##### 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 September 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 October 27, 2004: 95,466,652 shares.




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##### Table of Contents



PHELPS DODGE CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended September 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
    
    
    23Review 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
    
    
    51Other Matters Relating to the Statement of Consolidated Operations
    
    
    54Changes in Financial Condition
    
    
    56Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    61Item 4. Controls and Procedures
    
    
    61Part II. Other InformationItem 1. Legal Proceedings
    
    
    62Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    63Item 6. Exhibits and Reports on Form 8-K
    
    
    63Signatures
    
    
    63Index to Exhibits
    
    
    64EXHIBIT 11EXHIBIT 12EXHIBIT 15EXHIBIT 31EXHIBIT 32




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PHELPS DODGE CORPORATION AND SUBSIDIARIES  
  
 Item  1. Financial Statements PHELPS DODGE CORPORATION 
 STATEMENT OF
CONSOLIDATED OPERATIONS  Nine Months EndedThird Quarter
    
    September 30,2004
    
    2003
    
    2004
    
    2003(see Note 4)
    
    
    
    
    
    (see Note 4)Sales and other operating revenues
    
    $
    1,846.5
    
    
    
    1,031.1
    
    
    
    5,094.4
    
    
    
    2,971.3Operating costs and expensesCost of products sold (exclusive of items shown separately below)
    
    
    1,246.5
    
    
    
    825.0
    
    
    
    3,478.5
    
    
    
    2,419.3Depreciation, depletion and amortization
    
    
    125.9
    
    
    
    103.1
    
    
    
    375.2
    
    
    
    311.9Selling and general administrative expense
    
    
    42.0
    
    
    
    34.6
    
    
    
    114.7
    
    
    
    103.1Exploration and research expense
    
    
    15.8
    
    
    
    12.2
    
    
    
    44.9
    
    
    
    34.7Special items and provisions, net (see Note 3)
    
    
    11.1
    
    
    
    9.4
    
    
    
    6.4
    
    
    
    9.61,441.3
    
    
    
    984.3
    
    
    
    4,019.7
    
    
    
    2,878.6Operating income
    
    
    405.2
    
    
    
    46.8
    
    
    
    1,074.7
    
    
    
    92.7Interest expense
    
    
    (29.2
    )
    
    
    (36.9
    )
    
    
    (100.5
    )
    
    
    (109.9
    )Capitalized interest
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.4Early debt extinguishment costs (see Note 11)
    
    
    
    
    
    
    
    
    
    
    (37.6
    )
    
    
    Miscellaneous income and expense, net
    
    
    21.6
    
    
    
    2.1
    
    
    
    25.1
    
    
    
    15.3Income
(loss) before taxes, minority interests, equity in net earnings of
affiliated companies and cumulative effect of accounting change
    
    
    397.9
    
    
    
    12.2
    
    
    
    962.3
    
    
    
    (1.5
    )Provision for taxes on income (see Note 8)
    
    
    (62.2
    )
    
    
    (12.0
    )
    
    
    (109.1
    )
    
    
    (33.9
    )Minority interests in consolidated subsidiaries
    
    
    (43.4
    )
    
    
    (1.1
    )
    
    
    (149.0
    )
    
    
    (5.1
    )Equity in net earnings of affiliated companies
    
    
    0.6
    
    
    
    0.6
    
    
    
    1.0
    
    
    
    1.6Income
(loss) before cumulative effect of accounting change
    
    
    292.9
    
    
    
    (0.3
    )
    
    
    705.2
    
    
    
    (38.9
    )Cumulative effect of accounting change, net of tax of $(1.3) in 2003 (see Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.4Net income (loss)
    
    
    292.9
    
    
    
    (0.3
    )
    
    
    705.2
    
    
    
    (30.5
    )Preferred stock dividends
    
    
    (3.3
    )
    
    
    (3.3
    )
    
    
    (10.1
    )
    
    
    (10.1
    )Net income (loss) applicable to common shares
    
    $
    289.6
    
    
    
    (3.6
    )
    
    
    695.1
    
    
    
    (40.6
    )Weighted
average number of common shares outstanding  basic
    
    
    93.8
    
    
    
    88.7
    
    
    
    92.8
    
    
    
    88.6Basic
earnings (loss) per common share before cumulative effect of accounting change
    
    $
    3.09
    
    
    
    (0.04
    )
    
    
    7.49
    
    
    
    (0.55
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.09Basic earnings (loss) per common share
    
    $
    3.09
    
    
    
    (0.04
    )
    
    
    7.49
    
    
    
    (0.46
    )Weighted
average number of common shares outstanding  diluted*
    
    
    99.4
    
    
    
    88.7
    
    
    
    98.6
    
    
    
    88.6Diluted earnings (loss) per common share before cumulative effect of accounting change*
    
    $
    2.95
    
    
    
    (0.04
    )
    
    
    7.15
    
    
    
    (0.55
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.09Diluted earnings (loss) per common share*
    
    $
    2.95
    
    
    
    (0.04
    )
    
    
    7.15
    
    
    
    (0.46
    )
  *
    
    Diluted earnings (loss) per common share would have been anti-dilutive for the quarter and nine months ended September 30, 2003, if based on fully diluted shares adjusted to reflect stock option exercises, unvested
restricted stock and the conversion of mandatory convertible preferred shares to common shares. See Notes to Consolidated Financial Information. - 1 -




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PHELPS DODGE CORPORATION 
 CONSOLIDATED BALANCE SHEET  September 30,
    
    December 31,2004
    
    2003(see Note 4)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,269.2
    
    
    
    683.8Accounts receivable, less allowance for doubtful
accounts (2004 - $14.9; 2003 - $10.1)
    
    
    737.3
    
    
    
    461.3Mill and leach stockpiles
    
    
    22.4
    
    
    
    22.4Inventories
    
    
    395.5
    
    
    
    379.7Supplies
    
    
    179.8
    
    
    
    150.7Prepaid expenses and other current assets
    
    
    62.8
    
    
    
    31.0Deferred income taxes
    
    
    59.6
    
    
    
    61.1Current assets
    
    
    2,726.6
    
    
    
    1,790.0Investments and long-term receivables
    
    
    102.9
    
    
    
    150.3Property, plant and equipment, net (see Note 13)
    
    
    5,251.6
    
    
    
    4,962.2Long-term mill and leach stockpiles
    
    
    127.6
    
    
    
    89.2Deferred income taxes
    
    
    30.7
    
    
    
    7.6Goodwill
    
    
    99.1
    
    
    
    98.4Intangible assets, net (see Note 13)
    
    
    5.4
    
    
    
    5.6Other assets and deferred charges
    
    
    198.0
    
    
    
    169.6$
    8,541.9
    
    
    
    7,272.9LiabilitiesCurrent liabilities:Short-term debt
    
    $
    35.8
    
    
    
    50.5Current portion of long-term debt
    
    
    294.1
    
    
    
    204.6Accounts payable and accrued expenses
    
    
    849.8
    
    
    
    700.7Dividends payable
    
    
    3.3
    
    
    
    3.4Accrued income taxes
    
    
    64.7
    
    
    
    56.1Current liabilities
    
    
    1,247.7
    
    
    
    1,015.3Long-term debt
    
    
    1,304.8
    
    
    
    1,703.9Deferred income taxes
    
    
    461.7
    
    
    
    410.2Other liabilities and deferred credits
    
    
    1,010.0
    
    
    
    1,009.54,024.2
    
    
    
    4,138.9Commitments and contingencies (see Notes 5, 6 and 8)Minority interests in consolidated subsidiaries
    
    
    501.2
    
    
    
    70.2Shareholders equityCommon shares, par value $6.25; 200.0 shares authorized;
95.3 outstanding in 2004 and 91.0 outstanding in 2003 after
deducting 10.5 and 17.1 shares held in treasury in 2004
and 2003, respectively
    
    
    595.9
    
    
    
    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
    
    
    1,877.5
    
    
    
    1,642.5Retained earnings
    
    
    1,926.1
    
    
    
    1,254.6Accumulated other comprehensive loss
    
    
    (362.4
    )
    
    
    (393.5
    )Other
    
    
    (22.6
    )
    
    
    (10.3
    )4,016.5
    
    
    
    3,063.8$
    8,541.9
    
    
    
    7,272.9
 See Notes to Consolidated Financial Information. - 2 -




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PHELPS DODGE CORPORATION 
 CONSOLIDATED STATEMENT OF CASH FLOWS  Nine Months EndedSeptember 30,2004
    
    2003(see Note 4)Operating activitiesNet income (loss)
    
    $
    705.2
    
    
    
    (30.5
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    375.2
    
    
    
    311.9Deferred income tax provision
    
    
    6.5
    
    
    
    3.9Equity earnings, net of dividends received
    
    
    2.2
    
    
    
    Special items and provisions
    
    
    7.8
    
    
    
    3.2Early debt extinguishment costs
    
    
    37.6
    
    
    
    Minority interests in consolidated subsidiaries
    
    
    149.0
    
    
    
    5.1Cumulative effect of accounting change
    
    
    
    
    
    
    (9.7
    )Changes in current assets and liabilities:Accounts receivable
    
    
    (257.9
    )
    
    
    (74.4
    )Repayment from sale of accounts receivable
    
    
    
    
    
    
    (4.5
    )Mill and leach stockpiles
    
    
    4.8
    
    
    
    22.9Inventories
    
    
    (10.4
    )
    
    
    27.5Supplies
    
    
    (11.8
    )
    
    
    1.5Prepaid expenses
    
    
    (20.6
    )
    
    
    (2.2
    )Interest payable
    
    
    16.4
    
    
    
    29.0Other
accounts payable
    
    
    134.3
    
    
    
    15.9Accrued income taxes
    
    
    5.0
    
    
    
    20.4Other accrued expenses
    
    
    (8.0
    )
    
    
    (55.5
    )Other operating, net
    
    
    (23.2
    )
    
    
    (19.3
    )Net cash provided by operating activities
    
    
    1,112.1
    
    
    
    245.2Investing activitiesCapital outlays
    
    
    (160.0
    )
    
    
    (105.5
    )Capitalized interest
    
    
    (0.6
    )
    
    
    (0.4
    )Investment in subsidiaries
    
    
    (0.2
    )
    
    
    (0.8
    )Proceeds from asset dispositions
    
    
    18.9
    
    
    
    15.1Other investing, net
    
    
    (0.6
    )
    
    
    (4.2
    )Net cash used in investing activities
    
    
    (142.5
    )
    
    
    (95.8
    )Financing activitiesProceeds from issuance of debt
    
    
    150.0
    
    
    
    9.5Payment of debt
    
    
    (718.1
    )
    
    
    (102.7
    )Common dividends
    
    
    (23.6
    )
    
    
    Preferred dividends
    
    
    (10.1
    )
    
    
    (10.1
    )Issuance of shares, net
    
    
    254.0
    
    
    
    8.6Debt issue costs
    
    
    (7.3
    )
    
    
    Other financing, net
    
    
    (57.4
    )
    
    
    33.8Net cash used in financing activities
    
    
    (412.5
    )
    
    
    (60.9
    )Increase in cash and cash equivalents
    
    
    557.1
    
    
    
    88.5Increase 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
    
    $
    1,269.2
    
    
    
    438.3
 See Notes to Consolidated Financial Information. - 3 -




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PHELPS DODGE CORPORATION 
 CONSOLIDATED STATEMENT
OF COMMON SHAREHOLDERS EQUITY
 Common Shares
    
    Preferred Shares
    
    
    
    
    
    
    
    
    
    AccumulatedCapital in
    
    
    
    
    
    OtherNumber
    
    At Par
    
    Number
    
    At Par
    
    Excess of
    
    Retained
    
    Comprehensive
    
    
    
    
    
    Shareholdersof Shares
    
    Value
    
    of Shares
    
    Value
    
    Par Value
    
    Earnings
    
    Income (Loss)
    
    Other
    
    EquityBalance at December 31, 2003
    
    
    91.0
    
    
    $
    568.5
    
    
    
    2.0
    
    
    $
    2.0
    
    
    $
    1,642.5
    
    
    $
    1,254.6
    
    
    $
    (393.5
    )
    
    $
    (10.3
    )
    
    $
    3,063.8Stock options exercised
    
    
    4.1
    
    
    
    25.9
    
    
    
    
    
    
    
    
    
    
    
    217.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    243.7Restricted shares issued/cancelled, net
    
    
    0.2
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    16.8
    
    
    
    
    
    
    
    
    
    
    
    (12.3
    )
    
    
    6.0Directors stock compensation
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Common shares purchased
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Dividends on preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10.1
    )
    
    
    
    
    
    
    
    
    
    
    (10.1
    )Dividends on common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23.6
    )
    
    
    
    
    
    
    
    
    
    
    (23.6
    )Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    705.2
    
    
    
    
    
    
    
    
    
    
    
    705.2Other comprehensive income, net of tax:Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.5
    
    
    
    
    
    
    
    10.5Net gain on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.8
    
    
    
    
    
    
    
    13.8Other investment adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2Unrealized gain on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.5
    
    
    
    
    
    
    
    6.5Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31.1
    
    
    
    
    
    
    
    31.1Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736.3Balance at September 30, 2004
    
    
    95.3
    
    
    $
    595.9
    
    
    
    2.0
    
    
    $
    2.0
    
    
    $
    1,877.5
    
    
    $
    1,926.1
    
    
    $
    (362.4
    )
    
    $
    (22.6
    )
    
    $
    4,016.5
 See Notes to Consolidated Financial Information. - 4 -




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FINANCIAL DATA BY BUSINESS SEGMENT
(Unaudited; $ in millions) U.S. Mines
    
    South American MinesCandelaria/Bagdad/
    
    Miami/
    
    Chino/
    
    
    
    
    
    Ojos del
    
    Cerro
    
    
    
    
    
    PrimaryMorenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    Salado*
    
    Verde
    
    El Abra*
    
    MolybdenumThird Quarter 2004Sales and other operating revenues:Unaffiliated customers
    
    $
    
    
    
    
    5.7
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    130.4
    
    
    
    31.8
    
    
    
    88.6
    
    
    
    267.1Intersegment
    
    
    238.5
    
    
    
    270.0
    
    
    
    9.7
    
    
    
    75.5
    
    
    
    29.2
    
    
    
    41.8
    
    
    
    35.2
    
    
    
    58.0
    
    
    
    Depreciation, depletion and amortization
    
    
    19.5
    
    
    
    10.2
    
    
    
    1.4
    
    
    
    4.6
    
    
    
    3.0
    
    
    
    12.3
    
    
    
    8.1
    
    
    
    29.4
    
    
    
    7.7Operating income (loss) before special
items and provisions
    
    
    100.5
    
    
    
    139.6
    
    
    
    (0.7
    )
    
    
    16.9
    
    
    
    8.7
    
    
    
    77.2
    
    
    
    32.5
    
    
    
    63.3
    
    
    
    17.3Special items and provisions
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (1.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    100.4
    
    
    
    139.6
    
    
    
    (0.8
    )
    
    
    16.7
    
    
    
    7.2
    
    
    
    77.2
    
    
    
    32.5
    
    
    
    63.3
    
    
    
    17.3Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12.4
    )
    
    
    (3.9
    )
    
    
    (25.6
    )
    
    
    Assets at September 30
    
    
    944.0
    
    
    
    742.5
    
    
    
    104.8
    
    
    
    431.1
    
    
    
    176.4
    
    
    
    807.6
    
    
    
    524.0
    
    
    
    1,143.4
    
    
    
    826.3Expenditures for segment assets
    
    
    7.5
    
    
    
    14.8
    
    
    
    0.8
    
    
    
    2.4
    
    
    
    4.5
    
    
    
    3.0
    
    
    
    2.2
    
    
    
    3.1
    
    
    
    3.8Third Quarter 2003Sales and other operating revenues:Unaffiliated customers
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40.6
    
    
    
    10.5
    
    
    
    31.3
    
    
    
    101.0Intersegment
    
    
    150.0
    
    
    
    119.8
    
    
    
    7.9
    
    
    
    10.6
    
    
    
    21.9
    
    
    
    35.2
    
    
    
    29.0
    
    
    
    22.5
    
    
    
    Depreciation, depletion and amortization
    
    
    18.4
    
    
    
    8.1
    
    
    
    2.0
    
    
    
    2.1
    
    
    
    3.2
    
    
    
    10.3
    
    
    
    7.2
    
    
    
    17.6
    
    
    
    5.6Operating income (loss) before special
items and provisions
    
    
    20.9
    
    
    
    23.7
    
    
    
    (0.7
    )
    
    
    (3.6
    )
    
    
    (5.0
    )
    
    
    22.4
    
    
    
    10.6
    
    
    
    7.7
    
    
    
    (0.4
    )Special items and provisions
    
    
    (1.1
    )
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    19.8
    
    
    
    23.7
    
    
    
    (0.7
    )
    
    
    (4.9
    )
    
    
    (5.5
    )
    
    
    22.4
    
    
    
    10.6
    
    
    
    7.7
    
    
    
    (0.4
    )Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    Assets at September 30
    
    
    1,028.6
    
    
    
    743.0
    
    
    
    120.3
    
    
    
    300.9
    
    
    
    156.3
    
    
    
    665.6
    
    
    
    421.0
    
    
    
    536.8
    
    
    
    788.7Expenditures for segment assets
    
    
    3.2
    
    
    
    1.6
    
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.8
    
    
    
    0.9
    
    
    
    1.1
    
    
    
    (0.9
    )
    
    
    3.7
 Corporate,Manufac-
    
    
    
    
    
    PDMC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other &turing &
    
    Other
    
    Elimi-
    
    PDMC
    
    Specialty
    
    Wire &
    
    PDI
    
    Elimi-Sales
    
    Mining
    
    nations
    
    Subtotal
    
    Chemicals
    
    Cable
    
    Subtotal
    
    nations
    
    TotalsThird Quarter 2004Sales and other operating revenues:Unaffiliated customers
    
    $
    890.5
    
    
    
    6.1
    
    
    
    
    
    
    
    1,420.3
    
    
    
    171.1
    
    
    
    255.1
    
    
    
    426.2
    
    
    
    
    
    
    
    1,846.5Intersegment
    
    
    102.7
    
    
    
    18.5
    
    
    
    (824.6
    )
    
    
    54.5
    
    
    
    
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    (54.8
    )
    
    
    Depreciation, depletion and amortization
    
    
    6.0
    
    
    
    1.1
    
    
    
    
    
    
    
    103.3
    
    
    
    12.1
    
    
    
    8.9
    
    
    
    21.0
    
    
    
    1.6
    
    
    
    125.9Operating income (loss) before special
items and provisions
    
    
    10.2
    
    
    
    (34.2
    )
    
    
    
    
    
    
    431.3
    
    
    
    5.1
    
    
    
    10.7
    
    
    
    15.8
    
    
    
    (30.8
    )
    
    
    416.3Special items and provisions
    
    
    (3.1
    )
    
    
    (2.9
    )
    
    
    
    
    
    
    (7.9
    )
    
    
    
    
    
    
    (3.3
    )
    
    
    (3.3
    )
    
    
    0.1
    
    
    
    (11.1
    )Operating income (loss)
    
    
    7.1
    
    
    
    (37.1
    )
    
    
    
    
    
    
    423.4
    
    
    
    5.1
    
    
    
    7.4
    
    
    
    12.5
    
    
    
    (30.7
    )
    
    
    405.2Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41.9
    )
    
    
    
    
    
    
    (1.5
    )
    
    
    (1.5
    )
    
    
    
    
    
    
    (43.4
    )Assets at September 30
    
    
    485.9
    
    
    
    1,288.5
    
    
    
    (1,381.1
    )
    
    
    6,093.4
    
    
    
    789.8
    
    
    
    593.8
    
    
    
    1,383.6
    
    
    
    1,064.9
    
    
    
    8,541.9Expenditures for segment assets
    
    
    2.1
    
    
    
