8
    )
    
    
    3.2
 Specialty Chemicals  Operating Income Specialty Chemicals reported operating income in the 2004 first quarter of
$11.2 million, compared with operating income of $14.1 million in the 2003
first quarter, including a special, net pre-tax gain of $3.2 million. Excluding special items, the 2004 first quarter increase in operating
income of $0.3 million compared with the 2003 first quarter was primarily due
to improved variable margins in Europe and North America (approximately $12
million) driven by favorable exchange rates and lower feedstock costs;
partially offset by lower sales volumes predominately in the tire market in
Europe (approximately $3 million), higher manufacturing expenses (approximately
$9 million) primarily associated with unfavorable foreign exchange rates,
higher depreciation expense, expense associated with the blockage of a
feedstock supply pipeline in the UK and production delays in Korea caused by a
boiler failure at a local co-generation facility. Note: Supplemental Data The following table summarizes Specialty Chemicals special items for the
first quarters of 2004 and 2003 and the resultant earnings excluding these
special items: (Unaudited; $ in millions) First Quarter2004
    
    2003Special, pre-tax items
    
    $
    
    
    
    
    3.2Segment operating earnings
excluding special items
    
    $
    11.2
    
    
    
    10.9
 Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. Wire and Cable - Operating Income Wire and Cable reported operating income in the 2004 first quarter of $2.3
million, including a special, net pre-tax charge of $1.8 million, compared with
operating income of $3.4 million in the 2003 first quarter. Excluding special
items, the 2004 first quarter increase in operating income of $0.7 million
compared with the 2003 first quarter primarily was due to higher sales volumes
primarily resulting from increased demand in the international markets
(approximately $5 million); partially offset by lower prices (approximately $2
million) and higher operating costs (approximately $2 million).




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##### Table of Contents



- 43 - Note: Supplemental Data The following table summarizes Wire and Cables special items for the
first quarters of 2004 and 2003 and the resultant earnings excluding these
special items: (Unaudited; $ in millions) First Quarter2004
    
    2003Special, pre-tax items
    
    $
    (1.8
    )
    
    
    Segment operating earnings
excluding special items
    
    $
    4.1
    
    
    
    3.4
 Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. 
 OTHER MATTERS RELATING TO THE
STATEMENT OF CONSOLIDATED OPERATIONS Cost of Products Sold Cost of products sold increased $291.1 million in the 2004 first quarter
compared with the 2003 first quarter. The increase was attributable to higher
copper prices for purchased cathode (approximately $119 million), higher
purchased copper cathode volumes (approximately $67 million) and higher costs
of molybdenum purchased from third parties as well as by-product molybdenum
purchased from certain of our U.S. copper operations (approximately $52
million). Depreciation, Depletion and Amortization Depreciation, depletion and amortization expense was $124.9 million in the
2004 first quarter, compared with $101.6 million in the 2003 first quarter.
The increase of $23.3 million was due to a net production increase at PDMC
primarily associated with the full consolidation of Candelaria and El Abra
(approximately $20 million). Selling and General Administrative Expense Our selling and general administrative expense increased $5.8 million in
the 2004 first quarter compared with the 2003 first quarter. The increase
primarily resulted from employee benefits mostly associated with mark-to-market
adjustments for stock unit plans (approximately $2 million), higher consulting
and professional fees (approximately $1 million), higher restricted stock
amortization associated with issuance of additional shares (approximately $1
million) and higher expenses associated with sub-leases at vacated offices
(approximately $1 million). Exploration and Research Expense Our net exploration and research expense was $13.6 million in the 2004
first quarter, compared with $9.6 million in the 2003 first quarter. The
increase primarily resulted from higher PDMC exploration expense (approximately
$4 million). Interest Expense Interest expense increased $3.0 million in the 2004 first quarter compared
with the 2003 first quarter. The increase primarily was attributable to the
impact of fully consolidating El Abra and Candelaria (approximately $2
million). Early Debt Extinguishment Costs In March 2004, the Company redeemed its 8.375 percent debentures due in
2023 with a book value of approximately $149.7 million for a total of $152.7 million, plus
accrued interest. This resulted in a 2004 first quarter pre-tax loss of $3.9
million for early debt extinguishment costs, including certain book adjustments
of $1.1 million. In March 2004, the Company completed tender offers for its 6.625 percent
Notes due 2005 and its 7.375 percent Notes due in 2007. The tender offers
resulted in the retirement of long-term debt with a book value of
approximately $305 million,
which resulted in a 2004 first quarter pre-tax loss of $18.5 million for early
debt extinguishment costs, including purchase premiums and certain book
adjustments. Miscellaneous Income and Expense, Net Miscellaneous income (expense), net, increased $1.3 million in the 2004
first quarter compared with the 2003 first quarter. The increase resulted
primarily from mark-to-market benefits on non-qualified pension plan assets
($1.5 million) and the Chino financial assurance trust ($1.6 million), higher
dividends received ($1.3 million), lower shutdown expense ($1.1 million) and
higher interest income ($0.8 million); partially offset by a cost-basis
investment write-down ($3.6 million) and higher foreign currency exchange
losses ($2.0 million).




