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Rating Action:

MOODY'S DOWNGRADES PHELPS DODGE CORPORATION'S DEBT RATINGS; SENIOR UNSECURED TO Baa3 AND SHORT TERM TO PRIME-3

10 Oct 2001
MOODY'S DOWNGRADES PHELPS DODGE CORPORATION'S DEBT RATINGS; SENIOR UNSECURED TO Baa3 AND SHORT TERM TO PRIME-3

Approximately $2.4 Billion of Debt Securities Affected.

New York, October 10, 2001 -- Moody's Investors Service downgraded the senior unsecured debt ratings of Phelps Dodge Corporation (Phelps Dodge) to Baa3 from Baa2 and its short-term debt ratings to Prime-3 from Prime-2. This rating action reflects the severe impact on Phelps Dodge's earnings, coverage ratios and cash flow performance from reduced demand and the sustained fall in the price of copper during the course of 2001. Moody's rating action considers that Phelps Dodge's operating performance and financial flexibility will continue constrained given the company's significant leverage to the price of copper. The ability of Phelps Dodge to meaningfully reduce debt levels, improve coverage ratios and restore its balance sheet to historic strengths will, therefore, be stretched out over a longer time frame.

Short-term market fundamentals for copper have weakened during the year and inventories have continued to grow. Given the impact on the US and worldwide economies following the tragic events of September, and further softening in consumer, automotive and housing markets, the outlook for copper remains negative and a surplus position continues to grow in the absence of any producer cutbacks. While the implementation of its energy stabilization program and operating income improvement initiative have enabled Phelps Dodge to reduce unit production costs at its US mining operations from the extremely high levels experienced in 2000, the impact of lower copper prices has outstripped the Company's ability to reduce costs. Debt protection measures continue to erode, with EBITDA to interest of 2.3x for the half year to June 30, 2001. In addition, leverage remains high following the acquisition of Cyprus Amax in late 1999, and the debt/capital ratio stood at 50%, up from 46% at year end 2000. Following its $900 million bond offering in May 2001, proceeds of which were used to repay short-term debt, Phelps Dodge's cash position strengthened to $364 million at June 30, 2001. The additional cash will be used for general corporate purposes including meeting debt maturities in the first quarter of 2002. Liquidity remains further supported by a $1.0 billion bank credit facility, which expires in 2005, and under which there currently are no outstandings.

Reflective of the weak market fundamentals, building surplus in copper inventories and ongoing price pressure, which is unlikely to abate in the near term, the rating outlook remains negative. Phelps Dodge will continue to face significant challenges in reducing debt levels, improving coverage ratios and increasing financial flexibility.

Ratings downgraded are:

Phelps Dodge Corporation: Senior unsecured notes, debentures and IRB's to Baa3 from Baa2, shelf registration for senior unsecured debt to (P)Baa3 from (P)Baa2, junior subordinated debt to (P)Ba1 from (P)Baa3, preferred stock and junior convertible preferred stock to (P)Ba2 from (P)Ba1 and short term debt rating to Prime-3 from Prime-2.

Cyprus Amax Minerals Company: to Baa3 from Baa2, the senior unsecured notes, debentures and equipment trust certificates, all legally assumed by Phelps Dodge

Amax Inc: to Baa3 from Baa2, the senior unsecured notes and industrial revenue/pollution control bonds, all legally assumed by Phelps Dodge.

PD Capital Trust I: Guaranteed trust preferred shelf registration to (P)Ba1 from (P)Baa3

PD Capital Trust II: Guaranteed trust preferred shelf registration to (P)Ba1 from (P)Baa3.

The world's second largest copper producer, Phelps Dodge produced approximately 2.4 billion pounds of copper in 2000. In addition to its operations in the southwest US, PD has operating mines in Chile and Peru. Following the steep run-up in energy prices, most particularly electricity, in fiscal 2000, Phelps Dodge, in 2001, implemented an energy stabilization program. Subsequently in 2001, the company also initiated its operating income improvement program. This latter initiative is expected to contribute $30 million in 2001 and reach a run rate of $150 million annually in 2003. For the second quarter of 2001, implied unit production costs were $0.77/lb, approximately $0.05/lb less than in the first quarter. This downward trend is expected to continue throughout the year with fourth quarter costs anticipated to be roughly $0.09/lb below the first quarter. Despite this improvement, with implied unit production costs running in the low $0.70's/lb range, copper spot prices hovering in the low $0.60's range and likely to trade in these ranges for the balance of the year, and continued high interest expense, Moody's expects that Phelps Dodge will continue to suffer losses for the remainder of 2001. Industry conditions are likely to continue challenging in 2002 and as business fundamentals improve, inventory levels will need to be worked down. Phelps Dodge's good reserve position, quality orebodies and good operational capabilities are expected to allow the company to return to strong earnings performance over the medium term. During this time frame, Moody's anticipates that the Company will continue to manage its working capital and capital and discretionary expenditures in line with market conditions and expectations.

Headquartered in Phoenix, Arizona, Phelps Dodge 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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