Edgar Filing: PHELPS DODGE CORP

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission file number 1-82

PHELPS DODGE CORPORATION

(a New York corporation)

13-1808503
(I.R.S. Employer Identification No.)

One North Central Avenue, Phoenix, AZ 85004-2306

Registrant’s telephone number: (602) 366-8100

Securities registered pursuant to Section 12(b) of the Act:


		Name of each exchange
Title of each class		on which registered


Common Shares, $6.25 par value per share		New York Stock Exchange
Mandatory Convertible Preferred Shares,
$1.00 par value per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act). Yes [x] No [ ].

The aggregate market value of Common Shares of the issuer held by nonaffiliates at April 9, 2003, was approximately $2,892,046,398.

Number of Common Shares outstanding at April 9, 2003: 88,986,043 shares.

Documents Incorporated by Reference:


Document		Location in 10-K

Proxy Statement for 2003 Annual Meeting		Part III

TABLE OF CONTENTS


Part I
	Items 1. and 2. Business and Properties
	PHELPS DODGE MINING COMPANY
		Properties, Facilities and Production
		U.S. Mines
		South American Mines
		Manufacturing and Sales Segment
		Primary Molybdenum Segment
		Worldwide Copper Production by Source, Other Metal Production and Sales Data, and Manufacturing and Sales Production
		Other Mining Segment
		Exploration
		Process Technology
		Other
		Other Mining Investments
		Ore Reserves
		Average Drill-Hole Spacing at Ore Reserve Properties
		Metallurgical Recovery
		Mill and Leach Stockpiles
		Copper and Molybdenum Prices
		Mineralized Material
		Sales and Competition
		Prices, Supply and Consumption
		Costs
		Environmental and Other Regulatory Matters
		PHELPS DODGE INDUSTRIES
		Ownership of Property
		Wire and Cable Segment
		Environmental Matters
		LABOR MATTERS
		RESEARCH AND DEVELOPMENT
		OTHER ENVIRONMENTAL MATTERS
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Executive Officers of Phelps Dodge Corporation
Part II
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Disagreements on Accounting and Financial Disclosure
		MANAGEMENT’S DISCUSSION AND ANALYSIS
		RESULTS OF PHELPS DODGE MINING COMPANY
		RESULTS OF PHELPS DODGE INDUSTRIES
		OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS
		CHANGES IN FINANCIAL CONDITION; CAPITALIZATION
		CAPITAL OUTLAYS
		INFLATION
		DIVIDENDS AND MARKET PRICE RANGES
		QUARTERLY FINANCIAL DATA
		PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
		REPORT OF MANAGEMENT
		REPORT OF INDEPENDENT ACCOUNTANTS
		REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
		STATEMENT OF CONSOLIDATED OPERATIONS
		CONSOLIDATED BALANCE SHEET
		CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		FINANCIAL DATA BY GEOGRAPHIC AREA
Part III
	Items 10, 11, 12 and 13.
	Item 14. Controls and Procedures
	Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
SIGNATURES
Certifications
EX-11
EX-12
EX-21
EX-23
EX-24

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PHELPS DODGE CORPORATION

Annual Report on Form 10-K
For the Year Ended December 31, 2002

Table of Contents


					Page

Part I
	Items 1. and 2. Business and Properties					1
		Phelps Dodge Mining Company				2
			Properties, Facilities and Production			3
				U.S. Mines		3
				South American Mines		5
				Manufacturing and Sales		6
				Primary Molybdenum Segment		7
				Worldwide Copper Production by Source, Other Metal Production and Sales Data, and Manufacturing and Sales Production		7
				Phelps Dodge Copper Production Data, by Source		9
				Phelps Dodge Other Metal Production and Sales		12
				Phelps Dodge Manufacturing and Sales Production		13
				Other Mining Segment		14
				Exploration		14
				Process Technology		14
				Other		15
				Other Mining Investments		15
			Ore Reserves			16
			Average Drill Hole Spacing at Ore Reserve Properties			18
			Metallurgical Recovery			18
			Mill and Leach Stockpiles			19
			Copper and Molybdenum Prices			21
			Mineralized Material			22
			Sales and Competition			23
			Prices, Supply and Consumption			24
			Costs			25
			Environmental and Other Regulatory Matters			26
			Ownership of Property			32
		Phelps Dodge Industries				32
			Specialty Chemicals Segment			33
			Wire and Cable Segment			34
			Environmental Matters			36
		Labor Matters				36
		Research and Development				37
		Other Environmental Matters				37
	Item 3. Legal Proceedings					39
	Item 4. Submission of Matters to a Vote of Security Holders					47
	Executive Officers of Phelps Dodge Corporation					47
Part II
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters					48

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				Page

	Item 6. Selected Financial Data				48
	Item 7. Management’s Discussion and Analysis
		Management’s Discussion and Analysis			51
			Results of Phelps Dodge Mining Company		64
			Results of Phelps Dodge Industries		85
			Other Matters Relating to the Statement of Consolidated Operations		88
			Changes in Financial Condition; Capitalization		90
			Capital Outlays		105
			Inflation		105
			Dividends and Market Price Ranges		105
			Quarterly Financial Data		106
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk				51
	Item 8. Financial Statements and Supplementary Data
		Index to Consolidated Financial Statements			110
		Report of Management			110
		Report of Independent Accountants			111
		Report of Independent Accountants on Financial Statement Schedule			111
		Statement of Consolidated Operations			112
		Consolidated Balance Sheet			113
		Consolidated Statement of Cash Flows			114
		Consolidated Statement of Shareholders’ Equity			115
		Notes to Consolidated Financial Statements			116
		Financial Data by Geographic Area			163
		Financial Data by Business Segment			164
	Item 9. Disagreements on Accounting and Financial Disclosure				N/A
Part III.
	Item 10. Directors and Executive Officers of the Registrant				174
	Item 11. Executive Compensation				174
	Item 12. Security Ownership of Certain Beneficial Owners and Management				174
	Item 13. Certain Relationships and Related Transactions				174
	Item 14. Controls and Procedures				174
	Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K				174
	Valuation and Qualifying Accounts and Reserves				178
	Signatures				179
	Certifications				179

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PHELPS DODGE CORPORATION

2002 Annual Report on Form 10-K

Part I

Restatements

Phelps Dodge Corporation (the Company, which also may be referred to as Phelps Dodge, PD, we, us or ours) identified certain accounting matters relating to our December 31, 2001 and 2000, Consolidated Financial Statements that require restatement. The matters subject to adjustment, which are summarized below and discussed in Note 22 to the Consolidated Financial Statements increased retained earnings by $22.9 million at December 31, 2001 to reflect the after-tax effect of such items. These adjustments were necessary (i) to change the Company’s units-of-production depreciation rate methodology for mining, smelting and refining assets to exclude estimates of future capital as well as any material other than proven and probable ore reserves, and to depreciate short-lived assets on a straight-line basis over their estimated useful lives, less salvage value; (ii) to adjust the fair value estimates of acquired reclamation obligations and to recognize the related annual accretion expense, and to revise certain reclamation cost estimates and associated charges for information obtained in 2001; (iii) to capitalize as inventory copper contained in low-grade mill and leach stockpiles, and consequent in-process materials being converted to salable products; (iv) to reverse a loss contingency reserve associated with legal matters; and (v) to increase the valuation allowance for deferred tax assets. Additionally, as discussed in Note 21, Business Segment Data, our presentation of reportable segment information for Phelps Dodge Mining Company for 2001 and 2000 has been revised to reflect additional segments.

Items 1. and 2. Business and Properties

The Company is the world’s second largest producer of copper, among the world’s largest carbon black and magnet wire producers, and is the world’s largest producer of continuous-cast copper rod. On October 16, 1999, we acquired Cyprus Amax Minerals Company (Cyprus Amax or Cyprus). As a result of the acquisition, we also became one of the world’s largest producers/processors of molybdenum and molybdenum products.

The Company consists of two major divisions: (i) Phelps Dodge Mining Company (PDMC) and (ii) Phelps Dodge Industries (PDI).

	(i)		PDMC includes our worldwide, vertically integrated copper operations from mining through rod production, marketing and sales; molybdenum operations from mining through conversion, marketing and sales; other mining operations and investments; and worldwide mineral exploration and development programs. PDMC comprises 11 reportable segments – Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre and Tyrone (located in the United States), Candelaria, Cerro Verde and El Abra (located in South America), Manufacturing and Sales, Primary Molybdenum and Other Mining.

	(ii)		PDI comprises two reportable segments – Specialty Chemicals and Wire and Cable.

In 2002, PDMC produced 1,028,800 tons of copper for our account from worldwide mining operations, and an additional 246,800 tons of copper for the accounts of our minority interest joint-venture partners. Gold, silver, molybdenum, rhenium and sulfuric acid are by-products of our copper and molybdenum operations. Production of copper for our own account from our U.S. operations constituted approximately 49 percent of the copper mined in the United States in 2002. Much of our U.S. cathode copper production, together with additional copper purchased from others, is used to produce continuous-cast copper rod, the basic feed for the electrical wire and cable industry. We also explore for metals and minerals throughout the world.

Our South American mining operations include Candelaria and El Abra, major copper mines in Chile, the Cerro Verde copper mine in Peru, and other operations and investments in Chile and Peru. These operations produce a variety of metals and minerals including copper, gold and silver.

High-purity, chemical-grade molybdenum concentrate is produced at our Henderson mine in Colorado. Most of the concentrate produced at Henderson is roasted at our Fort Madison roasters and then further processed at the facility’s chemical plant into value-added molybdenum chemical products. In addition, some of the concentrate is processed into salable molysulfide for use primarily in the lubricant industry.

Molybdenum concentrate is also produced as a by-product at two of our U.S. copper operations.

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This concentrate is generally roasted at one of our three roasting operations to produce technical grade molybdic oxide for sale into the metallurgical markets (i.e., steel industries).

