##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION   FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 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
[   ]. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 in the Exchange Act). Yes
[x]            No
[   ] . Number of Common Shares
outstanding at July 23, 2004: 93,999,634 shares.




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PHELPS DODGE CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended June 30, 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
    
    
    7Review by Independent Registered Public Accounting Firm
    
    
    23Report of Independent Registered Public Accounting Firm
    
    
    23Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations
    
    
    24Results of Phelps Dodge Mining Company
    
    
    28Results of Phelps Dodge Industries
    
    
    50Other Matters Relating to the Statement of Consolidated Operations
    
    
    52Changes in Financial Condition
    
    
    55Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    59Item 4. Controls and Procedures
    
    
    60Part II. Other InformationItem 1. Legal Proceedings
    
    
    60Item 4. Submission of Matters to a Vote of Security Holders
    
    
    61Item 6. Exhibits and Reports on Form 8-K
    
    
    61Signatures
    
    
    61Index to Exhibits
    
    
    61EX-11EX-12EX-15EX-31EX-32
  - i -




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##### Table of Contents



PHELPS DODGE CORPORATION AND SUBSIDIARIES 
  
 Item 1. Financial Statements PHELPS DODGE CORPORATION 
 STATEMENT OF
CONSOLIDATED OPERATIONS
  Six Months EndedSecond Quarter
    
    June 30,2004
    
    2003
    
    2004
    
    2003(see Note 4)
    
    
    
    
    
    (see Note 4)Sales and other operating revenues
    
    $
    1,650.9
    
    
    
    962.2
    
    
    
    3,247.9
    
    
    
    1,940.2Operating costs and expensesCost of products sold (exclusive of items shown separately below)
    
    
    1,133.6
    
    
    
    787.0
    
    
    
    2,232.0
    
    
    
    1,594.3Depreciation, depletion and amortization
    
    
    124.4
    
    
    
    107.2
    
    
    
    249.3
    
    
    
    208.8Selling and general administrative expense
    
    
    34.2
    
    
    
    35.8
    
    
    
    72.7
    
    
    
    68.5Exploration and research expense
    
    
    15.5
    
    
    
    12.9
    
    
    
    29.1
    
    
    
    22.5Special items and provisions, net (see Note 3)
    
    
    (11.5
    )
    
    
    2.1
    
    
    
    (4.7
    )
    
    
    0.21,296.2
    
    
    
    945.0
    
    
    
    2,578.4
    
    
    
    1,894.3Operating income
    
    
    354.7
    
    
    
    17.2
    
    
    
    669.5
    
    
    
    45.9Interest expense
    
    
    (32.3
    )
    
    
    (37.0
    )
    
    
    (71.3
    )
    
    
    (73.0
    )Capitalized interest
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.2Early debt extinguishment costs (see Note 11)
    
    
    (15.2
    )
    
    
    
    
    
    
    (37.6
    )
    
    
    Miscellaneous income and expense, net
    
    
    1.3
    
    
    
    12.3
    
    
    
    3.5
    
    
    
    13.2Income (loss) before taxes, minority interests, equity in net earnings of
affiliated companies and cumulative effect of accounting change
    
    
    308.7
    
    
    
    (7.4
    )
    
    
    564.4
    
    
    
    (13.7
    )Provision for taxes on income (see Note 8)
    
    
    (40.7
    )
    
    
    (6.5
    )
    
    
    (46.9
    )
    
    
    (21.9
    )Minority interests in consolidated subsidiaries
    
    
    (42.0
    )
    
    
    (1.9
    )
    
    
    (105.6
    )
    
    
    (4.0
    )Equity in net earnings of affiliated companies
    
    
    0.6
    
    
    
    0.6
    
    
    
    0.4
    
    
    
    1.0Income (loss) before cumulative effect of accounting change
    
    
    226.6
    
    
    
    (15.2
    )
    
    
    412.3
    
    
    
    (38.6
    )Cumulative effect of accounting change, net of tax of $(1.3) in 2003 (see Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.4Net income (loss)
    
    
    226.6
    
    
    
    (15.2
    )
    
    
    412.3
    
    
    
    (30.2
    )Preferred stock dividends
    
    
    (3.4
    )
    
    
    (3.4
    )
    
    
    (6.8
    )
    
    
    (6.8
    )Net income (loss) applicable to common shares
    
    $
    223.2
    
    
    
    (18.6
    )
    
    
    405.5
    
    
    
    (37.0
    )Weighted average number of common shares outstanding  basic
    
    
    92.9
    
    
    
    88.6
    
    
    
    92.3
    
    
    
    88.6Basic earnings (loss) per common share before cumulative effect of accounting change
    
    $
    2.40
    
    
    
    (0.21
    )
    
    
    4.39
    
    
    
    (0.51
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.09Basic earnings (loss) per common share
    
    $
    2.40
    
    
    
    (0.21
    )
    
    
    4.39
    
    
    
    (0.42
    )Weighted average number of common shares outstanding  diluted*
    
    
    98.4
    
    
    
    88.6
    
    
    
    98.2
    
    
    
    88.6Diluted earnings (loss) per common share before cumulative effect of accounting change*
    
    $
    2.30
    
    
    
    (0.21
    )
    
    
    4.20
    
    
    
    (0.51
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.09Diluted earnings (loss) per common share*
    
    $
    2.30
    
    
    
    (0.21
    )
    
    
    4.20
    
    
    
    (0.42
    )
  *
    
    Diluted earnings (loss) per common share would have been anti-dilutive
for the quarter and six months ended June 30, 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. -1-




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PHELPS DODGE CORPORATION 
 CONSOLIDATED BALANCE SHEET
  June 30,
    
    December 31,2004
    
    2003(see Note 4)AssetsCurrent assets:Cash and cash equivalents
    
    $
    830.8
    
    
    
    683.8Accounts receivable, less allowance for doubtful
accounts (2004 - $12.7; 2003 - $10.1)
    
    
    631.0
    
    
    
    461.3Mill and leach stockpiles
    
    
    21.7
    
    
    
    22.4Inventories
    
    
    414.5
    
    
    
    379.7Supplies
    
    
    174.4
    
    
    
    150.7Prepaid expenses and other current assets
    
    
    52.4
    
    
    
    31.0Deferred income taxes
    
    
    58.0
    
    
    
    61.1Current assets
    
    
    2,182.8
    
    
    
    1,790.0Investments and long-term receivables
    
    
    102.8
    
    
    
    150.3Property,
plant and equipment, net (see Note 13)
    
    
    5,319.6
    
    
    
    4,962.2Long-term mill and leach stockpiles
    
    
    125.5
    
    
    
    89.2Deferred income taxes
    
    
    35.5
    
    
    
    7.6Goodwill
    
    
    95.3
    
    
    
    98.4Intangible assets, net (see Note 13)
    
    
    5.5
    
    
    
    5.6Other assets and deferred charges
    
    
    194.3
    
    
    
    169.6$
    8,061.3
    
    
    
    7,272.9LiabilitiesCurrent liabilities:Short-term debt
    
    $
    35.4
    
    
    
    50.5Current portion of long-term debt
    
    
    207.7
    
    
    
    204.6Accounts payable and accrued expenses
    
    
    828.6
    
    
    
    700.7Dividends payable
    
    
    26.8
    
    
    
    3.4Accrued income taxes
    
    
    52.9
    
    
    
    56.1Current liabilities
    
    
    1,151.4
    
    
    
    1,015.3Long-term debt
    
    
    1,395.3
    
    
    
    1,703.9Deferred income taxes
    
    
    435.5
    
    
    
    410.2Other liabilities and deferred credits
    
    
    1,015.3
    
    
    
    1,009.53,997.5
    
    
    
    4,138.9Commitments and contingencies (see Notes 5, 6 and 8)Minority interests in consolidated subsidiaries
    
    
    459.1
    
    
    
    70.2Shareholders equityCommon shares, par value $6.25; 200.0 shares authorized;
93.8 outstanding in 2004 and 91.0 outstanding in 2003 after
deducting 12.0 and 17.1 shares held in treasury in 2004
and 2003, respectively
    
    
    586.0
    
    
    
    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
    
    
    1,793.0
    
    
    
    1,642.5Retained earnings
    
    
    1,636.7
    
    
    
    1,254.6Accumulated other comprehensive loss
    
    
    (388.1
    )
    
    
    (393.5
    )Other
    
    
    (24.9
    )
    
    
    (10.3
    )3,604.7
    
    
    
    3,063.8$
    8,061.3
    
    
    
    7,272.9
 See Notes to Consolidated Financial Information. -2-




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PHELPS DODGE CORPORATION 
 CONSOLIDATED STATEMENT
OF CASH FLOWS
  Six Months EndedJune 30,2004
    
    2003(see Note 4)Operating activitiesNet income
(loss)
    
    $
    412.3
    
    
    
    (30.2
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    249.3
    
    
    
    208.8Deferred income tax provision (benefit)
    
    
    (21.1
    )
    
    
    3.5Equity earnings, net of dividends received
    
    
    1.9
    
    
    
    (0.3
    )Special items and provisions
    
    
    6.2
    
    
    
    (6.2
    )Early debt extinguishment costs
    
    
    37.6
    
    
    
    Minority interests in consolidated subsidiaries
    
    
    105.6
    
    
    
    4.0Cumulative effect of accounting change
    
    
    
    
    
    
    (9.7
    )Changes in current assets and liabilities:Accounts receivable
    
    
    (161.1
    )
    
    
    (86.8
    )Repayment from sale of accounts receivable
    
    
    
    
    
    
    (5.3
    )Mill and leach stockpiles
    
    
    5.5
    
    
    
    16.3Inventories
    
    
    (31.2
    )
    
    
    18.8Supplies
    
    
    (6.7
    )
    
    
    1.6Prepaid expenses
    
    
    (20.7
    )
    
    
    (2.7
    )Interest payable
    
    
    (4.0
    )
    
    
    0.5Other accounts payable
    
    
    115.9
    
    
    
    (9.2
    )Accrued income taxes
    
    
    (6.6
    )
    
    
    13.9Other accrued expenses
    
    
    14.2
    
    
    
    (47.9
    )Other operating, net
    
    
    (17.5
    )
    
    
    (32.1
    )Net cash provided by operating activities
    
    
    679.6
    
    
    
    37.0Investing activitiesCapital outlays
    
    
    (96.4
    )
    
    
    (76.7
    )Capitalized interest
    
    
    (0.3
    )
    
    
    (0.2
    )Investment in subsidiaries
    
    
    (0.2
    )
    
    
    (0.6
    )Proceeds from asset dispositions
    
    
    1.7
    
    
    
    13.1Other
investing, net
    
    
    2.8
    
    
    
    3.4Net cash used in investing activities
    
    
    (92.4
    )
    
    
    (61.0
    )Financing activitiesProceeds from issuance of debt
    
    
    149.8
    
    
    
    23.2Payment of debt
    
    
    (714.1
    )
    
    
    (78.3
    )Preferred dividends
    
    
    (6.8
    )
    
    
    (6.8
    )Issuance of shares, net
    
    
    167.1
    
    
    
    Debt issue costs
    
    
    (7.2
    )
    
    
    Other financing, net
    
    
    (57.3
    )
    
    
    34.3Net cash used in financing activities
    
    
    (468.5
    )
    
    
    (27.6
    )Increase (decrease) in cash and cash equivalents
    
    
    118.7
    
    
    
    (51.6
    )Increase at beginning of 2004 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
    
    $
    830.8
    
    
    
    298.2
 See Notes to Consolidated Financial Information. -3-




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##### Table of Contents



PHELPS DODGE CORPORATION 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
  Common Shares
    
    Preferred Shares
    
    Capital in
    
    
    
    
    
    AccumulatedOtherNumber
    
    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
    
    
    2.6
    
    
    
    16.0
    
    
    
    
    
    
    
    
    
    
    
    134.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150.0Restricted shares issued/cancelled, net
    
    
    0.2
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    17.1
    
    
    
    
    
    
    
    
    
    
    
    (14.6
    )
    
    
    4.0Common shares purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Dividends on preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.8
    )
    
    
    
    
    
    
    
    
    
    
    (6.8
    )Dividends on common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23.4
    )
    
    
    
    
    
    
    
    
    
    
    (23.4
    )Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    412.3
    
    
    
    
    
    
    
    
    
    
    
    412.3Other comprehensive income (loss), net of tax:Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.8
    )
    
    
    
    
    
    
    (6.8
    )Net gain on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.5
    
    
    
    
    
    
    
    12.5Other investment adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.5
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.4
    
    
    
    
    
    
    
    5.4Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    417.7Balance at June 30, 2004
    
    
    93.8
    
    
    $
    586.0
    
    
    
    2.0
    
    
    $
    2.0
    
    
    $
    1,793.0
    
    
    $
    1,636.7
    
    
    $
    (388.1
    )
    
    $
    (24.9
    )
    
    $
    3,604.7
 See Notes to Consolidated Financial Information. -4-




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##### Table of Contents



FINANCIAL DATA BY BUSINESS SEGMENT  U.S. Mines
    
    South American MinesCandelaria/Bagdad/
    
    Miami/
    
    Chino/
    
    
    
    
    
    Ojos del
    
    Cerro
    
    
    
    
    
    PrimaryMorenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    Salado*
    
    Verde
    
    El Abra*
    
    MolybdenumSecond Quarter 2004Sales and other operating revenues:Unaffiliated customers
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    95.3
    
    
    
    28.0
    
    
    
    97.1
    
    
    
    225.1Intersegment
    
    
    219.6
    
    
    
    201.5
    
    
    
    2.6
    
    
    
    45.9
    
    
    
    25.5
    
    
    
    46.5
    
    
    
    33.5
    
    
    
    66.0
    
    
    
    Depreciation, depletion and amortization
    
    
    19.2
    
    
    
    8.0
    
    
    
    1.2
    
    
    
    2.8
    
    
    
    3.0
    
    
    
    12.3
    
    
    
    8.1
    
    
    
    30.9
    
    
    
    7.9Operating income (loss) before special
items and provisions
    
    
    86.9
    
    
    
    91.4
    
    
    
    (3.1
    )
    
    
    10.4
    
    
    
    8.4
    
    
    
    49.3
    
    
    
    25.1
    
    
    
    64.6
    
    
    
    29.5Special items and provisions
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    (1.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Operating income (loss)
    
    
    86.5
    
    
    
    91.4
    
    
    
    (3.1
    )
    
    
    10.0
    
    
    
    6.6
    
    
    
    49.3
    
    
    
    25.1
    
    
    
    64.6
    
    
    
    29.8Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7.3
    )
    
    
    (3.0
    )
    
    
    (30.1
    )
    
    
    Assets at June 30
    
    
    967.0
    
    
    
    743.3
    
    
    
    108.4
    
    
    
    425.8
    
    
    
    174.2
    
    
    
    728.4
    
    
    
    491.4
    
    
    
    1,080.5
    
    
    
    814.9Expenditures for segment assets
    
    
    3.4
    
    
    
    7.4
    
    
    
    0.2
    
    
    
    5.2
    
    
    
    1.9
    
    
    
    5.3
    
    
    
    0.9
    
    
    
    1.2
    
    
    
    3.8Second Quarter 2003Sales and other operating revenues:Unaffiliated customers
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    60.0
    
    
    
    9.0
    
    
    
    30.0
    
    
    
    93.4Intersegment
    
    
    138.1
    
    
    
    119.4
    
    
    
    9.2
    
    
    
    8.4
    
    
    
    21.9
    
    
    
    7.1
    
    
    
    28.4
    
    
    
    20.8
    
    
    
    Depreciation, depletion and amortization
    
    
    20.3
    
    
    
    7.8
    
    
    
    1.5
    
    
    
    2.0
    
    
    
    3.5
    
    
    
    9.7
    
    
    
    7.3
    
    
    
    17.1
    
    
    
    6.8Operating income (loss) before special
items and provisions
    
    
    4.9
    
    
    
    18.3
    
    
    
    (2.6
    )
    
    
    (2.8
    )
    
    
    (4.5
    )
    
    
    13.6
    
    
    
    8.6
    
    
    
    5.2
    
    
    
    0.4Special items and provisions
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    4.9
    
    
    
    18.3
    
    
    
    (3.1
    )
    
    
    (2.8
    )
    
    
    (4.5
    )
    
    
    13.6
    
    
    
    8.6
    
    
    
    5.2
    
    
    
    0.4Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    Assets at June 30
    
    
    1,051.2
    
    
    
    749.0
    
    
    
    122.0
    
    
    
    297.1
    
    
    
    164.3
    
    
    
    643.6
    
    
    
    433.4
    
    
    
    539.9
    
    
    
    784.3Expenditures for segment assets
    
    
    3.8
    
    
    
    4.6
    
    
    
    0.1
    
    
    
    0.6
    
    
    
    
    
    
    
    1.0
    
    
    
    0.9
    
    
    
    0.5
    
    
    
    2.7
 Corporate,Manufac-
    
    
    
    
    
    PDMC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other &turing
    
    Other
    
    Elimi-
    
    PDMC
    
    Specialty
    
    Wire &
    
    PDI
    
    Elimi-& Sales
    
    Mining
    
    nations
    
    Subtotal
    
    Chemicals
    
    Cable
    
    Subtotal
    
    nations
    
    TotalsSecond Quarter 2004Sales and other operating revenues:Unaffiliated customers
    
    $
    803.4
    
    
    
    5.5
    
    
    
    
    
    
    
    1,254.5
    
    
    
    165.2
    
    
    
    231.2
    
    
    
    396.4
    
    
    
    
    
    
    
    1,650.9Intersegment
    
    
    110.9
    
    
    
    17.3
    
    
    
    (714.6
    )
    
    
    54.7
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    (54.8
    )
    
    
    Depreciation, depletion and amortization
    
    
    5.6
    
    
    
    1.1
    
    
    
    
    
    
    
    100.1
    
    
    
    11.8
    
    
    
    9.1
    
    
    
    20.9
    
    
    
    3.4
    
    
    
    124.4Operating income (loss) before special
items and provisions
    
    
    8.9
    
    
    
    (32.2
    )
    
    
    
    
    
    
    339.2
    
    
    
    15.9
    
    
    
    8.8
    
    
    
    24.7
    
    
    
    (20.7
    )
    
    
    343.2Special items and provisions
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (2.5
    )
    
    
    
    
    
    
    (2.5
    )
    
    
    (2.5
    )
    
    
    16.5
    
    
    
    11.5Operating income (loss)
    
    
    8.9
    
    
    
    (32.4
    )
    
    
    
    
    
    
    336.7
    
    
    
    15.9
    
    
    
    6.3
    
    
    
    22.2
    
    
    
    (4.2
    )
    
    
    354.7Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (40.6
    )
    
    
    (0.4
    )
    
    
    (1.0
    )
    
    
    (1.4
    )
    
    
    
    
    
    
    (42.0
    )Assets at June 30
    
    
    472.1
    
    
    
    1,277.1
    
    
    
    (1,384.2
    )
    
    
    5,898.9
    
    
    
    753.9
    
    
    
    582.4
    
    
    
    1,336.3
    
    
    
    826.1
    
    
    
    8,061.3Expenditures for segment assets
    
    
    3.1
    
    
    
    6.5
    
    
    
    (0.4
    )
    
    
    38.5
    
    
    
    3.5
    
    
    
    7.3
    
    
    
    10.8
    
    
    
    0.6
    
    
    
    49.9Second Quarter 2003Sales and other operating revenues:Unaffiliated customers
    
    $
    443.4
    
    
    
    5.7
    
    
    
    
    
    
    
    641.6
    
    
    
    166.1
    
    
    
    154.5
    
    
    
    320.6
    
    
    
    
    
    
    
    962.2Intersegment
    
    
    70.1
    
    
    
    17.7
    
    
    
    (410.2
    )
    
    
    30.9
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    (31.0
    )
    
    
    Depreciation, depletion and amortization
    
    
    4.0
    
    
    
    2.0
    
    
    
    
    
    
    
    82.0
    
    
    
    11.7
    
    
    
    8.9
    
    
    
    20.6
    
    
    
    4.6
    
    
    
    107.2Operating income (loss) before special
items and provisions
    
    
    6.5
    
    
    
    (21.3
    )
    
    
    
    
    
    
    26.3
    
    
    
    15.0
    
    
    
    3.5
    
    
    
    18.5
    
    
    
    (25.5
    )
    
    
    19.3Special items and provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.6
    )
    
    
    (2.1
    )Operating income (loss)
    
    
    6.5
    
    
    