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- 44 - Provision for Taxes on Income The Companys income tax provision for the 2004 first quarter principally
resulted from taxes on earnings at international operations ($36.9 million)
including benefit from release of valuation allowance ($24.5 million) and taxes
on earnings at U.S. operations ($0.1 million) including benefit from release of
valuation allowance ($24.3 million); partially offset by the reversal of the
valuation allowance associated with deferred tax assets that are expected to be
realized after 2004 at our 51 percent-owned El Abra copper mine ($30.8
million). The Companys income tax provision for the 2003 first quarter principally
resulted from taxes on earnings at international operations ($14.9 million)
that could not be offset by losses at domestic operations. Minority Interests in Consolidated Subsidiaries Minority interests were $63.6 million in the 2004 first quarter, compared
with $2.1 million in the 2003 first quarter. Prior to January 1, 2004, the El
Abra and Candelaria mines were accounted for on a proportional consolidation
basis. Effective January 1, 2004, both mines are fully consolidated and the
respective partners interest are reflected as minority interests. Cumulative Effect of Accounting Change On January 1, 2003, we adopted SFAS No. 143, Accounting for Asset
Retirement Obligations. With the adoption of this Statement, we recognize
asset retirement obligations (AROs) as liabilities when incurred, with the
initial measurement at fair value. These liabilities are accreted to full
value over time through charges to income. In addition, asset retirement costs
are capitalized as part of the related assets carrying value and are
depreciated on a units-of-production basis over the assets respective useful
life. Our AROs consist primarily of costs associated with mine reclamation and
closure activities. These activities, which tend to be site specific,
generally include costs for earthwork, revegetation, water treatment and
demolition. Upon adoption, we recorded a cumulative effect gain of $8.4
million, net of deferred income taxes. In the first quarter 2003, the effect
of adopting SFAS No. 143 decreased loss before cumulative effect of accounting
change by approximately $3 million, or 4 cents per common share. 
 CHANGES IN FINANCIAL CONDITION Chino Mines Company Acquisition As discussed in Note 2, Acquisitions and Divestitures, of the Companys
Form 10-K for the year ended December 31, 2003, we acquired, through a wholly
owned subsidiary, the one-third partnership interest in Chino Mines Company
held by Heisei on December 19, 2003. Heisei informed the Company that it
decided to exit the partnership because Chino was no longer a strategic fit for
its business. Under the terms of the agreement, Heisei paid us $114 million in
cash, including approximately $64 million placed into a trust to fund one-third
of Chinos financial assurance obligations under New Mexico mining reclamation
laws. Working Capital During the first quarter of 2004, net working capital balances (excluding
cash and cash equivalents and debt) increased $136.7 million. This increase
resulted primarily from:  
    
    a $226.4 million increase in accounts receivable primarily due
to higher copper prices (approximately $132 million), the impact of
full consolidation of El Abra and Candelaria (approximately $34
million), higher molybdenum sales volumes and prices (approximately
$17 million), higher Specialty Chemicals sales volumes (approximately
$10 million) and higher Wire and Cable sales volumes (approximately
$37 million);  
    
    an $18.8 million increase in supplies primarily due to full
consolidation of El Abra and Candelaria (increase of approximately
$18 million);  
    
    a $25.5 million increase in prepaid expenses and other current
assets primarily due to the timing of payments for consolidated risk
insurance (approximately $10 million) and the timing of major
maintenance activities (approximately $8 million) at
our Miami copper smelter (the cost of such activities is deferred and
charged to operations during the subsequent periods benefited);
partially offset by  
    
    a $96.0 million increase in accounts payable and accrued
expenses primarily due to higher cathode and