    5.1
    
    
    
    (0.3
    )
    
    
    49.0
    
    
    
    8.9
    
    
    
    5.2
    
    
    
    14.1
    
    
    
    0.5
    
    
    
    63.6Third Quarter 2003Sales and other operating revenues:Unaffiliated customers
    
    $
    514.7
    
    
    
    6.0
    
    
    
    
    
    
    
    704.1
    
    
    
    152.0
    
    
    
    175.0
    
    
    
    327.0
    
    
    
    
    
    
    
    1,031.1Intersegment
    
    
    80.4
    
    
    
    17.8
    
    
    
    (463.5
    )
    
    
    31.6
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    (31.7
    )
    
    
    Depreciation, depletion and amortization
    
    
    4.4
    
    
    
    2.0
    
    
    
    
    
    
    
    80.9
    
    
    
    11.4
    
    
    
    8.9
    
    
    
    20.3
    
    
    
    1.9
    
    
    
    103.1Operating income (loss) before special
items and provisions
    
    
    6.2
    
    
    
    (17.2
    )
    
    
    
    
    
    
    64.6
    
    
    
    8.4
    
    
    
    5.4
    
    
    
    13.8
    
    
    
    (22.2
    )
    
    
    56.2Special items and provisions
    
    
    (0.1
    )
    
    
    (2.0
    )
    
    
    
    
    
    
    (5.0
    )
    
    
    
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    (4.8
    )
    
    
    (9.4
    )Operating income (loss)
    
    
    6.1
    
    
    
    (19.2
    )
    
    
    
    
    
    
    59.6
    
    
    
    8.4
    
    
    
    5.8
    
    
    
    14.2
    
    
    
    (27.0
    )
    
    
    46.8Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    (0.3
    )
    
    
    (1.4
    )
    
    
    (1.7
    )
    
    
    
    
    
    
    (1.1
    )Assets at September 30
    
    
    493.2
    
    
    
    1,486.0
    
    
    
    (1,607.1
    )
    
    
    5,133.3
    
    
    
    745.9
    
    
    
    532.0
    
    
    
    1,277.9
    
    
    
    588.4
    
    
    
    6,999.6Expenditures for segment assets
    
    
    3.2
    
    
    
    1.6
    
    
    
    
    
    
    
    15.9
    
    
    
    7.6
    
    
    
    3.6
    
    
    
    11.2
    
    
    
    1.9
    
    
    
    29.0
  *
    
    Third quarter 2004 reflects full consolidation of El Abra and Candelaria; third 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 MinesCandelaria/Bagdad/
    
    Miami/
    
    Chino/
    
    
    
    
    
    Ojos del
    
    Cerro
    
    
    
    
    
    PrimaryMorenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    Salado*
    
    Verde
    
    El Abra*
    
    MolybdenumNine Months Ended September 30, 2004Sales and other operating revenues:Unaffiliated customers
    
    $
    
    
    
    
    5.7
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    312.0
    
    
    
    76.4
    
    
    
    284.9
    
    
    
    642.2Intersegment
    
    
    669.0
    
    
    
    642.3
    
    
    
    21.1
    
    
    
    158.1
    
    
    
    82.2
    
    
    
    158.6
    
    
    
    120.3
    
    
    
    198.3
    
    
    
    Depreciation, depletion and amortization
    
    
    56.8
    
    
    
    27.4
    
    
    
    3.8
    
    
    
    9.9
    
    
    
    9.0
    
    
    
    37.7
    
    
    
    24.4
    
    
    
    91.9
    
    
    
    22.9Operating income (loss) before special
items and provisions
    
    
    265.3
    
    
    
    285.9
    
    
    
    (4.5
    )
    
    
    42.3
    
    
    
    19.5
    
    
    
    195.3
    
    
    
    95.4
    
    
    
    202.5
    
    
    
    62.4Special items and provisions
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.6
    )
    
    
    (3.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Operating income (loss)
    
    
    264.8
    
    
    
    285.9
    
    
    
    (4.6
    )
    
    
    41.7
    
    
    
    16.2
    
    
    
    195.3
    
    
    
    95.4
    
    
    
    202.5
    
    
    
    62.7Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28.6
    )
    
    
    (11.8
    )
    
    
    (105.2
    )
    
    
    Assets at September 30
    
    
    944.0
    
    
    
    742.5
    
    
    
    104.8
    
    
    
    431.1
    
    
    
    176.4
    
    
    
    807.6
    
    
    
    524.0
    
    
    
    1,143.4
    
    
    
    826.3Expenditures for segment assets
    
    
    14.5
    
    
    
    26.7
    
    
    
    1.0
    
    
    
    8.5
    
    
    
    6.7
    
    
    
    13.3
    
    
    
    4.0
    
    
    
    5.7
    
    
    
    9.9Nine Months Ended September 30, 2003Sales and other operating revenues:Unaffiliated customers
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    159.8
    
    
    
    29.4
    
    
    
    92.8
    
    
    
    270.3Intersegment
    
    
    424.3
    
    
    
    334.6
    
    
    
    26.1
    
    
    
    28.4
    
    
    
    70.5
    
    
    
    65.8
    
    
    
    84.6
    
    
    
    64.3
    
    
    
    Depreciation, depletion and amortization
    
    
    57.4
    
    
    
    23.2
    
    
    
    5.4
    
    
    
    6.1
    
    
    
    10.0
    
    
    
    30.8
    
    
    
    21.8
    
    
    
    49.2
    
    
    
    18.5Operating income (loss) before special
items and provisions
    
    
    38.2
    
    
    
    48.7
    
    
    
    (4.0
    )
    
    
    (8.5
    )
    
    
    (13.9
    )
    
    
    59.1
    
    
    
    26.7
    
    
    
    18.5
    
    
    
    0.1Special items and provisions
    
    
    (1.1
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    (1.3
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    37.1
    
    
    
    48.7
    
    
    
    (4.5
    )
    
    
    (9.8
    )
    
    
    (14.4
    )
    
    
    59.1
    
    
    
    26.7
    
    
    
    18.5
    
    
    
    0.1Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.8
    )
    
    
    
    
    
    
    Cumulative effect of accounting change
    
    
    3.6
    
    
    
    2.6
    
    
    
    (2.7
    )
    
    
    (4.3
    )
    
    
    2.7
    
    
    
    
    
    
    
    0.9
    
    
    
    (0.4
    )
    
    
    1.4Assets at September 30
    
    
    1,028.6
    
    
    
    743.0
    
    
    
    120.3
    
    
    
    300.9
    
    
    
    156.3
    
    
    
    665.6
    
    
    
    421.0
    
    
    
    536.8
    
    
    
    788.7Expenditures for segment assets
    
    
    13.1
    
    
    
    12.4
    
    
    
    0.2
    
    
    
    2.2
    
    
    
    1.0
    
    
    
    2.5
    
    
    
    3.0
    
    
    
    (0.2
    )
    
    
    8.9
 Corporate,Manufac-
    
    
    
    
    
    PDMC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other &turing &
    
    Other
    
    Elimi-
    
    PDMC
    
    Specialty
    
    Wire &
    
    PDI
    
    Elimi-Sales
    
    Mining
    
    nations
    
    Subtotal
    
    Chemicals
    
    Cable
    
    Subtotal
    
    nations
    
    TotalsNine Months Ended September 30, 2004Sales and other operating revenues:Unaffiliated customers
    
    $
    2,551.1
    
    
    
    16.7
    
    
    
    
    
    
    
    3,889.3
    
    
    
    500.2
    
    
    
    704.9
    
    
    
    1,205.1
    
    
    
    
    
    
    
    5,094.4Intersegment
    
    
    321.1
    
    
    
    51.9
    
    
    
    (2,258.3
    )
    
    
    164.6
    
    
    
    
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    (165.0
    )
    
    
    Depreciation, depletion and amortization
    
    
    16.8
    
    
    
    3.3
    
    
    
    
    
    
    
    303.9
    
    
    
    37.0
    
    
    
    27.0
    
    
    
    64.0
    
    
    
    7.3
    
    
    
    375.2Operating income (loss) before special
items and provisions
    
    
    22.9
    
    
    
    (86.3
    )
    
    
    
    
    
    
    1,100.7
    
    
    
    32.2
    
    
    
    23.6
    
    
    
    55.8
    
    
    
    (75.4
    )
    
    
    1,081.1Special items and provisions
    
    
    (3.1
    )
    
    
    (3.1
    )
    
    
    
    
    
    
    (10.4
    )
    
    
    
    
    
    
    (7.6
    )
    
    
    (7.6
    )
    
    
    11.6
    
    
    
    (6.4
    )Operating income (loss)
    
    
    19.8
    
    
    
    (89.4
    )
    
    
    
    
    
    
    1,090.3
    
    
    
    32.2
    
    
    
    16.0
    
    
    
    48.2
    
    
    
    (63.8
    )
    
    
    1,074.7Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (145.6
    )
    
    
    (0.5
    )
    
    
    (2.9
    )
    
    
    (3.4
    )
    
    
    
    
    
    
    (149.0
    )Assets at September 30
    
    
    485.9
    
    
    
    1,288.5
    
    
    
    (1,381.1
    )
    
    
    6,093.4
    
    
    
    789.8
    
    
    
    593.8
    
    
    
    1,383.6
    
    
    
    1,064.9
    
    
    
    8,541.9Expenditures for segment assets
    
    
    8.3
    
    
    
    18.1
    
    
    
    (1.2
    )
    
    
    115.5
    
    
    
    14.7
    
    
    
    19.1
    
    
    
    33.8
    
    
    
    10.9
    
    
    
    160.2Nine Months Ended September 30, 2003Sales and other operating revenues:Unaffiliated customers
    
    $
    1,431.5
    
    
    
    16.7
    
    
    
    
    
    
    
    2,000.7
    
    
    
    480.2
    
    
    
    490.4
    
    
    
    970.6
    
    
    
    
    
    
    
    2,971.3Intersegment
    
    
    235.8
    
    
    
    51.8
    
    
    
    (1,293.7
    )
    
    
    92.5
    
    
    
    
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    (92.7
    )
    
    
    Depreciation, depletion and amortization
    
    
    12.6
    
    
    
    5.1
    
    
    
    
    
    
    
    240.1
    
    
    
    34.1
    
    
    
    26.7
    
    
    
    60.8
    
    
    
    11.0
    
    
    
    311.9Operating income (loss) before special
items and provisions
    
    
    21.2
    
    
    
    (59.5
    )
    
    
    
    
    
    
    126.6
    
    
    
    34.3
    
    
    
    12.3
    
    
    
    46.6
    
    
    
    (70.9
    )
    
    
    102.3Special items and provisions
    
    
    (0.1
    )
    
    
    (2.0
    )
    
    
    
    
    
    
    (5.5
    )
    
    
    3.2
    
    
    
    0.4
    
    
    
    3.6
    
    
    
    (7.7
    )
    
    
    (9.6
    )Operating income (loss)
    
    
    21.1
    
    
    
    (61.5
    )
    
    
    
    
    
    
    121.1
    
    
    
    37.5
    
    
    
    12.7
    
    
    
    50.2
    
    
    
    (78.6
    )
    
    
    92.7Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.8
    )
    
    
    (0.4
    )
    
    
    (2.9
    )
    
    
    (3.3
    )
    
    
    
    
    
    
    (5.1
    )Cumulative effect of accounting change
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    8.5
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5
    
    
    
    (0.6
    )
    
    
    8.4Assets at September 30
    
    
    493.2
    
    
    
    1,486.0
    
    
    
    (1,607.1
    )
    
    
    5,133.3
    
    
    
    745.9
    
    
    
    532.0
    
    
    
    1,277.9
    
    
    
    588.4
    
    
    
    6,999.6Expenditures for segment assets
    
    
    6.7
    
    
    
    3.1
    
    
    
    
    
    
    
    52.9
    
    
    
    17.3
    
    
    
    10.3
    
    
    
    27.6
    
    
    
    25.8
    
    
    
    106.3
  *
    
    Nine months ended September 30, 2004, reflects full consolidation of El Abra and Candelaria; nine months ended September 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 September 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 remaining one-third partnership interest in Chino Mines
Company (Chino) 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 nine months ended September
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) Third Quarter2004
    
    2003Net income (loss) as reported
    
    $
    292.9
    
    
    
    (0.3
    )Deduct:Total compensation cost
determined under fair value
based method for all awards,
net of tax
    
    
    (1.7
    )
    
    
    (2.9
    )Pro forma net income (loss)
    
    $
    291.2
    
    
    
    (3.2
    )Earnings (loss) per common shareBasic  as reported
    
    $
    3.09
    
    
    
    (0.04
    )Basic  pro forma
    
    $
    3.07
    
    
    
    (0.07
    )Earnings (loss) per common shareDiluted  as reported
    
    $
    2.95
    
    
    
    (0.04
    )Diluted  pro forma
    
    $
    2.93
    
    
    
    (0.07
    )
 - 7 -




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##### Table of Contents



(Unaudited; $ in millions except per share data) Nine Months EndedSeptember 30,2004
    
    2003Net income (loss) as reported
    
    $
    705.2
    
    
    
    (30.5
    )Deduct:Total compensation cost
determined under fair value
based method for all awards,
net of tax
    
    
    (5.1
    )
    
    
    (8.7
    )Pro forma net income (loss)
    
    $
    700.1
    
    
    
    (39.2
    )Earnings (loss) per common shareBasic  as reported
    
    $
    7.49
    
    
    
    (0.46
    )Basic  pro forma
    
    $
    7.43
    
    
    
    (0.56
    )Earnings (loss) per common shareDiluted  as reported
    
    $
    7.15
    
    
    
    (0.46
    )Diluted  pro forma
    
    $
    7.11
    
    
    
    (0.56
    )
  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 tables summarize the special items and provisions for the
quarter and nine months ended September 30, 2004: (Unaudited; gains (losses) in millions except per share amounts) Third Quarter 2004Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDMC Environmental provisions,
net
    
    $
    (11.8
    )
    
    
    (8.9
    )
    
    
    (0.09
    )Environmental insurance
recoveries, net
    
    
    7.5
    
    
    
    6.0
    
    
    
    0.06Hidalgo asset impairment
    
    
    (1.1
    )
    
    
    (0.9
    )
    
    
    (0.01
    )Historic legal matters
    
    
    (2.5
    )
    
    
    (2.0
    )
    
    
    (0.02
    )(7.9
    )
    
    
    (5.8
    )
    
    
    (0.06
    )PDI Restructuring programs
    
    
    (3.1
    )
    
    
    (2.3
    )
    
    
    (0.02
    )Environmental provisions,
net
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (3.3
    )
    
    
    (2.4
    )
    
    
    (0.02
    )Corporate and Other Environmental provisions,
net
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.01
    )Historic legal matters
    
    
    0.8
    
    
    
    0.6
    
    
    
    0.010.1
    
    
    
    0.1
    
    
    
    (11.1
    )
    
    
    (8.1
    )
    
    
    (0.08
    )Miscellaneous income and
expense, net:Historic legal matter
    
    
    9.5
    
    
    
    7.2
    
    
    
    0.07Total
    
    $
    (1.6
    )
    
    
    (0.9
    )
    
    
    (0.01
    )
 - 8 -




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##### Table of Contents



(Unaudited; gains (losses) in millions except per share amounts) Nine Months EndedSeptember 30, 2004Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDMC Environmental provisions,
net
    
    $
    (14.1
    )
    
    
    (10.7
    )
    
    
    (0.11
    )Environmental insurance
recoveries, net
    
    
    7.3
    
    
    
    5.9
    
    
    
    0.06Hidalgo asset impairment
    
    
    (1.1
    )
    
    
    (0.9
    )
    
    
    (0.01
    )Historic legal matters
    
    
    (2.5
    )
    
    
    (2.0
    )
    
    
    (0.02
    )(10.4
    )
    
    
    (7.7
    )
    
    
    (0.08
    )PDI Restructuring programs
    
    
    (6.7
    )
    
    
    (4.8
    )
    
    
    (0.05
    )Environmental provisions,
net
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    Asset impairment
charges
    
    
    (0.6
    )
    
    
    (0.5
    )
    
    
    (0.01
    )(7.6
    )
    
    
    (5.5
    )
    
    
    (0.06
    )Corporate and Other Environmental provisions,
net
    
    
    (4.8
    )
    
    
    (3.6
    )
    
    
    (0.03
    )Environmental insurance
recoveries, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    Historic legal matters
    
    
    16.3
    
    
    
    13.0
    
    
    
    0.1311.6
    
    
    
    9.5
    
    
    
    0.10(6.4
    )
    
    
    (3.7
    )
    
    
    (0.04
    )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:Historic legal matter
    
    
    9.5
    
    
    
    7.2
    
    
    
    0.07Cost-basis investment
write-downs
    
    
    (10.0
    )
    
    
    (9.1
    )
    
    
    (0.09
    )(0.5
    )
    
    
    (1.9
    )
    
    
    (0.02
    )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
    
    
    
    0.03
    
    
    
    (12.6
    )
    
    
    (0.12
    )Total
    
    $
    (45.4
    )
    
    
    (27.3
    )
    
    
    (0.28
    )
 Note: Supplemental Data  The following tables summarize the special items and provisions for the
quarter and nine months ended September 30, 2003: (Unaudited; gains (losses) in millions except per share amounts) Third Quarter 2003Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDMC Environmental provisions,
net
    
    $
    (5.0
    )
    
    
    (4.8
    )
    
    
    (0.05
    )PDI Environmental provisions,
net
    
    
    0.4
    
    
    
    0.4
    
    
    
    Corporate and Other Environmental provisions,
net
    
    
    (3.7
    )
    
    
    (3.5
    )
    
    
    (0.04
    )Historic Cyprus Amax
legal matter
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (0.01
    )(4.8
    )
    
    
    (4.6
    )
    
    
    (0.05
    )Total
    
    $
    (9.4
    )
    
    
    (9.0
    )
    
    
    (0.10
    )
 - 9 -




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##### Table of Contents



(Unaudited; gains (losses) in millions except per share amounts) Nine Months EndedSeptember 30, 2003Statement of Consolidated
    
    Pre-tax
    
    After-tax
    
    $/ShareOperations Line Item
    
    Earnings
    
    Earnings
    
    After-taxSpecial items and provisions, net:PDMC Environmental provisions,
net
    
    $
    (5.5
    )
    
    
    (5.2
    )
    
    
    (0.06
    )PDI Environmental provisions,
net
    
    $
    0.4
    
    
    
    0.4
    
    
    
    Termination of a foreign
postretirement benefit
plan
    
    
    3.2
    
    
    
    2.4
    
    
    
    0.033.6
    
    
    
    2.8
    
    
    
    0.03Corporate and Other Environmental provisions,
net
    
    
    (7.1
    )
    
    
    (6.8
    )
    
    
    (0.07
    )Environmental insurance
recoveries, net
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.01Historic Cyprus Amax
legal matter
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (0.01
    )(7.7
    )
    
    
    (7.4
    )
    
    
    (0.07
    )(9.6
    )
    
    
    (9.8
    )
    
    
    (0.10
    )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
    
    $
    6.5
    
    
    
    5.0
    
    
    
    0.06
  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 $9 million to be
incurred in connection with this restructuring program, which is projected
to be completed in 2005.In the third quarter of 2004, Phelps Dodge Magnet Wire entered into a
strategic partnership with Schwering und Hasse Elektrodaht Ltd. in Germany
to produce its product in their Lugde, Germany, facility that will
primarily serve European and Middle Eastern customers. This action will
result in the closure of the PD Austria facility in the third and fourth
quarters of 2004 in order to reduce costs as well as better position the
Magnet Wire Division. We expect approximately $4 million to be incurred
in connection with this restructuring program, which is projected to be
completed in the first half of 2005.The following table presents a roll-forward of the liabilities incurred in
connection with these restructuring programs, which were reflected as
current liabilities in our Consolidated Balance Sheet: (Unaudited; $ in millions) 2004Provision
    