    (21.3
    )
    
    
    
    
    
    
    25.8
    
    
    
    15.0
    
    
    
    3.5
    
    
    
    18.5
    
    
    
    (27.1
    )
    
    
    17.2Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    (1.9
    )Assets at June 30
    
    
    486.2
    
    
    
    1,490.6
    
    
    
    (1,593.4
    )
    
    
    5,168.2
    
    
    
    737.0
    
    
    
    518.2
    
    
    
    1,255.2
    
    
    
    534.5
    
    
    
    6,957.9Expenditures for segment assets
    
    
    1.9
    
    
    
    1.0
    
    
    
    
    
    
    
    17.1
    
    
    
    5.9
    
    
    
    4.1
    
    
    
    10.0
    
    
    
    22.9
    
    
    
    50.0
  *
    
    Second quarter 2004 reflects full consolidation of El Abra and
Candelaria; second quarter 2003 reflects El Abra and Candelaria on a
pro-rata basis (51 percent and 80 percent, respectively). -5-




---



##### Table of Contents



FINANCIAL DATA BY BUSINESS
SEGMENT(Unaudited; $ in millions) U.S. Mines
    
    South American MinesBagdad/
    
    Miami/
    
    Chino/
    
    
    
    
    
    Candelaria/Ojos del
    
    Cerro
    
    
    
    
    
    PrimaryMorenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    Salado*
    
    Verde
    
    El Abra*
    
    MolybdenumSix Months Ended June 30, 2004Sales and other operating revenues:Unaffiliated customers
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    181.6
    
    
    
    44.6
    
    
    
    196.3
    
    
    
    375.1Intersegment
    
    
    430.5
    
    
    
    372.3
    
    
    
    11.4
    
    
    
    82.6
    
    
    
    53.0
    
    
    
    118.9
    
    
    
    85.1
    
    
    
    140.3
    
    
    
    Depreciation, depletion and amortization
    
    
    37.3
    
    
    
    17.2
    
    
    
    2.4
    
    
    
    5.3
    
    
    
    6.0
    
    
    
    25.4
    
    
    
    16.3
    
    
    
    62.5
    
    
    
    15.2Operating income (loss) before special
items and provisions
    
    
    164.8
    
    
    
    146.3
    
    
    
    (3.8
    )
    
    
    25.4
    
    
    
    10.8
    
    
    
    118.1
    
    
    
    62.9
    
    
    
    139.2
    
    
    
    45.1Special items and provisions
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    (1.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Operating income (loss)
    
    
    164.4
    
    
    
    146.3
    
    
    
    (3.8
    )
    
    
    25.0
    
    
    
    9.0
    
    
    
    118.1
    
    
    
    62.9
    
    
    
    139.2
    
    
    
    45.4Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.2
    )
    
    
    (7.9
    )
    
    
    (79.6
    )
    
    
    Assets at June 30
    
    
    967.0
    
    
    
    743.3
    
    
    
    108.4
    
    
    
    425.8
    
    
    
    174.2
    
    
    
    728.4
    
    
    
    491.4
    
    
    
    1,080.5
    
    
    
    814.9Expenditures for segment assets
    
    
    7.0
    
    
    
    11.9
    
    
    
    0.2
    
    
    
    6.1
    
    
    
    2.2
    
    
    
    10.3
    
    
    
    1.8
    
    
    
    2.6
    
    
    
    6.1Six Months Ended June 30, 2003Sales and other operating revenues:Unaffiliated customers
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    119.2
    
    
    
    18.9
    
    
    
    61.5
    
    
    
    169.3Intersegment
    
    
    274.3
    
    
    
    214.8
    
    
    
    18.2
    
    
    
    17.8
    
    
    
    48.6
    
    
    
    30.6
    
    
    
    55.6
    
    
    
    41.8
    
    
    
    Depreciation, depletion and amortization
    
    
    39.0
    
    
    
    15.1
    
    
    
    3.4
    
    
    
    4.0
    
    
    
    6.8
    
    
    
    20.5
    
    
    
    14.6
    
    
    
    31.6
    
    
    
    12.9Operating income (loss) before special
items and provisions
    
    
    17.3
    
    
    
    25.0
    
    
    
    (3.3
    )
    
    
    (4.9
    )
    
    
    (8.9
    )
    
    
    36.7
    
    
    
    16.1
    
    
    
    10.8
    
    
    
    0.5Special items and provisions
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    17.3
    
    
    
    25.0
    
    
    
    (3.8
    )
    
    
    (4.9
    )
    
    
    (8.9
    )
    
    
    36.7
    
    
    
    16.1
    
    
    
    10.8
    
    
    
    0.5Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.4
    )
    
    
    
    
    
    
    Cumulative effect of accounting change
    
    
    3.6
    
    
    
    2.6
    
    
    
    (2.7
    )
    
    
    (4.3
    )
    
    
    2.7
    
    
    
    
    
    
    
    0.9
    
    
    
    (0.4
    )
    
    
    1.4Assets at June 30
    
    
    1,051.2
    
    
    
    749.0
    
    
    
    122.0
    
    
    
    297.1
    
    
    
    164.3
    
    
    
    643.6
    
    
    
    433.4
    
    
    
    539.9
    
    
    
    784.3Expenditures for segment assets
    
    
    9.9
    
    
    
    10.8
    
    
    
    0.1
    
    
    
    1.6
    
    
    
    0.2
    
    
    
    1.6
    
    
    
    1.9
    
    
    
    0.7
    
    
    
    5.2
 Manufac-
    
    
    
    
    
    PDMC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate,Other &turing &
    
    Other
    
    Elimi-
    
    PDMC
    
    Specialty
    
    Wire &
    
    PDI
    
    Elimi-Sales
    
    Mining
    
    nations
    
    Subtotal
    
    Chemicals
    
    Cable
    
    Subtotal
    
    nations
    
    TotalsSix Months Ended June 30, 2004Sales and other operating revenues:Unaffiliated customers
    
    $
    1,660.6
    
    
    
    10.6
    
    
    
    
    
    
    
    2,469.0
    
    
    
    329.1
    
    
    
    449.8
    
    
    
    778.9
    
    
    
    
    
    
    
    3,247.9Intersegment
    
    
    218.4
    
    
    
    33.4
    
    
    
    (1,435.8
    )
    
    
    110.1
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    (110.2
    )
    
    
    Depreciation, depletion and amortization
    
    
    10.8
    
    
    
    2.2
    
    
    
    
    
    
    
    200.6
    
    
    
    24.9
    
    
    
    18.1
    
    
    
    43.0
    
    
    
    5.7
    
    
    
    249.3Operating income (loss) before special
items and provisions
    
    
    12.7
    
    
    
    (52.1
    )
    
    
    
    
    
    
    669.4
    
    
    
    27.1
    
    
    
    12.9
    
    
    
    40.0
    
    
    
    (44.6
    )
    
    
    664.8Special items and provisions
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (2.5
    )
    
    
    
    
    
    
    (4.3
    )
    
    
    (4.3
    )
    
    
    11.5
    
    
    
    4.7Operating income (loss)
    
    
    12.7
    
    
    
    (52.3
    )
    
    
    
    
    
    
    666.9
    
    
    
    27.1
    
    
    
    8.6
    
    
    
    35.7
    
    
    
    (33.1
    )
    
    
    669.5Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103.7
    )
    
    
    (0.5
    )
    
    
    (1.4
    )
    
    
    (1.9
    )
    
    
    
    
    
    
    (105.6
    )Assets at June 30
    
    
    472.1
    
    
    
    1,277.1
    
    
    
    (1,384.2
    )
    
    
    5,898.9
    
    
    
    753.9
    
    
    
    582.4
    
    
    
    1,336.3
    
    
    
    826.1
    
    
    
    8,061.3Expenditures for segment assets
    
    
    6.2
    
    
    
    13.0
    
    
    
    (0.9
    )
    
    
    66.5
    
    
    
    5.8
    
    
    
    13.9
    
    
    
    19.7
    
    
    
    10.4
    
    
    
    96.6Six Months Ended June 30, 2003Sales and other operating revenues:Unaffiliated customers
    
    $
    916.8
    
    
    
    10.7
    
    
    
    
    
    
    
    1,296.6
    
    
    
    328.2
    
    
    
    315.4
    
    
    
    643.6
    
    
    
    
    
    
    
    1,940.2Intersegment
    
    
    155.4
    
    
    
    34.0
    
    
    
    (830.2
    )
    
    
    60.9
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    (61.0
    )
    
    
    Depreciation, depletion and amortization
    
    
    8.2
    
    
    
    3.1
    
    
    
    
    
    
    
    159.2
    
    
    
    22.7
    
    
    
    17.8
    
    
    
    40.5
    
    
    
    9.1
    
    
    
    208.8Operating income (loss) before special
items and provisions
    
    
    15.0
    
    
    
    (42.3
    )
    
    
    
    
    
    
    62.0
    
    
    
    25.9
    
    
    
    6.9
    
    
    
    32.8
    
    
    
    (48.7
    )
    
    
    46.1Special items and provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    3.2
    
    
    
    
    
    
    
    3.2
    
    
    
    (2.9
    )
    
    
    (0.2
    )Operating income (loss)
    
    
    15.0
    
    
    
    (42.3
    )
    
    
    
    
    
    
    61.5
    
    
    
    29.1
    
    
    
    6.9
    
    
    
    36.0
    
    
    
    (51.6
    )
    
    
    45.9Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.4
    )
    
    
    (0.1
    )
    
    
    (1.5
    )
    
    
    (1.6
    )
    
    
    
    
    
    
    (4.0
    )Cumulative effect of accounting change
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    8.5
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5
    
    
    
    (0.6
    )
    
    
    8.4Assets at June 30
    
    
    486.2
    
    
    
    1,490.6
    
    
    
    (1,593.4
    )
    
    
    5,168.2
    
    
    
    737.0
    
    
    
    518.2
    
    
    
    1,255.2
    
    
    
    534.5
    
    
    
    6,957.9Expenditures for segment assets
    
    
    3.5
    
    
    
    1.5
    
    
    
    
    
    
    
    37.0
    
    
    
    9.7
    
    
    
    6.7
    
    
    
    16.4
    
    
    
    23.9
    
    
    
    77.3
  *
    
    Six months ended June 30, 2004, reflects full consolidation of
El Abra and Candelaria; six months ended June 30, 2003, reflects El Abra and Candelaria on a pro-rata basis (51 percent and 80 percent, respectively). -6-




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
INFORMATION   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 June 30, 2004, include
the accounts of the Company and the full consolidation of El Abra and
Candelaria, which in prior years were 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 quarter and six month periods ended June
30, 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 tables present the effect on net
income (loss) and earnings (loss) per common share as if we had applied
the fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to
compensation cost. (Unaudited; $ in millions except per share data) Second Quarter2004
    
    2003Net income (loss) as reported
    
    $
    226.6
    
    
    
    (15.2
    )Deduct:Total compensation cost
determined under fair value
based method for all awards,
net of tax
    
    
    (1.7
    )
    
    
    (3.1
    )Pro forma net income (loss)
    
    $
    224.9
    
    
    
    (18.3
    )Earnings (loss) per common shareBasic  as reported
    
    $
    2.40
    
    
    
    (0.21
    )Basic  pro forma
    
    $
    2.38
    
    
    
    (0.24
    )Earnings (loss) per common shareDiluted  as reported
    
    $
    2.30
    
    
    
    (0.21
    )Diluted  pro forma
    
    $
    2.28
    
    
    
    (0.24
    )
 -7-




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(Unaudited; $ in millions except per share data) Six Months EndedJune 30,2004
    
    2003Net income (loss) as reported
    
    $
    412.3
    
    
    
    (30.2
    )Deduct:Total compensation cost
determined under fair value
based method for all awards,
net of tax
    
    
    (3.4
    )
    
    
    (6.5
    )Pro forma net income (loss)
    
    $
    408.9
    
    
    
    (36.7
    )Earnings (loss) per common shareBasic  as reported
    
    $
    4.39
    
    
    
    (0.42
    )Basic  pro forma
    
    $
    4.36
    
    
    
    (0.49
    )Earnings (loss) per common shareDiluted  as reported
    
    $
    4.20
    
    
    
    (0.42
    )Diluted  pro forma
    
    $
    4.17
    
    
    
    (0.49
    )
  3.
    
    Special Items and ProvisionsSpecial items and provisions are unpredictable and atypical of the
Companys operations in a given period. Management believes 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 our reportable segments excluding special
items. 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. Our measure of special items may not be comparable to similarly
titled measures reported by other companies. Note: Supplemental Data  The following schedules summarize the special items and provisions for the
quarter and six months ended June 30, 2004: (Unaudited; gains (losses) in millions except per share amounts) Second Quarter 2004Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDMC Environmental provisions,
net
    
    $
    (2.3
    )
    
    
    (1.8
    )
    
    
    (0.02
    )Environmental insurance
recoveries, net
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (2.5
    )
    
    
    (1.9
    )
    
    
    (0.02
    )PDI Restructuring program
    
    
    (1.9
    )
    
    
    (1.4
    )
    
    
    (0.01
    )Asset impairment
charges
    
    
    (0.6
    )
    
    
    (0.5
    )
    
    
    (0.01
    )(2.5
    )
    
    
    (1.9
    )
    
    
    (0.02
    )Corporate and Other Environmental provisions,
net
    
    
    0.5
    
    
    
    0.4
    
    
    
    Environmental insurance
recoveries, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    Historic legal matters
    
    
    15.9
    
    
    
    12.8
    
    
    
    0.1316.5
    
    
    
    13.3
    
    
    
    0.1311.5
    
    
    
    9.5
    
    
    
    0.09Early debt extinguishment
costs (see Note 11)
    
    
    (15.2
    )
    
    
    (12.6
    )
    
    
    (0.13
    )Miscellaneous income and
expense, net:Cost-basis investment
write-down
    
    
    (6.4
    )
    
    
    (6.4
    )
    
    
    (0.06
    )Provision for taxes on income:PD Brazil deferred tax asset
valuation allowance
    
    
    
    
    
    
    (9.0
    )
    
    
    (0.09
    )Minority interests in
consolidated subsidiaries:Candelaria early debt
extinguishment costs
    
    
    
    
    
    
    2.5
    
    
    
    0.03Total
    
    $
    (10.1
    )
    
    
    (16.0
    )
    
    
    (0.16
    )
 -8-




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(Unaudited; gains (losses) in millions except per share amounts) Six Months EndedJune 30, 2004Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDMC Environmental provisions,
net
    
    $
    (2.3
    )
    
    
    (1.8
    )
    
    
    (0.02
    )Environmental insurance
recoveries, net
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (2.5
    )
    
    
    (1.9
    )
    
    
    (0.02
    )PDI Restructuring program
    
    
    (3.6
    )
    
    
    (2.5
    )
    
    
    (0.02
    )Environmental provisions,
net
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    Asset impairment
charges
    
    
    (0.6
    )
    
    
    (0.5
    )
    
    
    (0.01
    )(4.3
    )
    
    
    (3.1
    )
    
    
    (0.03
    )Corporate and Other Environmental provisions,
net
    
    
    (4.1
    )
    
    
    (3.1
    )
    
    
    (0.03
    )Environmental insurance
recoveries, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    Historic legal matters
    
    
    15.5
    
    
    
    12.4
    
    
    
    0.1311.5
    
    
    
    9.4
    
    
    
    0.104.7
    
    
    
    4.4
    
    
    
    0.05Interest expense:Texas franchise tax matter
    
    
    (0.9
    )
    
    
    (0.7
    )
    
    
    (0.01
    )Early debt extinguishment
costs (see Note 11)
    
    
    (37.6
    )
    
    
    (30.2
    )
    
    
    (0.31
    )Miscellaneous income and
expense, net:Cost-basis investment
write-downs
    
    
    (10.0
    )
    
    
    (9.1
    )
    
    
    (0.09
    )Provision for taxes on income:Reversal of El Abra deferred
tax asset valuation
allowance
    
    
    
    
    
    
    30.8
    
    
    
    0.31PD Brazil deferred tax asset
valuation allowance
    
    
    
    
    
    
    (9.0
    )
    
    
    (0.09
    )
    
    
    
    21.8
    
    
    
    0.22Minority interests in
consolidated subsidiaries:Reversal of El Abra deferred
tax asset valuation
allowance
    
    
    
    
    
    
    (15.1
    )
    
    
    (0.15
    )Candelaria early debt
extinguishment costs
    
    
    
    
    
    
    2.5
    
    
    
    0.02
    
    
    
    (12.6
    )
    
    
    (0.13
    )Total
    
    $
    (43.8
    )
    
    
    (26.4
    )
    
    
    (0.27
    )
 Note: Supplemental Data  The following schedules summarize the special items and provisions for the
quarter and six months ended June 30, 2003: (Unaudited; gains (losses) in millions except per share
amounts) Second Quarter 2003Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDMC Environmental provisions,
net
    
    $
    (0.5
    )
    
    
    (0.4
    )
    
    
    Corporate and Other Environmental provisions,
net
    
    
    (2.1
    )
    
    
    (2.0
    )
    
    
    (0.02
    )Environmental insurance
recoveries, net
    
    
    0.5
    
    
    
    0.5
    
    
    
    (1.6
    )
    
    
    (1.5
    )
    
    
    (0.02
    )(2.1
    )
    
    
    (1.9
    )
    
    
    (0.02
    )Miscellaneous income and
expense, net:Gain on sale of cost-basis
investment
    
    
    6.4
    
    
    
    6.4
    
    
    
    0.07Total
    
    $
    4.3
    
    
    
    4.5
    
    
    
    0.05
 -9-




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(Unaudited; gains (losses) in millions except per share
amounts) Six Months EndedJune 30, 2003Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDMC Environmental provisions,
net
    
    $
    (0.5
    )
    
    
    (0.4
    )
    
    
    PDI Termination of a foreign
postretirement benefit
plan
    
    
    3.2
    
    
    
    2.4
    
    
    
    0.03Corporate and Other Environmental provisions,
net
    
    
    (3.4
    )
    
    
    (3.3
    )
    
    
    (0.03
    )Environmental insurance
recoveries, net
    
    
    0.5
    
    
    
    0.5
    
    
    
    (2.9
    )
    
    
    (2.8
    )
    
    
    (0.03
    )(0.2
    )
    
    
    (0.8
    )
    
    
    Miscellaneous income and
expense, net:Gain on sale of cost-basis
investment
    
    
    6.4
    
    
    
    6.4
    
    
    
    0.07Cumulative effect of
accounting change
(see Note 4)
    
    
    9.7
    
    
    
    8.4
    
    
    
    0.09Total
    
    $
    15.9
    
    
    
    14.0
    
    
    
    0.16
  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. We expect approximately $7 million to be
incurred in connection with this restructuring program, which is projected
to be completed in 2005.  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
    
    6/30/04PDI Wire and CableEmployee severance
    
    $
    0.6
    
    
    
    
    
    
    
    0.6Plant removal and
dismantling*
    
    
    3.0
    
    
    
    (2.8
    )
    
    
    0.2$
    3.6
    
    
    
    (2.8
    )
    
    
    0.8
  *
    
    Costs were charged to expense as incurred. Note: In the 2004 second quarter additions were $1.9 million ($0.3 million for
employee severance and $1.6 million for plant removal and dismantling), and
payments were $(1.6) million.  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.  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 June 30, 2003: (Unaudited; $ in millions) 12/31/02
    
    Payments
    
    6/30/03PDI Wire and CableEmployee severance
    
    $
    1.3
    
    
    
    (1.1
    )
    
    
    0.2
 Note: In the 2003 second quarter, payments were $(0.2) million. At December
31, 2003, there were no liabilities remaining.  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 -10-




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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.  The following schedule presents a roll-forward from December 31, 2002, of
the liabilities incurred in connection with the 2001 restructuring
programs: (Unaudited; $ in millions) 12/31/02
    
    Payments
    
    6/30/03PDMC 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
    )
    
    
    
 Note: All payments were made in the 2003 first quarter.  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
    
    6/30/04PDI Wire and CablePlant removal and
dismantling
    
    $
    0.5
    
    
    
    
    
    
    
    0.5
 (Unaudited; $ in millions) 12/31/02
    
    Payments
    
    6/30/03PDI 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
    
    6/30/04PDMC Other MiningMothballing/take-or-pay
contracts
    
    $
    0.6
    
    
    
    (0.1
    )
    
    
    0.5PDI Wire and CableTake-or-pay
contracts
    
    
    1.0
    
    
    
    
    
    
    
    1.0$
    1.6
    
    
    
    (0.1
    )
    
    
    1.5
 Note: All payments were made in the 2004 second quarter. -11-




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(Unaudited; $ in millions) 12/31/02
    
    Payments
    
    6/30/03PDMC Other MiningMothballing/take-or-pay
contracts
    
    $
    0.6
    
    
    
    
    
    
    
    0.6PDI Wire and CableTake-or-pay
contracts
    
    
    1.0
    
    
    
    
    
    
    
    1.0$
    1.6
    
    
    
    
    
    
    
    1.6
  4.
    