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##### Table of Contents



- 45 -  concentrate purchases
(approximately $32 million), the timing of payments (approximately
$14 million), the impact of fully consolidating El Abra and Candelaria (approximately $13
million) and higher interest accrued (approximately $23 million); and  
    
    a $32.6 million increase in accrued income taxes due to higher
foreign taxes. Debt At March 31, 2004, our total debt was $1,871.6 million, compared with
$1,959.0 million at year-end 2003. A $337.4 million decrease in total debt
from December 31, 2003, was partially offset by the recognition of $250 million
of debt due to the full consolidation of El Abra and Candelaria. Our ratio of
debt to total capitalization was 33.0 percent at March 31, 2004, compared with
38.5 percent at December 31, 2003. In March 2004, the Company completed the issuance of $150 million in
30-year senior notes pursuant to its $750 million universal shelf registration
statement. The notes were issued at a coupon of 6.125 percent and sold at a
price of 99.874 for a yield of 6.134 percent. The proceeds from the offering
were used to redeem the Companys 8.375 percent debentures due in 2023. These
debentures had a book value of approximately $149 million and were redeemed for
a total of $152.7 million, plus accrued interest, resulting in a 2004 first
quarter pre-tax loss of $3.9 million, including book adjustments of $1.1
million. The Company estimates that the net effect of this transaction will
reduce annual interest expense by approximately $3 million before taxes. In March 2004, the Company completed tender offers for its 6.625 percent
Notes due in 2005 and its 7.375 percent Notes due in 2007. The tender offers
resulted in the retirement of long-term debt with a book value of
approximately $305 million,
which resulted in a 2004 first quarter pre-tax loss of $18.5 million, including
purchase premiums and certain book adjustments of $12.2 million. On February 27, 2004, Phelps Dodge deposited with the Trustee an amount
sufficient to redeem its 7.25 percent Industrial Revenue Bonds and Pollution
Control Bonds (Amax Nickel Refining Company, Inc.) Series 1979, which were due
in 2009. These bonds had an aggregate book value of approximately $6 million
and were purchased at 100 percent of their face value, plus accrued interest.
The Company estimates that these debt repurchases will reduce annual interest
payments by approximately $21 million before taxes. We continue working to reduce outstanding debt in order to reach our
internal target of a 25 percent debt to capitalization ratio. In June 2004, we
likely will prepay all of the outstanding debt at Candelaria (approximately
$183 million, including interest rate swaps). We are also considering
prepaying a significant portion of El Abras senior debt in the fourth quarter
of 2004 (depending on copper prices). Other debt prepayment opportunities
under consideration include redeemable tax-exempt bonds ($81 million due in
2009 and $90 million due in 2013). A new unsecured revolving credit agreement between the Company and several
lenders became effective on April 20, 2004. The facility is to be used for
general corporate purposes. The agreement permits borrowings of up to $1.1
billion, with a $300 million sub-limit for letters of credit, until its
maturity on April 20, 2009. This agreement provides for a facility fee
(currently 25 basis points (0.25 percent)) ranging from 12.5 basis points to 50
basis points (depending on the Companys public debt rating) on total
commitments. 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 LIBOR or fixed rates
offered independently by the several lenders, for maturities of up to 360 days.
In addition, if utilization exceeds one-third of total commitments there is a
utilization fee ranging from 12.5 basis points to 25 basis points (depending on
the Companys public debt rating). Fees for letters of credit (currently 87.5
basis points) range from 47.5 basis points to 100 basis points (depending on
the Companys public debt rating) on letters of credit issued, plus a 12.5
basis point issuance fee. The agreement requires the Company to maintain a
minimum EBITDA (as defined in the agreement) to interest ratio of 2.25 on a
rolling four-quarter basis, and limits consolidated indebtedness to 55 percent
of total consolidated capitalization. This agreement replaced an earlier
five-year, $1 billion revolving credit agreement that was scheduled to mature
on May 10, 2005. Intangible Assets, Net At the March 2004 meeting, the Emerging Task Force (EITF) of the FASB
discussed EITF Issue 04-2 Whether Mineral Rights are Tangible or Intangible
Assets and Related Issues and reached a consensus that mineral rights should
be