    Payments
    
    9/30/04PDI Wire and Cable
Employee severance
    
    $
    1.0
    
    
    
    
    
    
    
    1.0Plant removal and
dismantling*
    
    
    5.6
    
    
    
    (5.3
    )
    
    
    0.3Take-or-pay
contracts
    
    
    0.7
    
    
    
    
    
    
    
    0.7$
    7.3
    
    
    
    (5.3
    )
    
    
    2.0
  *
    
    Costs were charged to expense as incurred. Note: In the 2004 third quarter, additions were $3.7 million ($0.4 million for
employee severance, $2.6 million for plant removal and dismantling, and $0.7
million for take-or-pay contracts) and payments were $(2.5) million.  In 1999-2003, there were several restructuring programs implemented that
related to improving efficiencies and consolidating certain wire and cable
operations and reducing operating costs at PDMC and Wire and Cable. Refer
to the Companys Form 10-K for the year ended December 31, 2003, for
additional discussion. - 10 -




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##### Table of Contents



The following tables present a roll-forward from December 31, 2002 and
2003, of the liabilities incurred in connection with the 1999-2002
restructuring programs, which were reflected as current liabilities in our
Consolidated Balance Sheet as of September 30, 2003 and 2004: (Unaudited; $ in millions) 12/31/02
    
    Payments
    
    9/30/031999 restructuring
programs
    
    $
    1.6
    
    
    
    
    
    
    
    1.62000 restructuring
programs
    
    
    0.5
    
    
    
    
    
    
    
    0.52001 restructuring
programs
    
    
    0.6
    
    
    
    (0.6
    )
    
    
    2002 restructuring
programs
    
    
    1.3
    
    
    
    (1.1
    )
    
    
    0.2$
    4.0
    
    
    
    (1.7
    )
    
    
    2.3
 (Unaudited; $ in millions) Reassess-
    
    Pay-12/31/03
    
    ments
    
    ments
    
    9/30/041999 restructuring
programs
    
    $
    1.6
    
    
    
    (0.5)
    *
    
    
    (0.1
    )
    
    
    1.0
    **2000 restructuring
programs
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5
    **$
    2.1
    
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    1.5
  *
    
    In the third quarter of 2004, an impairment analysis was performed for
the Hidalgo facility as a result of the expected sale in the fourth
quarter of 2004 of the Hidalgo townsite. This action resulted in the
reassessment of $0.5 million for mothballing/take-or-pay contracts at
Hidalgo in the 2004 third quarter.  **
    
    Liabilities are primarily related to take-or-pay obligations at PDIs
Wire and Cable segment.  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 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. 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
September 30, 2004, was an increase in total assets of $679.5 million,
total liabilities of $258.8 million and minority interests in consolidated
subsidiaries of $420.7 million. There was no impact on consolidated
shareholders equity. The impact for the quarter ended September 30,
2004, on our Statement of Consolidated Operations comprised increases
(decreases) in sales and other operating revenues of $67.5 million,
operating expenses of $20.4 million, operating income of $47.1 million,
net interest expense of $1.2 million, net miscellaneous income and expense
of $(1.0) million, provision
for taxes on income of $18.1 million and minority interests in
consolidated subsidiaries of $26.8 million. The impact for the - 11 -




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nine
months ended September 30, 2004, comprised increases (decreases) in sales
and other operating revenues of $199.3 million, operating expenses of
$61.9 million, operating income of $137.4 million, net interest expense of
$5.9 million, pre-tax early debt extinguishment costs of $3.1 million, net
miscellaneous income and expense of $(1.4) million, provision for taxes on
income of $(6.7) million and minority interests in consolidated
subsidiaries of $133.7 million. There was no impact on consolidated net
income for the quarter or nine months ended September 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 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 nine months ended September 30, 2003,
the effect of adopting SFAS No. 143 decreased loss before cumulative
effect of accounting change by $3.6 million, or 4 cents per common share,
and $14.5 million, or 16 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 (revised 2003), 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
has determined the impact of the FSP on our financial reporting and
disclosures is insignificant to the plan, and we will adopt the FSP at our
next regularly scheduled measurement date (December 31, 2004).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 nine months of 2004, we had a $19.2 million net increase in the
reserve estimate ($19.7 million of additions and $0.5 million of
reductions), offset - 12 -




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by $21.5 million of spending. As of September 30,
2004, the reserve balance was $314.9 million.At September 30, 2004, the cost range for reasonably possible outcomes for
all reservable sites was estimated to be from $281 million to $611 million
(of which $314.9 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 for which there is a
reasonably possible likelihood of an environmental liability. As of
September 30, 2004, the cost range for reasonably possible outcomes for
all such sites was estimated to be from $3 million to $17 million. The
liabilities arising from potential environmental obligations that have not
been reserved at this time may be material to the operating results of a
single quarter or year in the future. Management, however, believes the
liability arising from potential environmental obligations is not likely
to have a material adverse effect on the Companys liquidity or financial
position.The following tables summarize our asset retirement obligations and asset
retirement cost activities for the quarter and nine months ended September
30, 2004: Asset Retirement Obligations
(Unaudited; $ in millions) Nine MonthsThird
    
    EndedQuarter
    
    September 30,2004
    
    2004Balance, beginning of period
    
    $
    236.7
    
    
    
    225.3Additional liabilities from fully
consolidating El Abra and
Candelaria
    
    
    
    
    
    
    5.6New liabilities during the period
    
    
    0.5
    
    
    
    1.4Accretion expense
    
    
    4.9
    
    
    
    14.6Payments
    
    
    (8.3
    )
    
    
    (17.5
    )Revisions in estimated
cash flows
    
    
    4.8
    
    
    
    9.2Balance, end of period
    
    $
    238.6
    
    
    
    238.6
 Asset Retirement Cost
(Unaudited; $ in millions) Nine MonthsThird
    
    EndedQuarter
    
    September 30,2004
    
    2004Gross balance,
beginning of period
    
    $
    148.0
    
    
    
    138.9Additional assets from fully
consolidating El Abra and
Candelaria
    
    
    
    
    
    
    3.8New assets during the period
    
    
    0.5
    
    
    
    1.4Revisions in estimated
cash flows
    
    
    4.8
    
    
    
    9.2Gross balance,
end of period
    
    
    153.3
    
    
    
    153.3Less accumulated depreciation,
depletion and amortization
    
    
    (68.2
    )
    
    
    (68.2
    )Net balance, end of period
    
    $
    85.1
    
    
    
    85.1
  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 ProgramsBackgroundEach of 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), 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 dis- - 13 -




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charging 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 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 (internal cost
basis) 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.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, on an internal cost basis, 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, on a third-party cost basis, used to
determine the fair value of our closure and closeout accrual for SFAS No.
143 was approximately $389 million (undiscounted and unescalated). This
cost estimate 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 September 30, 2004, and - 14 -




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December 31, 2003, we had accrued approximately
$41 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 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, on an internal cost basis, 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. Our cost
estimate, on a third-party cost basis, used to determine the fair value of
our closure and closeout accrual for SFAS No. 143 was approximately $436
million (undiscounted and unescalated). 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
September 30, 2004, and December 31, 2003, we had accrued approximately
$76 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 - 15 -




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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. In August
2004, Cobre received a draft closure permit from NMED and a draft permit
revision to approve Cobres closeout plan from MMD. Cobre is providing
additional information to NMED and MMD concerning the draft permits,
including an updated cost estimate and comments on permit conditions.A cost estimate for purposes of establishing financial assurance under the
closure and closeout plans is being developed as part of the permitting
process. 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). This estimate will be
updated when NMED issues the closure permit. At both September 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 September 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 nine months
ended Sep- - 16 -




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tember 30, 2003, the number of incremental common shares relating
to the assumed conversion of the mandatory convertible preferred shares
(4.6 million and 4.9 million, respectively) and stock options (0.4 million
and 0.2 million, respectively) and unvested restricted stock (0.4 million)
issued to employees 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 0.1 million shares at an average
exercise price of $80.73 for the 2004 third quarter and 0.3 million shares
at an average exercise price of $74.97 for the nine months ended September
30, 2004; and 6.3 million shares at an average exercise price of $61.08
for the 2003 third quarter and 7.2 million shares at an average exercise
price of $58.89 for the nine months ended September 30, 2003. (Unaudited; $ in millions except per share data) Third Quarter2004
    
    2003Basic Earnings (Loss) Per Share
ComputationNumerator:Net income (loss)
    
    $
    292.9
    
    
    
    (0.3
    )Preferred stock dividends
    
    
    (3.3
    )
    
    
    (3.3
    )Net income (loss) applicable
to common shares
    
    $
    289.6
    
    
    
    (3.6
    )Denominator:Weighted average common
shares outstanding
    
    
    93.8
    
    
    
    88.7Basic earnings (loss) per
common share
    
    $
    3.09
    
    
    
    (0.04
    )Diluted Earnings (Loss) Per Share
ComputationNumerator:Net income (loss)
    
    $
    292.9
    
    
    
    (0.3
    )Preferred stock dividends
    
    
    
    
    
    
    (3.3
    )Net income (loss) applicable
to common shares
    
    $
    292.9
    
    
    
    (3.6
    )Denominator:Weighted average common
shares outstanding*
    
    
    99.4
    
    
    
    88.7Diluted earnings (loss) per
common share
    
    $
    2.95
    
    
    
    (0.04
    )
  *
    
    2003 third quarter excluded stock options, restricted stock and the
assumed conversion of the mandatory convertible preferred shares to
common shares due to the anti-dilutive impact. - 17 -




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(Unaudited; $ in millions except per share data) Nine Months EndedSeptember 30,2004
    
    2003Basic Earnings (Loss) Per Share
ComputationNumerator:Net income (loss)
    
    $
    705.2
    
    
    
    (30.5
    )Preferred stock dividends
    
    
    (10.1
    )
    
    
    (10.1
    )Net income (loss) applicable
to common shares
    
    $
    695.1
    
    
    
    (40.6
    )Denominator:Weighted average common
shares outstanding
    
    
    92.8
    
    
    
    88.6Basic earnings (loss) per
common share
    
    $
    7.49
    
    
    
    (0.46
    )Diluted Earnings (Loss) Per Share
ComputationNumerator:Net income (loss)
    
    $
    705.2
    
    
    
    (30.5
    )Preferred stock dividends
    
    
    
    
    
    
    (10.1
    )Net income (loss) applicable
to common shares
    
    $
    705.2
    
    
    
    (40.6
    )Denominator:Weighted average common
shares outstanding*
    
    
    98.6
    
    
    
    88.6Diluted earnings (loss) per
common share
    
    $
    7.15
    
    
    
    (0.46
    )
  *
    
    The nine months ended September 30, 2003, excluded stock options,
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 third quarter principally
resulted from (i) taxes on earnings at international operations ($36.1
million) including benefits from the release of valuation allowances
($14.8 million) and (ii) taxes on earnings at U.S. operations ($26.1
million) including benefits from the release of valuation allowances
($25.7 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.  The Companys income tax provision for the nine months ended September 30,
2004, principally resulted from (i) taxes on earnings at international
operations ($91.9 million) including benefits from the release of
valuation allowances ($60.6 million), (ii) taxes on earnings at U.S. operations ($39.0 million) including benefits from the release of valuation
allowances ($91.9 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. 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, determined
that recoverability was not likely and established a related valuation
allowance.  The Companys income tax provision for the 2003 third quarter principally
resulted from taxes on earnings at international operations ($14.0
million) that could not be offset by losses at domestic operations as
deferred tax benefits for net operating losses were completely offset by
valuation allowances of $11.8 million; partially offset by a current-year
loss carryback benefit for U.S. operations ($2.0 million).The Companys income tax provision for the nine months ended September 30,
2003, primarily resulted from taxes on earnings at international
operations ($41.2 million) that could not be offset by losses at domestic
operations as deferred tax benefits for net operating losses were
completely offset by valuation allowances of $46.3 million; partially
offset by a benefit from finalizing year-end 2002 estimates in the
Companys 2002 U.S. tax return filed in June 2003 ($4.2 million) and a
current-year loss carryback benefit for U.S. operations
($3.1 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 - 18 -




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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
Operations 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.As of September 30, 2004, and through October 15, 2004, Phelps Dodge
entered into separate programs to purchase zero-cost collars on
approximately 65 and 94 percent, respectively, of El Abras expected 2005
total production and 6 and 8 percent, respectively, of PDMCs expected
remaining 2005 consolidated production. The El Abra collars have an LME
put strike (floor) of $1.00 per pound (settled against a monthly average
LME price) and an LME call strike price (ceiling) of $1.3755 per pound
(settled against an annual average LME price). The collars on PDMCs
expected remaining consolidated production have an LME put strike price
(floor) of 94.3 cents per pound (settled against a monthly average LME
price) and an LME call strike price (ceiling) of $1.40 per pound (settled
against an annual average LME price).Additionally, during the quarter ended September 30, 2004, Phelps Dodge
entered into copper swap contracts to hedge our provisionally priced sales
exposure at Candelaria. The copper swap contracts allow us to receive the
average LME price for the month of shipment while our Candelaria customers
receive the quotational or QP price they requested (i.e., one to three
months after arrival at the customers facility). As of October 26, 2004,
we had entered into copper swap contracts for approximately 97 percent of
Candelarias provisionally priced copper sales outstanding at September
30, 2004,
at an average of $1.3093 per pound. This program is expected to
substantially alleviate the volatility that provisionally priced copper
sales could have on our revenues.For the quarter ended September 30, 2004, we reclassified approximately
$4.3 million of other comprehensive gains, and for the nine months ended
September 30, 2004, we reclassified approximately $7.9 million of other
comprehensive losses to the Statement of Consolidated Operations. The
quarter-end gains were primarily the result of our domestic diesel fuel
hedges, while the year-to-date losses principally resulted from our second
quarter unwinding of our floating-to-fixed interest rate swaps.During the quarter and nine months ended September 30, 2003, we
reclassified approximately $2.3 million and $6.3 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 nine
months ended September 30: Pension Benefits
(Unaudited; $ in millions) Third Quarter2004
    
    2003Service cost
    
    $
    5.9
    
    
    
    5.2Interest cost
    
    
    18.0
    
    
    
    18.1Expected return on plan assets
    
    
    (21.0
    )
    
    
    (21.6
    )Amortization of prior service cost
    
    
    0.9
    
    
    
    0.8Amortization of actuarial loss
    
    
    0.8
    
    
    
    0.6Curtailment and special
retirement benefits
    
    
    
    
    
    
    0.3Net periodic benefit cost
    
    $
    4.6
    
    
    
    3.4
 Nine Months EndedSeptember 30,2004
    
    2003Service cost
    
    $
    17.7
    
    
    
    15.7Interest cost
    
    
    54.0
    
    
    
    54.1Expected return on plan assets
    
    
    (63.1
    )
    
    
    (64.8
    )Amortization of prior service cost
    
    
    2.7
    
    
    
    2.6Amortization of actuarial loss
    
    
    2.4
    
    
    
    1.6Curtailment and special
retirement benefits
    
    
    0.6
    
    
    
    1.8Net periodic benefit cost
    
    $
    14.3
    
    
    
    11.0
  The Company contributed approximately $85 million in the 2004 third
quarter to the qualified pension plans it sponsors. An additional $5
million was deposited to the trust from which non-qualified pension
benefits are paid. Postretirement Benefits
(Unaudited; $ in millions) Third Quarter2004
    
    2003Service cost
    
    $
    1.3
    
    
    
    1.1Interest cost
    
    
    5.9
    
    
    
    5.9Expected return on plan assets
    
    
    (0.1
    )
    
    
    (0.2
    )Amortization of prior service cost
    
    
    0.3
    
    
    
    0.3Amortization of actuarial loss (gain)
    
    
    0.1
    
    
    
    (0.1
    )Net periodic benefit cost
    
    $
    7.5
    
    
    
    7.0
 Nine Months EndedSeptember 30,2004
    
    2003Service cost
    
    $
    4.0
    
    
    
    3.3Interest cost
    
    
    17.5
    
    
    
    17.5Expected return on plan assets
    
    
    (0.2
    )
    
    
    (0.4
    )Amortization of prior service cost
    
    
    0.9
    
    
    
    0.9Amortization of actuarial loss (gain)
    
    
    0.3
    
    
    
    (0.3
    )Curtailment and special
retirement benefits
    
    
    
    
    
    
    (2.5
    )Other
    
    
    (1.1
    )
    
    
    Net periodic benefit cost
    
    $
    21.4
    
    
    
    18.5
  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 quarter and nine months ended
September 30, 2004, do not reflect any amount associated with the subsidy
because we have determined that the impact of the FSP on our financial
reporting and disclosures is insignificant to the plan. We will adopt the
FSP at our next regularly scheduled measurement date (December 31, 2004).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 approxi- - 20 -




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mately
$166 million resulted in a 2004 second quarter pre-tax loss of $15.2
million, 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 of $12.2 million.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, including book adjustments of $1.1 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.On October 1, 2004, Phelps Dodge prepaid $90 million of long-term
tax-exempt bonds due in 2013 at a slight premium to par value ($0.9
million).On October 13, 2004, El Abra provided notice to its senior lenders of its
intent to
prepay in full its senior debt obligations (approximately
$320.6 million,
including principal and interest) on November 15, 2004, at a slight
prepayment penalty (approximately $3 million). El Abra expects to make
the prepayment with (i) cash on hand, (ii) borrowings of approximately $75
million at an aggregate interest rate of LIBOR plus 0.30 percent per
annum, and terms not to exceed one year, and (iii) advance payments of
approximately $25 million against copper cathode sales, for a term of 30
days or less.  On October 27, 2004, Phelps Dodge issued a redemption notice to the
Trustee of the 5.45 percent Greenlee County Pollution Control Bonds due in
2009 for payment on December 1, 2004. These bonds have an aggregate book
value of $81.1 million and will be redeemed for a premium of approximately
$1.6 million.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 - 21 -




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##### Table of Contents



that was scheduled to mature on May 10, 2005.
As of September 30, 2004, there was a total of $95.2 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 September 30, 2004, amounted to approximately $1,005 million, of
which approximately $205 million could be used for additional letters of
credit.  12.
    