    Accounting StandardsIn January 2003, the Financial Accounting Standards Board (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 were 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 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
June 30, 2004, was an increase in total assets of $633.7 million, total
liabilities of $250.9 million and minority interests in consolidated
subsidiaries of $382.8 million. There was no impact on consolidated
shareholders equity. The impact for the quarter ended June 30, 2004, on
our Statement of Consolidated Operations comprised increases (decreases)
in sales and other operating revenues of $65.9 million, operating expenses
of $23.8 million, operating income of $42.1 million, net interest expense
of $2.3 million, pre-tax early debt extinguishment costs of $3.1 million,
net miscellaneous income and expense of $0.2 million, provision for taxes
on income of $(11.9) million and minority interests in consolidated
subsidiaries of $48.8 million. The impact for the six months ended June
30, 2004, comprised increases (decreases) in sales and other operating
revenues of $131.8 million, operating expenses of $41.5 million, operating
income of $90.3 million, net interest expense of $4.7 million, pre-tax
early debt extinguishment costs of $3.1 million, net miscellaneous income
and expense of $(0.4) million, provision for taxes on income of $(24.8)
million and minority interests in consolidated subsidiaries of $106.9
million. There was no impact on consolidated net income for the quarter
or six months ended June 30, 2004.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
in- -12-




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come. 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. For the quarter and six months
ended June 30, 2003, the effect of adopting SFAS No. 143 decreased loss
before cumulative effect of accounting change by approximately $8 million,
or 9 cents per common share, and $11 million, or 12 cents per common
share, respectively.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 was effective for all financial instruments entered into or
modified after May 31, 2003, and was otherwise effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption
of SFAS No. 150 did 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 about the assets,
obligations, cash flows and net periodic benefit cost of defined benefit
pension and other 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.In May 2004, FASB issued FASB Staff Position (FSP) 106-2 Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act). This FSP provides
accounting and disclosure guidance for employers who sponsor
postretirement health care plans that provide drug benefits. The Company
is currently evaluating the impact of the FSP on our financial reporting
and disclosures, and has provided the required 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 six months of 2004, we had a $6.6 million net increase in the
reserve estimate ($8.8 million of additions and $2.2 million of
reductions), offset by $12.3 million of spending. As of June 30, 2004,
the reserve balance was $311.5 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 June 30, 2004, the cost range for reasonably possible outcomes for all
reservable remediation sites (including Pinal Creek) was estimated to be
from $266 million to $618 million (of which $311.5 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 Company for those sites,
but which there is a reasonably possible likelihood of an
environmental remediation liability. As of June 30, 2004, the cost
range for rea- -13-




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sonably 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
quarter and six months ended June 30, 2004: Asset Retirement Obligations/Closure and Reclamation Accrual
(Unaudited; $ in millions) Second
    
    Six MonthsQuarter
    
    Ended2004
    
    June 30, 2004Balance, beginning of period
    
    $
    233.5
    
    
    
    225.3Additional liabilities from fully
consolidating El Abra and
Candelaria
    
    
    
    
    
    
    5.6New liabilities during the period
    
    
    0.4
    
    
    
    0.9Accretion expense
    
    
    4.9
    
    
    
    9.7Payments
    
    
    (6.1
    )
    
    
    (9.2
    )Revisions in estimated
cash flows
    
    
    4.0
    
    
    
    4.4Balance, end of period
    
    $
    236.7
    
    
    
    236.7
 Asset Retirement Cost
(Unaudited; $ in millions) Second
    
    Six MonthsQuarter
    
    Ended2004
    
    June 30, 2004Gross balance,
beginning of period
    
    $
    143.6
    
    
    
    138.9Additional assets from fully
consolidating El Abra and
Candelaria
    
    
    
    
    
    
    3.8New assets during the period
    
    
    0.4
    
    
    
    0.9Revisions in estimated
cash flows
    
    
    4.0
    
    
    
    4.4Gross balance,
end of period
    
    
    148.0
    
    
    
    148.0Less accumulated depreciation,
depletion and amortization
    
    
    66.8
    
    
    
    66.8Net balance, end of period
    
    $
    81.2
    
    
    
    81.2
  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. The New Mexico Environment Department
(NMED) has required Chino, Tyrone, Cobre and Hidalgo to submit closure
plans for NMEDs 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.Chino, Tyrone and Cobre also are subject to regulation under the New
Mexico Mining Act (the Mining Act) and the Mining Act Rules, which are
administered by the Mining and Minerals Division (MMD) of the Energy,
Minerals and Natural Resources Department. 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 or portions of the mines.Financial assurance is required to ensure that funding will be available
to perform both the closure and the closeout plans if the operator is not
able to perform the work required by the plans. The amount - 14 -




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of the financial assurance is based upon the estimated cost for a third-party to
complete the work specified in the plans, including any long-term
operation and maintenance, such as operation of water treatment systems.
NMED and MMD calculate the required amount of financial assurance using a
net present value (NPV) method, based upon approved discount and
escalation rates, when the closure plan and/or closeout plan require
performance over a long period of time.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.Chino Mines CompanyNMED issued Chinos closure permit on February 24, 2003. The closure
permit was appealed by a third party. WQCC dismissed the appeal, and that
dismissal was appealed to the New Mexico Court of Appeals. If the
dismissal is not upheld, WQCC could hold a public hearing on Chinos
closure permit.MMD issued a permit revision approving Chinos closeout plan, subject to
conditions, on December 18, 2003. MMDs permit revision was not appealed.
The third-party cost estimate is approximately $395 million (undiscounted
and unescalated) over the 100-year period of the closure and closeout
plans. Chino has provided financial assurance to NMED and MMD for
approximately $192 million (NPV basis), including a trust fund containing
approximately $64 million and a third-party performance guarantee for
approximately $128 million provided by Phelps Dodge.The terms of the NMED and MMD permits require Chino to conduct
supplemental studies concerning closure and closeout, including a
feasibility study. The terms of the NMED permit also require Chino to
prepare and submit an abatement plan. Chino is complying with those
requirements. The studies and abatement plan are due to be submitted to
NMED before an application for renewal of the closure permit is due in
August 2007. Changes to the closure permit, which could increase or
decrease the estimated cost of closure and closeout, will be considered
when the permit is renewed. The permits also contain requirements and a
schedule for Chino to commence closure and reclamation of inactive
portions of the operations, subject to Chinos ability to seek standby
status for portions of the operations anticipated to resume operation in
the future.The Company estimates its cost to perform the requirements of the approved
Chino closure and closeout permits to be approximately $287 million
(undiscounted and unescalated) over the 100-year period of the closure and
closeout plans. 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 closure and closeout accrual was
approximately $389 million (undiscounted, unescalated and on a third-party
cost basis), 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 June 30, 2004, and December 31, 2003, we had accrued approximately $40
million and $39 million, respectively, for closure and closeout at Chino.Phelps Dodge Tyrone, Inc.NMED issued Tyrones closure permit on April 8, 2003. Tyrone appealed to
the WQCC, which upheld NMEDs permit conditions. Tyrone has appealed the
WQCCs decision to the New Mexico Court of Appeals.MMD issued a permit revision approving Tyrones closeout plan, subject to
conditions, on April 12, 2004. MMDs permit revision was not appealed.
The third-party cost estimate is approximately $439 million (undiscounted
and unescalated) over the 100-year period of the closure and closeout
plans. Tyrone has provided financial assurance to NMED and MMD for
approximately $271 million (NPV basis). The financial assurance includes
a trust fund initially funded in the amount of - 15 -




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approximately $17 million,
to increase to approximately $27 million over five years, a letter of
credit for approximately $6 million, a surety bond for approximately $58
million, and a third-party performance guarantee for approximately $190
million provided by Phelps Dodge. Tyrone expects to replace both the
letter of credit and the surety bond with collateral as the collateral is
approved by MMD and NMED over the next few months.The terms of the NMED and MMD permits require Tyrone to conduct
supplemental studies concerning closure and closeout plans, including a
feasibility study. The terms of the NMED permit also require Tyrone to
prepare and submit an abatement plan. Tyrone is complying with those
requirements. The studies and abatement plan are due to be submitted to
NMED before an application for renewal of the closure permit is due in
October 2007. Changes to the closure permit, which could increase or
decrease the estimated cost of closure and closeout, will be considered
when the permit is renewed. The permits also contain requirements and a
schedule for Tyrone to commence closure and reclamation of inactive
portions of the operations, subject to Tyrones ability to seek standby
status for portions of the operations anticipated to resume operation in
the future. Tyrone currently is complying with the requirements of a
settlement agreement with NMED to cease existing discharges to its tailing
impoundments and to complete closure and reclamation of the tailing
impoundments by 2011.The Company estimates its costs to perform the requirements of Tyrones
closure and closeout permits to be approximately $264 million
(undiscounted and unescalated) over the 100-year period of the closure and
closeout plans. 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. In the second quarter
ended June 30, 2004, we increased our cost estimate used to determine the
fair value of our closure and closeout accrual to approximately $436
million (undiscounted, unescalated and on a third-party cost basis). This
cost estimate excludes approximately $3 million of net costs from the
financial assurance cost estimate that primarily are not within the scope
of SFAS No. 143. At June 30, 2004, and December 31, 2003, we had accrued
approximately $80 million and $81 million, respectively, for closure and
closeout 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
proposed combined closure and closeout plan in May 2001 incorporating the
results of the scientific studies completed by Cobre to both NMED and MMD.In October 2002, MMD issued a Notice of Violation (NOV) to Cobre for
failing to meet an October 1, 2002, deadline for MMD to approve Cobres
closeout plan. In January 2003, the New Mexico Mining Commission issued
an Order to Cobre modifying the NOV to require approval of the closeout
plan within nine months after NMED issues Cobres closure permit. NMED
has not yet issued the closure permit.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. 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. - 16 -




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Based upon the proposed combined closure and closeout plan for Cobre
submitted in 2001, the current cost estimate for closure and closeout at
Cobre is approximately $9 million. Our cost estimate used to determine
the fair value of our closure and closeout accrual was approximately $41
million (undiscounted, unescalated and on a third-party cost basis). Both
of these estimates will be updated when NMED issues the closure permit.
At both June 30, 2004, and December 31, 2003, we had accrued approximately
$7 million for closure and closeout at Cobre.Phelps Dodge Hidalgo, Inc.Hidalgo obtained approval of a closure plan under a discharge permit
issued by NMED in 2000. In accordance with the permit, Hidalgo provided
financial assurance to NMED in the form of surety bonds for approximately
$11 million. Since obtaining approval of the closure plan, Hidalgo has
completed the closure of a former wastewater evaporation pond by
construction of a soil cap approved by NMED. The discharge permit under
which the closure plan was approved also requires corrective action for
contaminated groundwater near the smelters closed former wastewater
evaporation pond. Impacted groundwater is pumped from a series of wells,
treated in a neutralization facility, and discharged to a series of lined
impoundments or to an irrigation system. The discharge permit requires a
comprehensive groundwater study to characterize groundwater at the site.
The discharge permit requires updates of the closure plan, and NMED could
require future enhancement of the system based upon the results of the
ongoing study when the permit expires in 2005 or, in certain
circumstances, earlier. Hidalgo is not subject to the Mining Act and,
consequently, does not require a closeout plan. Our cost estimate used to
determine the fair value of our closure accrual was approximately $7
million (undiscounted, unescalated and on a third-party cost basis). At
both June 30, 2004, and December 31, 2003, we had accrued approximately $4
million for closure 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 for the quarter and six months
ended June 30, 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 (0.5 million) were excluded from
the calculation as the related impacts were anti-dilutive.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 0.8 million shares at an average
exercise price of $74.87 for the 2004 second quarter and 0.6 million shares at an average exercise price of $76.80 for the six months ended
June 30, 2004; and 7.2 million shares at an average exercise price of
$58.66 for the 2003 second quarter and 8.6 million shares at an average
exercise price of $55.30 for the six months ended June 30, 2003. - 17 -




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(Unaudited; $ in millions except per share data) Second Quarter2004
    
    2003Basic Earnings (Loss) Per Share
ComputationNumerator:Net income (loss)
    
    $
    226.6
    
    
    
    (15.2
    )Preferred stock dividends
    
    
    (3.4
    )
    
    
    (3.4
    )Net income (loss) applicable
to common shares
    
    $
    223.2
    
    
    
    (18.6
    )Denominator:Weighted average common
shares outstanding
    
    
    92.9
    
    
    
    88.6Basic earnings (loss) per
common share
    
    $
    2.40
    
    
    
    (0.21
    )Diluted Earnings (Loss) Per Share
ComputationNumerator:Net income (loss)
    
    $
    226.6
    
    
    
    (15.2
    )Preferred stock dividends
    
    
    
    
    
    
    (3.4
    )Net income (loss) applicable
to common shares
    
    $
    226.6
    
    
    
    (18.6
    )Denominator:Weighted average common
shares outstanding*
    
    
    98.4
    
    
    
    88.6Diluted earnings (loss) per
common share
    
    $
    2.30
    
    
    
    (0.21
    )
  *
    
    2003 second quarter excluded restricted stock and the assumed conversion
of the mandatory convertible preferred shares to common shares due to the
anti-dilutive impact. (Unaudited; $ in millions except per share data) Six Months EndedJune 30,2004
    
    2003Basic Earnings (Loss) Per Share
ComputationNumerator:Net income (loss)
    
    $
    412.3
    
    
    
    (30.2
    )Preferred stock dividends
    
    
    (6.8
    )
    
    
    (6.8
    )Net income (loss) applicable
to common shares
    
    $
    405.5
    
    
    
    (37.0
    )Denominator:Weighted average common
shares outstanding
    
    
    92.3
    
    
    
    88.6Basic earnings (loss) per
common share
    
    $
    4.39
    
    
    
    (0.42
    )Diluted Earnings (Loss) Per Share
ComputationNumerator:Net income (loss)
    
    $
    412.3
    
    
    
    (30.2
    )Preferred stock dividends
    
    
    
    
    
    
    (6.8
    )Net income (loss) applicable
to common shares
    
    $
    412.3
    
    
    
    (37.0
    )Denominator:Weighted average common
shares outstanding*
    
    
    98.2
    
    
    
    88.6Diluted earnings (loss) per
common share
    
    $
    4.20
    
    
    
    (0.42
    )
  *
    
    The six months ended June 30, 2003, 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 second quarter principally
resulted from (i) taxes on earnings at international operations ($18.9
million) including benefits from the release of valuation allowances
($21.3 million), (ii) taxes on earnings at U.S. operations ($12.8 million)
including benefits from the release of valuation allowances ($41.9
million) and (iii) the recognition of a valuation allowance for deferred
tax assets at our Brazilian wire and cable operation ($9.0 million). The release of both the domestic and international valuation allowances
reflects net operating losses (NOLs) and other tax credits that are
expected to be utilized in the current year. Due to the continued
economic weakness in the Brazilian wire and cable markets, we reassessed
the recoverability of deferred tax assets associated with our Brazilian
wire and cable op- - 18 -




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erations and determined that recoverability was not
likely and established a related valuation allowance.The Companys income tax provision for six months ended June 30, 2004,
principally resulted from (i) taxes on earnings at international
operations ($55.8 million) including benefits from the release of
valuation allowances ($45.8 million), (ii) taxes on earnings at U.S.
operations ($12.9 million) including benefits from the release of
valuation allowances ($66.2 million) and (iii) the recognition of a
valuation allowance for deferred tax assets at our Brazilian wire and
cable operation ($9.0 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 release of both the domestic and international
valuation allowances reflects NOLs and other tax credits that are expected
to be utilized.The Companys income tax provision for the 2003 second quarter principally
resulted from (i) taxes on earnings at international operations ($12.2
million) that could not be offset by losses at domestic operations, and
(ii) a benefit from finalizing year-end 2002 estimates in the Companys
2002 U.S. tax return filed in June 2003 ($4.2 million). The Companys
income tax provision for the six months ended June 30, 2003, primarily
comprised the following: (i) taxes on earnings at international
operations ($26.3 million) that could not be offset by losses at domestic
operations, and (ii) a benefit from finalizing year-end 2002 estimates in
the Companys 2002 U.S. tax return filed in June 2003 ($4.2 million).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 quarter and six months ended June 30, 2004, we reclassified
approximately $10.7 million and $12.3 million, respectively, of other
comprehensive losses to the Statement of Consolidated Operations,
principally as a result of the unwinding of our floating-to-fixed interest
rate swaps.During the quarter and six months ended June 30, 2003, we reclassified
approximately $2.8 million and $4.0 million, respectively, of other
comprehensive losses to the Statement of Consolidated Operations,
principally as a result of our floating-to-fixed interest rate swaps. - 19 -




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10.
    
    Pension and Postretirement BenefitsThe following tables present the components of net periodic benefit cost
for pension benefits and postretirement benefits for the quarters and six
months ended June 30: Pension Benefits
(Unaudited; $ in millions) Second Quarter2004
    
    2003Service cost
    
    $
    5.9
    
    
    
    5.2Interest cost
    
    
    18.1
    
    
    
    18.0Expected return on plan assets
    
    
    (21.2
    )
    
    
    (21.6
    )Amortization of prior service cost
    
    
    0.9
    
    
    
    0.9Amortization of actuarial loss
    
    
    0.8
    
    
    
    0.5Curtailment and special
retirement benefits
    
    
    0.1
    
    
    
    0.1Net periodic benefit cost
    
    $
    4.6
    
    
    
    3.1
 Six Months EndedJune 30,2004
    
    2003Service cost
    
    $
    11.8
    
    
    
    10.5Interest cost
    
    
    36.0
    
    
    
    36.0Expected return on plan assets
    
    
    (42.1
    )
    
    
    (43.2
    )Amortization of prior service cost
    
    
    1.8
    
    
    
    1.8Amortization of actuarial loss
    
    
    1.6
    
    
    
    1.0Curtailment and special
retirement benefits
    
    
    0.6
    
    
    
    1.5Net periodic benefit cost
    
    $
    9.7
    
    
    
    7.6
 Postretirement Benefits
(Unaudited; $ in millions) Second Quarter2004
    
    2003Service cost
    
    $
    1.3
    
    
    
    1.1Interest cost
    
    
    5.8
    
    
    
    5.8Expected return on plan assets
    
    
    
    
    
    
    (0.1
    )Amortization of prior service cost
    
    
    0.3
    
    
    
    0.3Amortization of actuarial loss (gain)
    
    
    0.3
    
    
    
    (0.1
    )Other
    
    
    (1.1
    )
    
    
    Net periodic benefit cost
    
    $
    6.6
    
    
    
    7.0
 Six Months EndedJune 30,2004
    
    2003Service cost
    
    $
    2.7
    
    
    
    2.2Interest cost
    
    
    11.6
    
    
    
    11.6Expected return on plan assets
    
    
    (0.1
    )
    
    
    (0.2
    )Amortization of prior service cost
    
    
    0.6
    
    
    
    0.6Amortization of actuarial loss (gain)
    
    
    0.2
    
    
    
    (0.2
    )Curtailment and special
retirement benefits
    
    
    
    
    
    
    (2.5
    )Other
    
    
    (1.1
    )
    
    
    Net periodic benefit cost
    
    $
    13.9
    
    
    
    11.5
  In December 2003, The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was enacted. The Act introduces a
prescription drug benefit under Medicare Part D as well as a federal
subsidy to sponsors of retiree healthcare benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. Our
measures of the accumulated postretirement benefit obligation and net
periodic postretirement benefit cost for the three and six months ended
June 30, 2004, do not reflect any amount associated with the subsidy
because we have not yet determined whether the benefits provided by the
plan are actuarially equivalent to Medicare Part D under the Act.11.
    