In addition to our mining interests, we produce engineered products principally for the global energy, telecommunications, transportation and specialty chemicals sectors through PDI.

We produce specialty chemicals at operations in North America, Europe, South America and Asia through Columbian Chemicals Company, one of the world’s largest producers of carbon black. Carbon black is a reinforcing agent in natural and synthetic rubber that increases the service life of tires, hoses, belting and other products for the rubber industry. We also produce specialty carbon black for other industrial applications such as pigments for printing, coatings, plastics and other non-rubber applications.

Our Wire and Cable segment has operations in the United States, Latin America, Asia, Europe and Africa. This segment produces magnet wire and other copper products for sale principally to original equipment manufacturers for use in electrical motors, generators, transformers and other products, and manufactures copper and aluminum energy cables, telecommunications cables and specialty conductors.

Note 21 to our Consolidated Financial Statements contained herein includes financial data for each of the last three years relating to our business segments, including data by geographic area.

Phelps Dodge was incorporated as a business corporation under the laws of the state of New York in 1885. Our world headquarters is located in Phoenix, Arizona, and is a leased property. We employed approximately 13,500 people worldwide on December 31, 2002.

Throughout this document, unless otherwise stated, all references to tons are to short tons, and references to ounces are to troy ounces.

Available Information. Phelps Dodge files annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the SEC). You may read and copy any document we file at the SEC’s public reference room at Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains a Web site that contains annual, quarterly and current reports, proxy statements and other information that issuers (including Phelps Dodge) file electronically with the SEC. The SEC’s Web site is http://www.sec.gov.

Phelps Dodge’s Web site is http://www.phelpsdodge. com. Phelps Dodge makes available free of charge through its Internet site, via a link to the SEC’s Web site at http://www.sec.gov, its annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; Forms 3, 4 and 5 filed on behalf of directors and executive officers; and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

Phelps Dodge makes available free of charge on http://www. phelpsdodge.com its most recent annual report on Form 10-K, its quarterly reports on Form 10-Q for the current fiscal year, its most recent proxy statement and its most recent summary annual report to shareholders, although in some cases these documents are not available on our site as soon as they are available on the SEC’s site. You will need to have on your computer the Adobe Acrobat Reader software to view some of these documents, which are in PDF format. If you do not have Adobe Acrobat, a link to Adobe’s Internet site, from which you can download the software, is provided. The information on Phelps Dodge’s Web site is not incorporated by reference into this report.

PHELPS DODGE MINING COMPANY

PDMC is our international business division that comprises our vertically integrated copper operations from mining through rod production, primary molybdenum operations through conversion, marketing and sales, and worldwide exploration. PDMC comprises 11 reporting segments.

Our copper mines comprise five reportable segments in the United States (Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, and Tyrone) and three reportable segments in South America (Candelaria, Cerro Verde and El Abra). These segments include open-pit mining, sulfide ore concentrating and electrowinning. In addition, they produce gold and silver, and the Bagdad and Sierrita mines also produce molybdenum and rhenium, as by-products.

The Manufacturing and Sales segment consists of conversion facilities including our smelters, refineries and rod mills, as well as sales and marketing. The Manufacturing and Sales segment sells copper to others primarily as rod, cathode or concentrate, and as rod to our Wire and Cable segment. In addition, at times it smelts and refines copper and produces copper rod for customers on a toll basis. Toll

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arrangements require the tolling customer to deliver appropriate copper-bearing material to our facilities, which we then process into a product that is returned to the customer. The customer pays PDMC for processing its material into the specified products.

The Primary Molybdenum segment consists of the Henderson and Climax mines and related conversion facilities. This segment is an integrated producer of molybdenum, with mining, roasting and processing facilities producing high-purity, molybdenum-based chemical and metallurgical products. In addition, at times it roasts and/or processes material on a toll basis. Toll arrangements require the tolling customer to deliver appropriate molybdenum-bearing material to our facilities, which we then process into a product that is returned to the customer. The customer pays PDMC for processing its material into the specified products.

Other Mining segment includes our worldwide mineral exploration and development programs, a process technology center that directs its activities at improving existing processes and developing new cost-competitive technologies, and other ancillary operations.

Our five reportable U.S. Mines segments (Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, and Tyrone), the Manufacturing and Sales segment and the Other Mining segment are discussed herein together, where appropriate, as U.S. Mining Operations.

Our U.S. Mining Operations (defined above) and our South American Mines (Candelaria, Cerro Verde and El Abra segments) are discussed herein together, where appropriate, as our Worldwide Copper Mining Operations.

Properties, Facilities and Production

Following is a map indicating the approximate location of PDMC’s U.S. copper and molybdenum mines:

United States Mines

U.S. Mines

We produce electrowon copper cathode at solution extraction/electrowinning (SX/EW) operations near Tyrone and Silver City, New Mexico (Tyrone and Chino mines, respectively); and Morenci, Miami (currently curtailed), Bagdad (partially curtailed) and Green Valley (partially curtailed), Arizona (Morenci, Miami, Bagdad and Sierrita mines, respectively). We produce copper concentrate from open-pit mines and concentrators located at Bagdad and Green Valley, Arizona (Bagdad and Sierrita mines, respectively); and Silver City, New Mexico (currently curtailed, Chino mine).

We are the world’s leading producer of copper using the SX/EW process. In 2002, we produced a total of 578,700 tons of cathode copper at our SX/EW facilities in the United States, compared with 585,300 tons in 2001 and 510,200 tons in 2000. SX/EW is a cost-effective process for extracting copper from cer-

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tain types of ores. SX/EW is a major factor in our continuing efforts to maintain internationally competitive costs. Our total annual capacity of electrowon copper cathode production currently is 410,000 tons at Morenci, 105,000 tons at Miami, 75,000 tons at Chino, 84,000 tons at Tyrone, 25,000 tons at Sierrita and 16,000 tons at Bagdad.

The Morenci complex in southeastern Arizona comprises an open-pit mine, a concentrator, four solution extraction facilities and three electrowinning tankhouses. We operate Morenci and own an 85 percent undivided interest; the remaining 15 percent interest is owned by Sumitomo Metal Mining Arizona, Inc. (Sumitomo), a jointly owned subsidiary of Sumitomo Metal Mining Co., Ltd., and Sumitomo Corporation. Each partner takes in kind its share of Morenci production. Morenci is the largest copper producing operation in North America.

In 2001, the Company completed its $220 million mine-for-leach project at Morenci. As a result, the Morenci concentrator was placed on care-and-maintenance status. The crushing facility at the Metcalf concentrator continues to process approximately 85,000 tons of ore daily for the expanded leach operation. The new mine-for-leach facilities increased Morenci’s annual electrowon cathode production capacity to 410,000 tons. Under certain favorable economic circumstances, Morenci may produce concentrates from primary sulfide ores.

In 1999, the Metcalf concentrator was permanently closed as a result of rebalancing PDMC operations. After the 1999 acquisition of Cyprus Amax and the Company’s decision to convert Morenci to mine-for-leach processing, it became clear that the Metcalf concentrator would not likely operate in the future. This resulted in a pre-tax impairment of $88 million recorded in 1999.

We are presently a party to litigation that could adversely impact the allocation of available water supplies for the Morenci operation and our other properties in Arizona. (Refer to Item 3, Legal Proceedings, for information concerning the status of these proceedings.)

Our wholly owned Bagdad mine in northwestern Arizona primarily mines copper sulfide ore. It produces copper and molybdenum concentrates and minor amounts of silver. The operation consists of an open-pit mine, sulfide ore concentrator producing copper and molybdenum concentrates, and a leaching system with an SX/EW operation producing copper cathode. In January 2002, as a result of the then-current economic environment, Bagdad’s mill throughput was curtailed temporarily to approximately one-half capacity. At the time of this curtailment, we estimated that approximately 70,500 tons of annual copper production and 7 million pounds of annual by-product molybdenum production would be reduced. In 2002, copper production at Bagdad exceeded our estimates due to improved production from our SX/EW operation, higher ore grades from normal mine planning improvements, and improvements in copper recovery and improved milling efficiency resulting from Quest for Zero actions. As a result, 2002 annual copper production was reduced by approximately 44,600 tons. Throughput at Bagdad also exceeded half capacity at various times during the year, primarily driven by smelter and sulfuric acid supply requirements.

In February 2002, we announced that Bagdad would construct an approximately $40 million copper concentrate leaching demonstration plant designed to recover commercial-grade copper cathode from chalcopyrite concentrates. The plant is scheduled to commence production in the second quarter of 2003. At full capacity, the plant is expected to produce 35 million pounds of copper cathode from concentrate annually. If successful, this technique could assist in our long-term cost reduction strategy.

We own the Sierrita mine near Green Valley, Arizona. The facility consists of an open-pit mine, sulfide ore concentrator producing copper and molybdenum concentrates, two molybdenum roasters and a rhenium processing facility. Sierrita also uses an oxide and low-grade sulfide ore stockpile leaching system with an SX/EW operation to produce copper cathode. Sierrita’s on-site roasters process molybdenum concentrates produced at Sierrita and Bagdad as well as purchased concentrates or concentrates tolled for third parties. The resulting metallurgical grade molybdic oxide and related products are either packaged for shipment to customers worldwide or transported to other Phelps Dodge facilities for further processing. At year-end 2001, as a result of the then-current economic environment, mill throughput at the Sierrita mine was reduced temporarily to approximately one-half of its capacity. Our estimates at the time were that these actions would eliminate approximately 49,600 tons of annual copper production and 7 million pounds of by-product molybdenum. In 2002, copper production at Sierrita exceeded our estimates due to improved production from higher ore grades from normal mine planning improvements, improvements in copper recovery and improved milling efficiency resulting from Quest for Zero actions, and smelter and acid supply requirements. As a result, 2002 annual copper production was reduced by approximately 44,200 tons.

