http://www.businessweek.com/stories/2006-04-02/phelps-dodge-time-to-make-a-buck-in-the-muck

Magazine

Phelps Dodge: Time To "Make A Buck In The Muck"


Amid the prickly pear cacti and greasewood shrubs of Safford, Ariz., something else is blooming: jobs. Over the past three years, the town's largest employer, mining giant Phelps Dodge Corp. (PD), has added 300 positions at its nearby facilities. Many more are coming as the company hopes to begin construction this summer on the first major new copper mine in the U.S. in over 30 years.

It represents a rich vein of cash for Safford, a hamlet of 9,600 hardy souls in the desert 165 miles southeast of Phoenix. Housing starts are up and new restaurants have opened, bringing new customers to establishments such as Nikki's Hard Rock Beauty Shop. "Our Wal-Mart (WMT) got super-sized," says Sheldon Miller, director of the local chamber of commerce. "It's like jump-starting the economy."

The global boom in commodity prices is breathing new life into communities such as Safford, and giving an even bigger boost to Phelps Dodge, the largest copper miner in the U.S. Copper prices have surged from 78 cents to $2.34 per pound in the past three years, as strong demand from China and India at times exceeded the industry's ability to produce the metal. Last year, Phelps Dodge earned $1.5 billion on sales of $8.2 billion, after posting a loss of $338 million as recently as 2002. The company's stock price has shot up sixfold since then, to a recent 74 per share.

For Chief Executive Officer J. Steven Whisler, the new prosperity is bringing its own challenges. A Phelps Dodge employee for three decades, the 51-year-old Colorado Springs native has seen copper prices ebb and flow and knows the importance of planning for the bad times. He has quadrupled capital spending to $700 million a year, split the stock, paid down over $1.7 billion in debt, and earmarked $935 million to cover retirement, health care, and environmental clean-up costs. That means that the company's pension plan is now fully funded. "Almost every week you pick up a newspaper and an American icon is struggling with its pension liabilities," Whisler says. "That creates stress with our employees."

Even after all of Whisler's shoring up of the balance sheet, he still had a cash pot of $1.9 billion, and just $677 million in debt, at the end of 2005. He has begun returning a big chunk of cash to shareholders: Since December the company has paid out $900 million, or $4.50 per share, in special dividends. It plans to distribute at least another $600 million by the end of 2006.

For some shareholders, though, those efforts aren't enough. Atticus Capital LLC, a New York City-based activist hedge fund that controls 10% of the company's shares (half of that in the form of options), has been pushing the company to embark on a multibillion-dollar stock-repurchase program, arguing that shares are undervalued. In a letter on Feb. 15, Atticus executives Timothy R. Barakett and David Slager told Whisler they had hired outside advisers to consider options, including selling the company out from under him. "A significant buyback of stock is not only the right thing to do for your shareholders; it is your surest guarantee of independence," the letter states. An Atticus spokesman declined comment.

CYCLICAL SAGA

Whisler fired back in a press release, calling Atticus' demands "a reckless bet that could threaten our company's future." Interviewed three weeks later in Phelps Dodge's copper-topped headquarters building in downtown Phoenix, Whisler was less combative but still resolved not to bend in order to please Atticus. "We've seen a few cycles and we'll probably see a few more," he said. "In this business, you have to plan and focus on the down cycle to survive the tough times."

The company has had more than its share of tough times. Founded in 1834 as a New York-based trading house, Phelps Dodge is among the last independent copper producers, as once-storied names such as Anaconda and Kennecott have been snapped up by foreign rivals. BusinessWeek included Phelps Dodge in a 1984 cover story called "The Death of Mining" that featured an ingot with handles on it made to look like a coffin. It was an era Whisler remembers well.

Then a young lawyer at the company's head office, he spent six months in 1983 filling in for striking workers at the massive Morenci mine, about 50 miles northeast of Safford. Whisler drove a dump truck, changed tires, and pulled copper sheets from the smelter. Ultimately, the mine workers voted the union out. "We spent a long time trying to educate employees that copper prices were low, we were losing money, and had to do some different things," Whisler says.

Those different things include deploying new technology. In the 1980s, Phelps Dodge began to replace many of the smoke-belching smelters long used to refine copper with a leaching process that uses chemicals to extract minerals from ore. Whisler is investing $210 million in a new leaching facility at Morenci. By first pulverizing rock to the consistency of sand, the process will allow Phelps Dodge to obtain copper from ore it otherwise couldn't have, extending the life of the 125-year-old mine. The process came out of the company's 130-person technology unit, based in Safford. "We're just trying to make a buck in the muck," says the unit's general manager, Rick Gilbert.

Whisler is also directing capital to plant expansion. He's in the middle of an $850 million addition to a mine in Peru that will triple production there, to 600 million pounds per year by the middle of 2007. By 2008's second half, Whisler hopes to have the $550 million Safford mine up and running.

Getting approvals from state and federal authorities for the new mine took 12 years of persistence and paperwork. The project's manager, Steven Holmes, followed in the footsteps of his now-deceased father, who tried to develop an underground mine in the hills above Safford in the mid-1970s.

The current mine deal involved a controversial land swap with the Bureau of Land Management that environmentalists and a local Apache tribe protested as fraught with ecological risk and a bad deal for the government. In combination with the Peruvian project, the Safford mine should help lift the company's annual copper production by 20%, to 3 billion pounds by 2010.

And therein lies a debate over copper prices and Phelps Dodge's future. Copper bulls argue that continuing demand from construction markets around the world, coupled with the difficulties producers have had adding new supply, should keep prices high or rising for years to come. In 2003, China overtook the U.S. as the world's largest copper consumer.

But copper demand isn't as strong as prices suggest. Last year worldwide usage actually fell 1.5%, according to the International Copper Study Group, a research organization sponsored by copper-producing countries. Robust growth in China, India, and Russia did not offset declining demand in the U.S., Japan, and Europe. On the New York Mercantile Exchange, copper trades at $2 per pound for delivery in February of 2008, high by historical standards but below today's price.

Whisler is thus in the awkward position of cheerleading for his chief product while also trying to temper expectations. He has spoken about a "second copper age," one in which more of the world's 4 billion people lacking plumbing and electrical connections gain access to such copper-dependent services. At the same time, he's cautious. "There's a fair amount of financial money in commodities today," he says. "Is that creating some froth? Yes. How much, I don't think anybody knows."

Can Whisler manage to please both Safford and New York? It's a delicate balancing act for a CEO, even in a boom.

By Christopher Palmeri


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