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##### Table of Contents



- 46 - removed as examples of intangible assets in SFAS Nos. 141 and 142. FASB is
expected to ratify this consensus. At March 31, 2004, if ratified, approximately $413 million associated with mineral rights primarily
relating to our South American mining concessions would be reclassified from
intangible assets to property, plant and equipment, net. This reclassification would have no impact on total assets, total liabilities and shareholders equity or consolidated net income. Capital Expenditures and Investments Capital expenditures and investments during the 2004 first quarter were
$28.0 million for PDMC, $8.9 million for PDI and $9.8 million for other
Corporate-related activities. Capital expenditures and investments in the
corresponding 2003 period were $19.9 million for PDMC, $6.4 million for PDI and
$1.0 million for other Corporate-related activities. We expect capital
expenditures and investments for the year 2004 to approximate $325 million,
comprising approximately $245 million for PDMC, approximately $65 million for
PDI, and approximately $15 million for Corporate-related activities. The
increase is primarily due to an increase in growth and technology capital and
an increase in capital to ramp-up operations. Dividends On February 4, 2004, Phelps Dodge declared a quarterly dividend of $1.6875
per mandatory convertible preferred share, to be paid on May 17, 2004. Contractual Obligations The
following table summarizes Phelps Dodges contractual obligations at
March 31, 2004, and the effect such obligations are expected to have on its
liquidity and cash flow in future periods for short-term debt, long-term debt
(including capital lease obligations) and take-or-pay contracts. The following
table, as of March 31, 2004, reflects an update of only the major changes to
the similar table presented in the Companys Form 10-K at December 31, 2003: Debt and Take-or-Pay Contracts as of March 31, 2004 (Unaudited; $ in millions) Less ThanTotal
    
    1 Year
    
    1-3 YearsShort-term debt
    
    $
    27.3
    
    
    
    27.3
    
    
    
    Long-term debt
    
    
    1,844.3
    
    
    
    258.2
    
    
    
    348.0Take-or-pay contracts
    
    
    537.6
    
    
    
    202.6
    
    
    
    166.7
 After4-5 Years
    
    5 YearsShort-term debt
    
    $
    
    
    
    
    Long-term debt
    
    
    196.6
    
    
    
    1,041.5Take-or-pay contracts
    
    
    92.6
    
    
    
    75.7
 Our take-or-pay contracts primarily include contracts for electricity
(approximately $210 million), contracts for petroleum-based feedstock for
conversion into carbon black (approximately $136 million), contracts for copper
anode for deliveries of specified volumes at market-based prices to our El Paso
Refinery (approximately $79 million), contracts for natural gas (approximately
$26 million), contracts for sulfuric acid for deliveries of specified volumes
based primarily on negotiated rates to El Abra and Cerro Verde (approximately
$19 million), transportation and port fee commitments (approximately $31
million) and oxygen obligations for deliveries of specified volumes at fixed
prices to Bagdad (approximately $11 million). Approximately 85 percent of our
take-or-pay electricity obligations are through PD Energy Services, the legal
entity used to manage power for PDMC at generally fixed-priced arrangements.
PD Energy Services has the right and the ability to resell the electricity as
circumstances warrant. Obligations for petroleum-based feedstock for
conversion into carbon black are for specific quantities, and ultimately will
be purchased based upon prevailing market prices at the time. These
petroleum-based products may be re-sold to others if circumstances warrant.
Obligations for natural gas provide for deliveries of specified volumes, at
market-based prices, primarily