Our wholly owned operations at Miami, Arizona, consist of an open-pit copper mine, an SX/EW operation producing copper cathode, a smelter, an

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acid plant, an electrolytic refinery and a copper rod plant. In January 2002, as a result of the then-current economic environment, the Miami mine and refinery were closed temporarily. Our estimate at the time was that this curtailment action would eliminate approximately 49,600 tons of annual copper production. In 2002, Miami’s copper production was improved by higher than expected output from residual leach stockpiles, various other improvements resulting from Quest for Zero actions, and the use of smelter weak acid in leaching operations. As a result, 2002 annual copper production was reduced by approximately 30,400 tons.

We operate an open-pit copper mine, concentrator and SX/EW facility near Silver City, New Mexico, and a smelter in Hurley, New Mexico, that are owned by Chino Mines Company (Chino), a general partnership in which we hold a two-thirds interest. Heisei Minerals Corporation (Heisei), a subsidiary of Mitsubishi Materials Corporation and Mitsubishi Corporation, owns the remaining one-third interest in Chino. Each partner purchases its proportionate share of Chino’s copper production each month. Beginning in late 1998 and through the first half of 1999, production was curtailed resulting in a reduction of approximately 35,000 tons of annual copper production. In March 2001, the concentrator was temporarily shut down, and in January 2002, the Chino mine and smelter were closed temporarily. Our estimates at the time were that these actions would eliminate approximately 144,400 tons of annual copper production. We anticipated that residual leaching operations at Chino would become uneconomic by mid-year 2002. However, copper recoveries from leach stockpiles have been better than anticipated and leaching operations are now expected to remain economic for several more years, even with the mine curtailed. As a result, 2002 annual copper production was reduced by approximately 97,400 tons.

Phelps Dodge operates its wholly owned Tyrone open-pit mine and SX/EW plant near Tyrone, New Mexico. Tyrone has been a mine-for-leach operation since 1992. The Tyrone mine is currently operating at less than full capacity due to current unfavorable market conditions.

In February 1998, we acquired Cobre Mining Company Inc. (Cobre) located in southwestern New Mexico adjacent to our Chino operations. The primary assets of Cobre include an open-pit copper mine, two underground copper mines, two mills, and the surrounding 11,000 acres of land, including mineral rights. In late 1998 and early 1999, all of these operations were indefinitely suspended, reducing copper production by approximately 35,000 tons per year. The entire Cobre operation remains on care-and-maintenance status. In December 2002, the Company recognized an impairment charge to write-down Cobre’s assets by $115.5 million (before and after taxes). We took this action after revising mine plans and assessing recoverability. The impairment assessment used a copper price lower than the prior-year assumption. The copper price used was based on the historical moving average copper price for the past 10 years, which we believe to be indicative of full economic and pricing cycles for copper. The amount of Cobre’s impairment was determined through an assessment of projected discounted cash flows for the remaining ore reserves.

South American Mines

We produce electrowon copper cathode at SX/EW operations near Arequipa, Peru; and near Calama, Chile. We produce copper concentrate from open-pit mines and concentrators located near Copiapó, Chile. We also produce copper concentrate from two underground mines and a concentrator located near Copiapó, Chile (currently curtailed).

Following is a map indicating the approximate location of PDMC’s South American mines:

South American Mines

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We operate the Candelaria mine located near Copiapó in the Atacama Desert of northern Chile. The operation presently consists of an open-pit copper mine, concentrator, port and associated facilities. We own an 80 percent partnership interest in Candelaria, a Chilean contractual mining company, through Phelps Dodge Candelaria, Inc., a wholly owned subsidiary. Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation own the remaining 20 percent interest.

Phelps Dodge owns a 51 percent partnership interest in Sociedad Contractual Minera El Abra (El Abra), a Chilean contractual mining company. El Abra holds mining concessions over more than 33,000 acres of land near Calama in the copper-rich Second Region of northern Chile. The remaining 49 percent is owned by the state-owned copper enterprise Corporación Nacional del Cobre de Chile (CODELCO). The El Abra operation, which began commercial production in the second half of 1996, consists of a mine-for-leach, open-pit mining operation that uses three stages of crushing prior to leaching, an on/off leach pad, and an SX/EW operation to produce copper cathode. In 2001, El Abra completed a $70 million project (including our partner’s share) to leach uncrushed run-of-mine (ROM) material. The ROM project allows El Abra to maintain tankhouse design capacity. ROM production began in January 2002, with full production from the project achieved in the second half of 2002.

We own approximately 82 percent of the common stock of Sociedad Minera Cerro Verde S.A.A. (Cerro Verde). Compañia de Minas Buenaventura S.A., a long-established Peruvian mining concern, owns approximately 9 percent and the employees of Cerro Verde and other shareholders own approximately 9 percent. The Cerro Verde operation, located approximately 30 kilometers southwest of Arequipa, Peru, consists of two open pits, Cerro Verde and Santa Rosa, a heap-leach operation and an SX/EW operation to produce copper cathode. The ore is processed through primary, secondary and tertiary crushers and placed on a leach pad after agglomeration.

Until the fourth quarter of 1998, we produced copper concentrate from two underground mines and a concentrator located near Copiapó, Chile, through our wholly owned Chilean subsidiary, Compañía Contractual Minera Ojos del Salado (Ojos del Salado). We suspended operations indefinitely at Ojos del Salado in October 1998, resulting in a reduction of more than 22,000 tons of annual copper production. The Ojos del Salado operations remain on care-and-maintenance status.

In 2002, we produced a total of 343,500 tons of cathode copper at our SX/EW facilities in South America, compared with 324,700 tons in 2001 and 296,100 tons in 2000. Our total annual capacity of electrowon copper cathode production currently is 248,000 tons at El Abra and 95,000 tons at Cerro Verde.

Manufacturing and Sales Segment

We own and operate a copper smelter in Miami, Arizona, and, through Chino Mines Company, a two-thirds interest in the Chino smelter in Hurley, New Mexico. In January 2002, the Chino smelter was temporarily closed. We smelt virtually all of our share of our U.S. copper concentrate production and, depending on market circumstances and internal production requirements, some concentrate production from Candelaria. In addition, we may purchase concentrate to keep our smelters operating at efficient levels.

In September 1999, we suspended operations at our Hidalgo smelter in Hidalgo County, New Mexico, due to a general lack of concentrate availability in the United States and depressed copper market fundamentals (this suspension was coincident with the closure of the Metcalf concentrator as previously discussed). As a result of the successful acquisition of Cyprus Amax and the decision to convert Morenci to a mine-for-leach operation, we concluded that Hidalgo would likely not be operated in its historic configuration in the foreseeable future. Accordingly, a pre-tax write-down of the Hidalgo assets of $201.5 million was taken in 1999. However, it was anticipated at the time that Hidalgo may have a future use for sulfuric acid production for the Company’s leach operations. In December 2002, the Company recognized an impairment charge to write-down Hidalgo’s assets by an additional $12.9 million (before and after taxes). As a result of the Company’s ability to use acid more efficiently and an updated assessment of PDMC’s long-term acid production and consumption balance, the Company determined that Hidalgo probably will not be reconfigured to produce acid as originally anticipated and that the net book value of Hidalgo assets probably would not be recovered. Hidalgo’s power facilities will continue to generate electricity when needed, and the facility will continue to be a backup alternative as a reliable producer of acid if conditions warrant. The remaining Hidalgo assets were written down to their estimated fair value. The Company also recognized a $7.0 million (before and after taxes) charge for the estimated remaining costs of its closure obligation at Hidalgo.

We refine our share of anode copper production from our smelters at our refineries in El Paso, Texas, and Miami, Arizona. During 2002, 2001 and 2000, the El Paso refinery operated significantly below capacity due to the late 1999 third quarter closing of the Hidalgo smelter. The closure of the Hidalgo smelter resulted not only in a curtailment of operations

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at the El Paso refinery, but also a reduction of approximately 200 refinery jobs. Our Miami refinery has an annual production capacity of about 200,000 tons of copper cathode, and the El Paso refinery has an annual production capacity of about 450,000 tons of copper cathode. The total combined capacity of about 650,000 tons of electrolytic copper per year is sufficient to refine all the anode copper we produce for our account at our operating smelters, as well as anodes from other customers that we refine on a toll basis. As a result of production curtailments announced in the fourth quarter of 2001, the Miami refinery temporarily was closed. Our refineries also produce copper sulfate, nickel sulfate, copper telluride, and autoclaved slimes material containing gold, silver, selenium, platinum and palladium.

We are the world’s largest producer of continuous-cast copper rod, the basic feed for the electrical wire and cable industry. Most of our refined copper, and additional purchased copper, is converted into rod at our continuous-cast copper rod facilities in El Paso, Texas; Norwich, Connecticut; Miami, Arizona; and Chicago, Illinois. Our four plants have a collective annual capacity to convert more than 1.1 million tons of refined copper into rod and other refined copper products.

Primary Molybdenum Segment

See United States Mines map on page 3 for the location of our molybdenum mines.

Phelps Dodge owns the underground Henderson molybdenum mine near Empire, Colorado. The operation consists of an underground block-caving mine where molybdenite ore is mined and transported to a conventional sulfide concentrator. The concentrator is capable of operating at a rate of 32,000 tons of ore per day, producing molybdenum disulfide concentrate containing up to 58 percent molybdenum. Most of the concentrate is shipped to our Fort Madison roasting and chemical processing facility in Iowa where a number of different high-purity products are made for final sale to customers. A portion of Henderson’s production is further refined and sold to customers as molysulfide. In 1999, Henderson’s mine was modernized (i) to replace a 20-year old underground and surface rail transportation system with a modern conveyor and (ii) to develop a new production level using more efficient high-lift caving methods.

In May 2000, as a result of an oversupply of molybdenum and continued low prices in the world market, Phelps Dodge announced a plan to curtail molybdenum production by approximately 20 percent and reduce its Henderson workforce by approximately 130 workers. In 2002, the previously announced production curtailment remained essentially in place.