    Debt and Other FinancingIn June 2004, Phelps Dodge completed the full repayment of Candelarias
senior debt and executed the termination and release of the existing
financing obligations and associated security package with the bank group.
The full repayment of long-term debt with a book value of approximately
$166 million resulted in a 2004 second quarter pre-tax loss of $15.2
mil- - 20 -




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lion, including unamortized issuance costs and the unwinding of
associated floating-to-fixed interest rate swaps. The debt repayment had
no impact on the full consolidation of Candelaria as it continues to meet
the criteria of a VIE and Phelps Dodge remains the primary beneficiary of
this entity.In 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 (as defined in the agreement). This agreement replaced an
earlier five-year, $1 billion revolving credit agreement that was
scheduled to mature on May 10, 2005. As of June 30, 2004, there was a
total of $73.2 million of letters of credit issued under the new revolver.
There were no revolving credit borrowings during the quarter. Total
availability under the revolving credit at June 30, 2004, amounted to
approximately $1,027 million, of which approximately $227 million could be
used for additional letters of credit.12.
    
    Shareholders EquityCommon Stock Dividends ReinstatedOn June 2, 2004, Phelps Dodge reinstated dividend payments on common
 shares by declaring a dividend of 25 cents per common share for the 2004
third quarter, amounting to $23.4 million. The dividend is payable on
September 3, 2004, to common shareholders of record at the close of
business on August 13, 2004.Series 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, - 21 -




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##### Table of Contents



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 June 30, 2004.Stock Options ExercisedDuring the 2004 second quarter, 0.4 million stock options were exercised
for Phelps Dodge shares. Phelps Dodge received approximately $16.1
million in the 2004 second quarter.During the first six months ended June 30, 2004, 2.6 million stock options
were exercised for Phelps Dodge shares. Phelps Dodge received
approximately $167.7 million in the first six months of 2004, including
approximately $18.6 million of cash associated with stock option exercises
in the 2003 fourth quarter.13.
    
    Reclassification of Intangible Assets, NetIn April 2004, FASB issued FASB FSP Nos. FAS 141-1 and FAS 142-1,
Interaction of FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, and EITF Issue No. 04-2,
Whether Mineral Rights Are Tangible or Intangible Assets. The FSP
addressed the inconsistency regarding the classification of mineral rights
between SFAS Nos. 141 and 142 and the Emerging Issues Task Force (EITF)
Issue No. 04-02, removing certain mineral rights as examples of intangible
assets in SFAS Nos. 141 and 142. As a result, approximately $413.8
million and $315.7 million associated with mineral rights primarily
relating to our South American mining concessions were reclassified from
intangible assets to property, plant and equipment, net, as of June 30,
2004, and December 31, 2003, respectively. The reclassifications had no effect on total assets, total liabilities, shareholders
equity or consolidated net income. - 22 -




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##### Table of Contents



REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The financial information as of June 30, 2004, and for the three-month and
six-month periods ended June 30, 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 registered public
accounting firm, in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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. 
 REVIEW OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 June 30, 2004, the related consolidated
statements of operations for each of the three-month and six-month periods
ended June 30, 2004 and 2003, the consolidated statement of cash flows for the
six-month periods ended June 30, 2004 and 2003, and the consolidated statement
of shareholders equity for the six-month period ended June 30, 2004. This
interim financial information is the responsibility of the Companys
management. We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the
standards of the Public Company Accounting Oversight Board (United States), 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 the standards of the Public Company
Accounting Oversight Board (United States), 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
July 23, 2004 - 23 -




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##### Table of Contents



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 Operations 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 June 30,
2004, Consolidated Financial Information for a discussion on the adoption of
Statement of Financial Accounting Standards (SFAS) No. 143 and Financial
Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46). As discussed in Note 4, Accounting Standards, in the accompanying
consolidated financial statements for the quarter and six months ended June 30,
2004, in accordance with FIN 46 in the 2004 first quarter, 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 June 30, 2004, our Consolidated Balance Sheet
included increases in total assets of $633.7 million, total liabilities of
$250.9 million and minority interests in consolidated subsidiaries of $382.8
million. There was no impact on consolidated shareholders equity. The impact
for the quarter ended June 30, 2004, on our Statement of Consolidated
Operations comprised increases (decreases) in sales and other operating
revenues of $65.9 million, operating expenses of $23.8 million, operating
income of $42.1 million, net interest expense of $2.3 million, pre-tax early
debt extinguishment costs of $3.1 million, net miscellaneous income and expense
of $0.2 million, provision for taxes on income of $(11.9) million and minority
interests in consolidated subsidiaries of $48.8 million. The impact for the
six months ended June 30, 2004, comprised increases (decreases) in sales and
other operating revenues of $131.8 million, operating expenses of $41.5
million, operating income of $90.3 million, net interest expense of $4.7
million, pre-tax early debt extinguishment costs of $3.1 million, net
miscellaneous income and expense of $(0.4) million, provision for taxes on
income of $(24.8) million and minority interests in consolidated subsidiaries
of $106.9 million. There was no impact on consolidated net income for the
quarter or six months ended June 30, 2004. 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 have
been included in the consolidated financial results for the quarter and six
months ended June 30, 2004. 
 RESULTS OF OPERATIONS Consolidated Financial Results (Unaudited; $ in millions except per share amounts) Second Quarter2004
    
    2003Sales and other operating revenues
    
    $
    1,650.9
    
    
    
    962.2Operating income
    
    $
    354.7
    
    
    
    17.2Income (loss) before cumulative effect
of accounting change
    
    $
    226.6
    
    
    
    (15.2
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    Net income (loss)
    
    $
    226.6
    
    
    
    (15.2
    )Basic earnings (loss) per
common share
    
    $
    2.40
    
    
    
    (0.21
    )Diluted earnings (loss) per
common share
    
    $
    2.30
    
    
    
    (0.21
    )
 The Company had consolidated net income in the 2004 second quarter of
$226.6 million, or $2.30 per common share, including after-tax, net special
charges of $16.0 million, or 16 cents per common share. (All references to per
share earnings or losses are based on diluted earnings or losses per share.)
In the 2003 second quarter, the consolidated net loss was $15.2 million, or 21
cents per common share, including an after-tax, net special gain of $4.5
million, or 5 cents per common share. - 24 -




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##### Table of Contents



The $241.8 million increase in consolidated net income in the 2004 second
quarter, compared with the corresponding 2003 period, primarily was due to
higher copper prices (approximately $274 million) and settlement of an historic
Cyprus matter regarding an insurance recovery associated with an operation that
it sold in 1993 ($15.9 million); partially offset by a higher tax provision
($46.2 million) due to the higher earnings and a deferred tax valuation
allowance at our Brazilian wire and cable operation. (Unaudited; $ in millions
except per share amounts) Six Months EndedJune 30,2004
    
    2003Sales and other operating revenues
    
    $
    3,247.9
    
    
    
    1,940.2Operating income
    
    $
    669.5
    
    
    
    45.9Income (loss) before cumulative effect
of accounting change
    
    $
    412.3
    
    
    
    (38.6
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    8.4Net income (loss)
    
    $
    412.3
    
    
    
    (30.2
    )Basic earnings (loss) per common
share before cumulative effect
of accounting change
    
    $
    4.39
    
    
    
    (0.51
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    0.09Basic earnings (loss) per
common share
    
    $
    4.39
    
    
    
    (0.42
    )Diluted earnings (loss) per common
share before cumulative effect
of accounting change
    
    $
    4.20
    
    
    
    (0.51
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    0.09Diluted earnings (loss) per
common share
    
    $
    4.20
    
    
    
    (0.42
    )
 The Company had consolidated net income for the six months ended June 30,
2004, of $412.3 million, or $4.20 per common share, including after-tax, net
special charges of $26.4 million, or 27 cents per common share. For the six
months ended June 30, 2003, the consolidated net loss was $30.2 million, or 42
cents per common share, including an after-tax, net special gain of $14.0
million, or 16 cents per common share. The $442.5 million increase in consolidated net income for the six months
ended June 30, 2004, compared with the corresponding 2003 period, primarily was
due to higher copper prices (approximately $532 million); partially offset by
early debt extinguishment costs in 2004 ($34.5 million) and a higher tax
provision ($49.8 million) due to higher earnings and a $9.0 million deferred
tax valuation allowance at our Brazilian wire and cable operation that was
partially offset by the reversal of a valuation allowance associated with
deferred tax assets at our 51 percent-owned El Abra copper mine ($30.8
million). Special Items and Provisions Throughout Managements Discussion and Analysis of Financial Condition and
Results of Operations there is disclosure and discussion of what management
believes to be special items and provisions. 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) Second Quarter2004
    
    2003Special items and provisions,
net of taxes
    
    $
    (16.0
    )
    
    
    4.5Earnings (losses) excluding
special items (after taxes)
and impact of minority interests
    
    $
    242.6
    
    
    
    (19.7
    )
 (Unaudited; $ in millions) Six Months EndedJune 30,2004
    
    2003Special items and provisions,
net of taxes
    
    $
    (26.4
    )
    
    
    14.0Earnings (losses) excluding
special items (after taxes)
and impact of minority interests
    
    $
    438.7
    
    
    
    (44.2
    )
 - 25 -




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##### Table of Contents



Note: Supplemental Data The following schedules summarize the special items and provisions for the
quarter and six month periods ended June 30, 2004 and 2003: (Unaudited; gains (losses) in millions except per share amounts) 2004 Second Quarter
    
    2003 Second QuarterPre-tax
    
    After-tax
    
    $/Share
    
    Pre-tax
    
    After-tax
    
    $/ShareEarnings
    
    Earnings
    
    After-tax
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDMC (see Business Segment disclosure)
    
    $
    (2.5
    )
    
    
    (1.9
    )
    
    
    (0.02
    )
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    PDI (see Business Segment disclosure)
    
    
    (2.5
    )
    
    
    (1.9
    )
    
    
    (0.02
    )
    
    
    
    
    
    
    
    
    
    
    Corporate and Other Environmental provisions, net
    
    
    0.5
    
    
    
    0.4
    
    
    
    
    
    
    
    (2.1
    )
    
    
    (2.0
    )
    
    
    (0.02
    )Environmental insurance recoveries, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    Historic legal matters
    
    
    15.9
    
    
    
    12.8
    
    
    
    0.13
    
    
    
    
    
    
    
    
    
    
    
    16.5
    
    
    
    13.3
    
    
    
    0.13
    
    
    
    (1.6
    )
    
    
    (1.5
    )
    
    
    (0.02
    )11.5
    
    
    
    9.5
    
    
    
    0.09
    
    
    
    (2.1
    )
    
    
    (1.9
    )
    
    
    (0.02
    )Early debt extinguishment costs (see Note 11)
    
    
    (15.2
    )
    
    
    (12.6
    )
    
    
    (0.13
    )
    
    
    
    
    
    
    
    
    
    
    Miscellaneous income and expense, net:Cost-basis investment write-down
    
    
    (6.4
    )
    
    
    (6.4
    )
    
    
    (0.06
    )
    
    
    
    
    
    
    
    
    
    
    Gain on sale of cost-basis investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.4
    
    
    
    6.4
    
    
    
    0.07(6.4
    )
    
    
    (6.4
    )
    
    
    (0.06
    )
    
    
    6.4
    
    
    
    6.4
    
    
    
    0.07Provision for taxes on income:PD Brazil deferred tax asset valuation allowance
    
    
    
    
    
    
    (9.0
    )
    
    
    (0.09
    )
    
    
    
    
    
    
    
    
    
    
    Minority interests in consolidated subsidiaries:Candelaria early debt extinguishment costs
    
    
    
    
    
    
    2.5
    
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    (10.1
    )
    
    
    (16.0
    )
    
    
    (0.16
    )
    
    
    4.3
    
    
    
    4.5
    
    
    
    0.05
 - 26 -




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##### Table of Contents



(Unaudited; gains (losses) in millions except per share amounts) Six Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2003Pre-tax
    
    After-tax
    
    $/Share
    
    Pre-tax
    
    After-tax
    
    $/ShareEarnings
    
    Earnings
    
    After-tax
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDMC (see Business Segment disclosure)
    
    $
    (2.5
    )
    
    
    (1.9
    )
    
    
    (0.02
    )
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    PDI (see Business Segment disclosure)
    
    
    (4.3
    )
    
    
    (3.1
    )
    
    
    (0.03
    )
    
    
    3.2
    
    
    
    2.4
    
    
    
    0.03Corporate and Other Environmental provisions, net
    
    
    (4.1
    )
    
    
    (3.1
    )
    
    
    (0.03
    )
    
    
    (3.4
    )
    
    
    (3.3
    )
    
    
    (0.03
    )Environmental insurance recoveries, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    Historic legal matters
    
    
    15.5
    
    
    
    12.4
    
    
    
    0.13
    
    
    
    
    
    
    
    
    
    
    
    11.5
    
    
    
    9.4
    
    
    
    0.10
    
    
    
    (2.9
    )
    
    
    (2.8
    )
    
    
    (0.03
    )4.7
    
    
    
    4.4
    
    
    
    0.05
    
    
    
    (0.2
    )
    
    
    (0.8
    )
    
    
    Interest expense:Texas franchise tax matter
    
    
    (0.9
    )
    
    
    (0.7
    )
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    Early debt extinguishment costs (see Note 11)
    
    
    (37.6
    )
    
    
    (30.2
    )
    
    
    (0.31
    )
    
    
    
    
    
    
    
    
    
    
    Miscellaneous income and expense, net:Cost-basis investment write-downs
    
    
    (10.0
    )
    
    
    (9.1
    )
    
    
    (0.09
    )
    
    
    
    
    
    
    
    
    
    
    Gain on sale of cost-basis investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.4
    
    
    
    6.4
    
    
    
    0.07(10.0
    )
    
    
    (9.1
    )
    
    
    (0.09
    )
    
    
    6.4
    
    
    
    6.4
    
    
    
    0.07Benefit (provision) for taxes on income:Reversal of El Abra deferred tax asset valuation allowance
    
    
    
    
    
    
    30.8
    
    
    
    0.31
    
    
    
    
    
    
    
    
    
    
    
    PD Brazil deferred tax asset valuation allowance
    
    
    
    
    
    
    (9.0
    )
    
    
    (0.09
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21.8
    
    
    
    0.22
    
    
    
    
    
    
    
    
    
    
    
    Minority interests in consolidated subsidiaries:Reversal of El Abra deferred tax asset valuation allowance
    
    
    
    
    
    
    (15.1
    )
    
    
    (0.15
    )
    
    
    
    
    
    
    
    
    
    
    Candelaria early debt extinguishment costs
    
    
    
    
    
    
    2.5
    
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12.6
    )
    
    
    (0.13
    )
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting change (see Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.7
    
    
    
    8.4
    
    
    
    0.09Total
    
    $
    (43.8
    )
    
    
    (26.4
    )
    
    
    (0.27
    )
    
    
    15.9
    
    
    
    14.0
    
    
    
    0.16
 - 27 -




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##### Table of Contents



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. 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. - 28 -




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##### Table of Contents



Major operating and financial results of PDMC for the quarters and six
months ended June 30, 2004 and 2003, are illustrated in the following table: (Unaudited; $ in millions except per pound amounts) Second Quarter2004
    
    2003Sales and other operating revenues
to unaffiliated customers
    
    $
    1,254.5
    
    
    
    641.6Operating income
    
    $
    336.7
    
    
    
    25.8Operating income before special
items and provisions
    
    $
    339.2
    
    
    
    26.3Minority interests
    
    $
    (40.6
    )
    
    
    (1.4
    )Copper production (thousand short tons):Total copper production
    
    
    321.4
    
    
    
    318.8Less undivided interest (A)
    
    
    15.7
    
    
    
    15.8Copper production on a
consolidated basis
    
    
    305.7
    
    
    
    303.0Less minority participants shares
previously accounted for on a
pro-rata basis (B)
    
    
    40.3
    
    
    
    43.7Copper production on a pro-rata basis
    
    
    265.4
    
    
    
    259.3Copper sales (thousand short tons):Total copper sales from own mines
    
    
    321.8
    
    
    
    326.1Less undivided interest (A)
    
    
    15.7
    
    
    
    15.8Copper sales from own mines on
a consolidated basis
    
    
    306.1
    
    
    
    310.3Less minority participants shares
previously accounted for on a
pro-rata basis (B)
    
    
    43.0
    
    
    
    43.8Copper sales from own mines on
a pro-rata basis
    
    
    263.1
    
    
    
    266.5Purchased copper (thousand short tons):Total purchased copper
    
    
    116.7
    
    
    
    84.7Total copper sales on a
consolidated basis
    
    
    422.8
    
    
    
    N/ATotal copper sales on a
pro-rata basis
    
    
    N/A
    
    
    
    351.2LME average spot copper price
per pound  cathodes
    
    $
    1.265
    
    
    
    0.744COMEX average spot copper price
per pound  cathodes
    
    $
    1.234
    
    
    
    0.747Implied full unit cost of
copper production per pound
    
    $
    0.711
    
    
    
    0.695Implied cash unit cost of
copper production per pound
    
    $
    0.540
    
    
    
    0.535Molybdenum production (million pounds)
    
    
    14.8
    
    
    
    13.1Molybdenum sales (million pounds):Net Phelps Dodge share
from own mines
    
    
    16.0
    
    
    
    13.5Purchased molybdenum
    
    
    3.1
    
    
    
    2.2Total molybdenum sales
    
    
    19.1
    
    
    
    15.7Metals Week:Molybdenum oxide price per pound
    
    $
    14.57
    
    
    
    5.21
 (Unaudited; $ in millions except per pound amounts) Six Months EndedJune 30,2004
    
    2003Sales and other operating revenues
to unaffiliated customers
    
    $
    2,469.0
    
    
    
    1,296.6Operating income
    
    $
    666.9
    
    
    
    61.5Operating income before special
items and provisions
    
    $
    669.4
    
    
    
    62.0Minority interests
    
    $
    (103.7
    )
    
    
    (2.4
    )Copper production (thousand short tons):Total copper production
    
    
    639.0
    
    
    
    636.0Less undivided interest (A)
    
    
    31.1
    
    
    
    31.3Copper production on a
consolidated basis
    
    
    607.9
    
    
    
    604.7Less minority participants shares
previously accounted for on a
pro-rata basis (B)
    
    
    82.2
    
    
    
    85.0Copper production on a pro-rata basis
    
    
    525.7
    
    
    
    519.7Copper sales (thousand short tons):Total copper sales from own mines
    
    
    645.1
    
    
    
    647.4Less undivided interest (A)
    
    
    31.1
    
    
    
    31.3Copper sales from own mines on
a consolidated basis
    
    
    614.0
    
    
    
    616.1Less minority participants shares
previously accounted for on a
pro-rata basis (B)
    
    
    84.8
    
    
    
    85.8Copper sales from own mines on
a pro-rata basis
    
    
    529.2
    
    
    
    530.3Purchased copper (thousand short tons):Total purchased copper
    
    
    231.8
    
    
    
    178.4Total copper sales on a
consolidated basis
    
    
    845.8
    
    
    
    N/ATotal copper sales on a
pro-rata basis
    
    
    N/A
    
    
    
    708.7LME average spot copper price
per pound  cathodes
    
    $
    1.252
    
    
    
    0.749COMEX average spot copper price
per pound  cathodes
    
    $
    1.233
    
    
    
    0.754Implied full unit cost of
copper production per pound
    
    $
    0.707
    
    
    
    0.691Implied cash unit cost of
copper production per pound
    
    $
    0.536
    
    
    
    0.535Molybdenum production (million pounds)
    
    
    28.3
    
    
    
    24.6Molybdenum sales (million pounds):Net Phelps Dodge share
from own mines
    
    
    31.2
    
    
    
    27.3Purchased molybdenum
    
    
    6.5
    
    
    
    3.6Total molybdenum sales
    
    
    37.7
    
    
    
    30.9Metals Week:Molybdenum oxide price per pound
    
    $
    11.42
    
    
    
    4.63
   (A)
    
    Represents a 15 percent undivided interest in Morenci, Arizona, copper
mining complex held by Sumitomo Metal Mining Arizona, Inc. - 29 -




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##### Table of Contents



(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 Corporación Nacional del Cobre de
Chile (CODELCO). (thousand short tons) Second Quarter2004
    
    2003Minority participants shares
previously accounted for on a
pro rata basis:Chino Mine and Smelter
    
    
    
    
    
    
    2.9Candelaria
    
    
    10.3
    
    
    
    10.5El Abra
    
    
    30.0
    
    
    
    30.340.3
    
    
    
    43.7
 (thousand short tons) Six Months EndedJune 30,2004
    
    2003Minority participants shares
previously accounted for on a
pro rata basis:Chino Mine and Smelter
    