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- 47 - due to our carbon black operations in Brazil. Transportation obligations
total approximately $20 million primarily for importing sulfuric acid to El
Abra. Our carbon black facility in the United Kingdom has port fee commitments
of approximately $11 million over approximately 45 years. Guarantees Phelps Dodge Corporation as a guarantor is involved in financial
guarantees (including option guarantees and indirect guarantees of the
indebtedness of others) and certain indemnity obligations. Refer to Note 20,
Guarantees, of the Companys Form 10-K for the year ended December 31, 2003,
for additional discussion regarding our financial guarantee and indemnity
obligations. As of March 31, 2004, there have been no significant changes in
our financial guarantee obligations and no liabilities recorded in connection
with our guarantees that existed as of December 31, 2003. Additionally, there
were no guarantees issued in the first three months of 2004 that had a material
impact on our consolidated financial statements. Other Items that May Affect Liquidity New Mexico and Colorados mined-land reclamation laws require financial
assurance covering the future cost of reclamation. In contrast, Arizonas Mine
Land Reclamation Act permits a company to satisfy financial assurance
requirements by demonstrating it has financial strength to fund future
reclamation costs identified in an approved reclamation plan. An
investment-grade bond rating is one of the financial strength tests under the
Arizona Act. Phelps Dodges senior unsecured debt currently carries an
investment-grade rating, albeit at the lowest level in that category.
Additionally, the Company currently meets another financial strength test in
Arizona that is not ratings dependent. For New Mexico, financial assurance may be provided in several forms,
including third-party performance guarantees, collateral bonds, surety bonds,
letters of credit and trust funds. Based upon current permit terms and
agreements with the state of New Mexico, up to 70 percent of the financial
assurance for Chino, Tyrone and Cobre may be provided in the form of
third-party performance guarantees. Under the Mining Act Rules and the terms
of the guarantees, certain financial soundness tests must be met by the
guarantor. A publicly traded company may satisfy these financial tests by
showing that its senior unsecured debt rating is investment grade and that it
meets certain requirements regarding assets in relation to the required amount
of financial assurance. Phelps Dodge has provided guarantees for Chino and
Tyrone and expects to provide a guarantee for a portion of Cobres financial
assurance. Phelps Dodges senior unsecured debt currently carries an
investment-grade rating. If the Companys bond rating falls below
investment-grade, unless a different financial soundness test is met, the New
Mexico mining operations that have a guarantee for a portion of their financial
assurance would be required to supply financial assurance in another form. The cost of surety bonds (the traditional source of financial assurance) has
increased significantly in recent years. Also, many surety companies are now
requiring an increased level of collateral supporting the bonds. If surety
bonds are unavailable at commercially reasonable terms, the Company could be
required to post other collateral or possibly cash or cash equivalents directly
in support of financial assurance obligations. The Chilean government currently is considering proposed legislation
that, under certain circumstances, would impose a royalty on
mining revenues generated in Chile at some point in the future. Any
potential impact on Phelps Dodge cannot be reasonably predicted at this time. Diesel Fuel and Natural Gas Price Protection Programs We purchase significant quantities of diesel fuel and natural gas to
operate our facilities as an input to the manufacturing process and as an input
for electricity generation and copper refining. To reduce the Companys exposure to price increases in these energy
products, the Company enters into energy price protection programs for our
North and South American operations. Our diesel fuel and natural gas price
protection programs consist of purchasing a combination of out-of-the-money
(OTM) diesel fuel and natural gas call option contracts and fixed-price swaps.
The OTM call option contracts give the holder the right, but not the
obligation, to purchase a specific commodity at a pre-determined price, or
strike price. OTM call options are options that have a strike price above
the current market price for that commodity. Call options allow the Company to
cap the commodity purchase cost at the strike price of the option while
allowing the Company the ability to purchase the commodity at a lower cost when
market prices are lower than the strike price. Fixed price swaps allow us to
establish a fixed commodity purchase price for delivery during a specific
future period.