Phelps Dodge also owns the Climax molybdenum mine near Leadville, Colorado. The operation consists of both an underground and open-pit mine, and a 16,000 ton-per-day concentrator. The Climax molybdenum mine had been placed on care-and-maintenance in 1995 by the predecessor owner. At year-end 2002, as well as at the acquisition, we expected to bring Climax into production concurrent with the exhaustion of the Henderson molybdenum mine reserves for continued long-term primary molybdenum supply for the chemicals business. The property occupies more than 14,000 acres.

Phelps Dodge processes molybdenum concentrates at its conversion plants in the United States and Europe into such products as technical grade molybdic oxide, ferromolybdenum, pure molybdic oxide, ammonium molybdates and molysulfide. The Company operates molybdenum roasters at Green Valley, Arizona; Fort Madison, Iowa; and Rotterdam, The Netherlands.

The Fort Madison, Iowa, facilities consist of two molybdenum roasters, a sulfuric acid plant, a metallurgical (technical oxide) packaging facility, and a chemical conversion plant, which includes a wet chemicals plant and sublimation equipment. In the chemical plant, molybdic oxide is further refined into various high-purity molybdenum chemicals for a wide range of uses by chemical and catalyst manufacturers. The Fort Madison facilities produce ammonium dimolybdate, pure molybdic oxide, ammonium heptamolybdate, ammonium octamolybdate, sodium molybdate, sublimed pure molybdic oxide and molysulfide.

The Rotterdam conversion plant consists of a molybdenum roaster, sulfuric acid plant, a metallurgical packaging facility and a chemical conversion plant. The plant produces metallurgical products primarily for third parties. Ammonium dimolybdate and pure molybdic oxide are produced in a wet chemical plant.

We also produce ferromolybdenum and molysulfide at our conversion plant located in Stowmarket, United Kingdom, both for European and worldwide customers. The plant is operated both as an internal and external customer tolling facility.

Worldwide Copper Production by Source, Other Metal Production and Sales Data, and Manufacturing and Sales Production

The following tables show our worldwide copper production by source for the years 1998 through 2002; aggregate production and sales data for copper,

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gold, silver, molybdenum and sulfuric acid from these sources for the same years; annual average copper and molybdenum prices; and production from our smelters and refineries. Major changes in operations during the five-year period included:

	•		completion of the run-of-mine leach project at El Abra in 2002;

	•		curtailment of Chino operations beginning in the 1998 fourth quarter, followed by temporary shut-down of the concentrator in March 2001 and temporary closure of the mine and smelter in January 2002;

	•		temporary closure of the Miami mine and refinery in January 2002;

	•		curtailment of mill throughput at Sierrita and Bagdad to approximately one-half capacity in January 2002;

	•		conversion of Morenci operations to mine-for-leach during 1999 and 2000, with completion in the 2001 first quarter;

	•		partial curtailment of Henderson operations beginning in the 2000 second quarter;

	•		acquisition of Cyprus Amax on October 16, 1999 (the primary assets acquired included the Bagdad, Sierrita, Miami, El Abra and Cerro Verde copper mines; the Henderson and Climax molybdenum mines; a copper smelter, refinery and two rod plants; three molybdenum roasting operations and four molybdenum conversion facilities);

	•		permanent closure of Morenci’s Metcalf concentrator at the end of 1999;

	•		temporary closure of the Hidalgo smelter facilities in September 1999;

	•		acquisition of Cobre in February 1998 followed by suspension of underground mining in October 1998 and the remaining facilities in March 1999;

	•		suspension of operations at Ojos del Salado in October 1998; and

	•		completion of the Southwest solution extraction project at Morenci in the 1998 third quarter.

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Phelps Dodge Copper Production Data, by Source (a)
(thousand tons)


				2002		2001		2000		1999		1998

Material mined (b)
		Morenci			248,505		281,474		274,871		297,872		288,200
		Bagdad			42,912		63,680		69,101		16,233		—
		Sierrita			23,066		60,869		75,319		15,875		—
		Miami			—		32,702		46,446		13,787		—
		Chino			220		59,277		61,519		44,562		117,432
		Cobre			—		—		—		4,558		15,763
		Tyrone			45,515		73,990		113,937		113,422		108,359
		Candelaria			109,211		126,509		128,464		139,886		131,155
		Ojos del Salado			—		—		—		—		1,336
		Cerro Verde			75,982		68,685		61,400		11,459		—
		El Abra			76,831		82,737		67,786		10,029		—

			Total material mined		622,242		849,923		898,843		667,683		662,245
	Less minority participants’ shares (c):
		Morenci			37,276		42,220		41,231		44,681		43,230
		Chino			73		19,758		20,506		14,854		39,144
		Candelaria			21,842		25,302		25,693		27,977		26,231
		El Abra			37,647		40,541		33,215		4,914		—

			Net Phelps Dodge share		525,404		722,102		778,198		575,257		553,640

Mill ore processed
		Morenci			—		4,301		26,698		38,283		47,108
		Bagdad			19,783		31,667		29,846		6,211		—
		Sierrita			21,439		38,133		38,319		8,046		—
		Chino			—		3,109		13,889		16,056		16,431
		Cobre			—		—		—		654		4,291
		Candelaria			28,507		27,365		26,165		22,405		24,432
		Ojos del Salado			—		—		—		—		1,210

			Total mill ore processed		69,729		104,575		134,917		91,655		93,472
	Less minority participants’ shares (c):
		Morenci			—		645		4,004		5,742		7,066
		Chino			—		1,036		4,630		5,352		5,477
		Candelaria			5,701		5,473		5,233		4,481		4,886

			Net Phelps Dodge share		64,028		97,421		121,050		76,080		76,043

See footnote explanations on page 13.

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Phelps Dodge Copper Production Data, by Source (a)
(thousand tons)


				2002		2001		2000		1999		1998

Leach ore placed in stockpiles
		Morenci			241,955		258,202		236,696		250,680		232,120
		Bagdad			328		696		—		—		—
		Sierrita			170		14,347		18,386		4,307		—
		Miami			—		10,208		11,032		2,379		—
		Chino			198		31,009		12,875		12,400		44,734
		Tyrone			34,835		27,513		51,446		55,693		55,086
		Cerro Verde			24,096		23,436		17,833		2,642		—
		El Abra			71,224		75,875		62,042		8,678		—

			Total leach ore placed in stockpiles		372,806		441,286		410,310		336,779		331,940
	Less minority participants’ shares (c):
		Morenci			36,293		38,729		35,503		37,602		34,817
		Chino			66		10,336		4,292		4,133		14,911
		El Abra			34,900		37,179		30,401		4,252		—

			Net Phelps Dodge share		301,547		355,042		340,114		290,792		282,212

Grade of ore mined - percent copper
		Morenci - mill			—		0.78		0.71		0.68		0.68
		Morenci - leach			0.28		0.30		0.26		0.26		0.26
		Bagdad - mill			0.43		0.43		0.43		0.43		—
		Bagdad - leach			0.29		0.28		—		—		—
		Sierrita - mill			0.32		0.29		0.29		0.29		—
		Sierrita - leach			0.21		0.22		0.20		0.20		—
		Miami - leach			—		0.41		0.71		0.52		—
		Chino - mill			—		0.79		0.83		0.59		0.68
		Chino - leach			0.29		0.48		0.22		0.25		0.18
		Cobre - mill			—		—		—		1.00		0.79
		Tyrone - leach			0.35		0.29		0.26		0.28		0.26
		Candelaria - mill			0.84		0.96		0.93		1.22		1.07
		Ojos del Salado - mill			—		—		—		—		1.64
		Cerro Verde - leach			0.55		0.53		0.59		0.78		—
		El Abra - leach			0.50		0.60		0.56		0.79		—
			Average copper grade - mill		0.56		0.54		0.59		0.75		0.80
			Average copper grade - leach		0.35		0.38		0.33		0.28		0.25

See footnote explanations on page 13.

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Phelps Dodge Copper Production and Sales Data, by Source (a)
(thousand tons)


				2002		2001			2000			1999		1998

Copper Production
	Morenci:
		Concentrate			—		23.5			132.3			195.2		247.2
		Electrowon			412.7		368.1			284.7			284.7		275.8
	Bagdad:
		Concentrate			68.4		118.1			111.5			22.3		—
		Electrowon			15.6		10.5			11.8			2.9		—
	Sierrita:
		Concentrate			60.0		94.6			95.9			19.7		—
		Electrowon			16.2		26.3			26.5			5.8		—
	Miami:
		Electrowon			10.5		44.1			59.3			13.2		—
	Bisbee:
		Precipitate			0.1		0.2			0.1			0.1		0.6
	Chino:
		Concentrate and precipitate			—		18.3			87.0			74.3		85.5
		Electrowon			53.8		59.9			48.6			55.8		72.4
	Cobre:
		Concentrate			—		—			—			6.6		34.2
	Tyrone:
		Electrowon			69.9		76.4			79.3			80.1		82.6
	Candelaria:
		Concentrate			219.5		243.2			224.7			250.1		236.9
	Ojos del Salado:
		Concentrate			—		—			—			—		17.9
	Cerro Verde:
		Electrowon			95.3		84.9			78.7			16.2		—
	El Abra:
		Electrowon			248.2		239.8			217.4			52.8		—
	Manufacturing and Sales (d)				5.4		3.0			1.2			1.5		(0.4	)

			Total copper production		1,275.6		1,410.9			1,459.0			1,081.3		1,052.7

	Less minority participants’ shares (c):
		Morenci			61.9		58.8			62.5			72.0		78.4
		Chino			17.9		26.1			45.2			43.3		52.6
		Candelaria			43.9		48.6			45.0			50.0		47.4
		El Abra			121.7		117.5			106.5			25.9		—
		Manufacturing and Sales (d)			1.4		(0.2	)		(0.5	)		—		0.3