    Shareholders EquityCommon Stock Dividends ReinstatedOn September 3, 2004, Phelps Dodge paid a regular quarterly dividend of 25
cents per common share for the 2004 third quarter, amounting to $23.6
million.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, 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 September 30, 2004.Stock Options ExercisedDuring the 2004 third quarter, 1.5 million stock options were exercised
for Phelps Dodge shares. Phelps Dodge received approximately $87.1
million in the 2004 third quarter.During the nine months ended September 30, 2004, 4.1 million stock options
were exercised for Phelps Dodge shares.
Phelps Dodge received approximately $254.8 million in the first nine
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. 04-2, 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, beginning June
30, 2004, and for comparative purposes as of 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 September 30, 2004, and for the
three-month and nine-month periods ended September 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 September 30, 2004, the related
consolidated statements of operations for each of the three-month and
nine-month periods ended September 30, 2004 and 2003, the consolidated
statement of cash flows for the nine-month periods ended September 30, 2004 and
2003, and the consolidated statement of shareholders equity for the nine-month
period ended September 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
October 26, 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 September
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 information for the quarter and nine months ended
September 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 September 30, 2004, our
Consolidated Balance Sheet included increases in total assets of $679.5
million, total liabilities of $258.8 million and minority interests in
consolidated subsidiaries of $420.7 million. There was no impact on
consolidated shareholders equity. The impact for the quarter ended September
30, 2004, on our Statement of Consolidated Operations comprised increases
(decreases) in sales and other operating revenues of $67.5 million, operating
expenses of $20.4 million, operating income of $47.1 million, net interest
expense of $1.2 million, net miscellaneous income and expense of $(1.0)
million, provision for taxes on income of $18.1 million and minority interests
in consolidated subsidiaries of $26.8 million. The impact for the nine months
ended September 30, 2004, comprised increases (decreases) in sales and other
operating revenues of $199.3 million, operating expenses of $61.9 million,
operating income of $137.4 million, net interest expense of $5.9 million,
pre-tax early debt extinguishment costs of $3.1 million, net miscellaneous
income and expense of $(1.4) million, provision for taxes on income of $(6.7)
million and minority interests in consolidated subsidiaries of $133.7 million.
There was no impact on consolidated net income for the quarter or nine months
ended September 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 nine
months ended September 30, 2004. 
 RESULTS OF OPERATIONS Consolidated Financial Results (Unaudited; $ in millions except per share data) Third Quarter2004
    
    2003Sales and other operating revenues
    
    $
    1,846.5
    
    
    
    1,031.1Operating income
    
    $
    405.2
    
    
    
    46.8Income (loss) before cumulative effect
of accounting change
    
    $
    292.9
    
    
    
    (0.3
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    Net income (loss)
    
    $
    292.9
    
    
    
    (0.3
    )Basic earnings (loss) per
common share
    
    $
    3.09
    
    
    
    (0.04
    )Diluted earnings (loss) per
common share
    
    $
    2.95
    
    
    
    (0.04
    )
 The Company had consolidated net income in the 2004 third quarter of
$292.9 million, or $2.95 per common share, including after-tax, net special
charges of $0.9 million, or 1 cent per common share. (All references to per
share earnings or losses are based on diluted earnings or losses per share.)
In the 2003 third quarter, the consolidated net loss was $0.3 million, or 4
cents per common share, including after-tax, net special charges of $9.0
million, or 10 cents per common share. - 24 -




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##### Table of Contents



Excluding special items, the $285.1 million increase in consolidated net
income in the 2004 third quarter, compared with the corresponding 2003 period,
primarily was due to higher copper prices (approximately $288 million) and a
lower implied unit cost of copper production as defined on page 30
(approximately $27 million); partially offset by a higher tax provision ($50.5
million) due to higher earnings. (Unaudited; $ in millions except per share data) Nine Months EndedSeptember 30,2004
    
    2003Sales and other operating revenues
    
    $
    5,094.4
    
    
    
    2,971.3Operating income
    
    $
    1,074.7
    
    
    
    92.7Income (loss) before cumulative effect
of accounting change
    
    $
    705.2
    
    
    
    (38.9
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    8.4Net income (loss)
    
    $
    705.2
    
    
    
    (30.5
    )Basic earnings (loss) per common
share before cumulative effect of accounting change
    
    $
    7.49
    
    
    
    (0.55
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    0.09Basic earnings (loss) per
common share
    
    $
    7.49
    
    
    
    (0.46
    )Diluted earnings (loss) per common
share before cumulative effect of accounting change
    
    $
    7.15
    
    
    
    (0.55
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    0.09Diluted earnings (loss) per
common share
    
    $
    7.15
    
    
    
    (0.46
    )
 The Company had consolidated net income for the nine months ended
September 30, 2004, of $705.2 million, or $7.15 per common share, including
after-tax, net special charges of $27.3 million, or 28 cents per common share.
For the nine months ended September 30, 2003, the consolidated net loss was
$30.5 million, or 46 cents per common share, including an after-tax, net
special gain of $5.0 million, or 6 cents per common share. Excluding special items, the $768.0 million increase in consolidated net
income for the nine months ended September 30, 2004, compared with the
corresponding 2003 period, primarily was due to higher copper prices
(approximately $820 million) and a lower implied unit cost of copper production
as defined on page 30 (approximately $14 million); partially offset by a higher
tax provision ($106.1 million) due to higher earnings. 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, provides 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 such items, may not be comparable to similarly titled
measures reported by other companies. Note: Supplemental Data (Unaudited; $ in millions) Third Quarter2004
    
    2003Net income (loss)
    
    $
    292.9
    
    
    
    (0.3
    )Special items and provisions,
net of taxes
    
    
    (0.9
    )
    
    
    (9.0
    )Earnings (losses) excluding
special items (after taxes)
and impact of minority interests
    
    $
    293.8
    
    
    
    8.7
 (Unaudited; $ in millions) Nine Months EndedSeptember 30,2004
    
    2003Net income
(loss)
    
    $
    705.2
    
    
    
    (30.5
    )Special items and provisions,
net of taxes
    
    
    (27.3
    )
    
    
    5.0Earnings (losses) excluding
special items (after taxes)

and impact of minority interests
    
    $
    732.5
    
    
    
    (35.5
    )
 - 25 -




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##### Table of Contents



Note: Supplemental Data The following tables summarize the special items and provisions for the
quarter and nine-month periods ended September 30, 2004 and 2003: (Unaudited; gains (losses) in millions except per share amounts) 2004 Third Quarter
    
    2003 Third 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)
    
    $
    (7.9
    )
    
    
    (5.8
    )
    
    
    (0.06
    )
    
    
    (5.0
    )
    
    
    (4.8
    )
    
    
    (0.05
    )PDI (see Business Segment disclosure)
    
    
    (3.3
    )
    
    
    (2.4
    )
    
    
    (0.02
    )
    
    
    0.4
    
    
    
    0.4
    
    
    
    Corporate and Other Environmental provisions, net
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.01
    )
    
    
    (3.7
    )
    
    
    (3.5
    )
    
    
    (0.04
    )Historic legal matters
    
    
    0.8
    
    
    
    0.6
    
    
    
    0.01
    
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (0.01
    )0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    (4.8
    )
    
    
    (4.6
    )
    
    
    (0.05
    )(11.1
    )
    
    
    (8.1
    )
    
    
    (0.08
    )
    
    
    (9.4
    )
    
    
    (9.0
    )
    
    
    (0.10
    )Miscellaneous income and expense, net:Historic legal matter
    
    
    9.5
    
    
    
    7.2
    
    
    
    0.07
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    (1.6
    )
    
    
    (0.9
    )
    
    
    (0.01
    )
    
    
    (9.4
    )
    
    
    (9.0
    )
    
    
    (0.10
    )
 - 26 -




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##### Table of Contents



(Unaudited; gains (losses) in millions except per share amounts) Nine Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 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)
    
    $
    (10.4
    )
    
    
    (7.7
    )
    
    
    (0.08
    )
    
    
    (5.5
    )
    
    
    (5.2
    )
    
    
    (0.06
    )PDI (see Business Segment disclosure)
    
    
    (7.6
    )
    
    
    (5.5
    )
    
    
    (0.06
    )
    
    
    3.6
    
    
    
    2.8
    
    
    
    0.03Corporate and Other Environmental provisions, net
    
    
    (4.8
    )
    
    
    (3.6
    )
    
    
    (0.03
    )
    
    
    (7.1
    )
    
    
    (6.8
    )
    
    
    (0.07
    )Environmental insurance recoveries, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.01Historic legal matters
    
    
    16.3
    
    
    
    13.0
    
    
    
    0.13
    
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (0.01
    )11.6
    
    
    
    9.5
    
    
    
    0.10
    
    
    
    (7.7
    )
    
    
    (7.4
    )
    
    
    (0.07
    )(6.4
    )
    
    
    (3.7
    )
    
    
    (0.04
    )
    
    
    (9.6
    )
    
    
    (9.8
    )
    
    
    (0.10
    )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
    )
    
    
    
    
    
    
    
    
    
    
    Historic legal matter
    
    
    9.5
    
    
    
    7.2
    
    
    
    0.07
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of cost-basis investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.4
    
    
    
    6.4
    
    
    
    0.07(0.5
    )
    
    
    (1.9
    )
    
    
    (0.02
    )
    
    
    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
    
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12.6
    )
    
    
    (0.12
    )
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting change (see Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.7
    
    
    
    8.4
    
    
    
    0.09Total
    
    $
    (45.4
    )
    
    
    (27.3
    )
    
    
    (0.28
    )
    
    
    6.5
    
    
    
    5.0
    
    
    
    0.06
 - 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 technology and project 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 from mining through conversion, marketing and sales, and
worldwide exploration and technology and project development programs. 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, certain of these
segments 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. It also
includes a process technology center that directs its primary activities at
developing new products and applications. 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 nine
months ended September 30, 2004 and 2003, are illustrated in the following
table: (Unaudited; $ in millions except per pound amounts) Third Quarter2004
    
    2003Sales and other operating revenues
to unaffiliated customers
    
    $
    1,420.3
    
    
    
    704.1Operating income
    
    $
    423.4
    
    
    
    59.6Operating income before special
items and provisions
    
    $
    431.3
    
    
    
    64.6Minority interests
    
    $
    (41.9
    )
    
    
    0.6Copper production (thousand short tons):Total copper production
    
    
    337.6
    
    
    
    329.2Less undivided interest (A)
    
    
    16.1
    
    
    
    16.3Copper production on a
consolidated basis
    
    
    321.5
    
    
    
    312.9Less minority participants shares
previously accounted for on a
pro-rata basis (B)
    
    
    38.6
    
    
    
    46.6Copper production on a pro-rata basis
    
    
    282.9
    
    
    
    266.3Copper sales (thousand short tons):Total copper sales from own mines
    
    
    341.6
    
    
    
    332.0Less undivided interest (A)
    
    
    16.1
    
    
    
    16.3Copper sales from own mines on
a consolidated basis
    
    
    325.5
    
    
    
    315.7Less minority participants shares
previously accounted for on a
pro-rata basis (B)
    
    
    36.7
    
    
    
    47.1Copper sales from own mines on
a pro-rata basis
    
    
    288.8
    
    
    
    268.6Purchased copper (thousand short tons):Total purchased copper
    
    
    103.8
    
    
    
    90.9Total copper sales on a
consolidated basis
    
    
    429.3
    
    
    
    N/ATotal copper sales on a
pro-rata basis
    
    
    N/A
    
    
    
    359.5LME average spot copper price
per pound  cathodes
    
    $
    1.293
    
    
    
    0.795COMEX average spot copper price
per pound  cathodes
    
    $
    1.287
    
    
    
    0.800Implied full unit cost of
copper production per pound
    
    $
    0.630
    
    
    
    0.675Implied cash unit cost of
copper production per pound
    
    $
    0.464
    
    
    
    0.518Molybdenum production (million pounds)
    
    
    15.1
    
    
    
    13.1Molybdenum sales (million pounds):Net Phelps Dodge share
from own mines
    
    
    15.4
    
    
    
    12.5Purchased molybdenum
    
    
    3.3
    
    
    
    2.6Total molybdenum sales
    
    
    18.7
    
    
    
    15.1Metals Week:Molybdenum oxide price per pound
    
    $
    16.90
    
    
    
    5.67
 (Unaudited; $ in millions except per pound amounts) Nine Months EndedSeptember 30,2004
    
    2003Sales and other operating revenues
to unaffiliated customers
    
    $
    3,889.3
    
    
    
    2,000.7Operating income
    
    $
    1,090.3
    
    
    
    121.1Operating income before special
items and provisions
    
    $
    1,100.7
    
    
    
    126.6Minority interests
    
    $
    (145.6
    )
    
    
    (1.8
    )Copper production (thousand short tons):Total copper production
    
    
    976.6
    
    
    
    965.2Less undivided interest (A)
    
    
    47.2
    
    
    
    47.6Copper production on a
consolidated basis
    
    
    929.4
    
    
    
    917.6Less minority participants shares
previously accounted for on a
pro-rata basis (B)
    
    
    120.8
    
    
    
    131.6Copper production on a pro-rata basis
    
    
    808.6
    
    
    
    786.0Copper sales (thousand short tons):Total copper sales from own mines
    
    
    986.7
    
    
    
    979.4Less undivided interest (A)
    
    
    47.2
    
    
    
    47.6Copper sales from own mines on
a consolidated basis
    
    
    939.5
    
    
    
    931.8Less minority participants shares
previously accounted for on a
pro-rata basis (B)
    
    
    121.5
    
    
    
    132.9Copper sales from own mines on
a pro-rata basis
    
    
    818.0
    
    
    
    798.9Purchased copper (thousand short tons):Total purchased copper
    
    
    335.6
    
    
    
    269.3Total copper sales on a
consolidated basis
    
    
    1,275.1
    
    
    
    N/ATotal copper sales on a
pro-rata basis
    
    
    N/A
    
    
    
    1,068.2LME average spot copper price
per pound  cathodes
    
    $
    1.266
    
    
    
    0.765COMEX average spot copper price
per pound  cathodes
    
    $
    1.251
    
    
    
    0.769Implied full unit cost of
copper production per pound
    
    $
    0.680
    
    
    
    0.686Implied cash unit cost of
copper production per pound
    
    $
    0.511
    
    
    
    0.530Molybdenum production (million pounds)
    
    
    43.4
    
    
    
    37.7Molybdenum sales (million pounds):Net Phelps Dodge share
from own mines
    
    
    46.6
    
    
    
    39.8Purchased molybdenum
    
    
    9.8
    
    
    
    6.2Total molybdenum sales
    
    
    56.4
    
    
    
    46.0Metals Week:Molybdenum oxide price per pound
    
    $
    13.25
    
    
    
    4.98
   (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) Third Quarter2004
    
    2003Minority participants shares
previously accounted for on a
pro-rata basis:Chino Mine and Smelter
    
    
    
    
    
    
    3.6Candelaria
    
    
    10.1
    
    
    
    10.9El Abra
    
    
    28.5
    
    
    
    32.138.6
    
    
    
    46.6
 (thousand short tons) Nine Months EndedSeptember 30,2004
    
    2003Minority participants shares
previously accounted for on a
pro-rata basis:Chino Mine and Smelter
    
    
    
    
    
    
    9.8Candelaria
    
    
    31.5
    
    
    
    33.4El Abra
    
    
    89.3
    
    
    
    88.4120.8
    
    
    
    131.6
 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 cost 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,
including technology development, for the divisions operations) that is
compared with the LME market price of copper to render an implied cost of
copper production. Implied cash 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 nine-month periods ended September 30, 2004 and 2003: (Unaudited; $ in millions except per pound amounts) Third Quarter2004
    
    2003PDMC implied unit cost of
copper productionOperating income
    
    $
    423.4
    
    
    
    59.6Less special operating items
and provisions
    
    
    (7.9
    )
    
    
    (5.0
    )Operating income excluding
special items and provisions
    
    $
    431.3
    
    
    
    64.6Copper sales from own mines on a
consolidated basis  million pounds
    
    
    651.0
    
    
    
    N/ACopper sales from own mines on a
pro-rata basis  million pounds
    
    
    N/A
    
    
    
    537.2Operating margin 
per pound copper sold
    
    $
    0.663
    
    
    
    0.120LME average spot copper price
per pound  cathodes
    
    $
    1.293
    
    
    
    0.795Implied full unit cost of
copper production per pound
    
    $
    0.630
    
    
    
    0.675
 - 30 -




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##### Table of Contents



(Unaudited; $ in millions except per pound amounts) Nine Months EndedSeptember 30,2004
    
    2003PDMC implied unit cost of
copper productionOperating income
    
    $
    1,090.3
    
    
    
    121.1Less special operating items
and provisions
    
    
    (10.4
    )
    
    
    (5.5
    )Operating income excluding
special items and provisions
    
    $
    1,100.7
    
    
    
    126.6Copper sales from own mines on a
consolidated basis  million pounds
    
    
    1,878.9
    
    
    
    N/ACopper sales from own mines on a
pro-rata basis  million pounds
    
    
    N/A
    
    
    
    1,597.9Operating margin 
per pound copper sold
    
    $
    0.586
    
    
    
    0.079LME average spot copper price
per pound  cathodes
    
    $
    1.266
    
    
    
    0.765Implied full unit cost of
copper production per pound
    
    $
    0.680
    
    
    
    0.686
 Note: Our measure of implied unit cost of copper production may not be
comparable to similarly titled measures reported by other companies. Total PDMC  Sales PDMCs sales and other operating revenues to unaffiliated customers
increased $716.2 million, or 102 percent, in the 2004 third quarter compared
with the 2003 third quarter. The increase reflected higher average copper
prices (approximately $400 million), the impact of fully consolidating El Abra
and Candelaria (approximately $68 million), higher average molybdenum
realizations (approximately $143 million), higher copper sales volumes
(approximately $77 million), higher molybdenum sales volumes (approximately $23
million) and higher copper rod sales (approximately $9 million). PDMCs sales and other operating revenues to unaffiliated customers
increased $1,888.6 million, or 94 percent, in the first nine months of 2004
compared with the first nine months of 2003. The increase reflected higher
average copper prices (approximately $1,105 million), higher average molybdenum
realizations (approximately $313 million), the impact of fully consolidating El
Abra and Candelaria (approximately $199 million), higher copper sales volumes
(approximately $182 million), higher molybdenum sales volumes (approximately
$57 million) and higher copper rod sales (approximately $23 million). Total PDMC  Operating Income PDMC reported operating income of $423.4 million in the 2004 third
quarter, including special, net pre-tax charges of $7.9 million, compared with
operating income of $59.6 million in the 2003 third quarter, including special,
net pre-tax charges of $5.0 million. Excluding special items, the increase in
operating income of $366.7 million primarily reflected higher copper
realizations (approximately $288 million), the impact of fully consolidating El
Abra and Candelaria (approximately $47 million) and a lower implied unit cost
(approximately $27 million). PDMC reported operating income of $1,090.3 million in the first nine
months of 2004, including special, net pre-tax charges of $10.4 million,
compared with operating income of $121.1 million in the first nine months of
2003, including special, net pre-tax charges of $5.5 million. Excluding
special items, the increase in operating income of $974.1 million primarily
reflected higher copper realizations (approximately $820 million), the impact
of fully consolidating El Abra and Candelaria (approximately $137 million) and
a lower implied unit cost of copper production (approximately $14 million). The New York Commodity Exchange (COMEX) spot price per pound of copper
cathode, primarily upon which we base our U.S. sales, averaged $1.287 and 80.0
cents in the third quarters of 2004 and 2003, respectively, and $1.251 and 76.9
cents for the first nine months of 2004 and 2003, respectively. The LME spot
price per pound of copper cathode, primarily upon which we base our
international sales, averaged $1.293 and 79.5 cents in the third quarters of
2004 and 2003, respectively, and $1.266 and 76.5 cents for the first nine
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 nine-month periods
ended September 30, 2004 and 2003: Third Quarter2004
    
    2003Reconciliation of Implied Unit Cost (per lb.)*Implied cash unit cost of copper
production  base operations
before copper pricing
adjustments
    
    $
    0.442
    
    
    
    0.470Net copper pricing adjustments 
decrease in implied unit cost**
    
    
    (0.031
    )
    
    
    (0.002
    )Implied cash unit cost of copper
production  base operations
    
    
    0.411
    
    
    
    0.468Exploration, technology and project
development
    
    
    0.026
    
    
    
    0.025Shutdown and curtailment expenses
    
    
    0.027
    
    
    
    0.025Implied cash unit cost of
copper production
    
    $
    0.464
    
    
    
    0.518Non-cash (depreciation, depletion,
amortization and closure
accretion/accrual)
    
    
    0.166
    
    
    
    0.157Implied full unit cost of copper
production
    
    $
    0.630
    
    
    
    0.675
 Nine Months EndedSeptember 30,2004
    
    2003Reconciliation of Implied Unit Cost (per lb.)*Implied cash unit cost of copper
production  base operations
before copper pricing
adjustments
    
    $
    0.461
    
    
    
    0.483Net copper pricing adjustments 
decrease in implied unit cost**
    
    
    (0.001
    )
    
    
    (0.004
    )Implied cash unit cost of copper
production  base operations
    
    
    0.460
    
    
    
    0.479Exploration, technology and project
development
    
    
    0.026
    
    
    
    0.022Shutdown and curtailment expenses
    
    
    0.025
    
    
    