    
    
    
    
    
    6.2Candelaria
    
    
    21.4
    
    
    
    22.5El Abra
    
    
    60.8
    
    
    
    56.382.2
    
    
    
    85.0
 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) (including mining through rod production,
primary molybdenum, marketing and sales, and worldwide exploration) excluding
special items and provisions 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 quarter and six month periods ended June 30,
2004 and 2003: (Unaudited; $ in millions except per pound amounts) Second Quarter2004
    
    2003PDMC implied unit cost of
copper productionOperating income
    
    $
    336.7
    
    
    
    25.8Less special operating items
and provisions
    
    
    (2.5
    )
    
    
    (0.5
    )Operating income excluding
special items and provisions
    
    $
    339.2
    
    
    
    26.3Copper sales from own mines on a
consolidated basis  million pounds
    
    
    612.2
    
    
    
    N/ACopper sales from own mines on a
pro-rata basis   million pounds
    
    
    N/A
    
    
    
    533.0Operating
margin 
per pound copper sold
    
    $
    0.554
    
    
    
    0.049LME average spot copper price
per pound  cathodes
    
    $
    1.265
    
    
    
    0.744Implied full unit cost of
copper production per pound
    
    $
    0.711
    
    
    
    0.695
 - 30 -




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##### Table of Contents



(Unaudited; $ in millions except per pound amounts) Six Months EndedJune 30,2004
    
    2003PDMC implied unit cost of
copper productionOperating income
    
    $
    666.9
    
    
    
    61.5Less special operating items
and provisions
    
    
    (2.5
    )
    
    
    (0.5
    )Operating income excluding
special items and provisions
    
    $
    669.4
    
    
    
    62.0Copper sales from own mines on a
consolidated basis  million pounds
    
    
    1,228.0
    
    
    
    N/ACopper sales from own mines on a
pro-rata basis  million pounds
    
    
    N/A
    
    
    
    1,060.6Operating margin 
per pound copper sold
    
    $
    0.545
    
    
    
    0.058LME average spot copper price
per pound  cathodes
    
    $
    1.252
    
    
    
    0.749Implied full unit cost of
copper production per pound
    
    $
    0.707
    
    
    
    0.691
 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 $612.9 million, or 96 percent, in the 2004 second quarter compared
with the 2003 second quarter. The increase reflected higher average copper
prices (approximately $342 million), the impact of fully consolidating El Abra
and Candelaria (approximately $66 million), higher average molybdenum prices
(approximately $111 million), higher copper sales volumes (approximately $64
million), higher molybdenum sales volumes (approximately $19 million) and
higher copper rod sales (approximately $10 million). PDMCs sales and other operating revenues to unaffiliated customers
increased $1,172.4 million, or 90 percent, in the first six months of 2004
compared with the first six months of 2003. The increase reflected higher
average copper prices (approximately $709 million), higher average molybdenum
prices (approximately $170 million), the impact of fully consolidating El Abra
and Candelaria (approximately $132 million), higher copper sales volumes
(approximately $108 million), higher molybdenum sales volumes (approximately
$35 million) and higher copper rod sales (approximately $14 million). Total PDMC  Operating Income PDMC reported operating income of $336.7 million in the 2004 second
quarter, including a special, net pre-tax loss of $2.5 million, compared with
operating income of $25.8 million in the 2003 second quarter, including a
special, net pre-tax loss of $0.5 million. Excluding special items, the
increase in operating income of $312.9 million primarily reflected higher
copper prices (approximately $274 million) and the impact of fully
consolidating El Abra and Candelaria (approximately $42 million); partially
offset by a slightly higher implied unit cost (approximately $3 million). PDMC reported operating income of $666.9 million in the first six months
of 2004, including a special, net pre-tax loss of $2.5 million, compared with
operating income of $61.5 million in the first six months of 2003, including a
special, net pre-tax loss of $0.5 million. Excluding special items, the
increase in operating income of $607.4 million primarily reflected higher
copper prices (approximately $532 million) and the impact of fully
consolidating El Abra and Candelaria (approximately $90 million); partially
offset by a higher implied unit cost of copper production (approximately $15
million). The New York Commodity Exchange (COMEX) spot price per pound of copper
cathode, primarily upon which we base our U.S. sales, averaged $1.234 and 74.7
cents in the second quarters of 2004 and 2003, respectively, and $1.233 and
75.4 cents for the first six months of 2004 and 2003, respectively. The LME
spot price per pound of copper cathode, primarily upon which we base our
international sales, averaged $1.265 and 74.4 cents in the second quarters of
2004 and 2003, respectively, and $1.252 and 74.9 cents for the first six months
of 2004 and 2003, respectively. - 31 -




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##### Table of Contents



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 quarter and six month periods
ended June 30, 2004 and 2003: Second Quarter2004
    
    2003Reconciliation of Implied Unit Cost (per lb.)*Cash implied unit cost of copper
production  base operations
before copper pricing
adjustments
    
    $
    0.426
    
    
    
    0.489Net copper pricing adjustments**
    
    
    0.060
    
    
    
    (0.004
    )Cash implied unit cost of copper
production  base operations
    
    
    0.486
    
    
    
    0.485Exploration, technology and project
development
    
    
    0.027
    
    
    
    0.023Shutdown and curtailment expenses
    
    
    0.027
    
    
    
    0.027Implied cash unit cost of
copper production
    
    $
    0.540
    
    
    
    0.535Non-cash (depreciation, depletion,
amortization and closure
accretion/accrual)
    
    
    0.171
    
    
    
    0.160Implied full unit cost of copper
production
    
    $
    0.711
    
    
    
    0.695
 Six Months EndedJune 30,2004
    
    2003Reconciliation of Implied Unit Cost (per lb.)*Cash implied unit cost of copper
production  base operations
before copper pricing
adjustments
    
    $
    0.469
    
    
    
    0.489Net copper pricing adjustments**
    
    
    0.017
    
    
    
    (0.005
    )Cash implied unit cost of copper
production  base operations
    
    
    0.486
    
    
    
    0.484Exploration, technology and project
development
    
    
    0.026
    
    
    
    0.020Shutdown and curtailment expenses
    
    
    0.024
    
    
    
    0.031Implied cash unit cost of
copper production
    
    $
    0.536
    
    
    
    0.535Non-cash (depreciation, depletion,
amortization and closure
accretion/accrual)
    
    
    0.171
    
    
    
    0.156Implied full unit cost of copper
production
    
    $
    0.707
    
    
    
    0.691
   *
    
    The implied full unit cost of copper production is based on PDMCs
operating margin per pound of copper sold is defined on page 30. 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 implied 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 that our measures of implied unit cost
of copper may not be comparable to similarly titled measures reported by
other companies.**
    
    Net pricing adjustments reflect mark-to-market adjustments related to
provisionally priced copper sales (including final settlements) and the
effect of COMEX to LME arbitrage on COMEX-based sales (primarily from U.S.
mines and operations). The implied full unit cost of copper production for the 2004 second
quarter increased by 1.6 cents per pound compared with the corresponding 2003
period despite an incremental benefit of approximately 14 cents per pound from
molybdenum operations (primarily higher prices). That benefit was more than
offset by several factors including net copper price adjustments of
approximately 6 cents per pound (see provisionally priced copper sales and
COMEX to LME arbitrage discussion below), and an 8 cents per pound increase in
certain cash costs primarily attributable to ramping up production at formerly
curtailed mines, the impact of slope slippage on mining rates and ore grade at
Bagdad, higher freight costs and higher energy costs. In addition, non-cash
costs increased approximately 1 cent per pound representing increased
depreciation expense. The implied full unit cost of copper production for the first six months
of 2004 increased by 1.6 cents per pound compared with the corresponding 2003
period despite a benefit of approximately 10 cents per pound from molybdenum
operations (primarily higher prices). That benefit was offset by several
factors including net copper price adjustments of approximately 2 cents per
pound, and an 8 cents per pound increase in certain cash costs primarily
attributable to the impact of costs that vary with copper prices, lower ore
grade at Sierrita, costs associated with ramping up production at formerly
curtailed sites, the impact of slope slippage on mining rates and ore grade at
Bagdad, lower Candelaria ore grade, higher freight costs, and higher energy and
non-cash costs. In addition, non-cash costs increased approximately 2 cents
per pound representing increased depreciation expense. - 32 -




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##### Table of Contents



Following is a table summarizing the net copper pricing adjustments and
their impact on implied unit cost of copper production for the quarters and six
months ended June 30, 2004 and 2003: ($ in millions except unit prices) Second Quarter
    
    Six Months Ended2004
    
    2003
    
    2004
    
    2003Provisionally priced copper sales, including final settlements
    
    $
    (26.8
    )
    
    
    1.5
    
    
    
    (8.3
    )
    
    
    2.4COMEX to LME arbitrage
    
    
    (10.0
    )
    
    
    0.8
    
    
    
    (12.4
    )
    
    
    2.4$
    (36.8
    )
    
    
    2.3
    
    
    
    (20.7
    )
    
    
    4.8Copper sales from own mine  million pounds
    
    
    612.2
    
    
    
    533.0
    
    
    
    1,228.0
    
    
    
    1,060.6Net copper pricing adjustments per pound 
(negative) favorable impact
    
    $
    (0.060
    )
    
    
    0.004
    
    
    
    (0.017
    )
    
    
    0.005
 Certain of Phelps Dodge Mining Companys (PDMC) sales agreements provide for
provisional pricing based on either the New York Commodity Exchange (COMEX) or
London Metal Exchange (LME) (as specified in the contract) when shipped. Final
settlement is based on the average applicable price for a specified future
period (quotational period or QP), generally from one to three months after
arrival at the customers facility. PDMC records revenues upon passage of
title using the forward rate in place for the QP. For accounting purposes,
these revenues are adjusted to fair value through earnings each period until
the date of final copper pricing. Provisionally priced pounds outstanding at
June 30, 2004, increased compared with December 31, 2003, reflecting a change
in the pricing election of certain of Candelarias customers effective January
1, 2004. The change primarily reflected movement away from pricing in the
month of shipment to pricing three months after month of arrival. Following
are the provisionally priced copper sales outstanding at June 30, 2004, March
31, 2004, and December 31, 2003: Provisionally Priced Copper Sales Outstanding at June 30, 2004: 86.6
    
    million pounds priced at
    
    $1.2265 per lb.
    
    with a final July 2004 QP36.3
    
    million pounds priced at
    
    $1.2224 per lb.
    
    with a final August 2004 QP48.8
    
    million pounds priced at
    
    $1.2102 per lb.
    
    with a final September 2004 QP36.9
    
    million pounds priced at
    
    $1.1966 per lb.
    
    with a final October 2004 QP208.6
    
    
    
    
    
    $1.2167 per lb.
    
    with a final July to October 2004 QP
 76 percent of the provisionally priced pounds outstanding at June 30, 2004, were at Candelaria. Provisionally Priced Copper Sales Outstanding at March 31, 2004: 124.3
    
    million pounds priced at
    
    $1.3724 per lb.
    
    with a final April to July 2004 QP
 61 percent of the provisionally priced pounds outstanding at March 31, 2004, were at Candelaria. Provisionally Priced Copper Sales Outstanding at December 31, 2003: 43.3
    
    million pounds priced at
    
    $1.0463 per lb.
    
    with a final January to April 2004 QP
 41 percent of the provisionally priced pounds outstanding at December 31, 2003, were at Candelaria. - 33 -




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##### Table of Contents



Note: Supplemental Data The following tables summarize PDMCs special items and provisions for the
quarter and six month periods ended June 30, 2004 and 2003, and the resultant
earnings (losses) excluding these special items and provisions: (Unaudited; $ in millions) Second Quarter2004
    
    2003Special, pre-tax items and provisions:U.S. Mining Operations*
    
    $
    (2.8
    )
    
    
    (0.5
    )South American Mines**
    
    
    
    
    
    
    Primary Molybdenum
    
    
    0.3
    
    
    
    $
    (2.5
    )
    
    
    (0.5
    )Segment operating income (loss)
excluding special items and provisions:U.S. Mining Operations*
    
    $
    170.7
    
    
    
    (1.5
    )South American Mines**
    
    
    139.0
    
    
    
    27.4Primary Molybdenum
    
    
    29.5
    
    
    
    0.4$
    339.2
    
    
    
    26.3
 (Unaudited; $ in millions) Six Months EndedJune 30,2004
    
    2003Special, pre-tax items and provisions:U.S. Mining Operations*
    
    $
    (2.8
    )
    
    
    (0.5
    )South American Mines**
    
    
    
    
    
    
    Primary Molybdenum
    
    
    0.3
    
    
    
    $
    (2.5
    )
    
    
    (0.5
    )Segment operating income (loss)
excluding special items and provisions:U.S. Mining Operations*
    
    $
    304.1
    
    
    
    (2.1
    )South American Mines**
    
    
    320.2
    
    
    
    63.6Primary Molybdenum
    
    
    45.1
    
    
    
    0.5$
    669.4
    
    
    
    62.0
   *
    
    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. Note: Our non-GAAP measure of special items and provisions may not be
comparable to similarly titled measures reported by other companies. Note: Supplemental Data Special, pre-tax items and provisions in operating income (loss) were as
follows: (Unaudited; $ in millions) Second Quarter andSix Months EndedJune 30, 2004U.S.
    
    South
    
    PrimaryMining
    
    American
    
    Molyb-Operations
    
    Mines
    
    denumEnvironmental
provisions, net
    
    $
    (2.6
    )
    
    
    
    
    
    
    0.3Environmental insurance
recoveries, net
    
    
    (0.2
    )
    
    
    
    
    
    
    $
    (2.8
    )
    
    
    
    
    
    
    0.3
 (Unaudited; $ in millions) Second Quarter andSix Months EndedJune 30, 2003U.S.
    
    South
    
    PrimaryMining
    
    American
    
    Molyb-Operations
    
    Mines
    
    denumEnvironmental
provisions, net
    
    $
    (0.5
    )
    
    
    
    
    
    
    
 Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. - 34 -




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##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited) The following tables summarize, on a segment basis, production and sales statistics, operating income (loss), and special items and provisions for the second quarter of 2004 and 2003. U.S. MinesBagdad/
    
    Miami/
    
    Chino/Morenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    SubtotalSecond Quarter 2004Copper production (thousand short tons):Total production
    
    
    105.0
    
    
    
    45.4
    
    
    
    2.4
    
    
    
    18.5
    
    
    
    10.5
    
    
    
    181.8Less undivided interest
    
    
    15.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.7Copper production on a consolidated basis
    
    
    89.3
    
    
    
    45.4
    
    
    
    2.4
    
    
    
    18.5
    
    
    
    10.5
    
    
    
    166.1Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper production on a pro-rata basis
    
    
    89.3
    
    
    
    45.4
    
    
    
    2.4
    
    
    
    18.5
    
    
    
    10.5
    
    
    
    166.1Copper sales (thousand short tons):Total copper sales from own mines
    
    
    104.7
    
    
    
    40.8
    
    
    
    1.0
    
    
    
    18.5
    
    
    
    10.5
    
    
    
    175.5Less undivided interest
    
    
    15.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.7Copper sales from own mines on a consolidated basis
    
    
    89.0
    
    
    
    40.8
    
    
    
    1.0
    
    
    
    18.5
    
    
    
    10.5
    
    
    
    159.8Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper sales from own mines on a pro-rata basis
    
    
    89.0
    
    
    
    40.8
    
    
    
    1.0
    
    
    
    18.5
    
    
    
    10.5
    
    
    
    159.8Purchased copper (thousand short tons):Total purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total copper sales on a consolidated basis
    
    
    89.0
    
    
    
    40.8
    
    
    
    1.0
    
    
    
    18.5
    
    
    
    10.5
    
    
    
    159.8($ in millions)Operating income (loss)
    
    $
    86.5
    
    
    
    91.4
    
    
    
    (3.1
    )
    
    
    10.0
    
    
    
    6.6
    
    
    
    191.4Special items and provisions
    
    $
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    (1.8
    )
    
    
    (2.6
    )Second Quarter 2003Copper production (thousand short tons):Total production
    
    
    105.5
    
    
    
    46.4
    
    
    
    3.9
    
    
    
    7.9
    
    
    
    14.3
    
    
    
    178.0Less minority participants shares
    
    
    15.8
    
    
    
    
    
    
    
    
    
    
    
    2.6
    
    
    
    
    
    
    
    18.4Copper production on a pro-rata basis
    
    
    89.7
    
    
    
    46.4
    
    
    
    3.9
    
    
    
    5.3
    
    
    
    14.3
    
    
    
    159.6Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    89.7
    
    
    
    53.3
    
    
    
    5.9
    
    
    
    5.3
    
    
    
    14.3
    
    
    
    168.5Purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total copper sales on a pro-rata basis
    
    
    89.7
    
    
    
    53.3
    
    
    
    5.9
    
    
    
    5.3
    
    
    
    14.3
    
    
    
    168.5($ in millions)Operating income (loss)
    
    $
    4.9
    
    
    
    18.3
    
    
    
    (3.1
    )
    
    
    (2.8
    )
    
    
    (4.5
    )
    
    
    12.8Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Refer to segment discussion on pages 45 through 48.
 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 43 and 44 for further discussion.) - 35 -




---



##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited) South American MinesCandelaria/Ojos delSalado*
    
    Cerro Verde
    
    El Abra*
    
    SubtotalSecond Quarter 2004Copper production (thousand short tons):Total production
    
    
    53.0
    
    
    
    24.5
    
    
    
    61.3
    
    
    
    138.8Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper production on a consolidated basis
    
    
    53.0
    
    
    
    24.5
    
    
    
    61.3
    
    
    
    138.8Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    10.3
    
    
    
    
    
    
    
    30.0
    
    
    
    40.3Copper production on a pro-rata basis
    
    
    42.7
    
    
    
    24.5
    
    
    
    31.3
    
    
    
    98.5Copper sales (thousand short tons):Total copper sales from own mines
    
    
    53.7
    
    
    
    25.5
    
    
    
    66.3
    
    
    
    145.5Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper sales from own mines on a consolidated basis
    
    
    53.7
    
    
    
    25.5
    
    
    
    66.3
    
    
    
    145.5Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    10.5
    
    
    
    
    
    
    
    32.5
    
    
    
    43.0Copper sales from own mines on a pro-rata basis
    
    
    43.2
    
    
    
    25.5
    
    
    
    33.8
    
    
    
    102.5Purchased copper (thousand short tons):Total purchased copper
    
    
    9.2
    
    
    
    
    
    
    
    
    
    
    
    9.2Total copper sales on a consolidated basis
    
    
    62.9
    
    
    
    25.5
    
    
    
    66.3
    
    
    
    154.7($ in millions)Operating income (loss)
    
    $
    49.3
    
    
    
    25.1
    
    
    
    64.6
    
    
    
    139.0Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    Second Quarter 2003Copper production (thousand short tons):Total production
    
    
    52.5
    
    
    
    24.8
    
    
    
    61.9
    
    
    
    139.2Less minority participants shares
    
    
    10.5
    
    
    
    
    
    
    
    30.3
    
    
    
    40.8Copper production on a pro-rata basis
    
    
    42.0
    
    
    
    24.8
    
    
    
    31.6
    
    
    
    98.4Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    39.3
    
    
    
    24.9
    
    
    
    32.5
    
    
    
    96.7Purchased copper
    
    
    7.7
    
    
    
    
    
    
    
    1.5
    
    
    
    9.2Total copper sales on a pro-rata basis
    
    
    47.0
    
    
    
    24.9
    
    
    
    34.0
    
    
    
    105.9($ in millions)Operating income (loss)
    
    $
    13.6
    
    
    
    8.6
    
    
    
    5.2
    
    
    
    27.4Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
 Refer to segment discussion on pages 45 through 48. 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 43 and 44 for further discussion.)  *
    
    Second quarter 2004 reflects full consolidation of El Abra and Candelaria; second quarter 2003 reflects El Abra and
Candelaria on a pro-rata basis (51 percent and 80 percent, respectively). - 36 -




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##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited) Primary
    
    Manufacturing
    
    
    
    
    
    TotalMolybdenum
    
    and Sales
    
    Other Mining
    
    PDMCSecond Quarter 2004Copper production (thousand short tons):Total production
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    321.4Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.7Copper production on a consolidated basis
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    305.7Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40.3Copper production on a pro-rata basis
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    265.4Copper sales (thousand short tons):Total copper sales from own mines
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    321.8Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.7Copper sales from own mines on a consolidated basis
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    306.1Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43.0Copper sales from own mines on a pro-rata basis
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    263.1Purchased copper (thousand short tons):Total purchased copper
    