			Net Phelps Dodge share		1,028.8		1,160.1			1,200.3			890.1		874.0

Copper sales - net Phelps Dodge share from own mines (e):
	Morenci				350.8		333.0			354.4			415.5		445.8
	Bagdad				92.3		132.9			123.3			25.2		—
	Sierrita				83.8		125.1			122.4			25.6		—
	Miami				15.2		46.6			59.2			13.2		—
	Bisbee				0.1		0.3			0.1			0.1		0.6
	Chino				35.8		52.1			90.4			89.3		105.6
	Cobre				—		—			—			6.6		33.8
	Tyrone				69.9		76.4			79.2			81.7		82.8
	Candelaria				174.6		190.1			181.5			187.4		190.2
	Cerro Verde				94.9		84.7			78.8			16.5		—
	El Abra				129.6		126.7			109.5			29.3		—
	Ojos del Salado				—		—			—			—		18.2
	Manufacturing and Sales (d)				4.1		2.9			1.8			1.5		(0.7	)

			Total copper sales - net Phelps Dodge share from own mines		1,051.1		1,170.8			1,200.6			891.9		876.3

Purchased copper:
	Morenci				—		—			—			0.1		0.1
	Candelaria				35.8		37.0			5.0			—		3.7
	El Abra				56.5		5.8			—			—		—
	Manufacturing and Sales (d)				350.7		418.4			490.0			289.6		305.5

		Total purchased copper			443.0		461.2			495.0			289.7		309.3

			Total sales		1,494.1		1,632.0			1,695.6			1,181.6		1,185.6

See footnote explanations on page 13.

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Phelps Dodge Other Metal Production and Sales (a)


			2002		2001		2000		1999		1998

Gold (thousand ounces)
	Total production			132		140		151		173		185
	Less minority participants’ shares (c)			24		31		33		37		36

		Net Phelps Dodge share		108		109		118		136		149

	Sales (e)			136		77		120		138		159

Silver (thousand ounces)
	Total production			2,582		3,773		4,985		4,284		3,566
	Less minority participants’ shares (c)			225		490		657		877		713

		Net Phelps Dodge share		2,357		3,283		4,328		3,407		2,853

	Sales (e)			3,317		2,504		4,813		3,415		3,251

Molybdenum (thousand pounds)
	Primary Molybdenum:
		Henderson		20,517		18,603		19,727		1,718		—
		By-product		24,448		36,912		31,751		6,585		1,369

		Total production		44,965		55,515		51,478		8,303		1,369
	Less minority participants’ shares (c):
		Chino		—		50		419		241		355

		Net Phelps Dodge share		44,965		55,465		51,059		8,062		1,014

	Sales - Net Phelps Dodge share from own mines (e)			46,665		55,105		57,988		11,391		1,050
	Purchased molybdenum			7,393		1,609		—		26		—

		Total sales		54,058		56,714		57,988		11,417		1,050

Sulfuric acid (thousand tons)
	Total production from copper smelters (f)			748.6		1,236.7		1,231.8		1,172.1		1,222.1
	Less minority participants’ shares (c)			1.6		190.2		186.3		212.5		200.9

		Net Phelps Dodge share		747.0		1,046.5		1,045.5		959.6		1,021.2

	Sales from copper smelters			14.5		15.9		35.0		625.5		196.1

		COMEX copper price per pound (g)	$	0.72		0.73		0.84		0.72		0.75
		LME copper price per pound (h)	$	0.71		0.72		0.82		0.71		0.75
		*Metals Week* - molybdenum dealer oxide mean price per pound (i)	$	3.77		2.36		2.56		2.65		3.41

See footnote explanations on page 13.

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Phelps Dodge Manufacturing and Sales Production (a)


			2002		2001		2000		1999		1998

Smelters (j)
	Total copper (thousand tons)			243.8		463.5		439.8		267.4		405.8
	Less minority participants’ shares (c)			0.5		36.7		49.5		57.0		60.1

		Net Phelps Dodge share		243.3		426.8		390.3		210.4		345.7

Refineries (k)
	Copper (thousand tons)			319.6		502.6		471.2		422.6		429.3
	Gold (thousand ounces)			79.0		86.6		52.6		72.9		74.6
	Silver (thousand ounces)			1,786.0		3,719.1		3,838.9		3,681.5		2,523.8
Rod (l)
	Total copper (thousand tons)			850.6		879.8		1,153.9		805.1		764.4

Footnotes to tables on pages 9 through 13:

(a)		Includes Cyprus Amax production and sales from the time it was acquired on October 16, 1999.

(b)		Includes material mined for leaching operations.

(c)		Interests in mining joint ventures in which we own more than 50 percent are reported using the proportional consolidation method. Cerro Verde, in which we own 82 percent of its common stock, is reported using the full consolidation method.

(d)		Includes smelter production from custom receipts and fluxes as well as tolling gains or losses.

(e)		Excludes sales of purchased copper, molybdenum, silver and gold.

(f)		Sulfuric acid production results from smelter air quality control operations; sales do not include internal usage.

(g)		New York Commodity Exchange annual average spot price per pound — cathodes.

(h)		London Metal Exchange annual average spot price per pound — cathodes.

(i)		Annual molybdenum dealer oxide average mean price per pound — as quoted in Platts Metals Week.

(j)		Includes production from purchased concentrates and copper smelted for others on a toll basis.

(k)		Includes production from purchased material and copper refined for others on a toll basis.

(l)		Includes rod, wire, oxygen-free billets/cakes, scrap and other shapes.

- 14-

Other Mining Segment

This segment includes our worldwide mineral exploration and development programs, a process technology center that directs its activities at improving existing processes and developing new cost-competitive technologies, and other ancillary operations.

Exploration

Our exploration group’s primary objectives are to increase PDMC’s reserve base through discoveries and joint ventures and, where appropriate, to diversify into other metals, minerals and geographic areas. Exploration is focused on finding large-scale copper, and copper and gold deposits in the four principal copper-producing regions of the world: southwest USA/Mexico, South American Cordillera, Central Africa, and Australia, as well as in other highly prospective areas. This group operates in over 12 countries and maintains offices in Australia, Brazil, Canada, Chile, India, Indonesia, Mexico, Peru, the Philippines and the United States.

In 2002, Phelps Dodge expended $20.0 million on worldwide exploration, compared with $36.8 million in 2001 and $39.7 million in 2000. Approximately 33 percent of the 2002 expenditures occurred in the United States with 24 percent being spent at our U.S. mines. This compares with 14 percent in 2001 (13 percent at U.S. mine sites) and 23 percent in 2000 (17 percent at U.S. mine sites). The balance of our exploration expenditures was spent principally in Australasia, Brazil, Chile, Mexico, Canada, Peru and Central Africa, including 7 percent at our South American mine sites.

During 2002, exploration efforts continued at our existing copper operations. Work commenced on an underground decline at Candelaria to provide exploration drilling access in 2003 to a high-grade underground zone of mineralization at depth adjacent to the Candelaria open pit. Drilling programs at Tyrone continued to further define two oxide copper deposits situated very near the surface. At our Morenci mine, the first phase drilling of five district targets intersected promising mineralized intercepts.

Environmental permitting continues at our Safford project in eastern Arizona to enable development of the Dos Pobres and San Juan deposits. The two deposits contain an estimated total of 533 million tons of leachable reserves with an ore grade of 0.37 percent copper.

In August 2002, Phelps Dodge announced it had replaced BHP Billiton as option holder under an existing agreement among BHP Billiton, Tenke Mining Corp. and others to acquire a controlling interest and operatorship in the Tenke Fungurume copper/cobalt project in the Democratic Republic of the Congo.

In December 2001, we recorded a charge of $3.9 million to write-off the net book value of the Piedras Verdes project in Sonora, Mexico, as it no longer met our development criteria. In March 2002, Phelps Dodge reached an agreement with Frontera Copper Corporation to sell its interest in the Piedras Verdes project in Mexico. The agreement gave Phelps Dodge $0.5 million in cash plus other consideration, which are subject to a number of conditions, not to exceed $16 million.

In October 2001, Phelps Dodge sold its 50 percent interest in Mineração Serra do Sossego to Companhia Vale do Rio Doce (CVRD) for $42.5 million in cash. Sossego is a copper-gold deposit in the Carajas region of Brazil.

Work on our Ambatovy nickel/cobalt deposit in central Madagascar remains on hold pending resolution of certain regulatory and permitting issues, and evaluation of strategic options. A feasibility study previously estimated mineralized material of 210 million tons at an estimated grade of 1.1 percent nickel and 0.1 percent cobalt.

Process Technology

The objectives of PDMC’s process technology center (PTC) in Safford, Arizona, are to enhance and strengthen Phelps Dodge’s competitive position in the world copper market. PTC was established in 1996 to provide metallurgical process development capabilities, process optimization services, metallurgical testing and advanced material characterization services to meet the needs of PDMC and its operations. PTC is ISO-9001 certified. The activities at PTC are directed at continuous improvement of existing processes and the development of new cost-competitive technologies, and are an integral part of our Quest for Zero program. PTC employs approximately 72 engineers, scientists and technical support staff. The facilities include:

•		a large-diameter column leach facility for testing run-of-mine material, which is capable of processing up to approximately 600 tons of ore annually;

•		a continuous SX/EW test facility capable of producing 1.5 tons of cathode copper per day;

•		a small-diameter column leach facility with a capacity of 250 individual tests per year for crushed material;

•		a metallurgical laboratory for the development of biological leaching processes and enhancements and other biological applications; and

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•

a state-of-the-art material characterization laboratory with advanced mineralogy, analytical chemistry and metallography capabilities.

