Jul28 - Phelps Dodge (PD) 108.00 unch: Stalwart copper fundamentals remained intact during Q2 as growth and demand, out of China, with low inventory levels, resulted in record copper prices. This bull environ is making soaring profits for copper producers. Phelps Dodge, world's second largest copper producer / recommended holding in Briefing.com's Active Portfolio
Net income grew to $682.3 mln, or $6.75 per share, up from $226.6 mln, or $2.30 per share last year. Stripping out numerous one-time items, earnings were $4.52 per share, nearly a quarter ahead of expectations, although assisted by a lower tax rate. On the top line, revenues rose 30.3% year/year to $2.15 bln driven virtually all by price. Prices averaged $1.532 per pound on the COMEX in Q2 compared to $1.234 in 2004 and $1.468 in Q1. Molybdenum prices averaged $35.27 per pound compared to $14.57 last year and $31.31 in Q1. With the year expected to end in a deficit of roughly 150,000 metric tons, according to the company, copper prices are likely to remain at these historically high levels.
On demand, China drives as GDP and industrial prod grew 9.5% and 16%. China's output of copper - gains in automobiles to electronic instruments. The caveat for quarter was on the production side. Copper production from PD's mines was 612 mln pounds, below guidance of 630-650 mln. PD suffered from weather-related issues that carried over from Q1, maintenance difficulties, and supplier issues. Costs were also higher due to external factors (energy, freight, supplies, repairs) and internal issues (higher swing production costs, increased mining rate). It's difficult to look at a mining company on a quarterly basis, as there are so many factors that can cause major swings on the demand and supply side from weather to energy prices to geological difficulties.
PD to improve its financial position, which will prepare for the bear-cycle times. cash on hand to $2.8 bln, or $27 per share - up a billion dollars y/y. PD continues to return value back to its shareholders by raising the dividend.
Looking out to Q3, PD stated low inventory levels will keep prices at $1.55 per pound, or better. It noted the shifts in the price may come from the steel industry and supply production disruptions in China. For the full year, PD anticipates demand will increase 2.5-3%, below its previous guidance of 3.5-4%, due to continued weakness in Europe. On the supply side, it anticipates a production shortfall will result in a deficit of 150,000 metric tons.
With PD up more than 30% since we added the name to our Active Portfolio, we would suggest investors trim positions. This stock trends to be quite volatile. As such, it is better to buy on weakness, then add in times of strength. We remain positive on the company as copper fundamentals will remain strong into 2006, providing a backdrop for Phelps Dodge to continue to improve its financial position and to drive earnings and cash flows. Copper prices are likely to remain at elevated levels based on critically low inventory levels, continued demand trends (read China), constraints from scheduled mine depletions, tougher environmental standards, and restrained mine production. Phelps Dodge is also planning for the longer-term, securing several new production projects, which will drive growth into 2007-2008 and beyond. The shares trade at 7.1x current earnings, which is at the low end of their historical range. ---- Kimberly DuBord, Briefing.com
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