    0.029Implied cash unit cost of
copper production
    
    $
    0.511
    
    
    
    0.530Non-cash (depreciation, depletion,
amortization and closure
accretion/accrual)
    
    
    0.169
    
    
    
    0.156Implied full unit cost of copper
production
    
    $
    0.680
    
    
    
    0.686
   *
    
    The implied full unit cost of copper production is based on PDMCs
operating margin per pound of copper sold and 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. Implied cash unit cost of
copper productionbase operations excludes PDMCs exploration, technology
and project development, and shutdown and curtailed expenses. Exploration,
technology and project development include expenses related to
exploration, pre-feasibility and feasibility studies and process
technology. Shutdown and curtailment expenses include costs related to
idled facilities at operating properties, care-and-maintenance properties
and discontinued operations. Note 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
Candelarias copper swap contracts) 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 third quarter
decreased by 4.5 cents per pound compared with the corresponding 2003 period.
This decrease included an incremental benefit of approximately 15 cents per
pound from molybdenum operations (primarily higher prices) and net copper price
adjustments of approximately 3 cents per pound (see provisionally priced copper
sales and COMEX to LME arbitrage discussion below); partially offset by a 12
cents per pound increase in certain cash costs primarily attributable to higher
milling and mining costs (approximately 4 cents per pound) due to costs
associated with ramping up production at formerly curtailed mines, higher
freight and treatment and refining costs (approximately 3 cents per pound),
higher repair and maintenance costs (approximately 2 cents per pound) and
higher energy costs (approximately 1 cent per pound). In addition, non-cash
costs increased approximately 1 cent per pound representing increased
depreciation expense primarily resulting from consolidating El Abra and
Candelaria. The implied full unit cost of copper production for the first nine months
of 2004 decreased by 0.6 cents per pound compared with the corresponding 2003
period. This decrease included an incremental benefit of approximately 12
cents per pound from molybdenum operations (primarily higher prices); partially
offset by a 10 cents per pound increase in certain cash costs primarily
attributable to higher milling and mining costs (approximately 2 cents per
pound) due to costs associated with ramping up production at formerly curtailed
sites, higher repair and maintenance costs, higher freight and treatment and
refining costs (approximately 1 cent per pound) and higher energy
(approximately 1 cent per pound). In addition, non-cash costs increased
approximately 1 cent per pound representing increased depreciation expense
primarily resulting from consolidating El Abra and Candelaria. - 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
nine months ended September 30, 2004 and 2003: ($ in millions except unit prices) Third Quarter
    
    Nine Months Ended2004
    
    2003
    
    2004
    
    2003Provisionally priced copper sales, including final settlements and
Candelarias swap contracts
    
    $
    22.8
    
    
    
    1.2
    
    
    
    17.5
    
    
    
    3.6COMEX to LME arbitrage
    
    
    (2.5
    )
    
    
    
    
    
    
    (14.8
    )
    
    
    2.4$
    20.3
    
    
    
    1.2
    
    
    
    2.7
    
    
    
    6.0Copper sales from own mines  million pounds
    
    
    651.0
    
    
    
    537.2
    
    
    
    1,878.9
    
    
    
    1,597.9Net copper pricing adjustments per pound 
decrease in implied unit cost
    
    $
    0.031
    
    
    
    0.002
    
    
    
    0.001
    
    
    
    0.004
 - 33 -




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##### Table of Contents



Certain of PDMCs sales agreements provide for provisional pricing based
on either COMEX or 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 copper sales pounds
outstanding at September 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. Provisionally priced pounds outstanding at September 30, 2004,
increased slightly from June 30, 2004, due to an increase in copper sales at
Candelaria in the third quarter 2004. Following are the provisionally priced
copper sales outstanding at September 30, 2004, June 30, 2004, March 31, 2004,
and December 31, 2003: Provisionally Priced Copper Sales Outstanding at September 30, 2004: 84.3
    
    
    million pounds priced at
    
    $1.3959 per lb. with a final October 2004 QP38.5
    
    
    million pounds priced at
    
    $1.3846 per lb. with a final November 2004 QP43.5
    
    
    million pounds priced at
    
    $1.3733 per lb. with a final December 2004 QP51.4
    
    
    million pounds priced at
    
    $1.3492 per lb. with a final January 2005 QP6.2
    
    
    million pounds priced at
    
    $1.3256 per lb. with a final February 2005 QP223.9
    
    
    million pounds priced at
    
    $1.3769 per lb. with a final October 2004 to February 2005 QP
 81 percent of the provisionally priced pounds outstanding at September 30, 2004, were at Candelaria. 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
    
    
    million pounds priced at
    
    $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. In the 2004 third quarter, Phelps Dodge entered into copper swap contracts
to hedge our provisionally priced sales exposure in a manner that allows us to
receive the average LME price for the month of shipment while our Candelaria
customers receive the QP price they requested (i.e., one to three months after
arrival at the customers facility). These hedge contracts are in accordance
with our Copper Quotational Period Swap Program discussed in the Companys Form
10-K for the year ended December 31, 2003. As of October 26, 2004, we had
entered into copper swap contracts for approximately 97 percent of Candelarias
provisionally priced copper sales outstanding at September 30, 2004, at an
average of $1.3093 per pound. This program is expected to substantially
alleviate the volatility that provisional priced copper sales could have on our
revenues. - 34 -




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##### Table of Contents



Note: Supplemental Data The following tables summarize PDMCs operating income (loss), special items and provisions, and the
resultant earnings (losses) excluding these special items and provisions for the
quarter and nine-month periods ended September 30, 2004 and 2003: (Unaudited; $ in millions) Third Quarter2004
    
    2003Operating income (loss):U.S. Mining Operations*
    
    $
    233.1
    
    
    
    19.3South American Mines**
    
    
    173.0
    
    
    
    40.7Primary Molybdenum
    
    
    17.3
    
    
    
    (0.4
    )$
    423.4
    
    
    
    59.6Special, pre-tax items and provisions:U.S. Mining Operations*
    
    $
    (7.9
    )
    
    
    (5.0
    )South American Mines**
    
    
    
    
    
    
    Primary Molybdenum
    
    
    
    
    
    
    $
    (7.9
    )
    
    
    (5.0
    )Segment operating income (loss)
excluding special items and provisions:U.S. Mining Operations*
    
    $
    241.0
    
    
    
    24.3South American Mines**
    
    
    173.0
    
    
    
    40.7Primary Molybdenum
    
    
    17.3
    
    
    
    (0.4
    )$
    431.3
    
    
    
    64.6
 (Unaudited; $ in millions) Nine Months EndedSeptember 30,2004
    
    2003Operating income (loss):U.S. Mining Operations*
    
    $
    534.4
    
    
    
    16.7South American Mines**
    
    
    493.2
    
    
    
    104.3Primary Molybdenum
    
    
    62.7
    
    
    
    0.1$
    1,090.3
    
    
    
    121.1Special, pre-tax items and provisions:U.S. Mining Operations*
    
    $
    (10.7
    )
    
    
    (5.5
    )South American Mines**
    
    
    
    
    
    
    Primary Molybdenum
    
    
    0.3
    
    
    
    $
    (10.4
    )
    
    
    (5.5
    )Segment operating income (loss)
excluding special items and provisions:U.S. Mining Operations*
    
    $
    545.1
    
    
    
    22.2South American Mines**
    
    
    493.2
    
    
    
    104.3Primary Molybdenum
    
    
    62.4
    
    
    
    0.1$
    1,100.7
    
    
    
    126.6
   *
    
    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. 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) Third Quarter 2004U.S.
    
    South
    
    PrimaryMining
    
    American
    
    Molyb-Operations
    
    Mines
    
    denumEnvironmental
provisions, net
    
    $
    (11.8
    )
    
    
    
    
    
    
    Environmental insurance
recoveries, net
    
    
    7.5
    
    
    
    
    
    
    
    Hidalgo asset
impairment
    
    
    (1.1
    )
    
    
    
    
    
    
    Historic legal matters
    
    
    (2.5
    )
    
    
    
    
    
    
    $
    (7.9
    )
    
    
    
    
    
    
    
 (Unaudited; $ in millions) Nine Months EndedSeptember 30, 2004U.S.
    
    South
    
    PrimaryMining
    
    American
    
    Molyb-Operations
    
    Mines
    
    denumEnvironmental
provisions, net
    
    $
    (14.4
    )
    
    
    
    
    
    
    0.3Environmental insurance
recoveries, net
    
    
    7.3
    
    
    
    
    
    
    
    Hidalgo asset
impairment
    
    
    (1.1
    )
    
    
    
    
    
    
    Historic legal matters
    
    
    (2.5
    )
    
    
    
    
    
    
    $
    (10.7
    )
    
    
    
    
    
    
    0.3
 (Unaudited; $ in millions) Third Quarter 2003U.S.
    
    South
    
    PrimaryMining
    
    American
    
    Molyb-Operations
    
    Mines
    
    denumEnvironmental
provisions, net
    
    $
    (5.0
    )
    
    
    
    
    
    
    
 (Unaudited; $ in millions) Nine Months EndedSeptember 30, 2004U.S.
    
    South
    
    PrimaryMining
    
    American
    
    Molyb-Operations
    
    Mines
    
    denumEnvironmental
provisions, net
    
    $
    (5.5
    )
    
    
    
    
    
    
    
 Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. - 35 -




---



##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS (Unaudited) The following tables summarize, on a segment basis, production and sales statistics, operating income (loss), special items and provisions, net, and operating income (loss) excluding special items and provisions for the third quarter of 2004 and 2003: U.S. MinesBagdad/
    
    Miami/
    
    Chino/Morenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    SubtotalThird Quarter 2004Copper production (thousand short tons):Total production
    
    
    107.6
    
    
    
    50.3
    
    
    
    2.4
    
    
    
    29.0
    
    
    
    11.1
    
    
    
    200.4Less undivided interest
    
    
    16.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16.1Copper production on a consolidated basis
    
    
    91.5
    
    
    
    50.3
    
    
    
    2.4
    
    
    
    29.0
    
    
    
    11.1
    
    
    
    184.3Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper production on a pro-rata basis
    
    
    91.5
    
    
    
    50.3
    
    
    
    2.4
    
    
    
    29.0
    
    
    
    11.1
    
    
    
    184.3Copper sales (thousand short tons):Total copper sales from own mines
    
    
    107.9
    
    
    
    55.0
    
    
    
    3.8
    
    
    
    29.0
    
    
    
    11.1
    
    
    
    206.8Less undivided interest
    
    
    16.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16.1Copper sales from own mines on a consolidated basis
    
    
    91.8
    
    
    
    55.0
    
    
    
    3.8
    
    
    
    29.0
    
    
    
    11.1
    
    
    
    190.7Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper sales from own mines on a pro-rata basis
    
    
    91.8
    
    
    
    55.0
    
    
    
    3.8
    
    
    
    29.0
    
    
    
    11.1
    
    
    
    190.7Purchased copper (thousand short tons):Total purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total copper sales on a consolidated basis
    
    
    91.8
    
    
    
    55.0
    
    
    
    3.8
    
    
    
    29.0
    
    
    
    11.1
    
    
    
    190.7($ in millions)Operating income (loss)
    
    $
    100.4
    
    
    
    139.6
    
    
    
    (0.8
    )
    
    
    16.7
    
    
    
    7.2
    
    
    
    263.1Special items and provisions, net
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (1.5
    )
    
    
    (1.9
    )Operating income (loss) excluding special items and provisions
    
    $
    100.5
    
    
    
    139.6
    
    
    
    (0.7
    )
    
    
    16.9
    
    
    
    8.7
    
    
    
    265.0Third Quarter 2003Copper production (thousand short tons):Total production
    
    
    108.6
    
    
    
    46.9
    
    
    
    5.1
    
    
    
    10.1
    
    
    
    13.5
    
    
    
    184.2Less minority participants shares
    
    
    16.3
    
    
    
    
    
    
    
    
    
    
    
    3.4
    
    
    
    
    
    
    
    19.7Copper production on a pro-rata basis
    
    
    92.3
    
    
    
    46.9
    
    
    
    5.1
    
    
    
    6.7
    
    
    
    13.5
    
    
    
    164.5Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    92.3
    
    
    
    46.0
    
    
    
    4.9
    
    
    
    6.7
    
    
    
    13.5
    
    
    
    163.4Purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total copper sales on a pro-rata basis
    
    
    92.3
    
    
    
    46.0
    
    
    
    4.9
    
    
    
    6.7
    
    
    
    13.5
    
    
    
    163.4($ in millions)Operating income (loss)
    
    $
    19.8
    
    
    
    23.7
    
    
    
    (0.7
    )
    
    
    (4.9
    )
    
    
    (5.5
    )
    
    
    32.4Special
items and provisions, net
    
    
    (1.1
    )
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (0.5
    )
    
    
    (2.9
    )Operating income (loss) excluding special items and provisions
    
    $
    20.9
    
    
    
    23.7
    
    
    
    (0.7
    )
    
    
    (3.6
    )
    
    
    (5.0
    )
    
    
    35.3
 Refer to segment discussion on pages 46 through 49. 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 44 and 45 for further discussion.) - 36 -




---



##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS (Unaudited) South American MinesCandelaria/Ojos delSalado*
    
    Cerro Verde
    
    El Abra*
    
    SubtotalThird Quarter 2004Copper production (thousand short tons):Total production
    
    
    54.1
    
    
    
    24.5
    
    
    
    58.0
    
    
    
    136.6Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper production on a consolidated basis
    
    
    54.1
    
    
    
    24.5
    
    
    
    58.0
    
    
    
    136.6Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    10.1
    
    
    
    
    
    
    
    28.5
    
    
    
    38.6Copper production on a pro-rata basis
    
    
    44.0
    
    
    
    24.5
    
    
    
    29.5
    
    
    
    98.0Copper sales (thousand short tons):Total copper sales from own mines
    
    
    56.2
    
    
    
    24.5
    
    
    
    53.5
    
    
    
    134.2Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper sales from own mines on a consolidated basis
    
    
    56.2
    
    
    
    24.5
    
    
    
    53.5
    
    
    
    134.2Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    10.5
    
    
    
    
    
    
    
    26.2
    
    
    
    36.7Copper sales from own mines on a pro-rata basis
    
    
    45.7
    
    
    
    24.5
    
    
    
    27.3
    
    
    
    97.5Purchased copper (thousand short tons):Total purchased copper
    
    
    5.0
    
    
    
    
    
    
    
    
    
    
    
    5.0Total copper sales on a consolidated basis
    
    
    61.2
    
    
    
    24.5
    
    
    
    53.5
    
    
    
    139.2($ in millions)Operating income (loss)
    
    $
    77.2
    
    
    
    32.5
    
    
    
    63.3
    
    
    
    173.0Special
items and provisions, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating
income (loss) excluding special items and provisions
    
    $
    77.2
    
    
    
    32.5
    
    
    
    63.3
    
    
    
    173.0Third Quarter 2003Copper production (thousand short tons):Total production
    
    
    54.5
    
    
    
    24.1
    
    
    
    65.3
    
    
    
    143.9Less minority participants shares
    
    
    10.9
    
    
    
    
    
    
    
    32.1
    
    
    
    43.0Copper production on a pro-rata basis
    
    
    43.6
    
    
    
    24.1
    
    
    
    33.2
    
    
    
    100.9Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    47.2
    
    
    
    24.4
    
    
    
    32.8
    
    
    
    104.4Purchased copper
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    2.2Total copper sales on a pro-rata basis
    
    
    49.4
    
    
    
    24.4
    
    
    
    32.8
    
    
    
    106.6($ in millions)Operating income (loss)
    
    $
    22.4
    
    
    
    10.6
    
    
    
    7.7
    
    
    
    40.7Special
items and provisions, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating
income (loss) excluding special items and provisions
    
    $
    22.4
    
    
    
    10.6
    
    
    
    7.7
    
    
    
    40.7
 Refer to segment discussion on pages 46 through 49. 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 44 and 45 for further discussion.)  *
    
    Third quarter 2004 reflects full consolidation of El Abra and Candelaria; third quarter 2003 reflects El Abra and Candelaria on a
pro-rata basis (51 percent and 80 percent, respectively). - 37 -




---



##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS (Unaudited) Primary
    
    Manufacturing
    
    
    
    
    
    TotalMolybdenum
    
    and Sales
    
    Other Mining
    
    PDMCThird Quarter 2004Copper production (thousand short tons):Total production
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    337.6Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16.1Copper production on a consolidated basis
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    321.5Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38.6Copper production on a pro-rata basis
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    282.9Copper sales (thousand short tons):Total copper sales from own mines
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    341.6Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16.1Copper sales from own mines on a consolidated basis
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    325.5Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36.7Copper sales from own mines on a pro-rata basis
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    288.8Purchased copper (thousand short tons):Total purchased copper
    
    
    
    
    
    
    98.8
    
    
    
    
    
    
    
    103.8Total copper sales on a consolidated basis
    
    
    
    
    
    
    99.4
    
    
    
    
    
    
    
    429.3Molybdenum production (thousand pounds):Primary - Henderson
    
    
    6,794
    
    
    
    
    
    
    
    
    
    
    
    6,794By-product
    
    
    8,277
    
    
    
    
    
    
    
    
    
    
    
    8,277Total production
    
    
    15,071
    
    
    
    
    
    
    
    
    
    
    
    15,071Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    15,466
    
    
    
    
    
    
    
    
    
    
    
    15,466Purchased molybdenum
    
    
    3,264
    
    
    
    
    
    
    
    
    
    
    
    3,264Total molybdenum sales
    
    
    18,730
    
    
    
    
    
    
    
    
    
    
    
    18,730($ in millions)Operating income (loss)
    
    $
    17.3
    
    
    
    7.1
    
    
    
    (37.1
    )
    
    
    423.4Special
items and provisions, net
    
    
    
    
    
    
    (3.1
    )
    
    
    (2.9
    )
    
    
    (7.9
    )Operating
income (loss) excluding special items and provisions
    
    $
    17.3
    
    
    
    10.2
    
    
    
    (34.2
    )
    
    
    431.3
 Refer to segment discussion on pages 46 through 49. 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 44 and 45 for further discussion.) - 38 -




---



##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS (Unaudited) Primary
    
    Manufacturing
    
    
    
    
    
    TotalMolybdenum
    
    and Sales
    
    Other Mining
    
    PDMCThird Quarter 2003Copper production (thousand short tons):Total production
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    329.2Less minority participants shares
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    62.9Copper production on a pro-rata basis
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    266.3Copper sales (thousand short tons):Total copper sales from own mines on a pro-rata basis
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    268.6Purchased copper
    
    
    
    
    
    
    88.7
    
    
    
    
    
    
    
    90.9Total copper sales on a pro-rata basis
    
    
    
    
    
    
    89.5
    
    
    
    
    
    
    
    359.5Molybdenum production (thousand pounds):Primary - Henderson
    
    
    5,164
    
    
    
    
    
    
    
    
    
    
    
    5,164By-product
    
    
    7,924
    
    
    
    
    
    
    
    
    
    
    
    7,924Total production
    
    
    13,088
    
    
    
    
    
    
    
    
    
    
    
    13,088Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    12,484
    
    
    
    
    
    
    
    
    
    
    
    12,484Purchased molybdenum
    
    
    2,578
    
    
    
    
    
    
    
    
    
    
    
    2,578Total molybdenum sales
    
    
    15,062
    
    
    
    
    
    
    
    
    
    
    
    15,062($ in millions)Operating income (loss)
    
    $
    (0.4
    )
    
    
    6.1
    
    
    
    (19.2
    )
    
    
    59.6Special
items and provisions, net
    
    
    
    
    
    
    (0.1
    )
    
    
    (2.0
    )
    
    
    (5.0
    )Operating
income (loss) excluding special items and provisions
    
    $
    (0.4
    )
    
    
    6.2
    
    
    
    (17.2
    )
    