The principal areas of activity include hydrometallurgy, mineral processing (grinding and flotation), material characterization and technical information services. Some of the most important projects and milestones in 2002 were:

•		The design and construction of a new concentrate pressure leaching demonstration plant at the Bagdad mine. The facility is the first of its kind in the world to use high-temperature pressure leaching to process chalcopyrite concentrates. The technology is proprietary and is covered under a Technology Development Agreement between Phelps Dodge and Placer Dome Inc. The plant is being constructed at a cost of approximately $40 million and is designed to produce 35 million pounds of copper cathode from concentrate annually. Copper recovery is expected to be 98 percent compared with 96 to 97 percent by conventional smelting and refining. The plant will be used to prove this new technology, and related technology, for possible application at other PDMC properties in the future. The plant is scheduled to start production in the second quarter of 2003.

•		The successful completion of continuous pilot plant testing of a new medium-temperature pressure leaching process for copper concentrate treatment at the Hazen Research facility in Golden, Colorado. This process is designed to minimize acid production and has potential application for the processing of concentrates where sulfuric acid cannot be beneficially used in stockpile or heap leaching operations.

•		The development of a direct electrowinning technology for use in conjunction with the pressure leaching technology described above.

•		The continued advancement of proprietary technology for heap and stockpile leaching of low-grade chalcopyrite ores.

•		The investigation of alternative technologies to reduce the cost of copper electrowinning.

•		The investigation of alternative sulfuric acid production techniques.

•		The successful installation and commissioning of a second QemSCAN scanning electron microscope in the second quarter of 2002.

Total expenditures for PTC in 2002 were approximately $13 million, compared with $11 million in 2001 and $9 million in 2000. PDMC intends to advance all of these research and development projects aggressively in 2003.

Other

Additionally, this segment includes our Tohono copper operation in south central Arizona, which includes an SX/EW facility capable of producing copper cathode. The facility is located on lands leased from the Tohono O’odham Nation. Although mining of ore ceased in July 1997, production of copper continued from existing leach stockpiles until February 1999 when the facility was placed on care-and-maintenance status. The property has mineralized material for which, at higher copper prices, various alternatives could be considered.

Other Mining Investments

We own a 14.0 percent interest in Southern Peru Copper Corporation (SPCC), which operates two open-pit copper mines, two concentrators, an SX/EW operation, a smelter and a refinery in Peru. SPCC’s other principal shareholders are a subsidiary of Grupo Mexico, S.A. de C.V., with a 54.2 percent interest, and Cerro Trading Company, Inc., with a 14.2 percent interest. A total of 17.6 percent interest is publicly held. SPCC’s results are not included in our earnings because we account for our investment in SPCC on the cost basis. Based on the composition of SPCC’s Board of Directors, Grupo Mexico has majority control and the two principal minority shareholders cannot override Grupo Mexico’s decisions. During 2002, we received dividend payments of $4.0 million from SPCC, compared with $4.0 million in 2001 and $3.8 million in 2000.

In May 1997, we acquired an indirect 40 percent voting interest, representing a 26.67 percent economic interest, in a Peruvian zinc mining company, Compañía San Ignacio de Morococha S.A. (SIMSA) and its San Vicente mine. SIMSA’s other shareholder with voting shares was the Jesus Arias family. We accounted for our investment in SIMSA on the equity basis. During the fourth quarter of 2001, the investment was written down by $9.1 million due to the impact of low zinc prices on the operation’s ability to generate cash flows to cover operational and debt costs and our belief that we could not recover our investment. In November 2002, we sold our interest in SIMSA to the Arias family for $0.2 million.

In March 2000, we sold Cyprus Australia Coal Company, a wholly owned subsidiary that we acquired as part of the Cyprus transaction, to a subsidiary of Glencore International for $150 million in cash.

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Ore Reserves

Ore reserves are those estimated quantities of proven and probable material that may be economically mined and processed for extraction of their constituent values. Estimates of our ore reserves are based upon engineering evaluations of assay values derived from sampling of drill holes and other openings. In our opinion, the sites for such samplings are spaced sufficiently close and the geologic characteristics of the deposits are sufficiently well defined to render the estimates reliable. The ore reserve estimates include assessments of the resource, mine, and metallurgical models as well as consideration of economic, marketing, legal, environmental, social and governmental factors.

Phelps Dodge uses several additional factors to determine mine design limits that it believes maximize the value of future cash flows including time-valued concepts to recognize, for example, any elapsed time between mining of overburden and the mining of ore. Our mine designs recognize capital and other expenditures required to extract the ore reserves over the life of the mine. Cutoff grade strategies are implemented to maximize time-valued cash flows. Phelps Dodge believes that its ore reserve calculation methodology is prudent and consistent with appropriate industry standards.

Proven and probable ore reserves at December 31, 2002, and 2001 for each of our operating, curtailed and development properties are summarized as follows:


	Total Reserves Estimated at December 31, 2002 (1)

							Leachable Reserves

	Millable Reserves						Crushed Leach				Run-of-Mine (ROM)				Phelps
															Dodge
	Million		%		%		Million		%		Million		%		Interest
	Tons		Copper		Moly		Tons		Copper		Tons		Copper		(%)

Operating and Curtailed Operations
Morenci (2)		181.5		0.47		—		587.7		0.57		2,303.0		0.19		85.0
Bagdad		873.6		0.36		0.02		—		—		17.2		0.29		100.0
Sierrita		1,040.9		0.27		0.03		—		—		26.7		0.19		100.0
Miami (3)		—		—		—		—		—		126.9		0.37		100.0
Chino (3) (4)		187.0		0.62		0.02		—		—		263.8		0.42		66.7
Cobre (3) (4)		57.6		0.55		—		—		—		77.8		0.26		100.0
Tyrone (4)		—		—		—		—		—		224.5		0.32		100.0
Candelaria (5)		387.0		0.70		—		—		—		—		—		80.0
Ojos del Salado (3) (5)		18.7		1.32		—		—		—		—		—		100.0
Cerro Verde		—		—		—		198.8		0.66		133.5		0.30		82.0
El Abra		—		—		—		309.3		0.54		281.2		0.27		51.0
Primary Molybdenum:
Climax (3)		145.2		—		0.23		—		—		—		—		100.0
Henderson		170.7		—		0.21		—		—		—		—		100.0

Undeveloped Reserves - require substantial capital investments to bring into production
Cerro Verde		464.0		0.61		0.02		—		—		—		—		82.0
Other Mining:
Ajo (6)		—		—		—		—		—		—		—		100.0
Safford (7)		—		—		—		447.2		0.40		86.1		0.20		100.0

(1)		Total reserves estimated (i) are 100% basis, (ii) include only in-situ tonnages, and (iii) do not include stockpiled ores.

(2)		Morenci ore reserves increased from 2001 primarily as a result of additional drilling, completion of the resource model and development of an economic mine plan for the Fairbanks area.

(3)		Chino, Cobre, Climax, Miami and Ojos del Salado properties are on care-and-maintenance status with no mining taking place.

(4)		Chino, Cobre and Tyrone reserves were reduced from 2001 primarily as a result of new mine plans and new economic parameters.

(5)		The Candelaria and Ojos del Salado deposits also contain, respectively, 0.006 ounces and 0.008 ounces of gold per ton. Candelaria reserves increased from 2001 primarily due to additional drilling and remodeling.

(6)		Material previously characterized as ore reserves at the Ajo development property were reclassified as mineralized material in 2002 as a result of an updated mine plan and economic assessment.

(7)		The Safford property is in the permitting process. Safford ore reserves were reduced from 2001 due to a new mine plan and new economic parameters.

-17-


	Total Reserves Estimated at December 31, 2002 (1)

							Leachable Reserves

	Millable Reserves						Crushed Leach				Run-of-Mine (ROM)				Phelps
															Dodge
	Million		%		%		Million		%		Million		%		Interest
	Tons		Copper		Moly		Tons		Copper		Tons		Copper		(%)

Operating and Curtailed Operations
Morenci		128.7		0.41		—		468.8		0.60		2,853.0		0.22		85.0
Bagdad		884.9		0.36		0.02		—		—		17.7		0.29		100.0
Sierrita		1,052.1		0.27		0.03		—		—		62.5		0.19		100.0
Miami		—		—		—		—		—		117.6		0.38		100.0
Chino		303.6		0.59		—		—		—		448.8		0.30		66.7
Cobre		132.4		0.73		—		—		—		—		—		100.0
Tyrone		—		—		—		—		—		434.3		0.29		100.0
Candelaria		375.7		0.83		—		—		—		—		—		80.0
Ojos del Salado		18.7		1.32		—		—		—		—		—		100.0
Cerro Verde		—		—		—		207.2		0.66		123.3		0.28		82.0
El Abra		—		—		—		353.0		0.55		383.8		0.30		51.0
Primary Molybdenum:
Climax		145.2		—		0.23		—		—		—		—		100.0
Henderson		175.9		—		0.21		—		—		—		—		100.0

Undeveloped Reserves - require substantial capital investments to bring into production
Cobre		—		—		—		—		—		98.0		0.35		100.0
Cerro Verde		464.0		0.61		0.02		—		—		—		—		82.0
Other Mining:
Ajo (2)		150.0		0.56		—		—		—		—		—		100.0
Safford (2)		—		—		—		474.7		0.39		151.6		0.16		100.0

(1)		Total reserves estimated (i) are 100% basis, (ii) include only in-situ tonnages, and (iii) do not include stockpiled ores.

(2)		The Ajo and Safford properties were at various stages in the permitting process. The current mine plan for Safford is based on an open-pit leach operation. Prior to 2001, material previously characterized as underground ore reserves at Safford has, therefore, been reclassified as mineralized material.

