P HELPS D ODGE C ORPORATION 2001 A NNUAL R EPORT P HELPS D ODGE O VERVIEW Phelps Dodge Corporation is the world’s second-largest producer of copper, a world leader in the production of molybdenum, the largest producer of molybdenum-based chemicals and continuous-cast copper rod, and among the leading producers of magnet wire and carbon black. The company’s two divisions, Phelps Dodge Mining Company and Phelps Dodge Industries, employ approximately 14,500 people in 27 countries. PHELPS DODGE MINING COMPANY (PDMC) is an industry leader in the safe, efficient and environmentally responsible production of high-quality metals and minerals. PDMC is a fully integrated producer of copper and molybdenum, with mines and processing facilities in North and South America and Europe. As by-products, PDMC also processes other minerals, such as gold, silver and rhenium. Phelps Dodge Exploration Corporation and the Process Technology Center ensure the continued discovery and development of economically viable mineral reserves, and the refinement and creation of production and process technologies. PHELPS DODGE INDUSTRIES (PDI) comprises two global companies—PD Wire & Cable Group and Columbian Chemicals Company—that manufacture engineered products for the energy, telecommunications, transportation and specialty chemicals sectors both in established and emerging markets worldwide. PD Wire & Cable products deliver energy and transmit voice and data communications in the electricity-based economy. Columbian Chemicals Company is among the world’s largest producers of carbon black. Its primary products, rubber and industrial blacks, add strength, durability and improved performance to tires, mechanical rubber goods, inks, paint, plastics, electrical cable and other products. TABLE OF C ONTENTS Results in Brief . 1 Letter to Shareholders . 2 Form 10-K . 9 11-Year Financial Summary . 93 Directory . 98 F ORWARD-LOOKING S TATEMENTS Except for historical information, the matters discussed in this Annual Report and Form 10-K are forward-looking statements regarding future events or the future financial performance of Phelps Dodge Corporation. Actual results may differ materially from those projected. These forward-looking statements represent the company’s judgment as of March 12, 2002, but involve a number of risks and uncertainties. Further explanation of these statements and a review of the factors that may affect them are included in Management’s Discussion and Analysis within Form 10-K on page 31. R ESULTS IN B RIEF (Dollars in thousands, except per share amounts, copper prices and cost) 2001 (a) 2000 (b) 1999 (c) Sales and other operating revenues $ 4,002,400 4,525,100 3,114,400 Operating income (loss) before special items $ (76,500) 294,400 139,800 Operating income (loss) $ (44,900) 237,000 (315,600) Net income (loss) before special items $ (297,500) 72,300 21,700 Net income (loss) $ (275,000) 29,000 (257,800) Earnings (loss) per common share – diluted $ (3.50) 0.37 (4.19) Return on average shareholders’ equity (9.5)% 0.9% (9.9)% Net cash provided by operating activities $ 302,700 511,200 204,500 Capital expenditures and investments $ 311,000 422,300 240,400 Depreciation, depletion and amortization $ 465,300 464,200 329,100 Average number of shares outstanding – diluted (thousands) 78,500 78,800 61,600 AT Y EAR E ND Total assets $ 7,618,800 7,830,800 8,229,000 Total debt $ 2,851,000 2,687,700 2,755,000 Long-term debt $ 2,522,000 1,963,000 2,172,500 Shareholders’ equity $ 2,707,200 3,105,000 3,276,800 Shares outstanding (thousands) 78,700 78,700 78,700 Number of employees 14,500 15,500 16,400 D IVISION R ESULTS Phelps Dodge Mining Company operating income (loss) (d) $ (92,200) 243,300 (301,000) Phelps Dodge Mining Company operating income (loss) before special items (d) $ (90,100) 294,100 84,200 Phelps Dodge Industries operating income (e) $ 74,000 70,300 49,700 Phelps Dodge Industries operating income before special items (e) $ 78,700 121,900 119,700 Copper production (own production – tons) 1,160,100 1,200,300 890,100 Copper sales (own production – tons) 1,170,800 1,200,600 884,200 C OPPER P RICE COMEX annual average spot price per pound – cathodes $ 0.73 0.84 0.72 LME annual average spot price per pound – cathodes $ 0.72 0.82 0.71 Implied unit cost of copper production (f) $ 0.75 0.72 0.67 (a) 2001 operating loss was $76.5 million before a net special gain of $31.6 million comprising gains of $61.8 million for environmental insurance recoveries and $39.9 million for the gain on the sale of Sossego, partially offset by special charges of $29.8 million for restructuring activities, $31.1 million provision for environmental costs and $9.2 million for asset write-downs and other items. 