    
    64.6
 Refer to segment discussion on pages 46 through 49. 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 44 and 45 for further discussion.) - 39 -




---



##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS (Unaudited) The following tables
summarize, on a segment basis, production and sales statistics,
operating income (loss), special items and provisions, net, and
operating income (loss) excluding special items and provisions for the nine months ended September 30, 2004 and 2003: U.S. MinesBagdad/
    
    Miami/
    
    Chino/Morenci
    
    Sierrita
    
    Bisbee
    
    Cobre
    
    Tyrone
    
    SubtotalNine Months Ended September 30, 2004Copper production (thousand short tons):Total production
    
    
    314.9
    
    
    
    138.4
    
    
    
    7.1
    
    
    
    62.7
    
    
    
    32.8
    
    
    
    555.9Less undivided interest
    
    
    47.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47.2Copper production on a consolidated basis
    
    
    267.7
    
    
    
    138.4
    
    
    
    7.1
    
    
    
    62.7
    
    
    
    32.8
    
    
    
    508.7Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper production on a pro-rata basis
    
    
    267.7
    
    
    
    138.4
    
    
    
    7.1
    
    
    
    62.7
    
    
    
    32.8
    
    
    
    508.7Copper sales (thousand short tons):Total copper sales from own mines
    
    
    314.9
    
    
    
    142.9
    
    
    
    8.5
    
    
    
    62.7
    
    
    
    32.8
    
    
    
    561.8Less undivided interest
    
    
    47.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47.2Copper sales from own mines on a consolidated basis
    
    
    267.7
    
    
    
    142.9
    
    
    
    8.5
    
    
    
    62.7
    
    
    
    32.8
    
    
    
    514.6Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper sales from own mines on a pro-rata basis
    
    
    267.7
    
    
    
    142.9
    
    
    
    8.5
    
    
    
    62.7
    
    
    
    32.8
    
    
    
    514.6Purchased copper (thousand short tons):Total purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total copper sales on a consolidated basis
    
    
    267.7
    
    
    
    142.9
    
    
    
    8.5
    
    
    
    62.7
    
    
    
    32.8
    
    
    
    514.6($ in millions)Operating income (loss)
    
    $
    264.8
    
    
    
    285.9
    
    
    
    (4.6
    )
    
    
    41.7
    
    
    
    16.2
    
    
    
    604.0Special
items and provisions, net
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.6
    )
    
    
    (3.3
    )
    
    
    (4.5
    )Operating
income (loss) excluding special items and provisions
    
    $
    265.3
    
    
    
    285.9
    
    
    
    (4.5
    )
    
    
    42.3
    
    
    
    19.5
    
    
    
    608.5Nine Months Ended September 30, 2003Copper production (thousand short tons):Total production
    
    
    317.6
    
    
    
    136.0
    
    
    
    14.4
    
    
    
    26.4
    
    
    
    44.9
    
    
    
    539.3Less minority participants shares
    
    
    47.6
    
    
    
    
    
    
    
    
    
    
    
    8.8
    
    
    
    
    
    
    
    56.4Copper production on a pro-rata basis
    
    
    270.0
    
    
    
    136.0
    
    
    
    14.4
    
    
    
    17.6
    
    
    
    44.9
    
    
    
    482.9Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    270.0
    
    
    
    143.4
    
    
    
    16.6
    
    
    
    17.6
    
    
    
    44.9
    
    
    
    492.5Purchased copper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total copper sales on a pro-rata basis
    
    
    270.0
    
    
    
    143.4
    
    
    
    16.6
    
    
    
    17.6
    
    
    
    44.9
    
    
    
    492.5($ in millions)Operating income (loss)
    
    $
    37.1
    
    
    
    48.7
    
    
    
    (4.5
    )
    
    
    (9.8
    )
    
    
    (14.4
    )
    
    
    57.1Special
items and provisions, net
    
    
    (1.1
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    (1.3
    )
    
    
    (0.5
    )
    
    
    (3.4
    )Operating
income (loss) excluding special items and provisions
    
    $
    38.2
    
    
    
    48.7
    
    
    
    (4.0
    )
    
    
    (8.5
    )
    
    
    (13.9
    )
    
    
    60.5
 Refer to segment discussion on pages 46 through 49. 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 44 and 45 for further discussion.) - 40 -




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##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS (Unaudited) South American MinesCandelaria/Ojos delSalado*
    
    Cerro Verde
    
    El Abra*
    
    SubtotalNine Months Ended September 30, 2004Copper production (thousand short tons):Total production
    
    
    162.6
    
    
    
    74.2
    
    
    
    182.2
    
    
    
    419.0Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper production on a consolidated basis
    
    
    162.6
    
    
    
    74.2
    
    
    
    182.2
    
    
    
    419.0Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    31.5
    
    
    
    
    
    
    
    89.3
    
    
    
    120.8Copper production on a pro-rata basis
    
    
    131.1
    
    
    
    74.2
    
    
    
    92.9
    
    
    
    298.2Copper sales (thousand short tons):Total copper sales from own mines
    
    
    164.7
    
    
    
    75.6
    
    
    
    182.9
    
    
    
    423.2Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Copper sales from own mines on a consolidated basis
    
    
    164.7
    
    
    
    75.6
    
    
    
    182.9
    
    
    
    423.2Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    31.9
    
    
    
    
    
    
    
    89.6
    
    
    
    121.5Copper sales from own mines on a pro-rata basis
    
    
    132.8
    
    
    
    75.6
    
    
    
    93.3
    
    
    
    301.7Purchased copper (thousand short tons):Total purchased copper
    
    
    25.1
    
    
    
    
    
    
    
    
    
    
    
    25.1Total copper sales on a consolidated basis
    
    
    189.8
    
    
    
    75.6
    
    
    
    182.9
    
    
    
    448.3($ in millions)Operating income (loss)
    
    $
    195.3
    
    
    
    95.4
    
    
    
    202.5
    
    
    
    493.2Special
items and provisions, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating
income (loss) excluding special items and provisions
    
    $
    195.3
    
    
    
    95.4
    
    
    
    202.5
    
    
    
    493.2Nine Months Ended September 30, 2003Copper production (thousand short tons):Total production
    
    
    167.0
    
    
    
    73.5
    
    
    
    180.3
    
    
    
    420.8Less minority participants shares
    
    
    33.4
    
    
    
    
    
    
    
    88.4
    
    
    
    121.8Copper production on a pro-rata basis
    
    
    133.6
    
    
    
    73.5
    
    
    
    91.9
    
    
    
    299.0Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    135.6
    
    
    
    73.9
    
    
    
    92.8
    
    
    
    302.3Purchased copper
    
    
    19.6
    
    
    
    
    
    
    
    7.3
    
    
    
    26.9Total copper sales on a pro-rata basis
    
    
    155.2
    
    
    
    73.9
    
    
    
    100.1
    
    
    
    329.2($ in millions)Operating
income (loss)
    
    $
    59.1
    
    
    
    26.7
    
    
    
    18.5
    
    
    
    104.3Special
items and provisions, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating
income (loss) excluding special items and provisions
    
    $
    59.1
    
    
    
    26.7
    
    
    
    18.5
    
    
    
    104.3
 Refer to segment discussion on pages 46 through 49. 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 44 and 45 for further discussion.)  *
    
    Nine months ended September 30, 2004, reflects full consolidation of El Abra and Candelaria; nine months ended September 30,
2003, reflects El Abra and Candelaria on a pro-rata basis (51 percent and 80 percent, respectively). - 41 -




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##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS (Unaudited) Primary
    
    Manufacturing
    
    
    
    
    
    TotalMolybdenum
    
    and Sales
    
    Other Mining
    
    PDMCNine Months Ended September 30, 2004Copper production (thousand short tons):Total production
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    976.6Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47.2Copper production on a consolidated basis
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    929.4Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120.8Copper production on a pro-rata basis
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    808.6Copper sales (thousand short tons):Total copper sales from own mines
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    986.7Less undivided interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47.2Copper sales from own mines on a consolidated basis
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    939.5Less minority participants shares previously accounted
for on a pro-rata basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121.5Copper sales from own mines on a pro-rata basis
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    818.0Purchased copper (thousand short tons):Total purchased copper
    
    
    
    
    
    
    310.5
    
    
    
    
    
    
    
    335.6Total copper sales on a consolidated basis
    
    
    
    
    
    
    312.2
    
    
    
    
    
    
    
    1,275.1Molybdenum production (thousand pounds):Primary - Henderson
    
    
    20,307
    
    
    
    
    
    
    
    
    
    
    
    20,307By-product
    
    
    23,075
    
    
    
    
    
    
    
    
    
    
    
    23,075Total production
    
    
    43,382
    
    
    
    
    
    
    
    
    
    
    
    43,382Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    46,614
    
    
    
    
    
    
    
    
    
    
    
    46,614Purchased molybdenum
    
    
    9,796
    
    
    
    
    
    
    
    
    
    
    
    9,796Total molybdenum sales
    
    
    56,410
    
    
    
    
    
    
    
    
    
    
    
    56,410($ in millions)Operating income (loss)
    
    $
    62.7
    
    
    
    19.8
    
    
    
    (89.4
    )
    
    
    1,090.3Special
items and provisions, net
    
    
    0.3
    
    
    
    (3.1
    )
    
    
    (3.1
    )
    
    
    (10.4
    )Operating
income (loss) excluding special items and provisions
    
    $
    62.4
    
    
    
    22.9
    
    
    
    (86.3
    )
    
    
    1,100.7
 Refer to segment discussion on pages 46 through 49. 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 44 and 45 for further discussion.) - 42 -




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##### Table of Contents



PDMC RESULTS BY REPORTABLE SEGMENTS (Unaudited) Primary
    
    Manufacturing
    
    
    
    
    
    TotalMolybdenum
    
    and Sales
    
    Other Mining
    
    PDMCNine Months Ended September 30, 2003Copper production (thousand short tons):Total production
    
    
    
    
    
    
    5.1
    
    
    
    
    
    
    
    965.2Less minority participants shares
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    179.2Copper production on a pro-rata basis
    
    
    
    
    
    
    4.1
    
    
    
    
    
    
    
    786.0Copper sales (thousand short tons):Copper sales from own mines on a pro-rata basis
    
    
    
    
    
    
    4.1
    
    
    
    
    
    
    
    798.9Purchased copper
    
    
    
    
    
    
    242.4
    
    
    
    
    
    
    
    269.3Total copper sales on a pro-rata basis
    
    
    
    
    
    
    246.5
    
    
    
    
    
    
    
    1,068.2Molybdenum production (thousand pounds):Primary - Henderson
    
    
    15,778
    
    
    
    
    
    
    
    
    
    
    
    15,778By-product
    
    
    21,938
    
    
    
    
    
    
    
    
    
    
    
    21,938Total production
    
    
    37,716
    
    
    
    
    
    
    
    
    
    
    
    37,716Molybdenum sales (thousand pounds):Net Phelps Dodge share from own mines
    
    
    39,783
    
    
    
    
    
    
    
    
    
    
    
    39,783Purchased molybdenum
    
    
    6,210
    
    
    
    
    
    
    
    
    
    
    
    6,210Total molybdenum sales
    
    
    45,993
    
    
    
    
    
    
    
    
    
    
    
    45,993($ in millions)Operating income (loss)
    
    $
    0.1
    
    
    
    21.1
    
    
    
    (61.5
    )
    
    
    121.1Special items and provisions, net
    
    
    
    
    
    
    (0.1
    )
    
    
    (2.0
    )
    
    
    (5.5
    )Operating
income (loss) excluding special items and provisions
    
    $
    0.1
    
    
    
    21.2
    
    
    
    (59.5
    )
    
    
    126.6
 Refer to segment discussion on pages 46 through 49. 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 44 and 45 for further discussion.) - 43 -




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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 37 percent and 51
percent of their copper to the Manufacturing and Sales segment in the third
quarters of 2004 and 2003, respectively, and 42 percent and 43 percent for the
first nine 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) Third Quarter2004
    
    2003U.S. Mining Operations*Unaffiliated customers
    
    $
    902.4
    
    
    
    520.7Intersegment elimination
    
    
    (135.0
    )
    
    
    (86.7
    )767.4
    
    
    
    434.0South American Mines**Unaffiliated customers
    
    
    250.8
    
    
    
    82.4Intersegment
    
    
    135.0
    
    
    
    86.7385.8
    
    
    
    169.1Primary MolybdenumUnaffiliated customers
    
    
    267.1
    
    
    
    101.0Intersegment
    
    
    
    
    
    
    267.1
    
    
    
    101.0Total PDMCUnaffiliated customers
    
    $
    1,420.3
    
    
    
    704.1
 (Unaudited; $ in millions) Nine Months EndedSeptember 30,2004
    
    2003U.S. Mining Operations*Unaffiliated customers
    
    $
    2,573.8
    
    
    
    1,448.4Intersegment elimination
    
    
    (477.2
    )
    
    
    (214.7
    )2,096.6
    
    
    
    1,233.7South American Mines**Unaffiliated customers
    
    
    673.3
    
    
    
    282.0Intersegment
    
    
    477.2
    
    
    
    214.71,150.5
    
    
    
    496.7Primary MolybdenumUnaffiliated customers
    
    
    642.2
    
    
    
    270.3Intersegment
    
    
    
    
    
    
    642.2
    
    
    
    270.3Total PDMCUnaffiliated customers
    
    $
    3,889.3
    
    
    
    2,000.7
   *
    
    U.S. Mining Operations combines the following segments: Morenci,
Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and
Sales, and Other Mining.**
    
    South American Mines combines the following segments: Candelaria/Ojos del
Salado, Cerro Verde and El Abra.  U.S. 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 $381.7 million, or 73
percent, in the 2004 third quarter compared with the 2003 third quarter. This
increase was primarily due to higher realized copper prices (approximately $329
million), higher copper sales volumes (approximately $48 million) and higher
copper rod sales (approximately $9 million). Sales and other operating revenues to unaffiliated customers by U.S.
Mines, Other Mining and Manufacturing and Sales increased $1,125.4 million, or
78 percent, in the first nine months of 2004 compared with the corresponding
2003 period. This increase was primarily due to higher realized copper prices
(approximately $916 million), higher copper sales volumes (approximately $186
million) and higher copper rod sales (approximately $23 million). - 44 -




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##### Table of Contents



South American Mines Segments  Sales South American Mines sales and other operating revenues to unaffiliated
customers increased $168.4 million, or 204 percent, in the 2004 third quarter
compared with the 2003 third quarter. This increase was primarily due to
higher realized copper prices (approximately $71 million), the impact of fully
consolidating El Abra and Candelaria (approximately $68 million) and higher
sales volumes of copper (approximately $29 million). South American Mines sales and other operating revenues to unaffiliated
customers increased $391.3 million, or 139 percent, in the first nine months of
2004 compared with the corresponding 2003 period. This increase was primarily
due to higher realized copper prices (approximately $189 million) and the
impact of fully consolidating El Abra and Candelaria (approximately $199
million); partially offset by lower sales volumes of copper (approximately $4
million). Primary Molybdenum Segment  Sales Primary Molybdenum sales and other operating revenues to unaffiliated
customers increased $166.1 million, or 164 percent, in the 2004 third quarter
compared with the 2003 third quarter. This increase primarily was due to
higher average molybdenum realizations (approximately $143 million) and higher
sales volumes of molybdenum (approximately $23 million). Primary Molybdenum sales and other operating revenues to unaffiliated
customers increased $371.9 million, or 138 percent, in the first nine months of
2004 compared with the corresponding 2003 period. This increase primarily was
due to higher average molybdenum realizations (approximately $313 million) and
higher sales volumes of molybdenum (approximately $57 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, our segment information reflects management
determinations that may not be indicative of actual financial performance of
each segment as if it were an independent entity. (Unaudited; $ in millions) Third Quarter2004
    
    2003U.S. Mining Operations*
    
    $
    233.1
    
    
    
    19.3South American Mines**
    
    
    173.0
    
    
    
    40.7Primary Molybdenum
    
    
    17.3
    
    
    
    (0.4
    )Total PDMC
    
    $
    423.4
    
    
    
    59.6
 (Unaudited; $ in millions) Nine Months EndedSeptember 30,2004
    
    2003U.S. Mining Operations*
    
    $
    534.4
    
    
    
    16.7South American Mines**
    
    
    493.2
    
    
    
    104.3Primary Molybdenum
    
    
    62.7
    
    
    
    0.1Total PDMC
    
    $
    1,090.3
    
    
    
    121.1
   *
    
    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 U.S. Mining Operations reported operating income of $233.1 million in the
2004 third quarter including $7.9 million of special, net pre-tax losses,
compared with operating income of $19.3 million in the 2003 third quarter
including $5.0 million of special, net pre-tax losses. U.S. Mining Operations reported operating income of $534.4 million for the
first nine months of 2004 including $10.7 million of special, net pre-tax
losses, compared with operating income of $16.7 million in the corresponding
2003 period including $5.5 million of special, net pre-tax losses. (Refer to
the separate discussion of PDMCs segments below for further detail.) - 45 -




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##### Table of Contents



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 $100.4 million in the 2004 third quarter increased $80.6
million compared with the 2003 third quarter primarily due to higher average
copper prices (approximately $89 million); partially offset by higher cost of
copper production (approximately $9 million) primarily due to higher mining and
operating costs. Operating income of $264.8 million for the first nine months of 2004
increased $227.7 million compared with the corresponding 2003 period primarily
due to higher average copper prices (approximately $248 million); partially
offset by higher cost of copper production (approximately $8 million),
management fees (approximately $10 million) and insurance claims (approximately
$2 million). Higher cost of copper production was primarily due to higher
mining and operating costs (approximately $11 million) and lower grade
(approximately $3 million); partially offset by a favorable change in
heap-leach and work-in-process inventories (approximately $6 million). Bagdad/Sierrita Segment  Operating
Income Our wholly owned Bagdad and Sierrita open-pit mines, located in northwest
Arizona and near Green Valley, Arizona, respectively, mine copper sulfide and
oxide ores. They produce copper and molybdenum concentrates and copper
cathodes. The 2004 third quarter operating income of $139.6 million increased
$115.9 million compared with the 2003 third quarter primarily due to higher
average copper prices (approximately $52 million), lower cost of copper
production (approximately $59 million) and higher sales volumes (approximately
$4 million). Lower cost of copper production was primarily due to higher
molybdenum by-product credits resulting from higher prices and volumes
(approximately $85 million); partially offset by higher mining and milling
costs (approximately $21 million) and the impact of changes in inventory
(approximately $9 million). Operating income of $285.9 million for the first nine months of 2004
increased $237.2 million compared with the corresponding 2003 period primarily
due to higher average copper prices (approximately $133 million) and lower cost
of copper production (approximately $105 million). Lower cost of copper
production was primarily due to higher molybdenum by-product credits resulting
from higher prices and volumes (approximately $175 million) and the impact of
changes in inventory (approximately $3 million); partially offset by higher
mining and milling costs (approximately $64 million) and energy costs
(approximately $11 million) primarily due to the ramp-up of operations in 2004. Miami/Bisbee Segment  Operating
Loss Our wholly owned Miami open-pit mine, located in Miami, Arizona, produces
electrowon copper cathodes. The Bisbee precipitation operation is located in
southern Arizona. The 2004 third quarter operating loss of $0.8 million was
comparable with the 2003 third quarter. Higher average copper prices
(approximately $3 million) were offset by higher cost of copper production
(approximately $3 million). Higher cost of copper production was primarily due
to lower grade (approximately $2 million), higher depreciation expense
(approximately $1 million) and an unfavorable change in work-in-process
inventories (approximately $1 million); partially offset by lower mining and
operating costs (approximately $1 million). An operating loss of $4.6 million for the first nine months of 2004 was
comparable with the corresponding 2003 period. Higher average copper prices
(approximately $8 million) and lower shutdown costs (approximately $1 million)
were offset by lower sales volumes (approximately $5 million) and higher cost
of copper production (approximately $4 million). Higher cost of copper
production was primarily due to lower grade (approximately $6 million), higher
energy costs (approximately $2 million) and higher depreciation expense
(approximately $2 million); partially offset by lower mining and operating
costs (approximately $5 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 cathodes 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 - 46 -