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Average Drill-Hole Spacing at Ore Reserve Properties

The following table sets forth the average drill-hole spacing for proven and probable ore reserves by process types:


	As of December 31, 2002

	Proven				Probable
	(average spacing feet)				(average spacing feet)

Property	Mill		Leach		Mill		Leach

Morenci		283		283		400		400
Bagdad		190		81		441		323
Sierrita		224		141		339		243
Miami		N/A		200		N/A		300
Chino		141		200		200		283
Cobre		150		200		200		300
Tyrone		N/A		283		N/A		283
Candelaria		115		N/A		230		N/A
Ojos del Salado		82		N/A		164		N/A
Cerro Verde		196		121		444		303
El Abra		N/A		197		N/A		328
Climax		200		N/A		200		N/A
Henderson		65		N/A		290		N/A
Safford		N/A		200		N/A		400

Metallurgical Recovery

The following table sets forth the average expected metallurgical recovery by process type:

Copper

Molybdenum

Mill % (a)

Leach % (b)

Mill % (c)

Morenci

80.2

58.4

N/A

Bagdad

85.8

44.4

67.3

Sierrita

84.1

53.0

78.9

Miami

N/A

64.7

N/A

Chino

77.9

53.1

16.9

Cobre

85.5

56.4

N/A

Tyrone

N/A

64.2

N/A

Candelaria

92.0

N/A

Ojos del Salado

88.3

N/A

Cerro Verde

84.8

71.5

59.4

El Abra

N/A

65.9

N/A

Climax

N/A

86.8

Henderson

N/A

85.8

Safford

N/A

70.0

N/A

(a)		Mill recoveries include expected mill and smelter recoveries and an allowance for concentrate transportation losses.

(b)		Leach recoveries are the expected total recoveries over multiple leach cycles.

(c)		Molybdenum recoveries include mill recoveries and roaster deductions.

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Mill and Leach Stockpiles

Stockpiled copper-bearing material that has been removed from the mine, and for which we have reasonable certainty of processing is summarized below:

(in million tons)


		2002								2001

				Contained								Contained
		Stockpile		Copper		Recovery		Recoverable		Stockpile		Copper		Recovery		Recoverable
		Material		(%)		(%)		Copper		Material		(%)		(%)		Copper

Mill stockpiles:
	100% basis		45		0.46		91.9		0.2		43		0.45		92.2		0.2
	Phelps Dodge share								0.2								0.1
Leach stockpiles:
	100% basis		7,745		0.16		11.7		1.4		6,857		0.17		8.3		0.9
	Phelps Dodge share								1.2								0.8

Note: We did not have stockpiled molybdenum-bearing material that had been removed from the mine at December 31, 2001 and 2002.

The determination of copper contained in mill and leach stockpiles by physical count is impracticable. We employ reasonable estimation methods to determine such amounts.

Mill Stockpiles

Mill stockpiles contain low-grade ore that has been extracted from the mine and is available for processing to recover the contained copper by milling, concentrating, smelting and refining. The quantity of material delivered to the stockpiles is based on surveyed volumes of mined material and daily production records. Sampling and assaying of blast-hole cuttings determine the estimated amount of copper contained in the material delivered to the mill stockpiles.

Expected copper recovery rates are determined by metallurgical testing. The recoverable copper in mill stockpiles can be extracted into copper concentrate almost immediately upon processing. Estimates of copper contained in mill stockpiles are reduced as material is removed and fed to the mill.

Leach Stockpiles

Leach stockpiles contain low-grade ore that has been extracted from the mine and is available for processing to recover the contained copper through a leaching process. Leach stockpiles are exposed to acidic solutions that dissolve contained copper and deliver the copper in solution to the extraction processing facilities. The quantity of material is based on surveyed volumes of mined material and daily production records. Sampling and assaying of blast-hole cuttings determine the estimated amount of copper contained in material delivered to the leach stockpiles.

Expected copper recovery rates are determined using small-scale laboratory tests, medium-scale column testing (which simulates the production-scale process), historical trends and other factors, including mineralogy of the ore and rock type.

Ultimate recovery of copper contained in leach stockpiles can vary from a very low percentage to over 90 percent depending on several variables including type of processing, mineralogy and particle size of the rock. Although as much as 70 percent of the copper ultimately recoverable may be extracted during the first year of processing, recovery of the remaining copper may take several years.

- 20 -

The estimated recoverable copper contained in stockpiles at each mine follows:

(in million tons)


		December 31,

		2002		2001

Mill stockpiles:
	Candelaria		0.2		0.2

Leach stockpiles:
	Morenci		0.4		0.4
	Bagdad		0.1		—
	Sierrita		0.1		—
	Miami		0.1		0.1
	Chino		0.4		0.2
	Tyrone		0.1		0.1
	Cerro Verde		0.1		—
	El Abra		0.1		0.1

			1.4		0.9

	Total		1.6		1.1
	Phelps Dodge share		1.4		0.9

Note: The mill stockpiles are expected to be processed late in the Candelaria mine’s life as milling capacity is available. The leach stockpiles are expected to be processed over the lives of the respective mines. We began capitalization of costs for mill and leach stockpiles when we had reasonable certainty that the material would be processed. The capitalized costs are evaluated periodically to ensure carrying amounts are stated at the lower of cost or market. (Refer to Notes 1 and 7 to the Consolidated Financial Statements for additional financial information regarding mill and leach stockpiles.)

Our estimated share of aggregate copper and molybdenum ore reserves as of December 31 was as follows:


		2002		2001		2000		1999		1998

Milling reserves (billion tons)			3.4		3.6		4.3		4.2		1.6
Leaching reserves (billion tons)			4.3		5.2		3.8		4.1		3.2
Commercially recoverable copper (million of tons):
	Ore reserves		19.6		22.1		23.1		23.7		13.7
	Stockpiles and in-process inventories		1.4		0.9		1.0		0.7		0.8

	Total		21.0		23.0		24.1		24.4		14.5
Commercially recoverable molybdenum (billion of pounds)			2.1		2.1		2.2		2.2		—

Ore reserves reported by Southern Peru Copper Corporation (SPCC) (in which we hold a 14.0 percent interest) as of December 31, 2002, for its Peruvian properties were approximately 2 billion tons of millable reserves at a grade of 0.68 percent copper and approximately 2 billion tons of leachable reserves at an average grade of 0.20 percent copper. These in-pit reserves are the combined totals for both the Cuajone and Toquepala properties. SPCC is controlled by its majority shareholder, Grupo Mexico. We have relied on SPCC’s public filings and have not conducted an independent review of its ore reserves.

- 21 -

Copper and Molybdenum Prices

The volatility of copper and molybdenum prices is reflected in the following table, which gives the high, low and average COMEX price of high-grade copper and the Platts Metals Week mean price of molybdenum oxide for each of the last 15 years:


Cents per pound of Copper							Dollars per pound of Molybdenum Oxide
COMEX							Platts *Metals Week*

Year	High		Low		Average		High		Low		Average

1988		165		87		115		4.40		2.98		3.47
1989		160		99		125		3.89		2.44		3.40
1990		138		96		119		3.30		2.52		2.85
1991		120		96		105		2.78		2.08		2.38
1992		116		93		103		2.44		1.82		2.21
1993		107		72		85		2.80		1.82		2.32
1994		140		78		107		17.00		2.68		4.51
1995		146		121		135		17.50		3.90		8.08
1996		131		86		106		5.50		2.90		3.79
1997		123		76		104		4.90		3.52		4.31
1998		86		64		75		4.60		2.00		3.41
1999		85		61		72		2.90		2.48		2.65
2000		93		74		84		2.98		2.15		2.56
2001		87		60		73		2.65		2.15		2.36
2002		78		65		72		8.30		2.40		3.77

Phelps Dodge’s reported ore reserves are economic at a three-year historical average COMEX copper price of 76 cents per pound and a three-year historical average molybdenum price of $2.89 per pound (Metals Week Mean Dealer Oxide).

Phelps Dodge develops its business plans using a time horizon that is reflective of the historical, moving average for the full price cycle. We currently use a long-term average COMEX price of 90 cents per pound of copper and an average molybdenum price of $3.40 per pound (Metals Week Mean Dealer Oxide), along with near-term price forecasts reflective of the current price environment to develop mine plans and production schedules.

The per pound COMEX copper price over the past 10 years, 15 years and 20 years averaged 91 cents, 99 cents and 91 cents, respectively. The per pound Metals Week Mean Dealer Oxide molybdenum price over the same periods averaged $3.78, $3.47 and $3.44, respectively.

- 22 -

Mineralized Material

We hold various properties containing mineralized material that we believe could be brought into production should market conditions warrant. Permitting and significant capital expenditures would likely be required before operations could commence at these properties. The deposits are estimated to contain the following mineralized material as of December 31, 2002:



		Milling Material				Leaching Material						Phelps
												Dodge
		Millions		%		Millions		%		%		Interest
Property/Deposit	Location	of Tons		Copper		of Tons		Copper		Nickel		(%)

Ambatovy (1)	Madagascar		—		—		210		—		1.10		100.0
Ajo (2)	Arizona		205		0.50		—		—		—		100.0
Candelaria Norte (3)	Chile		12		2.15		—		—		—		80.0
Cochise/Bisbee	Arizona		—		—		276		0.47		—		100.0
El Abra	Chile		650		0.53		100		0.31		—		51.0
Lone Star (Safford)	Arizona		—		—		1,600		0.38		—		100.0
Lumwana	Zambia		220		0.83		—		—		—		50.0
Morenci	Arizona		—		—		567		0.25		—		85.0
Niagara (Tyrone)	New Mexico		—		—		500		0.29		—		100.0
Safford	Arizona		330		0.65		—		—		—		100.0
Sanchez (Safford)	Arizona		—		—		230		0.29		—		100.0
Tohono	Arizona		276		0.70		404		0.63		—		100.0


Note:		Mineralized material has been delineated by appropriately spaced drilling and/or underground sampling to support the reported tonnage and average grade of metal(s). Such a deposit does not qualify as an ore reserve until legal and economic feasibility is concluded based upon a comprehensive evaluation of implied unit costs, grade, recoveries and other material factors.

(1)		Ambatovy deposit also contains 0.10 percent cobalt.