    
    
    
    
    
    107.5
    
    
    
    
    
    
    
    116.7Total copper sales on a consolidated basis
    
    
    
    
    
    
    108.3
    
    
    
    
    
    
    
    422.8Molybdenum production (thousand pounds):Primary - Henderson
    
    
    7,057
    
    
    
    
    
    
    
    
    
    
    
    7,057By-product
    
    
    7,779
    
    
    
    
    
    
    
    
    
    
    
    7,779Total production
    
    
    14,836
    
    
    
    
    
    
    
    
    
    
    
    14,836Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    15,991
    
    
    
    
    
    
    
    
    
    
    
    15,991Purchased molybdenum
    
    
    3,108
    
    
    
    
    
    
    
    
    
    
    
    3,108Total molybdenum sales
    
    
    19,099
    
    
    
    
    
    
    
    
    
    
    
    19,099($ in millions)Operating income (loss)
    
    $
    29.8
    
    
    
    8.9
    
    
    
    (32.4
    )
    
    
    336.7Special items and provisions
    
    $
    0.3
    
    
    
    
    
    
    
    (0.2
    )
    
    
    (2.5
    )
 Refer to segment discussion on pages 45 through 48. 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 43 and 44 for further discussion.) - 37 -




---



##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited) Primary
    
    Manufacturing
    
    
    
    
    
    TotalMolybdenum
    
    and Sales
    
    Other Mining
    
    PDMCSecond Quarter 2003Copper production (thousand short tons):Total production
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    318.8Less minority participants shares
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    59.5Copper production on a pro-rata basis
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    259.3Copper sales (thousand short tons):Total copper sales from own mines on a pro-rata basis
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    266.5Purchased copper
    
    
    
    
    
    
    75.5
    
    
    
    
    
    
    
    84.7Total copper sales on a pro-rata basis
    
    
    
    
    
    
    76.8
    
    
    
    
    
    
    
    351.2Molybdenum production (thousand pounds):Primary - Henderson
    
    
    5,775
    
    
    
    
    
    
    
    
    
    
    
    5,775By-product
    
    
    7,350
    
    
    
    
    
    
    
    
    
    
    
    7,350Total production
    
    
    13,125
    
    
    
    
    
    
    
    
    
    
    
    13,125Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    13,517
    
    
    
    
    
    
    
    
    
    
    
    13,517Purchased molybdenum
    
    
    2,152
    
    
    
    
    
    
    
    
    
    
    
    2,152Total molybdenum sales
    
    
    15,669
    
    
    
    
    
    
    
    
    
    
    
    15,669($ in millions)Operating income (loss)
    
    $
    0.4
    
    
    
    6.5
    
    
    
    (21.3
    )
    
    
    25.8Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
 Refer to segment discussion on pages 45 through 48. 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 43 and 44 for further discussion.) - 38 -




---



##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited) The following tables summarize, on a segment basis, production and sales statistics, operating income (loss), and special items and provisions for the six months
ended June 30, 2004 and 2003. U.S. MinesBagdad/
    
    Miami/
    
    Chino/Morenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    SubtotalSix Months Ended June 30, 2004Copper production (thousand short tons):Total production
    
    
    207.3
    
    
    
    88.1
    
    
    
    4.7
    
    
    
    33.7
    
    
    
    21.7
    
    
    
    355.5Less undivided interest
    
    
    31.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31.1Copper production on a consolidated basis
    
    
    176.2
    
    
    
    88.1
    
    
    
    4.7
    
    
    
    33.7
    
    
    
    21.7
    
    
    
    324.4Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper production on a pro-rata basis
    
    
    176.2
    
    
    
    88.1
    
    
    
    4.7
    
    
    
    33.7
    
    
    
    21.7
    
    
    
    324.4Copper sales (thousand short tons):Total copper sales from own mines
    
    
    207.0
    
    
    
    87.9
    
    
    
    4.7
    
    
    
    33.7
    
    
    
    21.7
    
    
    
    355.0Less undivided interest
    
    
    31.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31.1Copper sales from own mines on a consolidated basis
    
    
    175.9
    
    
    
    87.9
    
    
    
    4.7
    
    
    
    33.7
    
    
    
    21.7
    
    
    
    323.9Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper sales from own mines on a pro-rata basis
    
    
    175.9
    
    
    
    87.9
    
    
    
    4.7
    
    
    
    33.7
    
    
    
    21.7
    
    
    
    323.9Purchased copper (thousand short tons):Total purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total copper sales on a consolidated basis
    
    
    175.9
    
    
    
    87.9
    
    
    
    4.7
    
    
    
    33.7
    
    
    
    21.7
    
    
    
    323.9($ in millions)Operating income (loss)
    
    $
    164.4
    
    
    
    146.3
    
    
    
    (3.8
    )
    
    
    25.0
    
    
    
    9.0
    
    
    
    340.9Special items and provisions
    
    $
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    (1.8
    )
    
    
    (2.6
    )Six Months Ended June 30, 2003Copper production (thousand short tons):Total production
    
    
    209.0
    
    
    
    89.1
    
    
    
    9.3
    
    
    
    16.3
    
    
    
    31.4
    
    
    
    355.1Less minority participants shares
    
    
    31.3
    
    
    
    
    
    
    
    
    
    
    
    5.4
    
    
    
    
    
    
    
    36.7Copper production on a pro-rata basis
    
    
    177.7
    
    
    
    89.1
    
    
    
    9.3
    
    
    
    10.9
    
    
    
    31.4
    
    
    
    318.4Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    177.7
    
    
    
    97.4
    
    
    
    11.7
    
    
    
    10.9
    
    
    
    31.4
    
    
    
    329.1Purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total copper sales on a pro-rata basis
    
    
    177.7
    
    
    
    97.4
    
    
    
    11.7
    
    
    
    10.9
    
    
    
    31.4
    
    
    
    329.1($ in millions)Operating income (loss)
    
    $
    17.3
    
    
    
    25.0
    
    
    
    (3.8
    )
    
    
    (4.9
    )
    
    
    (8.9
    )
    
    
    24.7Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
 Refer to segment discussion on pages 45 through 48. 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 43 and 44 for further discussion.) - 39 -




---



##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited) South American MinesCandelaria/Ojos delSalado*
    
    Cerro Verde
    
    El Abra*
    
    SubtotalSix Months Ended June 30, 2004Copper production (thousand short tons):Total production
    
    
    108.5
    
    
    
    49.7
    
    
    
    124.2
    
    
    
    282.4Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper production on a consolidated basis
    
    
    108.5
    
    
    
    49.7
    
    
    
    124.2
    
    
    
    282.4Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    21.4
    
    
    
    
    
    
    
    60.8
    
    
    
    82.2Copper production on a pro-rata basis
    
    
    87.1
    
    
    
    49.7
    
    
    
    63.4
    
    
    
    200.2Copper sales (thousand short tons):Total copper sales from own mines
    
    
    108.5
    
    
    
    51.1
    
    
    
    129.4
    
    
    
    289.0Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper sales from own mines on a consolidated basis
    
    
    108.5
    
    
    
    51.1
    
    
    
    129.4
    
    
    
    289.0Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    21.4
    
    
    
    
    
    
    
    63.4
    
    
    
    84.8Copper sales from own mines on a pro-rata basis
    
    
    87.1
    
    
    
    51.1
    
    
    
    66.0
    
    
    
    204.2Purchased copper (thousand short tons):Total purchased copper
    
    
    20.1
    
    
    
    
    
    
    
    
    
    
    
    20.1Total copper sales on a consolidated basis
    
    
    128.6
    
    
    
    51.1
    
    
    
    129.4
    
    
    
    309.1($ in millions)Operating income (loss)
    
    $
    118.1
    
    
    
    62.9
    
    
    
    139.2
    
    
    
    320.2Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30, 2003Copper production (thousand short tons):Total production
    
    
    112.5
    
    
    
    49.4
    
    
    
    115.0
    
    
    
    276.9Less minority participants shares
    
    
    22.5
    
    
    
    
    
    
    
    56.3
    
    
    
    78.8Copper production on a pro-rata basis
    
    
    90.0
    
    
    
    49.4
    
    
    
    58.7
    
    
    
    198.1Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    88.4
    
    
    
    49.5
    
    
    
    60.0
    
    
    
    197.9Purchased copper
    
    
    17.4
    
    
    
    
    
    
    
    7.3
    
    
    
    24.7Total copper sales on a pro-rata basis
    
    
    105.8
    
    
    
    49.5
    
    
    
    67.3
    
    
    
    222.6($ in millions)Operating income (loss)
    
    $
    36.7
    
    
    
    16.1
    
    
    
    10.8
    
    
    
    63.6Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
 Refer to segment discussion on pages 45 through 48. 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 43 and 44 for further discussion.)  *
    
    Six months ended June 30, 2004, reflects full
consolidation of El Abra and Candelaria; six months ended June 30,
2003, reflects
El Abra and Candelaria on a pro-rata basis (51 percent and 80 percent, respectively). - 40 -




---



##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited) Primary
    
    Manufacturing
    
    
    
    
    
    TotalMolybdenum
    
    and Sales
    
    Other Mining
    
    PDMCSix Months Ended June 30, 2004Copper production (thousand short tons):Total production
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    639.0Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31.1Copper production on a consolidated basis
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    607.9Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82.2Copper production on a pro-rata basis
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    525.7Copper sales (thousand short tons):Total copper sales from own mines
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    645.1Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31.1Copper sales from own mines on a consolidated basis
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    614.0Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84.8Copper sales from own mines on a pro-rata basis
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    529.2Purchased copper (thousand short tons):Total purchased copper
    
    
    
    
    
    
    211.7
    
    
    
    
    
    
    
    231.8Total copper sales on a consolidated basis
    
    
    
    
    
    
    212.8
    
    
    
    
    
    
    
    845.8Molybdenum production (thousand pounds):Primary - Henderson
    
    
    13,513
    
    
    
    
    
    
    
    
    
    
    
    13,513By-product
    
    
    14,798
    
    
    
    
    
    
    
    
    
    
    
    14,798Total production
    
    
    28,311
    
    
    
    
    
    
    
    
    
    
    
    28,311Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    31,148
    
    
    
    
    
    
    
    
    
    
    
    31,148Purchased molybdenum
    
    
    6,532
    
    
    
    
    
    
    
    
    
    
    
    6,532Total molybdenum sales
    
    
    37,680
    
    
    
    
    
    
    
    
    
    
    
    37,680($ in millions)Operating income (loss)
    
    $
    45.4
    
    
    
    12.7
    
    
    
    (52.3
    )
    
    
    666.9Special items and provisions
    
    $
    0.3
    
    
    
    
    
    
    
    (0.2
    )
    
    
    (2.5
    )
 Refer to segment discussion on pages 45 through 48. 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 43 and 44 for further discussion.) - 41 -




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##### Table of Contents



PDMC RESULTS BY REPORTABLE
SEGMENTS
(Unaudited) Primary
    
    Manufacturing
    
    
    
    
    
    TotalMolybdenum
    
    and Sales
    
    Other Mining
    
    PDMCSix Months Ended June 30, 2003Copper production (thousand short tons):Total production
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    636.0Less minority participants shares
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    116.3Copper production on a pro-rata basis
    
    
    
    
    
    
    3.2
    
    
    
    
    
    
    
    519.7Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    
    
    
    
    3.3
    
    
    
    
    
    
    
    530.3Purchased copper
    
    
    
    
    
    
    153.7
    
    
    
    
    
    
    
    178.4Total copper sales on a pro-rata basis
    
    
    
    
    
    
    157.0
    
    
    
    
    
    
    
    708.7Molybdenum production (thousand pounds):Primary - Henderson
    
    
    10,614
    
    
    
    
    
    
    
    
    
    
    
    10,614By-product
    
    
    14,014
    
    
    
    
    
    
    
    
    
    
    
    14,014Total production
    
    
    24,628
    
    
    
    
    
    
    
    
    
    
    
    24,628Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    27,299
    
    
    
    
    
    
    
    
    
    
    
    27,299Purchased molybdenum
    
    
    3,632
    
    
    
    
    
    
    
    
    
    
    
    3,632Total molybdenum sales
    
    
    30,931
    
    
    
    
    
    
    
    
    
    
    
    30,931($ in millions)Operating income (loss)
    
    $
    0.5
    
    
    
    15.0
    
    
    
    (42.3
    )
    
    
    61.5Special items and provisions
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
 Refer to segment discussion on pages 45 through 48. 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 43 and 44 for further discussion.) - 42 -




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##### Table of Contents



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 40 percent and 36
percent of their copper to the Manufacturing and Sales segment in the second
quarters of 2004 and 2003, respectively, and 45 percent and 39 percent for the
first six months of 2004 and 2003, respectively. 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) Second Quarter2004
    
    2003U.S. Mining Operations*Unaffiliated customers
    
    $
    809.0
    
    
    
    449.2Intersegment elimination
    
    
    (146.0
    )
    
    
    (56.3
    )663.0
    
    
    
    392.9South American Mines**Unaffiliated customers
    
    
    220.4
    
    
    
    99.0Intersegment
    
    
    146.0
    
    
    
    56.3366.4
    
    
    
    155.3Primary MolybdenumUnaffiliated customers
    
    
    225.1
    
    
    
    93.4Intersegment
    
    
    
    
    
    
    225.1
    
    
    
    93.4Total PDMCUnaffiliated customers
    
    $
    1,254.5
    
    
    
    641.6
 (Unaudited; $ in millions) Six Months EndedJune 30,2004
    
    2003U.S. Mining Operations*Unaffiliated customers
    
    $
    1,671.4
    
    
    
    927.7Intersegment elimination
    
    
    (344.3
    )
    
    
    (128.0
    )1,327.1
    
    
    
    799.7South American Mines**Unaffiliated customers
    
    
    422.5
    
    
    
    199.6Intersegment
    
    
    344.3
    
    
    
    128.0766.8
    
    
    
    327.6Primary MolybdenumUnaffiliated customers
    
    
    375.1
    
    
    
    169.3Intersegment
    
    
    
    
    
    
    375.1
    
    
    
    169.3Total PDMCUnaffiliated customers
    
    $
    2,469.0
    
    
    
    1,296.6
   *
    
    U.S. Mining Operations combines the following segments: Morenci,
Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and
Sales, and Other Mining.**
    
    South American Mines combines the following segments: Candelaria/Ojos del
Salado, Cerro Verde and El Abra. 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 $359.8 million, or 80
percent, in the 2004 second quarter compared with the 2003 second quarter.
This increase was primarily due to higher realized copper prices (approximately
$286 million), higher copper sales volumes (approximately $67 million) and
higher copper rod sales (approximately $10 million). Sales and other operating revenues to unaffiliated customers by U.S.
Mines, Other Mining and Manufacturing and Sales increased $743.7 million, or 80
percent, in the first six months of 2004 compared with the corresponding 2003
period. This increase was primarily due to higher realized copper prices
(approximately $589 million), higher copper sales volumes (approximately $138
million) and higher copper rod sales (approximately $14 million). - 43 -




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South American Mines Segments  Sales South American Mines sales and other operating revenues to unaffiliated
customers increased $121.4 million, or 123 percent, in the 2004 second quarter
compared with the 2003 second quarter. This increase was primarily due to
higher realized copper prices (approximately $56 million) and the impact of
fully consolidating El Abra and Candelaria (approximately $66 million);
partially offset by lower sales volumes of copper (approximately $3 million). South American Mines sales and other operating revenues to unaffiliated
customers increased $222.9 million, or 112 percent, in the first six months of
2004 compared with the corresponding 2003 period. This increase was primarily
due to higher realized copper prices (approximately $120 million) and the
impact of fully consolidating El Abra and Candelaria (approximately $132
million); partially offset by lower sales volumes of copper (approximately $29
million). Primary Molybdenum Segment  Sales Primary Molybdenum sales and other operating revenues to unaffiliated
customers increased $131.7 million, or 141 percent, in the 2004 second quarter
compared with the 2003 second quarter. This increase primarily was due to
higher average molybdenum realizations (approximately $111 million) and higher
sales volumes of molybdenum (approximately $19 million). Primary Molybdenum sales and other operating revenues to unaffiliated
customers increased $205.8 million, or 122 percent, in the first six months of
2004 compared with the corresponding 2003 period. This increase primarily was
due to higher average molybdenum realizations (approximately $170 million) and
higher sales volumes of molybdenum (approximately $35 million). Operating Income (Loss) for Copper (U.S. and South America) and Molybdenum In addition to the allocation of revenues, management allocates certain
operating costs, expenses and capital 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) Second Quarter2004
    
    2003U.S. Mining Operations*
    
    $
    167.9
    
    
    
    (2.0
    )South American Mines**
    
    
    139.0
    
    
    
    27.4Primary Molybdenum
    
    
    29.8
    
    
    
    0.4Total PDMC
    
    $
    336.7
    
    
    
    25.8
 (Unaudited; $ in millions) Six Months EndedJune 30,2004
    
    2003U.S. Mining Operations*
    
    $
    301.3
    
    
    
    (2.6
    )South American Mines**
    
    
    320.2
    
    
    
    63.6Primary Molybdenum
    
    
    45.4
    
    
    
    0.5Total PDMC
    
    $
    666.9
    
    
    
    61.5
   *
    
    U.S. Mining Operations combines the following segments: Morenci,
Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and
Sales, and Other Mining.**
    
    South American Mines combines the following segments: Candelaria/Ojos del
Salado, Cerro Verde and El Abra. U.S. Mining Operations  Operating Income (Loss) U.S. Mining Operations reported operating income of $167.9 million in the
2004 second quarter including $2.8 million of special, net pre-tax losses,
compared with an operating loss of $2.0 million in the 2003 second quarter
including $0.5 million of special, net pre-tax losses. U.S. Mining Operations reported operating income of $301.3 million for the
first six months of 2004 including $2.8 million of special, net pre-tax losses,
compared with an operating loss of $2.6 million in the corresponding 2003
period including $0.5 million of special, net pre-tax losses. (Refer - 44 -




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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 $86.5 million in the 2004 second quarter increased $81.6
million compared with the 2003 second quarter primarily due to higher average
copper prices (approximately $83 million). Operating income of $164.4 million for the first six months of 2004
increased $147.1 million compared with the corresponding 2003 period primarily
due to higher average copper prices (approximately $159 million); partially
offset by higher management fees (approximately $10 million) and insurance
claims (approximately $2 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 second quarter operating income of $91.4 million increased
$73.1 million compared with the 2003 second quarter primarily due to higher
average copper prices (approximately $38 million) and lower cost of copper
production (approximately $40 million); offset by lower sales volumes
(approximately $5 million). Lower cost of copper production was primarily due
to higher molybdenum by-product credits resulting from higher prices and
volumes (approximately $61 million) and the impact of changes in inventory
(approximately $9 million); partially offset by higher mining and
milling costs (approximately $22 million), including the impact of slope
slippage at Bagdad and energy costs (approximately $4 million) primarily due to
the ramp-up of operations in 2004 and an unfavorable change in heap leach and
work-in-process inventories (approximately $1 million). Operating income of $146.3 million for the first six months of 2004
increased $121.3 million compared with the corresponding 2003 period primarily
due to higher average copper prices (approximately $80 million) and lower cost
of copper production (approximately $44 million); offset by lower sales volumes
(approximately $2 million). Lower cost of copper production was primarily due
to higher molybdenum by-product credits resulting from higher prices and
volumes (approximately $88 million); partially offset by higher mining and
milling costs (approximately $39 million) and energy costs (approximately $8
million) primarily due to the ramp-up of operations in 2004. During the 2004 second quarter, the Sierrita operation entered into a new
lease of property upon which its electrowinning tankhouse facility is located.
The prior lease had expired during the 2003 fourth quarter. 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 second quarter operating loss of $3.1 million was
comparable with the 2003 second quarter. Higher average copper prices
(approximately $1 million) and lower cost of copper production (approximately
$1 million) were offset by lower sales volumes (approximately $2 million). An operating loss of $3.8 million for the first six months of 2004 was
comparable with the corresponding 2003 period. Higher average copper prices
(approximately $4 million) were offset by lower sales volumes (approximately $4
million). 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 second quarter operating
income of $10.0 million increased $12.8 million compared with the 2003 second
quarter primarily due to higher average copper prices and the effect of
increased sales volumes (approximately $11 million) and lower cost of copper
production (approximately $2 million). Lower cost of copper production
included higher grade and recovery (approximately $21 - 45 -