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##### Table of Contents



care-and-maintenance status, with the exception of limited mining
activities. The 2004 third quarter operating income of $16.7 million increased $21.6
million compared with the 2003 third quarter primarily due to higher average
copper prices and the effect of increased sales volumes (approximately $22
million). Operating income of $41.7 million for the first nine months of 2004
increased $51.5 million compared with the corresponding 2003 period primarily
due to higher average copper prices and the effect of increased sales volumes
(approximately $49 million) and lower shutdown costs (approximately $3
million).  Tyrone Segment  Operating Income (Loss) Our wholly owned Tyrone open-pit mine, located near Tyrone, New Mexico,
mines leachable copper ore and produces electrowon copper cathodes. The 2004
third quarter operating income of $7.2 million increased $12.7 million compared
with the 2003 third quarter due to higher average copper prices
(approximately $11 million). Operating income of $16.2 million in the first nine months of 2004
increased $30.6 million compared with the corresponding 2003 period due to
higher average copper prices
(approximately $30 million); partially offset by higher special pre-tax charges
for environmental provisions ($2.8 million). South American Mines  Operating Income South American Mines reported operating income in the 2004 third quarter
of $173.0 million, compared with operating income of $40.7 million in the 2003
third quarter. South American Mines reported operating income of $493.2 million for the
first nine months of 2004, compared with operating income of $104.3 million for
the first nine 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 $77.2 million in the 2004 third quarter increased
$54.8 million compared with the 2003 third quarter primarily due to higher
average copper prices (approximately $77 million); partially offset by higher
cost of copper production (approximately $24 million). Higher cost of copper
production included higher mine operating costs (approximately $14 million),
lower copper ore grade and recovery (approximately $4 million), higher
downstream charges (approximately $2 million) and an unfavorable change in
work-in-process inventory (approximately $6 million); partially offset by lower
depreciation (approximately $2 million). Operating income of $195.3 million for the first nine months of 2004
increased $136.2 million compared with the corresponding 2003 period primarily
due to higher average copper prices (approximately $173 million) and higher
copper sales volumes (approximately $11 million); partially offset by higher
cost of copper production (approximately $46 million) and operator fees
(approximately $1 million). Higher cost of copper production included higher
mine operating costs (approximately $40 million), lower copper ore grade and
recovery (approximately $10 million) and an unfavorable change in
work-in-process inventory (approximately $7 million); partially offset by lower
power costs (approximately $7 million) and lower depreciation (approximately $6
million).  Cerro Verde Segment  Operating
Income The Cerro Verde open-pit mine, located near Arequipa, Peru, produces
copper cathodes. We own approximately 82 percent of the common stock of Cerro
Verde, which we fully consolidate (and show the minority interest). The 2004 third quarter operating income of $32.5 million increased $21.9
million from the 2003 third quarter due to higher average copper -47-




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prices
(approximately $27 million); partially offset by higher cost of copper
production (approximately $6 million) resulting primarily from higher operating
costs. Operating income of $95.4 million for the first nine months of 2004
increased $68.7 million from the corresponding 2003 period primarily due to
higher average copper prices (approximately $80 million); partially offset by
higher cost of copper production (approximately $12 million). Higher cost of
copper production included higher operating costs (approximately $12 million)
and higher depreciation (approximately $2 million); partially offset by a
favorable change in work-in-process inventories (approximately $3 million). See discussion on page 49 in PDMC  Other Matters regarding the
conditional approval by the Phelps Dodge Board of Directors for an $850 million
expansion of the Cerro Verde mine.  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 third quarter operating income of $63.3 million increased $55.6
million from the 2003 third quarter primarily due to higher average copper
prices (approximately $59 million) and higher copper sales volumes
(approximately $5 million); partially offset by higher cost of copper
production (approximately $10 million). Higher cost of copper production
included higher operating costs (approximately $21 million) and lower ore grade
(approximately $10 million); partially offset by lower depreciation
(approximately $18 million) and lower power costs (approximately $3 million). Operating income of $202.5 million for the first nine months of 2004
increased $184.0 million from the corresponding 2003 period primarily due to
higher average copper prices (approximately $196 million) and higher copper
sales volumes (approximately $19 million); partially offset by higher cost
of copper production (approximately $31 million). Higher cost of copper
production included higher operating costs (approximately $71 million) and an
unfavorable change in heap-leach and work-in-process inventories (approximately
$31 million); partially offset by higher ore grade (approximately $3 million),
lower depreciation (approximately $53 million) and lower energy costs
(approximately $10 million). See discussion on page 58 of El Abras intent to prepay its senior debt
obligations. Primary Molybdenum  Operating Income (Loss) Primary Molybdenum includes our wholly owned Henderson and Climax
molybdenum mines in Colorado and conversion facilities in the United States and
Europe. Henderson produces high-purity, chemical-grade molybdenum
concentrates, 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 third
quarter of $17.3 million, compared with an operating loss of $0.4 million in
the third quarter of 2003. The 2004 third quarter increase of $17.7 million
primarily was due to higher average molybdenum prices (approximately $143
million) and higher sales volumes (approximately $23 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
$130 million), higher production costs (approximately $17 million) and shutdown
expenses (approximately $1 million). Higher production costs resulted from
increased volumes and included higher labor and maintenance costs
(approximately $6 million), conversion costs (approximately $4 million), cost
of material drawn from inventory (approximately $3 million), depreciation
(approximately $2 million) and freight and warehousing costs (approximately $1
million). Primary Molybdenum operations reported operating income of $62.7 million
for the first nine months of 2004, compared with operating income of $0.1
million for the corresponding 2003 period. The increase of $62.6 million
primarily was due to higher average molybdenum prices (approximately $313
million), higher sales volumes (approximately $57 million) and lower shutdown
expenses (approximately $2 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 opera- -48-




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tions (approximately $277
million) and higher production costs (approximately $33 million). Higher
production costs resulted from increased volumes and included higher labor and
maintenance costs (approximately $9 million), conversion costs (approximately
$8 million), cost of material drawn from inventory (approximately $5 million),
energy costs (approximately $4 million), depreciation (approximately $4
million) and freight and warehousing costs (approximately $3 million). Manufacturing and Sales Segment  Operating Income Manufacturing and Sales reported operating income of $7.1 million in the
2004 third quarter, compared with operating income of $6.1 million in the 2003
third quarter. The 2004 third quarter increase of $1.0 million compared with
the 2003 third quarter primarily was due to higher rod sales (approximately $6
million); offset by higher special, net pre-tax charges ($3.0 million) and
lower smelter credits associated with in-process material (approximately $2
million). Manufacturing and Sales reported operating income of $19.8 million for the
first nine months of 2004, compared with operating income of $21.1 million for
the first nine months of 2003. The 2004 decrease of $1.3 million primarily was
due to lower smelter credits associated with in-process material (approximately
$8 million), higher special, net pre-tax charges ($3.0 million) and refinery
operating expenses (approximately $1 million); offset by higher rod sales
(approximately $11 million). Other Mining Segment  Operating Loss Other Mining reported an operating loss of $37.1 million in the 2004 third
quarter, compared with an operating loss of $19.2 million in the 2003 third
quarter. The 2004 third quarter increase in operating loss of $17.9 million
compared with the 2003 third quarter primarily was due to higher incentive
compensation (approximately $7 million), exploration expense (approximately $3
million), profit sharing cost
(approximately $6 million) and pre-tax, net special charges ($0.9
million). Other Mining reported an operating loss of $89.4 million for the first
nine months of 2004, compared with an operating loss of $61.5 million for the
first nine months of 2003. The increase in operating loss of $27.9 million
primarily was due to higher incentive compensation (approximately $15 million),
exploration expense (approximately $10 million), profit sharing cost
(approximately $11 million) and higher pre-tax, net special charges ($1.1
million); partially offset by higher management fees paid by Morenci
(approximately $10 million). PDMC  Other Matters On October 11, 2004, the Phelps Dodge Board of Directors announced
conditional approval to an $850 million expansion of the Cerro Verde mine near
Arequipa, Peru. Final approval is contingent upon receiving all required
permits from the Peruvian government and placing necessary financing. At present, Phelps Dodge owns 82.5 percent of the outstanding shares of
Cerro Verde. Compania de Minas Buenaventura S.A., a publicly traded Peruvian
mining concern (Buenaventura), owns 9.2 percent of the outstanding shares, and
the remainder is publicly traded on the Lima Stock Exchange. Buenaventura has
agreed in principle to increase its ownership in Cerro Verde up to a maximum of
20 percent. In addition, Sumitomo Metal Mining Co., Ltd., and Sumitomo Corp.
have agreed in principle to acquire jointly an equity position in Cerro Verde
of 21-25 percent. The Buenaventura and Sumitomo transactions are subject to a
variety of conditions, including the approval of the boards of directors of
each party, the approval of Cerro Verdes shareholders, and the negotiation and
execution of definitive agreements. Cerro Verde expects to receive proceeds of
$400 million to $500 million depending upon the extent of participation by
Buenaventura and other shareholders. Phelps Dodge will retain a majority
interest in the operation. The expansion, which will be financed with a combination of Cerro Verde
cash and new debt, permits mining a primary sulfide ore body beneath the
leachable ore currently in production. Through the expansion, approximately 1
billion tons of sulfide ore reserves averaging 0.51 percent copper will be
processed through a new concentrator. Mining of the sulfide ore body is
expected to begin in late 2006. The current copper production at Cerro Verde
is approximately 100,000 tons per year. After the expansion, copper production
initially will approximate 300,000 tons per year. 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 fun- -49-




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damentals 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 began producing 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 increased 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 120 million pounds in 2004 and approximately 300 million
pounds in 2005, as compared with 2003 production. This will bring our pro-rata
share of production to 2.2 billion pounds (2.7 billion pounds on a 100 percent
basis) and 2.4 billion pounds (2.9 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 190 million to
220 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 $17 million, or approximately 18 cents per
common share. Our current annual molybdenum production is approximately 58 million
pounds (approximately 28 million pounds from primary mines and 30 million
pounds from by-product mines). Approximately 70 percent of our molybdenum
contracts are priced based on the average of the previous 30 days of published
prices (i.e., Platts Metals Week, Ryans Notes, or Metal Bulletin), plus
premiums. Accordingly, 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). To limit the effects of potential decreases in copper selling prices, we
may enter into copper price protection contracts for a portion of our expected
future mine production. Our copper price protection program involves the
purchase of zero-cost copper collars, which is the simultaneous purchase of
monthly put options and sale of annual call options. This strategy provides
downside price protection against substantial declines in copper selling prices
while retaining the ability to participate in some price increases. As of October 15, 2004, Phelps Dodge entered into separate programs to
purchase zero-cost collars on approximately 94 percent of El Abras expected
2005 total production and 8 percent of PDMCs remaining 2005 consolidated
production. The El Abra collars have an LME put strike price (floor) of $1.00
per pound (settled against a monthly average LME price) and an LME call strike
price (ceiling) of $1.3755 per pound (settled against an annual average LME
price). The collars on PDMCs expected remaining consolidated production have
an LME put strike price (floor) of 94.3 cents per pound (settled against a
monthly average LME price) and an LME call strike price (ceiling) of $1.40 per
pound (settled against an annual average LME price). El Abra entered into its
program in order to ensure a copper price sufficient to provide the necessary
cash to repay its short-term borrowings arising from the 2004 fourth quarter
prepayment of its senior debt obligations, repay sponsor support and -50-




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to ensure
financial flexibility. The other program covers a small portion of PDMCs
remaining production ensuring a minimum copper price for the re-started Chino
facility to operate comfortably throughout 2005. Significant New Mexico Environmental and Reclamation Programs Each of 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), 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 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 (internal cost
basis) 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. Refer to Note 6, Contingencies, to our unaudited September 30, 2004,
Consolidated Financial 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) Third Quarter2004
    
    2003Sales and other operating revenues
to unaffiliated customers:Specialty Chemicals
    
    $
    171.1
    
    
    
    152.0Wire and Cable
    
    
    255.1
    
    
    
    175.0$
    426.2
    
    
    
    327.0Operating income:Specialty Chemicals
    
    $
    5.1
    
    
    
    8.4Wire and Cable
    
    
    7.4
    
    
    
    5.8$
    12.5
    
    
    
    14.2
 (Unaudited; $ in millions) Nine Months EndedSeptember 30,2004
    
    2003Sales and other operating revenues
to unaffiliated customers:Specialty Chemicals
    
    $
    500.2
    
    
    
    480.2Wire and Cable
    
    
    704.9
    
    
    
    490.4$
    1,205.1
    
    
    
    970.6Operating income:Specialty Chemicals
    
    $
    32.2
    
    
    
    37.5Wire and Cable
    
    
    16.0
    
    
    
    12.7$
    48.2
    
    
    
    50.2
 -51-




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PDI  Sales PDI reported sales to unaffiliated customers of $426.2 million in the 2004
third quarter, compared with sales of $327.0 million in the 2003 third quarter.
The increase of $99.2 million was due to higher Wire and Cable sales that
increased $80.1 million, or 46 percent, primarily as a result of increased
metal prices (approximately $49 million) for energy cables and building wire in
the international markets, higher magnet wire sales in North America
(approximately $23 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 $8 million). Higher metal
prices impacting revenues generally reflect Wire and Cables higher purchase
cost of such metals. Specialty Chemicals 2004 third quarter sales increased
$19.1 million, or 13 percent, primarily due to increased sales volumes in North
America and Europe (approximately $8 million), higher average unit selling
prices in North America and South America (approximately $4 million) due to
higher feedstock-related increases and higher foreign currency translation
gains (approximately $7 million). PDI reported sales to unaffiliated customers of $1,205.1 million for the
first nine months of 2004, compared with sales of $970.6 million in the
corresponding 2003 period. The increase of $234.5 million, or 24 percent, was
due
to higher Wire and Cable sales that increased $214.5 million, or 44
percent, primarily as a result of increased metal prices (approximately $114
million) and demand for energy cables and building wire in the international
markets (approximately $18 million), higher magnet wire sales in North America
(approximately $63 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 $20 million). Specialty
Chemicals sales for the first nine months of 2004 increased $20.0 million
primarily due to higher foreign currency translation gains (approximately $27
million) and increased sales volumes (approximately $4 million) primarily in
North America; partially offset by lower average unit selling prices
(approximately $11 million) primarily in Europe and South America. PDI  Operating Income PDI reported operating income of $12.5 million in the 2004 third quarter,
including special, net pre-tax charges of $3.3 million, compared with operating
income of $14.2 million in the 2003 third quarter, including a special, net
pre-tax gain of $0.4 million. PDI reported operating income of $48.2 million for the first nine months
of 2004, including special, net pre-tax charges of $7.6 million, compared with
operating income of $50.2 million for the first nine months of 2003, including
a special, net pre-tax gain of $3.6 million. (Refer to the separate discussion
of PDIs Specialty Chemicals and Wire and Cable segments below for further
detail.) Note: Supplemental Data The
following tables summarize PDIs operating income, special items and provisions, and the
resultant earnings excluding these special items and provisions for the
third quarter and nine-month periods ended September 30, 2004 and 2003: (Unaudited; $ in millions) Third Quarter2004
    
    2003Operating income
    
    $
    12.5
    
    
    
    14.2Special, pre-tax items and
provisions
    
    
    (3.3
    )
    
    
    0.4Segment operating earnings
excluding special items and
provisions
    
    $
    15.8
    
    
    
    13.8
 (Unaudited; $ in millions) Nine Months EndedSeptember 30,2004
    
    2003Operating income
    
    $
    48.2
    
    
    
    50.2Special, pre-tax items and
provisions
    
    
    (7.6
    )
    
    
    3.6Segment operating earnings
excluding special items and
provisions
    
    $
    55.8
    
    
    
    46.6
 Note: Our non-GAAP measure of special items may not be comparable to similarly
titled measures reported by other companies. -52-




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Special items and provisions in operating income were as follows: (Unaudited; $ in millions) Third Quarter2004
    
    2003Restructuring program
    
    $
    (3.1
    )
    
    
    Environmental provisions, net
    
    
    (0.2
    )
    
    
    0.4$
    (3.3
    )
    
    
    0.4
 (Unaudited; $ in millions) Nine Months EndedSeptember 30,2004
    
    2003Restructuring program
    
    $
    (6.7
    )
    
    
    Environmental provisions, net
    
    
    (0.3
    )
    
    
    0.4Asset impairment charges
    
    
    (0.6
    )
    
    
    Termination of a foreign
postretirement benefit plan
    
    
    
    
    
    
    3.2$
    (7.6
    )
    
    
    3.6
  Specialty Chemicals  Operating Income Specialty Chemicals reported operating income of $5.1 million in the 2004
third quarter, compared with operating income of $8.4 million in the 2003 third
quarter. The 2004 third quarter decrease in operating income of $3.3 million
was primarily due to higher expenses mainly associated with higher customer
allowances and higher employee-related costs for operational improvement
programs. Specialty Chemicals reported operating income of $32.2 million for the
first nine months of 2004, compared with operating income of $37.5 million for
the first nine months of 2003, including a special, net pre-tax gain of $3.2
million. Excluding special items, the 2004 decrease in operating income of
$2.1 million was primarily due to higher expenses mainly associated with higher
customer allowances and higher employee related costs for operational
improvement programs. Note: Supplemental Data The
following table summarizes Specialty Chemicals operating
income, special items and provisions, and the resultant earnings
excluding these special items and provisions for the
first nine months of 2004 and 2003 (Note: There were no special items and provisions for Specialty
Chemicals in the 2004 and 2003 third quarters): (Unaudited; $ in millions) Nine Months EndedSeptember 30,2004
    
    2003Operating
income
    
    $
    32.2
    
    
    
    37.5Special, pre-tax items and
provisions
    
    
    
    
    
    
    3.2Segment operating earnings
excluding special items and
provisions
    
    $
    32.2
    
    
    
    34.3
 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 third quarter of $7.4
million, including a special, net pre-tax charge of $3.3 million, compared with
operating income of $5.8 million in the 2003 third quarter, including a
special, net pre-tax gain of $0.4 million. Excluding special items, the
increase in operating income of $5.3 million primarily was due to improved
margins for energy cables and building wire in the international markets as
well as specialty conductors in North America (approximately $7 million);
partially offset by lower magnet wire margins due to competitive pricing
pressures (approximately $1 million). Wire and Cable reported operating income of $16.0 million for the first
nine months of 2004, including a special, net pre-tax charge of $7.6 million,
compared with operating income of $12.7 million for the first nine months of
2003, including a special, net pre-tax gain of $0.4 million. Excluding special
items, the increase in operating income of $11.3 million primarily was due to
improved margins for energy cables and building wire in the international
markets as well as specialty conductors in North America (approximately $11
million) and sales volumes (approximately $9 million); partially offset by
higher operating cost in the international markets (approximately $5 million)
and lower magnet wire margins due to competitive pricing pressures
(approximately $4 million). Note: Supplemental Data The
following tables summarize Wire and Cables operating income, special items and
provisions, and the resultant earnings excluding these special items
and provisions for the third quarter -53-




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and nine-month periods ended September 30,
2004 and 2003: (Unaudited; $ in millions) Third Quarter2004
    
    2003Operating
income
    
    $
    7.4
    
    
    
    5.8Special, pre-tax items and
provisions
    
    
    (3.3
    )
    
    
    0.4
    


Segment operating earnings
excluding special items and
provisions
    
    $
    10.7
    
    
    
    5.4
 (Unaudited; $ in millions) Nine Months EndedSeptember 30,2004
    
    2003Operating
income
    
    $
    16.0
    
    
    