2001 after-tax loss was $297.5 million, or $3.79 per common share, before special gains that totaled $22.5 million, or 29 cents per common share, on an after-tax basis. Return on average shareholders’ equity was (10.2) percent before special gains. (b) 2000 operating income was $294.4 million before special provisions of $51.8 million for restructuring activities and an associated $5.6 million working capital write-down. 2000 after-tax income was $72.3 million, or 92 cents per share, before special provisions that totaled $43.3 million, or 55 cents per common share, on an after-tax basis. Return on average shareholders’ equity was 2.3 percent before special provisions. (c) 1999 operating income was $139.8 million before special provisions of $332.3 million for asset impairments primarily at Phelps Dodge Mining Company, $28.2 million for environmental charges at Phelps Dodge Mining Company and $94.9 million for restructuring activities. 1999 after-tax income was $21.7 million, or 35 cents per common share, before special provisions that totaled $279.5 million, or $4.54 per common share, on an after-tax basis. Return on average shareholders’ equity was 0.8 percent before special provisions. (d) 2001 operating loss for Phelps Dodge Mining Company was $90.1 million before a net special pre-tax charge of $2.1 million comprising special charges of $27.1 million for restructuring activities, a $14.9 million provision for environmental costs and a $39.9 million gain on the sale of Sossego. 2000 operating income was $249.1 million before pre-tax, special charges of $5.8 million for restructuring activities. 1999 operating income was $84.2 million before special provisions of $320.4 million for asset impairments, $28.2 million for environmental charges and $36.6 million for restructuring activities. (e) 2001 operating income for Phelps Dodge Industries was $78.7 million before pre-tax, special charges of $4.7 million for restructuring activities. 2000 operating income was $121.9 million before pre-tax, special charges of $51.6 million for wire and cable restructuring activities. 1999 operating income for Phelps Dodge Industries was $119.7 million before special provisions of $11.9 million for asset impairments, $40.4 million for restructuring activities in the wire and cable segment and $17.7 million at the specialty chemicals segment. (f) Based on Phelps Dodge Mining Company’s all-in operating margin per pound of copper sold (i.e., Phelps Dodge Mining Company operating income (loss) before special items, divided by pounds of Phelps Dodge-mined copper sold, plus or minus the LME copper price). Phelps Dodge Corporation 1 TO O UR S HAREHOLDERS: 2001 was an extremely challenging year for many businesses, including Phelps Dodge Corporation. We reported a loss of $297.5 million before special items. Although we are hopeful worldwide economies will begin to recover later this year, we recognize we are facing a difficult and unpredictable J. Steven Whisler Chairman, President and CEO economic environment. Accordingly, we have taken— “Copper is a building block of society— it is the preferred metal for the conduction and will continue to take—aggressive actions to of electricity, an essential element in telecommunication systems and devices, mitigate the impact of these conditions and build a and a staple in the automotive and technology industries. I am proud to be company that prospers throughout business cycles. involved in an industry that has made We are confident these steps position the company and continues to make such significant contributions to society. Most importantly, well regardless of economic conditions, and we I am proud to lead the talented, committed and innovative people of Phelps Dodge.” remain strong believers in the excellent long-term fundamentals of the copper market. Phelps Dodge Corporation 2 2001: A N E XTRAORDINARILY D IFFICULT YEAR During the year, depressed metal prices and poor 600,000 metric tons in the London Metal Exchange global economic environments significantly impacted (LME) and New York Commodity Exchange (COMEX) Phelps Dodge. Our two main operating divisions, warehouses. Expressed relative to copper usage, Phelps Dodge Mining Company and Phelps Dodge we estimate that world inventories grew from five Industries, confronted steady declines in North weeks of usage in 2000 to more than seven weeks American, European and Asian markets and were by the end of 2001. affected by negative trends on several fronts. The combination of increasing inventories and PHELPS DODGE MINING COMPANY economic downturn pushed the average COMEX • The copper market was severely affected by the copper price down 13 percent in 2001 to an global manufacturing and economic downturn. average price of 73 cents per pound from 84 cents Industrial production, one of the key drivers of copper the previous year. The spot price for copper plunged demand, fell by more than 3 percent in the United as low as 60 cents per pound in November before States and by an estimated 2 percent worldwide.