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Rating Action:

MOODY'S CONFIRMS PHELPS DODGE'S SENIOR UNSECURED RATINGS AT Baa2, SHORT TERM RATING AT P-2: CHANGES OUTLOOK TO NEGATIVE

17 May 2001
MOODY'S CONFIRMS PHELPS DODGE'S SENIOR UNSECURED RATINGS AT Baa2, SHORT TERM RATING AT P-2: CHANGES OUTLOOK TO NEGATIVE

Approximately $3 Billion of Debt Securities Affected

New York, May 17, 2001 -- Moody's Investors Service confirmed Phelps Dodge Corporation's (PD) senior unsecured rating at Baa2, and its short term rating at P-2 but changed the outlook to negative. This action follows PD's announcement that it has terminated its sales process for the PD Wire and Cable and Columbian Chemical segments of Phelps Dodge Industries (PDI) due to economic conditions which have depressed the values for these businesses. The rating confirmation acknowledges PD's ongoing efforts to stabilize its cost base and improve operating performance in a difficult business environment exacerbated by higher fuel and energy costs. Recent actions include the power stabilization plan which has eliminated the company's exposure to spot electricity prices, fuel hedging for a portion of its fuel requirements, rolling production curtailments at Sierrita and Bagdad in Arizona and Tyrone, New Mexico, which will allow for the transfer of power within the system, and its operating profit improvement plan. With respect to the latter, PD estimates operating profit performance will improve by $30 million in 2001, increasing to $150 million by 2003 on an annual, sustainable basis through actions such as moving to shared services and focused management on duplicative functions. Additionally, PD has reduced its dividend to $0.50 per annum which will provide approximately $118 million in cash savings.

The negative outlook reflects Moody's expectations that PD's operating performance and cash flow generation will remain under pressure in 2001 due to the impact of continued high energy related costs and a weak copper price environment. Copper prices have averaged in the $0.75/lb range since April reflecting economic pressures in the US and the business downturn across most industries. Moody's anticipates that recovery could be slow over the balance of the year thereby continuing to constrain PD's performance, which is significantly leveraged to the price of copper. Moody's therefore believes that PD's ability to meaningfully reduce debt levels, improve coverage ratios and restore its balance sheet to historic strengths will be stretched out over a longer time frame.

Ratings confirmed are:

Phelps Dodge Corporation: senior unsecured notes, debentures, bank credit facility and IRB's at Baa2, shelf registration for senior unsecured debt securities at (P)Baa2, junior subordinated debt securities at (P)Baa3, preferred stock at (P)"ba1" and junior participating cumulative preferred stock at (P)"ba2", short term debt at P-2

PD Capital Trust I: shelf registration for preferred stock at (P)"baa3"

PD Capital Trust II: shelf registration for preferred stock at (P) "baa3"

Cyprus Amax Minerals Company: senior unsecured notes, debentures and equipment trust certificates, all legally assumed by Phelps Dodge at Baa2

Amax Inc.: senior unsecured notes, industrial revenue/pollution control bonds, all legally assumed by Phelps Dodge, at Baa2.

The second largest copper producer globally, PD has quality mines, geographic diversity and potential for improved performance over the medium term. However, in the near term, its operations will be challenged by higher costs and the weak economic environment, reducing flexibility to respond to unforeseen events.

PD's performance in the first quarter of 2001 evidenced continued pressure from higher energy costs as well as the transition to mine for leach production at the Morenci operations, which impacted production levels and cost. This project has been completed and expectations are for production at full capacity by year-end. With the increase in SX/EW production, costs at Morenci are expected to moderate. Overall implied production costs were around $0.82/lb in the first quarter and expectations are for implied costs in the high $0.70's/lb range for the second quarter. Earnings for the first quarter were bolstered by non-recurring gains of $29 million, principally from insurance recoveries on historic liability claims. This contributed to PD reporting net income of $15 million.

Although Moody's believes that the medium term fundamentals for the copper market are positive, the negative outlook reflects Moody's view that Phelps Dodge faces significant challenges over the near term in strengthening its capital structure, reducing interest costs, and increasing its financial flexibility to respond to weak economic conditions and copper pricing pressure. The ratings will remain under pressure absent demonstrable progress in implementation of and results from the various initiatives undertaken by Phelps Dodge. Further weakening in the copper price or spikes in energy costs, particularly during the summer months will also pressure the rating.

Headquartered in Phoenix, Arizona, PD had revenues of $4.5 billion in 2000.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Carol Cowan
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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