    12.7Special, pre-tax items and
provisions
    
    
    (7.6
    )
    
    
    0.4Segment operating earnings
excluding special items and
provisions
    
    $
    23.6
    
    
    
    12.3
 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 $421.5 million in the 2004 third quarter
compared with the 2003 third quarter due to higher purchased cathode and
concentrate (approximately $131 million) resulting from higher copper prices
and volumes, higher costs of molybdenum purchased from third parties
(approximately $59 million), an increase in production costs (approximately
$156 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 $50 million). Cost of products sold increased $1,059.2 million for the first nine months
of 2004 compared with the corresponding 2003 period. The increase was
attributable to higher purchased cathode and concentrate (approximately $427
million) due to higher copper prices and volumes, higher costs of molybdenum
purchased from third parties (approximately $129 million), an increase in
production costs (approximately $391 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 $110 million).  Depreciation, Depletion and Amortization Depreciation, depletion and amortization expense was $125.9 million in the
2004 third quarter, compared with $103.1 million in the 2003 third quarter.
The increase of $22.8 million was due to increases at PDMC in net production
volumes (approximately $17 million) primarily associated with the full
consolidation of Candelaria and El Abra and an increase in straight-line
depreciation expense (approximately $6 million). Depreciation, depletion and amortization expense was $375.2 million for
the first nine months of 2004, compared with $311.9 million for the first nine
months of 2003. The increase of $63.3 million was due to increases at PDMC in
net production volumes (approximately $55 million) primarily associated with
the full consolidation of Candelaria and El Abra and an increase in
straight-line depreciation expense (approximately $9 million).  Selling and General Administrative Expense Our selling and general administrative expense increased $7.4 million in
the 2004 third quarter compared with the 2003 third quarter. The increase
primarily resulted from employee benefit costs mostly associated with
mark-to-market adjustments for stock unit plans (approximately $3 million),
higher accruals for a Company-wide annual incentive compensation plan
(approximately $3 million) and higher restricted stock amortization associated
with issuance of additional shares (approximately $1 million). Our selling and general administrative expense increased $11.6 million for
the first nine months of 2004 compared with the corresponding 2003 period. The
increase primarily resulted from employee benefit costs mostly associated with
mark-to-market adjustments for stock unit plans (approximately $3 million),
higher accruals for a Company-wide annual incentive compensation plan
(approximately $3 million), higher restricted stock amortization associated
with issuance of
additional shares (approximately $3 million), higher directors and
officers liability insurance premiums (approximately $1 million) and higher
deferred profit sharing (approximately $1 million). -54-




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Exploration and Research Expense Our net exploration and research expense, including technology
development, was $15.8 million in the 2004 third quarter, compared with $12.2
million in the 2003 third quarter. The increase primarily resulted from higher
PDMC exploration expense of approximately $3 million primarily at Candelaria
and Safford. Our net exploration and research expense, including technology
development, was $44.9 million for the first nine months of 2004, compared with
$34.7 million for the first nine months of 2003. The increase primarily
resulted from higher PDMC exploration expense of approximately $10 million
primarily at Candelaria and Safford.  Interest Expense Interest expense decreased $7.7 million in the 2004 third quarter compared
with the 2003 third quarter. The decrease was primarily attributable to
reductions (approximately $10 million) related to the payoff of long-term debt;
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 $1 million). Interest expense decreased $9.4 million for the first nine months of 2004
compared with the corresponding 2003 period. The decrease was primarily
attributable to reductions (approximately $21 million) related to the payoff of
long-term debt; partially offset by the increase attributable to the impact of
fully consolidating El Abra and Candelaria (approximately $6 million), higher
effective interest rates for certain notes primarily resulting from the
unwinding of certain interest rate swaps in 2003 (approximately $3 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 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, increased $19.5 million in the 2004
third quarter compared with the 2003 third quarter. The increase resulted
primarily from the settlement of an historic legal matter ($9.5 million),
higher dividend income on cost-basis investments ($6.9 million) and higher
mark-to-market benefits on the Chino and Tyrone financial assurance trusts
($2.7 million). Miscellaneous income and expense, net, increased $9.8 million for the
first nine months of 2004 compared with the corresponding 2003 period. The
increase resulted primarily from higher dividend income on cost-basis
investments ($13.7 million), settlement of an historic legal matter ($9.5
million) and mark-to-market benefits on the Chino and Tyrone financial
assurance trusts ($2.7 million); partially offset by cost-basis investment
write-downs ($10.0 million) and the absence of the 2003 gain on sale of a cost
investment ($6.4 million).  Provision for Taxes on Income The Companys income tax provision for the 2004 third quarter principally
resulted from (i) taxes on earnings at international operations ($36.1 million)
including benefits from the release of valuation allowances ($14.8 million) and (ii) taxes on earnings at
U.S. operations ($26.1 million) including benefits from the
release of valua- -55-




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tion allowances ($25.7 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. The Companys income tax provision for the nine months ended September 30,
2004, principally resulted from (i) taxes on earnings at international
operations ($91.9 million) including benefits from the release of valuation
allowances ($60.6 million), (ii) taxes on earnings at U.S. operations ($39.0
million) including benefits from the release of valuation allowances ($91.9
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. 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 2003 third quarter principally
resulted from taxes on earnings at international operations ($14.0 million)
that could not be offset by losses at domestic operations as deferred tax
benefits for net operating losses were completely offset by valuation
allowances of $11.8 million; partially offset by a current-year loss carryback
benefit for U.S. operations ($2.0 million). The Companys income tax provision for the nine months ended September 30,
2003, primarily resulted from taxes on earnings at international operations
($41.2 million) that could not be offset by losses at domestic operations as
deferred tax benefits for net operating losses were completely offset by
valuation allowances of $46.3 million; partially offset by a benefit from
finalizing year-end 2002 estimates in the Companys 2002 U.S. tax return filed
in June 2003 ($4.2 million) and a current-year loss carryback benefit for U.S.
operations ($3.1 million).  Minority Interests in Consolidated Subsidiaries Minority interests were $43.4 million and $1.1 million in the third
quarters of 2004 and 2003, respectively, and $149.0 million and $5.1 million
for the nine months ended September 30, 2004 and 2003, respectively, with the
increases resulting from the full consolidation of El Abra and Candelaria.
Prior to January 1, 2004, the El Abra and Candelaria mines were accounted for
on a proportional consolidation basis. Effective January 1, 2004, both mines
are fully consolidated, and the respective partners interests 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 nine months ended
September 30, 2003, the effect of adopting SFAS No. 143 decreased loss before
cumulative effect of accounting change by approximately $3.6 million, or 4
cents per common share, and $14.5 million, or 16 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 -56-




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one-third
of Chinos financial assurance obligations under New Mexico mining reclamation
laws.  Working Capital During the first nine months of 2004, net working capital balances
(excluding cash and cash equivalents and debt) increased $193.6 million. This
increase resulted primarily from:  
    
    a $276.0 million increase in accounts receivable primarily due
to higher copper prices (approximately $122 million), higher
molybdenum sales volumes and prices (approximately $62 million), the
impact of fully consolidating El Abra and Candelaria (approximately
$34 million), higher Wire and Cable sales volumes (approximately $24
million) and the impact of increases in forward prices on
provisionally priced copper sales (approximately $25 million);
    
    a $31.8 million increase in prepaid expenses and other current
assets primarily due to an increase in fair value
adjustments associated with hedges (approximately $10 million), the current portion of long-term
investments (approximately $9 million), the timing of payments for
consolidated risk insurance (approximately $7 million),
the timing of major maintenance activities (approximately $3 million)
at our Miami copper smelter (the cost of such activities is deferred
and charged to operations during the subsequent periods benefited) and assets held for sale (approximately $2 million);
    
    a $29.1 million increase in supplies primarily due to fully
consolidating El Abra and Candelaria (approximately $18
million) and to support increased production associated with the
ramp-up of operations (approximately $7 million);
    
    a $15.8 million increase in inventories primarily due to higher
purchases at Wire and Cable resulting from increased sales volumes
(approximately $33 million); partially offset by a decrease due to
higher
copper sales (approximately $7 million) and higher molybdenum sales
(approximately $10 million);
    
    a $149.1 million increase in accounts payable and accrued
expenses primarily due to higher cathode and concentrate purchases
(approximately $71 million), a net increase in asset retirement
obligation costs (approximately $19 million) primarily resulting from
the reclassification of the current portion, timing of payments
(approximately $33 million), higher accrued interest (approximately
$19 million) due to timing of payments, higher accruals for employee
incentive compensation plans (approximately $29 million), higher
mark-to-market adjustments (approximately $16 million), and the
impact of fully consolidating El Abra and Candelaria (approximately
$13 million); partially offset by pension-related contributions
(approximately $85 million); and
    
    an $8.6 million increase in accrued income taxes primarily due
to higher foreign and federal income taxes (approximately $103
million); partially offset by payments, net of refunds (approximately
$90 million).  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 lend cash
to other international operations. At September 30, 2004, approximately 45
percent of the Companys $1,269.2 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 in November 2004, 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 September 30, 2004, our total debt was $1,634.7 million, compared with
$1,638.4 million at June 30, 2004, and $1,959.0 million at year-end 2003. A
$324.3 million net decrease in total debt from December 31, 2003, included the
recognition -57-




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of $189.0 million of debt due to the full consolidation of El Abra
and Candelaria. Our ratio of debt to total capitalization was 26.6 percent at
September 30, 2004, compared with 28.7 percent at
June 30, 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. We continue working to reduce outstanding debt in order to reach our
internal target of a 25 percent ratio of debt to capitalization. On October 1,
2004, we prepaid $90 million of long-term tax exempt bonds due in 2013 at a
slight premium to par value ($0.9 million). On October 13, 2004, El Abra provided notice to its senior lenders of its
intent to prepay in full its senior debt obligations (approximately $320.6
million, including principal and interest) on November 15, 2004, at a slight
prepayment penalty (approximately $3 million). El Abra expects to make the
prepayment with (i) cash on hand, (ii) borrowings of approximately $75 million
at an aggregate interest rate of LIBOR plus 0.30 percent per annum, and terms
not to exceed one year, and (iii) advance payments of approximately $25 million
against copper cathode sales, for a term of 30 days or less. On October 27, 2004, we issued a redemption notice to the Trustee of the
5.45 percent Greenlee County Pollution Control Bonds due in 2009 for payment on
December 1, 2004. These bonds have an aggregate book value of $81.1 million
and will be redeemed for a premium of approximately $1.6 million. 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. At September 30, 2004, there was
a -58-




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total of $95.2 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 September 30, 2004, amounted to
approximately $1,005 million, of which approximately $205 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. 04-2,
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 beginning June 30, 2004, and for comparative purposes as of
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 nine months of 2004
were $115.5 million for PDMC, $33.8 million for PDI and $10.9 million for other
Corporate-related activities. Capital expenditures and investments in the
corresponding 2003 period were $52.9 million for PDMC, $27.6 million for PDI
and $25.8 million for other Corporate-related activities. We expect capital
expenditures and investments for the year 2004 to approximate $355 million,
comprising approximately $275 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 September 3, 2004, Phelps Dodge paid a regular quarterly dividend of 25
cents per common share for the 2004 third quarter, amounting to $23.6 million. For the first nine months of 2004, Phelps Dodge has declared quarterly
dividends of $5.0625 per mandatory convertible preferred share amounting to
$10.1 million. Contractual Obligations The following table summarizes Phelps Dodges contractual obligations at
September 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. This table
reflects an update of only the major changes to the similar table presented in
the Companys Form 10-K at December 31, 2003: Debt and Take-or-Pay Contracts as of September 30, 2004: (Unaudited; $ in millions) Total
    
    Less Than
1 Year
    
    1-3 YearsShort-term debt
    
    $
    35.8
    
    
    
    35.8
    
    
    
    Long-term debt
    
    
    1,598.9
    
    
    
    294.1
    
    
    
    351.1Take-or-pay contracts
    
    
    550.5
    
    
    
    212.8
    
    
    
    194.3
 After4-5 Years
    
    5 YearsShort-term debt
    
    $
    
    
    
    
    Long-term debt
    
    
    83.7
    
    
    
    870.0Take-or-pay contracts
    
    
    70.5
    
    
    
    72.9
 Our take-or-pay contracts primarily include contracts for electricity
(approximately $178 million), contracts for petroleum-based feedstock for
conversion into carbon black (approximately $146 million), transportation and
port fee commitments (approximately $83 million), contracts for copper anode
for deliveries of specified volumes at market-based prices to our El Paso
Refinery (approximately $53 million), contracts for sulfuric acid for
deliveries of specified volumes based primarily on negotiated rates to El Abra
and Cerro Verde (approximately $33 million), contracts for natural gas
(approximately $20 million) and oxygen obligations for deliveries of specified
volumes at fixed prices to Bagdad (approximately $10 million). Approximately
79 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 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 -59-




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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 $72 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 FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45) requires that upon issuance of certain guarantees, a guarantor
must recognize a liability for the fair value of an obligation assumed under
the guarantee. 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 September 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 nine months
of 2004 that had a material impact on our consolidated financial statements. Other Items that May Affect Liquidity New Mexico and Colorados mined-land reclamation laws require financial
assurance covering the future cost of reclamation. In contrast, Arizonas Mine
Land Reclamation Act permits a company to satisfy financial assurance
requirements by demonstrating it has financial strength to fund future
reclamation costs
identified in an approved reclamation plan. An investment-grade bond
rating is one of the financial strength tests under the Arizona Act. Phelps
Dodges senior unsecured debt currently carries an investment-grade rating,
albeit at the lowest level in that category. Additionally, the Company
currently meets another financial strength test in Arizona that is not ratings
dependent. For New Mexico, financial assurance may be provided in several forms,
including third-party performance guarantees, collateral bonds, surety bonds,
letters of credit and trust funds. Based upon current permit terms and
agreements with the state of New Mexico, up to 70 percent of the financial
assurance for Chino, Tyrone and Cobre may be provided in the form of
third-party performance guarantees. Under the Mining Act Rules and the terms
of the guarantees, certain financial soundness tests must be met by the
guarantor. A publicly traded company may satisfy these financial tests by
showing that its senior unsecured debt rating is investment grade and that it
meets certain requirements regarding assets in relation to the required amount
of financial assurance. Phelps Dodge has provided 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. On August 10, 2004,
the Peruvian Congress amended this law, stating that projects in regard to
which a contractual royalty has been contractually established with the
Government or Governmental agency before the enactment of the law, shall abide
by their contractual dispositions regarding royalties and will not be subject
to the royalty payment. It is still pending the issuance of the final
regulations to this law. It is not clear what, if any effect the new royalty
law will have on operations at Cerro Verde not subject to the current 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 assess- -60-




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ment. 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. Other In the 2004 fourth quarter, we will complete our annual update to our
company-wide business plans which include updating our mine plans and
associated ore reserve estimates, and our Specialty Chemicals and Wire and
Cable business plans. The mine plans are based upon managements estimates
including long-term copper and molybdenum prices reflective of recent historic
average copper and molybdenum price cycles. Specialty Chemicals and Wire and
Cable business plans are based on managements analysis and estimates of their
respective market dynamics. Upon completion of our business plans in the
fourth quarter, we will evaluate any significant changes in our mines and
businesses and conduct impairment analyses if appropriate. Southern Peru Copper Corporation (SPCC) announced on October 21, 2004,
that it has executed a merger agreement with Americas Mining Corporation (AMC),
a subsidiary of Grupo Mexico S.A. de C.V., the largest shareholder of SPCC.
Pursuant to the merger agreement AMC will sell its 99.15 percent shareholding
in its subsidiary Minera Mexico, S.A. de C.V. to SPCC, in return for 67.2
million shares of SPCC. Phelps Dodge owns a 14 percent interest in SPCC.
Based upon the information provided in SPCCs Form 8-K filed on October 22,
2004, if this transaction is completed we estimate Phelps
Dodges interest in SPCC would be diluted to approximately 7.6 percent. President Bush signed the American Jobs Creation Act (Act) of 2004 on
October 22, 2004. Our initial analysis of the more significant provisions
contained in the Act indicates they will have a minor favorable impact on the
Company. 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 September 30,
2004, we had outstanding diesel fuel option contracts in place to hedge 13.9
million gallons of diesel fuel through December 2004. As of September 30,
2003, our diesel fuel price protection program had 24.9 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 September 30, 2004, our natural gas price protection program, which
started in 2001, had outstanding natural gas option contracts in place to hedge
1.9 million decatherms of natural gas through December 2004. As of September
30, 2003, our natural gas price protection program had outstanding natural gas
option contracts in place to hedge 9.4 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 nine 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. 
 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 -61-




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to management, including our chief executive
officer and chief financial officer, and reported 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 third 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 state court action concerning the dissenting Pinal Creek Group
members contractual liability under the Pinal Creek Group agreement has been
settled and the parties claims in that litigation have been dismissed with
prejudice. 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. In August 2004, Cobre Mining Company (Cobre) received a draft closure
permit from the New Mexico Environment Department (NMED) and a draft permit
revision from the Mining and Minerals Division (MMD) that would approve Cobres
closeout plan subject to certain conditions. Cobre is reviewing and providing
comments to NMED and MMD on the draft permit conditions. III. Reference is made to paragraph XI of Part I, Item 3, Legal
Proceedings, of the Companys Form 10-K for the year ended December 31, 2003. On August 13, 2004, the United Kingdom Environment Agency (Agency) issued
a Summons to Columbian Chemicals Companys Sevalco plant (Sevalco) in Bristol,
England, ordering it to appear in Magistrates Court on September 28, 2004
(which subsequently was postponed to November 15, 2004) to answer charges
concerning the alleged submission of incorrect data to the Agency and operation
of a process not in accordance with its operating permit. IV. Reference is made to paragraph VI of Part I, Item 3, Legal
Proceedings, of the Companys Form 10-K for the year ended December 31, 2003. In an opinion dated October 14, 2004, the Court granted Asarco
Incorporateds motion for summary judgment and entered judgment for Asarco. -62-




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (e) Issuer Purchases of Equity Securities The following table sets forth information with respect to shares of
common stock of the Company purchased by the Company during the three months
ended September 30, 2004: (c) Total Number of
    
    (d) Maximum Number (orShares (or Units)
    
    Approximate Dollar Value)(a) Total Number
    
    (b) Average Price
    
    Purchased as Part of
    
    of Shares (or Units) That Mayof Shares (or Units)
    
    Paid Per
    
    Publicly Announced
    
    Yet Be Purchased UnderPeriod
    
    Purchased*
    
    Share (or Unit)
    
    Plans or Programs
    
    the Plans or ProgramsJuly 1-31, 2004
    
    
    2,431
    
    
    $
    75.61
    
    
    
    
    
    
    
    August 1-31, 2004
    
    
    57
    
    
    
    79.72
    
    
    
    
    
    
    
    September 1-30, 2004
    
    
    326
    
    
    
    89.52
    
    
    
    
    
    
    
    Total
    
    
    2,814
    
    
    $
    77.31
    
    
    
    
    
    
    
    
  *
    
    The shares shown have been repurchased under the Companys applicable
restricted stock plans (Plans) and its non-qualified supplemental savings
plan (SSP). Through the Plans, certain employees may elect to satisfy
their tax obligations on restricted stock awards by having the Company
withhold a portion of their shares of restricted stock. Additionally, the
Company repurchases shares in the SSP as a result of changes in investment
elections by plan participants. 
 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 September 30, 2004, the Company filed
a Current Report on Form 8-K bearing cover date of July 27, 2004, in
which the Company reported under Item 12 that it had issued a press
release announcing financial results for the three- and six-months
ended June 30, 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   Date:
    
    October 28, 2004By:
    
    /s/ Denise R.
DannerDenise R. DannerVice President and Controller(Principal Accounting Officer)
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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, Executive 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, Executive 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. -64-