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- 48 - Our diesel fuel price protection program began in North America in 2000
and expanded to our South American mining operations in 2003. At March 31,
2004, we had outstanding diesel fuel option contracts in place to hedge
approximately 37.9 million gallons of diesel fuel through
December 2004. As of March 31, 2003, our diesel fuel price protection program
had 19.4 million gallons of diesel fuel hedged. Gains and losses on these
hedge transactions were substantially offset by a similar amount of gain or
loss on the underlying energy purchases. As of March 31, 2004, our natural gas price protection program, which
started in 2001, had outstanding natural gas option contracts in place to hedge
approximately 5.7 million decatherms of natural gas through December 2004. As
of March 31, 2003, our natural gas price protection program had outstanding
natural gas option contracts in place to hedge approximately 2.6 million
decatherms of natural gas. Gains and losses on these hedge transactions were
substantially offset by a similar amount of gain or loss on the underlying
purchases. 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk There have been no material changes in the Companys market risk during
the quarter ended March 31, 2004. For additional information on market risk,
refer to pages 39 through 41 and 71 through 74 of our report on Form 10-K for
the year ended December 31, 2003. 
 Item 4. Controls and Procedures The Company maintains a system of disclosure controls and procedures that
is designed to ensure information required to be disclosed by the Company is
accumulated and communicated to management, including our chief executive
officer and chief financial officer, in a timely manner. An evaluation of the effectiveness of this system of disclosure controls
and procedures was performed under the supervision and with the participation
of the Companys management, including the Companys chief executive officer
and chief financial officer, as of the end of the period covered by this
report. Based upon this evaluation, the Companys management, including the
Companys chief executive officer and chief financial officer, concluded that
the current system of controls and procedures is effective. The Company maintains a system of internal control over financial
reporting. There has been no change in the Companys internal control over
financial reporting that occurred during the Companys first fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. 
 Part II. Other Information 
 Item 1. Legal Proceedings I. Reference is made to paragraph VIII of Part I, Item 3, Legal
Proceedings, of the Companys Form 10-K for the year ended December 31, 2003. On April 12, 2004, the Mining and Minerals Division of the New Mexico
Energy, Minerals and Natural Resources Department (MMD) approved the closeout
plan for Phelps Dodge Tyrone, Inc. (Tyrone), and MMD and New Mexico Environment
Department approved Tyrones financial assurance arrangement. II. Reference is made to paragraph X of Part I, Item 3, Legal
Proceedings, of the Companys Form 10-K for the year ended December 31, 2003. Columbian Chemicals Company (Columbian) signed a Consent Agreement and
First Order (Consent) resolving this matter on April 19, 2004. The Consent
requires Columbian to pay a civil penalty of $39,300 and fund a Supplemental
Environmental Project in the amount of $75,700 for a total settlement amount of
$115,000. III. Reference is made to paragraph XIV of Part I, Item 3, Legal
Proceedings, of the Companys Form 10-K for the year ended December 31, 2003. On February 26, 2004, an order was entered staying the cases of the
Companys wholly-owned subsidiary, Western Nuclear, Inc. (and the two other
companies involved in the proceeding) and the Environmental Protection Agency
pending the outcome of mediation intended to settle all outstanding issues. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Any exhibits required to be filed by the Company are listed in
the Index to Exhibits.(b)
    
    During the quarter ended March 31, 2004, the Company filed the
following Current Reports on




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- 49 -  Form 8-K: (i) Current Report on Form
8-K bearing cover date of January 29, 2004, in which the Company
reported under Item 12 that it had issued a press release announcing
financial results for the three months and year ended December 31, 2003; (ii) Current Report on Form 8-K bearing cover
date of February 26, 2004, in which the Company reported under Item
12 that it was revising its reported results for the three months
and year ended December 31, 2003; and (iii) Current Report on Form
8-K bearing cover date of March 4, 2004, in which the Company
reported under Item 7, the filing of an Underwriting Agreement,
dated March 1, 2004, between the Company and Citigroup Global
Markets Inc. 
 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. PHELPS DODGE CORPORATION
(Corporation or Registrant) Date: April 28, 2004
    By:
    /s/ Stanton K. RideoutStanton K. RideoutVice President and Controller
(Principal Accounting Officer) 
 Index to Exhibits 4.1
    
    Credit Agreement, effective April 20, 2004, among the Company, the
Lenders parties thereto, the book manager and the syndication agents named
therein, and Citibank N.A., as administrative agent for the Lenders (SEC
File No. 1-82).11
    
    Computation of per share earnings.12
    
    Computation of ratios of total debt to total capitalization.15
    
    Letter from PricewaterhouseCoopers LLP with respect to unaudited interim
financial information.31
    
    Certifications of J. Steven Whisler, Chairman and Chief Executive Officer
of the Company, and Ramiro G. Peru, Senior Vice President and Chief
Financial Officer of the Company, pursuant to Rule 13a-14(a) of the
Exchange Act, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.32
    
    Certifications of J. Steven Whisler, Chairman and Chief Executive Officer
of the Company, and Ramiro G. Peru, Senior Vice President and Chief
Financial Officer of the Company, pursuant to 18 United States Code
Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.