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Rating Action:

MOODY'S DOWNGRADES SENIOR DEBT RATINGS OF PHELPS DODGE CORPORATION TO Baa2; CONFIRMS SHORT TERM RATINGS AT P-2

22 Feb 2001
MOODY'S DOWNGRADES SENIOR DEBT RATINGS OF PHELPS DODGE CORPORATION TO Baa2; CONFIRMS SHORT TERM RATINGS AT P-2

Approximately $2.4 Billion of Debt Securities Affected.

New York, February 22, 2001 -- Moody's Investors Service downgraded the senior debt ratings of Phelps Dodge Corporation (Phelps Dodge) to Baa2 from A3, concluding its pending review of the company's long term debt ratings for possible downgrade. Phelps Dodge's short term debt rating was not included in the review and is confirmed at the Prime-2 level. The rating outlook is stable. The downgrade reflects the company's weaker than anticipated operating performance, despite improved copper prices during the past year, as well as the erosion of the company's debt protection measurements and continued high leverage stemming from the acquisition of Cyprus Amax Minerals (Cyprus) in late 1999. Moody's recognizes however, that approximately 30% of long-term debt and capital lease obligations relate to project financings at Candelaria, El Abra and Cerro Verde. The rating action also incorporates Moody's expectation that the company's operating performance will remain under pressure through the intermediate term due to sharply higher US energy costs. The stable outlook acknowledges the potential for debt reduction from a proposed sale of the carbon black and cable and wire businesses of its Phelps Dodge Industries (PDI) subsidiary.

With approximately 2.4 billion pounds of copper sold from mine production in 2000, Phelps Dodge is the world's second largest copper producer with a diversified production base. Phelps Dodge's operating performance during 2000 was adversely affected by a number of factors including higher energy costs, operational challenges caused by power interruptions and power curtailments, unusually heavy rain which affected production at the Morenci mine in the 4th quarter, and a significant drop in molybdenum prices, also in the 4th quarter. Although Phelps Dodge was successful in achieving the expected $135 million in synergy savings following its acquisition of Cyprus, and COMEX copper prices averaged $0.84 in 2000, $0.12 above average 1999 prices, these positive fundamentals were offset by the impact on the Company's US operations of higher energy costs for power, natural gas and diesel fuel. Energy-related costs in fiscal 2000 increased $70 million year on year and in the fourth quarter equated to approximately $0.17/lb of copper. Phelps Dodge has indicated that energy costs are expected to increase by an additional $0.02/lb in the first quarter of 2001. The company's implied production costs were $0.78/lb copper in the fourth quarter, which was significantly above historic levels. Phelps Dodge's outlook for continued high energy prices and weak molybdenum fundamentals led the Company to issue WARN notices to its employees at the Chino and Tyrone operations in New Mexico and the Sierrita operations in Arizona on the possible curtailment of production. Although operating cash flow, together with asset sales proceeds, covered capital expenditures and dividends in 2000, it was not of a level sufficient to provide meaningful debt reduction.

In light of its desire to reduce indebtedness, increase financial flexibility, and focus on the metals/mining business, Phelps Dodge is exploring strategic alternatives for PDI's carbon black and wire and cable businesses, including the sale of these businesses. Although Phelps Dodge has always been leveraged to the price of copper, historically, these businesses were viewed as providing a relatively stable source of cash flow to offset the cyclicality of the copper business. EBITDA from PDI has averaged an estimated $232 million per year before restructuring costs the past 3 years. The sale of these businesses would provide funds to reduce debt, strengthen Phelps Dodge's capital structure and allow for improved debt coverage ratios over the near term. From a longer term strategic perspective, however, Moody's believes that Phelps Dodge's ability to achieve its growth and financial return targets will be challenged by the need to bring US production costs into better balance, to replace depleting mining resources in its copper business, or reinvest in less cyclical businesses, and to restore its balance sheet to historic strengths.

Although Moody's expects energy-related cost challenges to continue for the foreseeable term, the stable outlook anticipates that Phelps Dodge will continue to seek to manage this situation and identify savings that will offset higher energy costs. The outlook also anticipates that the carbon black and wire and cable businesses can be sold for reasonable amounts. The timing of such sales and disposition of proceeds remain critical factors. A significant delay in the sale of either the carbon black or wire and cable businesses or failure to apply proceeds to meaningful debt reduction would adversely alter this view.

The ratings downgraded are:

Phelps Dodge Corporation: to Baa2 from A3 senior unsecured notes, debentures, bank credit facility, IRB's and senior unsecured shelf registration.

Cyprus Amax Minerals Company: to Baa2 from A3 senior unsecured notes, debentures and equipment trust certificates, all legally assumed by Phelps Dodge.

Amax Inc: to Baa2 from A3 senior unsecured notes, industrial revenue /pollution control bonds, all legally assumed by Phelps Dodge.

Phelps Dodge's $1.0 billion credit facility provides adequate liquidity for its outstanding commercial paper and near term maturities.

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

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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