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million), lower depreciation (approximately $5 million) and a favorable
change in heap-leach and work-in-process inventories (approximately $1
million); partially offset by higher operating costs (approximately $20
million) and energy costs (approximately $5 million) primarily due to increased
production. Operating income of $25.0 million for the first six months of 2004
increased $29.9 million compared with the corresponding 2003 period primarily
due to higher average copper prices and the effect of increased sales volumes
(approximately $26 million) and lower cost of copper production (approximately
$4 million). Lower cost of copper production included higher grade and
recovery (approximately $27 million), lower depreciation (approximately $8
million) and a favorable change in heap-leach and work-in-process inventories
(approximately $6 million); partially offset by higher operating costs
(approximately $28 million) and energy costs (approximately $9 million)
primarily due to increased production. Tyrone Segment  Operating Income (Loss) Our wholly owned Tyrone open-pit mine, located near Tyrone, New Mexico,
mines leachable copper ore and it produces electrowon copper cathode. The 2004
second quarter operating income of $6.6 million increased $11.1 million
compared with the 2003 second quarter due to higher average copper prices and
the effect of decreased sales volumes (approximately $11 million) and lower
cost of copper production (approximately $2 million); partially offset by a
special pre-tax charge for environmental provisions ($1.8 million). Lower cost
of copper production included lower costs associated with mine plan changes and
lower production (approximately $6 million) and a favorable change in heap
leach and work-in-process inventories (approximately $2 million); partially
offset by lower grade and recovery (approximately $6 million). Operating income of $9.0 million in the first six months of 2004 increased
$17.9 million compared with the corresponding 2003 period due to higher average
copper prices and the effect of decreased sales volumes
(approximately $23 million); partially offset by higher cost of copper production (approximately
$3 million) and a special pre-tax charge for environmental provisions ($1.8
million). Higher cost of copper production included lower production due to
lower grade and recovery (approximately $14 million) and higher depreciation
and closure/accretion costs (approximately $3 million); partially offset by
lower costs associated with mine plan changes and lower production
(approximately $8 million), a favorable change in heap leach and
work-in-process inventories (approximately $4 million) and lower energy costs
(approximately $2 million). South American Mines  Operating Income South American Mines reported operating income in the 2004 second quarter
of $139.0 million, compared with operating income of $27.4 million in the 2003
second quarter. South American Mines reported operating income of $320.2 million for the
first six months of 2004, compared with operating income of $63.6 million for
the first six months of 2003. (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 wholly owned,
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 $49.3 million in the 2004 second
quarter increased $35.7 million compared with the 2003 second quarter primarily
due to higher average copper prices (approximately $40 million) and higher
copper sales volumes (approximately $5 million); partially offset by higher
cost of copper production (approximately $8 million) and operator fees
(approximately $2 million). Higher cost of copper production included higher
mine operating costs due to increased production (approximately $10 million)
and higher downstream charges (approximately $3 million); partially offset by
higher gold and silver credits resulting from higher prices (approximately $4
million). Operating income of $118.1 million for the first six months of 2004
increased $81.4 million compared with the corresponding 2003 period primarily
due to higher average copper prices (approximately $94 million) and higher
copper sales volumes (approximately $9 million); partially offset by higher
cost of copper production (approximately $21 million) and operator fees
(approximately $2 million). Higher cost of copper production included higher
mine operating costs due to increased production (approximately $17 million), - 46 -




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higher downstream charges (approximately $6 million) and lower copper ore
grade and recovery (approximately $3 million); partially offset by higher gold
and silver credits resulting from higher prices (approximately $5 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
second quarter operating income of $25.1 million increased $16.5 million from
the 2003 second quarter due to higher average copper prices (approximately $23
million); partially offset by higher cost of copper production (approximately
$7 million). Higher cost of copper production included higher operating costs
(approximately $5 million) and higher depreciation (approximately $1 million). Operating income of $62.9 million for the first six months of 2004
increased $46.8 million from the corresponding 2003 period primarily due to
higher average copper prices (approximately $53 million); partially offset by
higher cost of copper production (approximately $6 million). Higher cost of
copper production included higher operating costs (approximately $6 million)
and higher depreciation (approximately $2 million); partially offset by a
favorable change in work-in-process inventories (approximately $2 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 second quarter operating income of $64.6
million increased $59.4 million from the 2003 second quarter primarily due to
higher average copper prices (approximately $62 million) and higher copper
sales volumes (approximately $4 million); partially offset by higher cost of
copper production (approximately $8 million). Higher cost of copper production
included an unfavorable change in heap-leach and work-in-process inventories
(approximately $5 million), higher operating costs (approximately $2 million),
lower ore grade (approximately $2 million) and the impact of full consolidation
(approximately $1 million); partially offset by lower depreciation
(approximately $2 million). Operating income of $139.2 million for the first six months of 2004
increased $128.4 million from the corresponding 2003 period primarily due to
higher average copper prices (approximately $139 million) and higher copper
sales volumes (approximately $11 million); partially offset by higher cost of
copper production (approximately $24 million). Higher cost of copper
production included an unfavorable change in heap-leach and work-in-process
inventories (approximately $22 million) and higher operating costs
(approximately $10 million); partially offset by higher ore grade
(approximately $2 million), lower depreciation (approximately $4 million) and
the impact of full consolidation (approximately $1 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. The Climax mine is currently on care-and-maintenance status. We
expect to bring it into production concurrent with the exhaustion of the
Henderson molybdenum mine reserves for continued long-term primary molybdenum
supply for the chemicals business. Primary Molybdenum operations reported operating income in the 2004 second
quarter of $29.8 million, compared with operating income of $0.4 million in the
second quarter of 2003. The 2004 second quarter increase of $29.4 million
primarily was due to higher average molybdenum prices (approximately $111
million), higher sales volumes (approximately $19 million) and lower shutdown
expenses (approximately $3 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 $94
million) and higher production costs (approximately $9 million). Higher
production costs resulted from increased volumes and included higher freight
and warehousing costs (approximately $3 million), labor and maintenance costs
(approximately $3 million), conversion costs (approximately $1 million) and
depreciation (approximately $1 million). Primary Molybdenum operations reported operating income of $45.4 million
for the first six months of 2004, compared with operating income - 47 -




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of $0.5 million for the corresponding 2003 period. The increase of $44.9
million primarily was due to higher average molybdenum prices (approximately
$170 million), higher sales volumes (approximately $35 million) and lower
shutdown expenses (approximately $3 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 $147
million) and higher production costs (approximately $16 million). Higher
production costs resulted from increased volumes and included higher labor and
maintenance costs (approximately $5 million), conversion costs (approximately
$4 million), freight and warehousing costs (approximately $3 million), energy
costs (approximately $2 million) and depreciation (approximately $2 million). Manufacturing and Sales Segment  Operating Income Manufacturing and Sales reported operating income of $8.9 million in the
2004 second quarter, compared with operating income of $6.5 million in the 2003
second quarter. The 2004 second quarter increase of $2.4 million compared with
the 2003 second quarter primarily was due to higher rod sales (approximately $4
million) and operating expenses (approximately $1 million); offset by lower
smelter production (approximately $3 million). Manufacturing and Sales reported operating income of $12.7 million for the
first six months of 2004, compared with operating income of $15.0 million for
the first six months of 2003. The 2004 decrease of $2.3 million primarily was
due to lower smelter production (approximately $5 million) and higher refinery
operating expenses (approximately $2 million); offset by higher rod sales
(approximately $5 million). Other Mining Segment  Operating Loss Other Mining reported an operating loss of $32.4 million in the 2004
second quarter, compared with an operating loss of $21.3 million in the 2003
second quarter. The 2004 second quarter increase in operating loss of $11.1
million compared with the 2003 second quarter primarily was due to higher
incentive compensation (approximately $3 million), exploration expense
(approximately $3 million), profit sharing cost (approximately $3 million) and
project expenses at Tohono (approximately $2 million). Other Mining reported an operating loss of $52.3 million for the first six
months of 2004, compared with an operating loss of $42.3 million for the first
six months of 2003. The increase in operating loss of $10.0 million primarily
was due to higher incentive compensation (approximately $8 million),
exploration expense (approximately $7 million) and profit sharing cost
(approximately $5 million); offset by higher management fees paid by Morenci
(approximately $10 million). PDMC  Other Matters On July 2, 2004, the U.S. Bureau of Land Management issued its Record of
Decision supporting a land exchange with Phelps Dodge. This was a critical
milestone in developing a proposed copper mining operation near Safford,
Arizona. In January 2004, we decided to resume production 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 and actual production ramp-ups and timing are as follows:  
    
    Our Sierrita and Bagdad mines in Arizona began increasing
production in January 2004. Bagdad produced at capacity in the 2004
second quarter and Sierrita is expected to be at capacity 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.
The Chino milling operation is expected to increase to approximately
80 percent of capacity in the 2004 third quarter, 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, resumed underground mining and milling operations during
the 2004 second quarter.
    
    Our Miami smelter in Arizona resumed operating at full capacity
in the 2004 second quarter. These recommencements, in conjunction with the acquisition of the
one-third share of Chino 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 - 48 -




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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). 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 19 cents per common share. Our current annual molybdenum production is approximately 58 million
pounds (approximately 27 million pounds from primary mines and 31 million
pounds from by-product mines). Approximately 70 percent of our molybdenum
contracts are priced based on the average of the previous 30 days of published
prices (i.e., Platts Metals Week, Ryans Notes, or Metal Bulletin), plus
premiums. Accordingly, each $1.00 per pound change in our average annual
realized molybdenum price causes a variation in annual operating income before
taxes of approximately $41 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 at June 30, 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 is subject to regulation under the New Mexico
Water Quality Act and the Water Quality Control Commission (WQCC) regulations
adopted under that Act. The New Mexico Environment Department (NMED) has
required Chino, Tyrone, Cobre and Hidalgo to submit closure plans for NMEDs
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. Chino, Tyrone and Cobre also are subject to regulation under the New
Mexico Mining Act (the Mining Act) and the Mining Act Rules, which are
administered by the Mining and Minerals Division (MMD) of the Energy, Minerals
and Natural Resources Department. 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 or portions of
the mines. Financial assurance is required to ensure that funding will be available
to perform both the closure plans and the closeout plans if the operator is not
able to perform the work required by the plans. The amount of the financial
assurance is based upon the estimated cost for a third party to complete the
work specified in the plans, including any long-term operation and maintenance,
such as operation of water treatment systems. NMED and MMD calculate the
required amount of financial assurance based upon a net present value (NPV)
method, based upon approved discount and escalation rates, when the closure
plan and/or closeout plan require performance over a long period of time. 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. Refer to Note 6, Contingencies, to our unaudited June 30, 2004,
Consolidated Financial - 49 -




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Information for additional information on significant New Mexico
Environmental and Reclamation Programs. 
 RESULTS OF PHELPS DODGE INDUSTRIES PDI, our manufacturing division, produces engineered products principally
for the global energy, telecommunications, transportation and specialty
chemicals sectors. Its operations are characterized by products with
significant market share, internationally competitive cost and quality, and
specialized engineering capabilities. The manufacturing division includes our
Specialty Chemicals segment and our Wire and Cable segment. Our Specialty
Chemicals segment includes Columbian Chemicals Company and its subsidiaries
(Columbian Chemicals or Columbian). Our Wire and Cable segment consists of
three worldwide product line businesses including magnet wire, energy and
telecommunications cables, and specialty conductors. (Unaudited; $ in millions) Second Quarter2004
    
    2003Sales and other operating revenues
to unaffiliated customers:Specialty Chemicals
    
    $
    165.2
    
    
    
    166.1Wire and Cable
    
    
    231.2
    
    
    
    154.5$
    396.4
    
    
    
    320.6Operating income:Specialty Chemicals
    
    $
    15.9
    
    
    
    15.0Wire and Cable
    
    
    6.3
    
    
    
    3.5$
    22.2
    
    
    
    18.5
 (Unaudited; $ in millions) Six Months EndedJune 30,2004
    
    2003Sales and other operating revenues
to unaffiliated customers:Specialty Chemicals
    
    $
    329.1
    
    
    
    328.2Wire and Cable
    
    
    449.8
    
    
    
    315.4$
    778.9
    
    
    
    643.6Operating income:Specialty Chemicals
    
    $
    27.1
    
    
    
    29.1Wire and Cable
    
    
    8.6
    
    
    
    6.9$
    35.7
    
    
    
    36.0
 PDI  Sales PDI reported sales to unaffiliated customers of $396.4 million in the 2004
second quarter, compared with sales of $320.6 million in the 2003 second
quarter. The increase of $75.8 million was due to higher Wire and Cable sales
that increased $76.7 million, or 50 percent, primarily as a result of increased
demand and metal prices for energy cables and building wire in the
international markets (approximately $49 million), higher magnet wire sales in
North America (approximately $22 million) primarily due to higher copper
prices, and increased sales of specialty conductors in North America due to
higher sales volumes and higher metal prices (approximately $6 million).
Higher metal prices impacting revenues generally reflect wire and cables
higher purchase cost of such metals. Specialty Chemicals 2004 second quarter
sales of $165.2 million remained essentially unchanged from the 2003 second
quarter. PDI reported sales to unaffiliated customers of $778.9 million for the
first six months of 2004, compared with sales of $643.6 million in the
corresponding 2003 period. The increase of $135.3 million was due to higher
Wire and Cable sales that increased $134.4 million, or 43 percent, primarily as
a result of increased demand and metal prices for energy cables and building
wire in the international markets (approximately $83 million), higher magnet
wire sales in North America (approximately $40 million) primarily due to higher
copper prices and increased sales of specialty metal products in North America
primarily due to higher metal prices and higher volumes (approximately $12
million). Specialty Chemicals 2004 first six months sales of $329.1 million
remained essentially unchanged from the first six months of 2003. PDI  Operating Income PDI reported operating income of $22.2 million in the 2004 second quarter,
including a special, net pre-tax charge of $2.5 million, compared with
operating income of $18.5 million in the 2003 second quarter. PDI reported operating income of $35.7 million for the first six months of
2004, including a special, net pre-tax charge of $4.3 million, compared with
operating income of $36.0 million for the first six months of 2003, 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.) - 50 -




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Note: Supplemental Data The following tables summarize PDIs special items and provisions for the
second quarter and six month periods ended June 30, 2004 and 2003 and the
resultant earnings excluding these special items and provisions: (Unaudited; $ in millions) Second Quarter2004
    
    2003Operating income
    
    $
    22.2
    
    
    
    18.5Special, pre-tax items and
provisions
    
    
    (2.5
    )
    
    
    Segment operating earnings
excluding special items and
provisions
    
    $
    24.7
    
    
    
    18.5
 (Unaudited; $ in millions) Six Months EndedJune 30,2004
    
    2003Operating income
    
    $
    35.7
    
    
    
    36.0Special, pre-tax items and
provisions
    
    
    (4.3
    )
    
    
    3.2Segment operating earnings
excluding special items and
provisions
    
    $
    40.0
    
    
    
    32.8
 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) Second Quarter2004
    
    2003Restructuring program
    
    $
    (1.9
    )
    
    
    Hopkinsville asset impairment
    
    
    (0.6
    )
    
    
    $
    (2.5
    )
    
    
    
 (Unaudited; $ in millions) Six Months EndedJune 30,2004
    
    2003Restructuring program
    
    $
    (3.6
    )
    
    
    Environmental provisions, net
    
    
    (0.1
    )
    
    
    Hopkinsville asset impairment
    
    
    (0.6
    )
    
    
    Termination of a foreign
postretirement benefit plan
    
    
    
    
    
    
    3.2$
    (4.3
    )
    
    
    3.2
 Specialty Chemicals  Operating Income Specialty Chemicals reported operating income of $15.9 million in the 2004
second quarter, compared with operating income of $15.0 million in the 2003
second quarter. The 2004 second quarter increase in operating income of $0.9
million was primarily due to improved variable margins (approximately $8
million) driven by improved volumes in North America, and by favorable exchange
rates and lower feedstock costs in Europe, South America and Asia; partially
offset by higher expenses (approximately $7 million) primarily associated with
the unfavorable impact of stronger foreign exchange rates, higher maintenance
and repair costs, higher administrative costs, and expense associated with the
blockage of a feedstock supply pipeline in the United Kingdom. Specialty Chemicals reported operating income of $27.1 million for the
first six months of 2004, compared with operating income of $29.1 million for
the first six months of 2003, including a special, net pre-tax gain of $3.2
million. Excluding special items, the 2004 increase in operating income of
$1.2 million was primarily due to improved variable margins (approximately $17
million) driven by favorable foreign exchange rates and lower feedstock costs
in North America, Europe and South America; partially offset by higher expenses
(approximately $16 million) primarily associated with the unfavorable impact of
stronger foreign exchange rates, higher depreciation expense, higher
maintenance and repair costs, higher administrative costs, expense associated
with the blockage of a feedstock supply pipeline in the United Kingdom and
production delays in Korea caused by a boiler failure at a local co-generation
facility. - 51 -




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Note: Supplemental Data The following table summarizes Specialty Chemicals special items for the
first six months of 2004 and 2003 and the resultant earnings excluding these
special items (Note: There were no special items and provisions for Specialty
Chemicals in the 2004 and 2003 second quarters): (Unaudited; $ in millions) Six Months EndedJune 30,2004
    
    2003Special, pre-tax items and
provisions
    
    $
    
    
    
    
    3.2Segment operating earnings
excluding special items and
provisions
    
    $
    27.1
    
    
    
    25.9
 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 second quarter of
$6.3 million, including a special, net pre-tax charge of $2.5 million, compared
with operating income of $3.5 million in the 2003 second quarter. Excluding
special items, the increase in operating income of $5.3 million primarily was
due to improved margins in the international markets associated with higher
sales volumes (approximately $6 million); partially offset by lower magnet wire
margins due to competitive pricing pressures ($1 million). Wire and Cable reported operating income of $8.6 million for the first six
months of 2004, including a special, net pre-tax charge of $4.3 million,
compared with operating income of $6.9 million for the first six months of
2003. Excluding special items, the increase in operating income of $6.0
million primarily was due to higher sales volumes primarily resulting from
increased demand in the international markets (approximately $9 million);
partially offset by higher variable operating costs (approximately $2 million)
and higher administrative expenses (approximately $1 million). Note: Supplemental Data The following tables summarize Wire and Cables special items and
provisions for the second quarter and six month periods ended June 30, 2004 and
2003 and the resultant earnings excluding these special items: (Unaudited; $ in millions) Second Quarter2004
    
    2003Special, pre-tax items and
provisions
    
    $
    (2.5
    )
    
    
    Segment operating earnings
excluding special items and
provisions
    
    $
    8.8
    
    
    
    3.5
 (Unaudited; $ in millions) Six Months EndedJune 30,2004
    
    2003Special, pre-tax items and
provisions
    
    $
    (4.3
    )
    
    
    Segment operating earnings
excluding special items and
provisions
    
    $
    12.9
    
    
    
    6.9
 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 $346.6 million in the 2004 second quarter
compared with the 2003 second quarter due to higher purchased cathode and
concentrate (approximately $208 million) due to higher copper prices and
volumes, higher costs of molybdenum purchased from third parties (approximately
$43 million), an increase in production costs (approximately $38 million) due
primarily to increased production volumes (including the impact of the
full consolidation of Candelaria and El Abra), and higher wire and
cable third-party raw material purchases (approximately $47 million). Cost of products sold increased $637.7 million for the first six months of
2004 compared with the corresponding 2003 period. The increase was
attributable to higher purchased cathode and concentrate (approximately $387
million) due to higher copper prices and volumes, higher costs of - 52 -




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molybdenum purchased from third parties (approximately $73 million), an
increase in production costs (approximately $96 million) due primarily to
increased production volumes (including the impact of the full consolidation of Candelaria
and El Abra), and higher wire and cable third party raw material purchases and
sales volumes (approximately $77 million). Depreciation, Depletion and Amortization Depreciation, depletion and amortization expense was $124.4 million in the
2004 second quarter, compared with $107.2 million in the 2003 second quarter.
The increase of $17.2 million was due to a net production increase at PDMC
primarily associated with the full consolidation of Candelaria and El Abra
(approximately $19 million). Depreciation, depletion and amortization expense was $249.3 million for
the first six months of 2004, compared with $208.8 million for the first six
months of 2003. The increase of $40.5 million was due to a net production
increase at PDMC primarily associated with the full consolidation of Candelaria
and El Abra (approximately $38 million). Selling and General Administrative Expense Our selling and general administrative expense decreased $1.6 million in
the 2004 second quarter compared with the 2003 second quarter. The decrease
primarily resulted from employee benefits mostly associated with mark-to-market
adjustments for stock unit plans (approximately $3 million) and lower legal and
professional fees (approximately $2 million); partially offset by higher
restricted stock amortization associated with issuance of additional shares
(approximately $1 million), directors and officers liability insurance premiums
(approximately $1 million) and deferred profit sharing (approximately $1
million). Our selling and general administrative expense increased $4.2 million for
the first six months of 2004 compared with the corresponding 2003 period. The
increase primarily resulted from an increase in higher restricted stock
amortization associated with issuance of additional shares (approximately $2
million), higher directors and officers liability insurance premiums
(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 $15.5 million in the 2004
second quarter, compared with $12.9 million in the 2003 second quarter. The
increase primarily resulted from higher PDMC exploration expense at Candelaria
and Safford (approximately $3 million). Our net exploration and research expense was $29.1 million for the first
six months of 2004, compared with $22.5 million for the first six months of
2003. The increase primarily resulted from higher PDMC exploration expense at
Candelaria and Safford (approximately $7 million). Interest Expense Interest expense decreased $4.7 million in the 2004 second quarter
compared with the 2003 second quarter. The decrease was primarily attributable
to reductions related to the payoff of long-term debt (approximately $9
million); partially offset by the increase attributable to the impact of fully
consolidating El Abra and Candelaria (approximately $2 million) and higher
effective interest rates for certain notes primarily resulting from the
unwinding of certain interest rate swaps in 2003 (approximately $2 million). Interest expense decreased $1.7 million for the first six months of 2004
compared with the corresponding 2003 period. The decrease was primarily
attributable to reductions related to the payoff of long-term debt
(approximately $11 million); partially offset by the increase attributable to
the impact of fully consolidating El Abra and Candelaria (approximately $4
million), higher effective interest rates for certain notes primarily resulting
from the unwinding of certain interest rate swaps in 2003 (approximately $2
million) and interest associated with the Texas franchise tax matter and prior
year tax returns (approximately $2 million). Early Debt Extinguishment Costs In June 2004, the Company completed the full repayment of Candelarias
senior debt and executed the termination and release of the existing financing
obligations and associated security package with the bank group. The full
repayment of long-term debt with a book value of approximately $166 million
resulted in a 2004 second quarter pre-tax loss of $15.2 million for early debt
extinguishment costs, including unamortized issuance costs and the unwinding of
associated floating-to-fixed interest rate swaps. The debt repayment had no
impact on the full consolidation of - 53 -




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Candelaria as it continues to meet the criteria of a variable interest
entity and Phelps Dodge remains the primary beneficiary of this entity. In March 2004, the Company redeemed its 8.375 percent debentures due in
2023 with a book value of approximately $149 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 and expense, net, decreased $11.0 million in the 2004
second quarter compared with the 2003 second quarter. The decrease resulted
primarily from a cost-basis investment write-down ($6.4 million), the absence
of 2003 second quarter gain on the sale of a cost-basis wire and cable
investment ($6.4 million), lower mark-to-market benefits on non-qualified
pension plan assets ($2.3 million) and the Chino and Tyrone financial assurance
trusts ($1.6 million); partially offset by higher dividend
income ($5.4
million). Miscellaneous income and expense, net, decreased $9.7 million for the
first six months of 2004 compared with the corresponding 2003 period. The
decrease resulted primarily from cost-basis investment write-downs ($10.0
million), the absence of 2003 second quarter gain on the sale of a cost-basis
wire and cable investment ($6.4 million), higher foreign currency exchange
losses ($1.9 million) and lower mark-to-market benefits on non-qualified
pension plan assets ($0.8 million); partially offset by higher dividend income
($6.7 million), lower shutdown expenses ($2.1 million) and higher interest
income primarily due to higher cash balances ($0.6 million). Provision for Taxes on Income The Companys income tax provision for the 2004 second quarter principally
resulted from (i) taxes on earnings at international operations ($18.9 million)
including benefits from the release of valuation allowances ($21.3 million),
(ii) taxes on earnings at U.S. operations ($12.8 million) including benefits
from the release of valuation allowances ($41.9 million) and (iii) the
recognition of a valuation allowance for deferred tax assets at our Brazilian
wire and cable operation ($9.0 million). The release of both the domestic and
international valuation allowances reflects net operating losses (NOLs) and
other tax credits that are expected to be utilized in the current year. Due to
the continued economic weakness in the Brazilian wire and cable markets, we
reassessed the recoverability of deferred tax assets associated with our
Brazilian wire and cable operations and determined that recoverability was not
likely and established a related valuation allowance. The Companys income tax provision for the six months ended June 30, 2004,
principally resulted from (i) taxes on earnings at international operations
($55.8 million) including benefits from the release of valuation allowances
($45.8 million), (ii) taxes on earnings at U.S. operations ($12.9 million)
including benefits from the release of valuation allowances ($66.2 million) and
(iii) the recognition of a valuation allowance for deferred tax assets at our
Brazilian wire and cable operation ($9.0 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 release of both the domestic and international
valuation allowances reflects NOLs and other tax credits that are expected to
be utilized. The Companys income tax provision for the 2003 second quarter principally
resulted from (i) taxes on earnings at international operations ($12.2 million)
that could not be offset by losses at domestic operations, and (ii) a benefit
from finalizing year-end 2002 estimates in the Companys 2002 U.S. tax return
filed in June 2003 ($4.2 million). The Companys income tax provision for the
six months ended June 30, 2003, primarily comprised the following: (i) taxes
on earnings at international operations ($26.3 million) that could not be
offset by losses at domestic operations, and (ii) a benefit from finalizing
year-end 2002 estimates in the Companys 2002 U.S. tax return filed in June
2003 ($4.2 million). Minority Interests in Consolidated Subsidiaries Minority interests were $42.0 million and $1.9 million in the second
quarters of 2004 and 2003, respectively, and $105.6 million and $4.0 million
for the six months ended June 30, 2004 and 2003, respectively. Prior to
January 1, 2004, - 54 -




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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. For the quarter and six months ended
June 30, 2003, the effect of adopting SFAS No. 143 decreased loss before
cumulative effect of accounting change by approximately $8 million, or 9 cents
per common share, and $11 million, or 12 cents per common share, respectively. 
 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 six months of 2004, net working capital balances
(excluding cash and cash equivalents and debt) increased $97.7 million. This
increase resulted primarily from:  
    
    a $169.7 million increase in accounts receivable primarily due
to higher copper prices (approximately $71 million), the impact of
fully consolidating El Abra and Candelaria (approximately $34
million), higher molybdenum sales volumes and prices (approximately
$48 million), higher Specialty Chemicals sales volumes (approximately
$11 million) and higher Wire and Cable sales volumes (approximately
$35 million); partially offset by timing of collections
(approximately $17 million) and the impact of a reduction in the
forward curve price on provisionally priced copper sales
(approximately $15 million);
    
    a $34.8 million increase in inventories primarily due to higher
purchases at Wire and Cable resulting from increased sales volumes
(approximately $32 million);
    
    a $23.7 million increase in supplies primarily due to fully
consolidating El Abra and Candelaria (increase of approximately $18
million) and increased production associated with the ramp-up of
operations (approximately $4 million);
    
    a $21.4 million increase in prepaid expenses and other current
assets primarily due to the timing of payments for consolidated risk
insurance (approximately $10 million), fair value adjustments
associated with hedges (approximately $7 million) and the timing of
major maintenance activities (approximately $4 million) at our Miami
copper smelter (the cost of such activities is deferred and charged
to operations during the subsequent periods benefited);
    
    a $127.9 million increase in accounts payable and accrued
expenses primarily due to higher cathode and concentrate purchases
(approximately $59 million), an increase in closure accrual costs
(approximately $20 million) primarily resulting from the
reclassification of the current portion, the timing of payments (approximately $18 million), the impact of
fully consolidating El Abra and Candelaria (approximately $13 million),
higher - 55 -




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molybdenum third-party concentrate purchases (approximately $7
million) and current year minority dividends at Candelaria
(approximately $5 million); and
    
    a $23.4 million increase in dividends payable due to
reinstatement of dividends on common shares. Cash and Cash Equivalents We manage our cash on a global basis and maintain cash at our
international operations to fund local operating needs, fulfill local debt
requirements and, in some cases, fund local growth opportunities or loan cash
to other international operations. At June 30, 2004, approximately 44 percent
of the Companys $830.8 million of cash was held at international operations.
It is likely that a significant portion of that cash will be used to redeem
debt at El Abra, fund international growth opportunities, and pay dividends to
the Corporation from time to time. Should the current favorable copper price
environment continue for the foreseeable future, it is likely that our
operations will continue to generate significant cash flows and cash balances. Debt At June 30, 2004, our total debt was $1,638.4 million, compared with
$1,871.6 million at March 31, 2004, and $1,959.0 million at year-end 2003. A
$320.6 million net decrease in total debt from December 31, 2003, included the
recognition of $188.6 million of debt due to the full consolidation of El Abra
and Candelaria. Our ratio of debt to total capitalization was 28.7 percent at
June 30, 2004, compared with 33.0 percent at March 31, 2004, and 38.5 percent
at December 31, 2003. In June 2004, the Company completed the full repayment of Candelarias
senior debt and executed the termination and release of the existing financing
obligations and associated security package with the bank group. The full
repayment resulted in the retirement of long-term debt with a book value of
approximately $166 million. A special, pre-tax charge of $15.2 million before
minority interest ($10.1 million after-tax and net of minority interest impact)
was recorded in the 2004 second quarter primarily reflecting the unwinding of
interest rate swaps. 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 debt transactions in the first half of 2004, described above,
including repayment costs and Candelarias scheduled 2004 second quarter
payment, resulted in a net $510 million use of cash. The Company estimates a
net reduction in annual interest payments of approximately $32 million before
taxes. We continue working to reduce outstanding debt in order to reach our
internal target of a 25 percent ratio of debt to capitalization. We are
assessing the potential prepayment of a significant portion of El Abras
senior debt as well as certain long-term tax-exempt bonds that are
redeemable at slight premiums to par values ($81 million due in 2009 and $90
million due in 2013) in the second half of the year, depending on copper
prices. 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
bil- - 56 -




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lion,
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 (as defined in the agreement). This
agreement replaced an earlier five-year, $1 billion revolving credit agreement
that was scheduled to mature on May 10, 2005. At June 30, 2004, there was a
total of $73.2 million of letters of credit issued under the new revolver.
There we no revolving credit borrowings during the quarter. Total availability
under the revolving credit at June 30, 2004, amounted to approximately $1,027
million, of which approximately $227 million could be used for additional
letters of credit. Intangible Assets, Net In April 2004, FASB issued FASB Staff Position (FSP) Nos. FAS 141-1 and
FAS 142-1, Interaction of FASB Statements No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, and EITF Issue No. 04-2,
Whether Mineral Rights Are Tangible or Intangible Assets. The FSP addressed
the inconsistency regarding the classification of mineral rights between SFAS
Nos. 141 and 142 and the Emerging Issues Task Force (EITF) Issue No. 04-02,
removing certain mineral rights as examples of intangible assets in SFAS Nos.
141 and 142. As a result, approximately $413.8 million and $315.7 million
associated with mineral rights primarily relating to our South American mining
concessions were reclassified from intangible assets to property, plant and
equipment, net as of June 30, 2004, and December 31, 2003, respectively. The
reclassifications had no effect on total assets, total liabilities,
shareholders equity or consolidated net income. Capital Expenditures and Investments Capital expenditures and investments for the first six months of 2004 were
$66.5 million for PDMC, $19.7 million for PDI and $10.4 million for other
Corporate-related activities. Capital expenditures and investments in the
corresponding 2003 period were $37.0 million for PDMC, $16.4 million for PDI
and $23.9 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 mining operations. Dividends On June 2, 2004, Phelps Dodge reinstated dividend payments on common
shares by declaring a dividend of 25 cents per common share for the 2004 third
quarter amounting to $23.4 million. The dividend is payable on September 3,
2004, to common shareholders of record at the close of business on August 13,
2004. For the first six months of 2004, Phelps Dodge has declared quarterly
dividends of $3.375 per mandatory convertible preferred share amounting to $6.8
million. - 57 -




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Contractual Obligations The following table summarizes Phelps Dodges contractual obligations at
June 30, 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 June 30, 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 (Note:
As of June 30, 2004, our take-or-pay contracts have increased approximately $43
million due to fully consolidating El Abra and Candelaria in accordance with
FIN 46.): Debt and Take-or-Pay Contracts as of June 30, 2004: (Unaudited; $ in millions) Less ThanTotal
    
    1 Year
    
    1-3 YearsShort-term debt
    
    $
    35.4
    
    
    
    35.4
    
    
    
    Long-term debt
    
    
    1,603.0
    
    
    
    207.7
    
    
    
    351.4Take-or-pay contracts
    
    
    523.7
    
    
    
    182.8
    
    
    
    183.7
 After4-5 Years
    
    5 YearsShort-term debt
    
    $
    
    
    
    
    Long-term debt
    
    
    83.7
    
    
    
    960.2Take-or-pay contracts
    
    
    85.9
    
    
    
    71.3
 Our take-or-pay contracts primarily include contracts for electricity
(approximately $204 million), contracts for petroleum-based feedstock for
conversion into carbon black (approximately $135 million), contracts for copper
anode for deliveries of specified volumes at market-based prices to our El Paso
Refinery (approximately $47 million), transportation and port fee commitments
(approximately $46 million), contracts for sulfuric acid for deliveries of
specified volumes based primarily on negotiated rates to El Abra and Cerro
Verde (approximately $35 million), contracts for natural gas (approximately $24
million) and oxygen obligations for deliveries of specified volumes at fixed
prices to Bagdad (approximately $11 million). Approximately 81 percent of our
take-or-pay electricity obligations are through PD Energy Services, the legal
entity used to manage power for PDMC at generally fixed-priced arrangements.
PD Energy Services has the right and the ability to resell the electricity as
circumstances warrant. Obligations for petroleum-based feedstock for
conversion into carbon black are for specific quantities, and ultimately will
be purchased based upon prevailing market prices at the time. These
petroleum-based products may be re-sold to others if circumstances warrant.
Obligations for natural gas provide for deliveries of specified volumes, at
market-based prices, primarily due to our carbon black operations in Brazil.
Transportation obligations total approximately $35 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 44 years. Guarantees Phelps Dodge Corporation as a guarantor is involved in providing 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 June 30, 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 six 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 - 58 -




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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 performance guarantees for
Chino and Tyrone and expects to provide a performance 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 performance 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. On June 24, 2004, the Executive Branch of the Peruvian government approved
legislation incorporating a royalty on mining activities. The Peruvian
Congress is in the process of amending certain clauses prior to issuing the
final regulation. It is not clear whether the new royalty law will have an
effect on current operations at Cerro Verde because of the existence of a
contractual stability agreement with the Government. 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. A former Cyprus subsidiary, which Cyprus sold in 1998, received an adverse
tax assessment. If that entity is unsuccessful in its appeals, Cyprus may be
required to pay up to $13.5 million to a third party in respect of this
assessment. 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. Our diesel fuel price protection program began in North America in 2000
and expanded to our South American mining operations in 2003. At June 30,
2004, we had outstanding diesel fuel option contracts in place to hedge
approximately 28 million gallons of diesel fuel through December 2004. As of
June 30, 2003, our diesel fuel price protection program had 32 million gallons
of diesel fuel hedged. Gains and losses on these hedge transactions were
substantially offset by a similar amount of losses or gains on the underlying
energy purchases. As of June 30, 2004, our natural gas price protection program, which
started in 2001, had outstanding natural gas option contracts in place to hedge
approximately 3.8 million decatherms of natural gas through December 2004. As
of June 30, 2003, our natural gas price protection program had outstanding
natural gas option contracts in place to hedge approximately 2.2 million
decatherms of natural gas. Gains and losses on these hedge transactions were
substantially offset by a similar amount of losses or gains 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 first six months of 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. - 59 -




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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 second 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 V of Part I, Item 3, Legal Proceedings,
of the Companys Form 10-K for the year ended December 31, 2003. The trial date for the contribution litigation between the members of the
Pinal Creek Group and three other parties involved in the Pinal Creek site, has
been vacated and is yet to be rescheduled. Also, the members of the Pinal
Creek Group reached an agreement in principle to settle the state court action
concerning the dissenting members contractual liability under the Pinal Creek
Group agreement. Under the terms of the proposed settlement, the parties will
use the allocation established in the federal contribution action (after any
appeals are exhausted) as the final allocation formula. II. 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 June 10, 2004, the New Mexico Water Quality Control Commission (WQCC)
issued a Partial Final Decision and Order upholding the decision of the New
Mexico Environment Department (NMED) on Phelps Dodge Tyrones closure permit.
Following NMEDs modification of one permit condition (as requested in WQCCs
order), the WQCC is expected to issue a final order affirming the permit.
Tyrone has filed a Notice of Appeal of the Partial Final Decision and Order and
intends to appeal WQCCs final decision to the New Mexico Court of Appeals. III. Reference is made to paragraph XIII of Part I, Item 3, Legal
Proceedings, of the Companys Form 10-K for the year ended December 31, 2003. In
Technical Industries, Inc. v. Cabot Corporation et al., Columbian
Chemicals Company and the other defendants have filed a motion to dismiss the
consolidated amended complaint for failure to state a claim. The plaintiffs
have filed a motion for class certification. Discovery is ongoing. In the class action filed in state court in North Carolina, the court
granted the defendants motion to dismiss; that decision is being appealed. IV. Reference is made to paragraph IV of Part I, Item 3, Legal
Proceedings, of the Companys Form 10-K for the year ended December 31, 2003. The Company and U.S. Environmental Protection Agency (EPA) reached a
settlement of the issues raised in the Notice of Violations. The settlement agreement was
embodied in a consent decree, which, along with a formal complaint, was lodged
with the United States District Court for the District of Arizona on June 21,
2004, United States and State of Arizona v. Phelps Dodge Sierrita, Inc., No.
CIV 04-312 TUC FRZ. Final entry of the decree can occur only after the close
of a required public comment period. The state of Arizona joined in
the complaint and consent decree, although it did not join in most of the
allegations made by EPA. Without admitting any of the allegations, the Company
agreed to pay a civil penalty totaling $1.4 million to be divided between the
United States and the state of Arizona. The Company also agreed to undertake
certain monitoring and permitting actions, including continuous emissions
monitoring at the molybdenum roasting facility. - 60 -




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Item 4. Submission of Matters to a Vote of Security Holders Our annual meeting was held on May 28, 2004. A total of 82,246,886 common
shares, or approximately 88 percent of our issued and outstanding common
shares, were represented at the meeting. Set forth below is a description of
the matters voted upon at the meeting and a summary of the voting regarding
each matter: For
    
    WithheldElection of Directors:Marie L. Knowles
    
    
    78,450,833
    
    
    
    3,796,053Jon C. Madonna
    
    
    80,003,371
    
    
    
    2,243,515Gordon R. Parker
    
    
    78,990,234
    
    
    
    3,256,652Robert D. Johnson
    
    
    80,839,004
    
    
    
    1,407,882
 For
    
    Against
    
    AbstainShareholder Proposal:The Shareholders
recommend to the
Board of Directors of
Phelps Dodge to
cease making
charitable
contributions
    
    
    1,412,233
    
    
    
    66,431,403
    
    
    
    5,219,620
 There were 9,183,629 broker non-votes included in the results of the
shareholder proposal. There were no broker non-votes included in the results
of the election of directors. The date of the 2005 annual meeting of shareholders was published in the
2004 Proxy Statement as May 27, 2005. 
 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 June 30, 2004, the Company filed the
following Current Report on Form 8-K: (i) Current Report on Form 8-K
bearing cover date of April 28, 2004, in which the Company reported
under Item 12 that it had issued a press release announcing financial
results for the three months ended March 31, 2004. 
 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: July 27, 2004
    
    By:
    
    /s/ Stanton K. RideoutStanton K. RideoutVice President and Controller(Principal Accounting Officer)
 
 Index to Exhibits  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 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certifications of J. Steven Whisler, Chairman and Chief Executive Officer
of the Company, and Ramiro G. Peru, Senior Vice President and Chief
Financial Officer of the Company, pursuant to 18 United States Code
Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. - 61 -