(2)		Material previously characterized as ore reserves at the Ajo development property was reclassified as mineralized material in 2002 as a result of an updated mine plan and economic assessment.

(3)		Candelaria Norte is a potential underground mine that would utilize the existing process facilities and infrastructure. The stated tonnage also contains 0.015 ounces of gold per ton.

- 23 -

Sales and Competition

U.S. Mining Operations

The majority of our copper, produced or purchased, at our U.S. operations is cast into rod. Rod sales to outside wire and cable manufacturers constituted approximately 70 percent of PDMC’s U.S. sales in 2002, 65 percent in 2001 and 79 percent in 2000. The remainder of our U.S. copper sales are primarily in the form of copper cathode or copper concentrate. Sales of rod and cathode are made directly to wire and cable fabricators and brass mills under contracts principally of a one-year duration. Our rod also is used by our Wire and Cable segment. We generally sell our copper rod and cathode produced at our U.S. operations at a premium over New York Commodity Exchange (COMEX) prices.

South American Mines

The production from our South American Mines is sold as copper concentrate or as copper cathode. Our Candelaria mine sells its production in the form of copper concentrates primarily to copper smelters located in Japan and the rest of Asia under long-term, multi-year contracts or on a spot basis through merchants. In addition, a portion of Candelaria’s production is shipped to North America for further processing at our U.S. operations. El Abra produces copper cathodes that are sold primarily under annual or multi-year contracts to Asian or European rod or brass mill customers or to merchants. Cerro Verde produces copper cathode; the majority of which are shipped to our U.S. rod mills for processing. The remainder of Cerro Verde’s production is sold under annual contracts to South American customers or to merchants on a spot basis. The copper cathode sold by our international operations generally is sold at a premium over London Metal Exchange (LME) prices. We also sell copper concentrate based on COMEX or LME prices.

Worldwide Copper Mining Operations

From time to time, we engage in hedging programs designed to enable us to realize current average prices for metal delivered or committed to be delivered. We also have entered into price protection arrangements from time to time, depending on market circumstances, to ensure a minimum price for a portion of expected future mine production.

Most of the refined copper we sell is incorporated into electrical wire and cable products worldwide for use in the construction, electric utility, communications and transportation industries. It also is used in industrial machinery and equipment, consumer products and a variety of other electrical and electronic applications.

When we sell copper as rod, cathode and concentrate, we compete, directly or indirectly, with many other sellers including at least two other U.S. primary producers as well as numerous foreign producers, metal merchants, custom refiners and scrap dealers. Some major producers outside the United States have cost advantages resulting from richer ore grades, lower labor costs and in some cases, a lack of strict regulatory requirements. We believe our ongoing programs to contain costs, improve productivity and employ new technologies will significantly narrow these cost advantages and place us in a more competitive position with respect to a number of our international competitors.

Other materials that compete with copper include aluminum, plastics, stainless steel and fiber optics. Our principal methods of competing include pricing, product properties, product quality, customer service and dependability of supply.

Primary Molybdenum Segment

Molybdic oxide is used primarily in the steel industry for corrosion resistance, strengthening and heat resistance. Molybdenum chemicals are used in a number of diverse applications such as catalysts for petroleum refining, lubricants and feedstock for pure molybdenum metal used in electronics. A substantial portion of Phelps Dodge’s expected 2003 molybdenum production is committed for sale throughout the world pursuant to annual and/or quarterly agreements based primarily on prevailing market prices one month prior to the time of sale.

The molybdenum market is generally characterized by cyclical and volatile prices, little product differentiation and strong competition. Prices are influenced by production costs of domestic and foreign competitors, worldwide economic conditions, world supply/demand balances, inventory levels, the U.S. dollar exchange rate and other factors. Molybdenum prices also are affected by the demand for end-use products in, for example, the construction, transportation and durable goods markets. A substantial portion of world molybdenum is produced as a by-product of copper mining, which is relatively insensitive to molybdenum price levels. China exports quantities of molybdenum that represent a significant portion of world consumption. China also imports quantities of molybdenum but usually, we believe, in quantities significantly less than it exports. Because of their size, China’s net exports can significantly affect the balance of supply and demand, and pricing, in the world molybdenum market. Our estimates place China’s molybdenum net exports at approximately 20 to 25 percent of global consumption.

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Prices, Supply and Consumption

Worldwide Copper Mining Operations

Copper is an internationally traded commodity, and its prices are effectively determined by the two major metals exchanges – COMEX and LME. The prices on these exchanges generally reflect the worldwide balance of copper supply and demand, but are also influenced significantly from time to time by speculative actions and by currency exchange rates.

Copper is a critical component of the world’s infrastructure. The demand for copper ultimately reflects the rate of underlying world economic growth, particularly the growth in industrial production, construction and durable goods. Copper’s end-use markets reflect its fundamental role in the world economy. Estimated percentages of copper consumption by end-use markets comprise (i) construction – 40 percent, (ii) electrical applications – 25 percent, (iii) industrial machinery – 15 percent, (iv) transportation – 10 percent, and (v) consumer products – 10 percent. Since 1990, refined copper consumption grew by an estimated compound rate of 2.8 percent to 15 million tons according to published data by the World Bureau of Metals Statistics (WBMS) and PD’s estimate for 2002. This rate of increase was slightly higher than the growth of world industrial production, which grew at an estimated compound annual rate of 2.3 percent over the same period. Asian copper consumption, led by China, was particularly strong, increasing by 5.9 percent per year from 1990 through 2002. Asia now represents approximately 43 percent of world refined copper consumption compared with 25 percent for Europe and 25 percent for the Americas. The strong demand for copper in Asia has been driven by the increasing standard of living in this region as well as production of value added products for export to the developed world.

From 1990 through 2002, refined copper production has grown at an average annual rate of 2.9 percent according to WBMS (based on published data through 2001) and PD’s estimate for 2002. This growth was encouraged by a number of factors. First, limited investment in new mine production in the latter half of the 1980s coupled with growing demand for copper during that period resulted in market deficits and declining copper inventories that in turn encouraged new investment. Second, an improved investment climate in Latin America, particularly Chile, encouraged investment in this region. In 2002, Latin America represented 44 percent of world mine production, a significant increase from 25 percent in 1990. Third, SX/EW technology made some previously uneconomic resources viable investments.

Copper demand and price tend to follow economic cycles and, therefore, copper price has historically experienced significant fluctuations. Considering the period from 1990 to 2002, the LME price of copper averaged 95 cents per pound, and ranged from a high annual average price of $1.33 per pound in 1995 to a low annual average price of 71 cents per pound in 2002. The COMEX price of copper averaged 95 cents per pound from 1990 through 2002, but has ranged from a high annual average price of $1.35 per pound in 1995 to a low annual average price of 72 cents per pound in 2002.

In 2002, the average COMEX copper price of 72 cents per pound was 1 cent less than the 2001 average price. Continued low prices resulted from weak global economic conditions and a resulting modest surplus of production over consumption. More than 175,000 metric tons of excess metal in the market was delivered into LME and COMEX warehouses, bringing the combined inventories to historically high levels of more than 1.2 million metric tons. Demand for copper remained sluggish in 2002 increasing a modest 1.8 percent from 2001 levels as copper consumption in many regions, particularly the United States, Europe and Japan, remained weak as the result of depressed global economic conditions. Expectations of improvement in global manufacturing diminished as technology, telecommunications and electronics sectors stagnated. Chinese copper demand, however, continued to outpace the rest of the world as government infrastructure projects, an expanding industrial complex and increasing domestic prosperity led to the third year of double digit growth in copper consumption.

World refined copper production declined 1.7 percent in 2002 from 2001 due to a number of announced production curtailments. Beginning in October 2001, world copper producers, including Phelps Dodge, independently announced a series of production curtailments with a combined total of approximately 580,000 metric tons of copper. The cutbacks served to curb production of copper in concentrates and corresponding global primary refined production. As a result, the copper market moved back into balance during the second half of 2002, as evidenced by modest declines in reported LME and COMEX warehouse stocks. The tightened supply chain, however, was not enough to prevent a 150,000 metric ton surplus for the year.

In 2001, the COMEX copper price averaged 73 cents per pound, 11 cents less than the 2000 average price. The decrease in price was the result of a surplus market as modest growth in refined production outpaced weak global demand for metal. The market imbalance resulted in approximately 627,000 metric tons of excess copper being delivered into western world exchange inventories, increasing warehouse stocks to more than 1 million metric tons. The signifi-

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cant rise in inventory caused the price to fall below the 70-cent level where it remained for nearly all of the second half of 2001. Weakness in the U.S. and Japanese economies reduced world demand for copper, particularly in the electronics and technology sectors where metal off-take had been expanding. Output from manufacturing industries in the large copper consuming regions of the world were slowed by the economic downturn, especially those heavily dependent on export markets in the United States, Europe and Japan. The lone bright spot in the copper market was China whose economy continued to expand supported by increases in consumer demand, government-funded infrastructure projects, and its acceptance into the World Trade Organization.

The COMEX copper price averaged 84 cents per pound for the year 2000, a 12-cent improvement over the previous year. The increase in price was triggered by deficit market conditions created by robust demand for the metal coupled with lower world copper production growth following the closure of nearly 780,000 metric tons of capacity during 1998 and 1999. After having added nearly 480,000 metric tons during the previous two years, combined Western exchange inventories topped 930,000 metric tons in early March 2000. During the remainder of the year, LME and COMEX inventories declined by approximately 515,000 metric tons to end the year at 415,000 metric tons, a decline of 52 percent from the beginning of the year.

Primary Molybdenum Segment

Molybdenum demand depends heavily on worldwide steel industry consumption and to a lesser extent on chemical applications. During 2002, demand in the United States held steady compared with 2001; however, demand in Europe and Japan declined slightly compared with 2001. Overall global demand decreased slightly in 2002 compared with 2001. We estimate consumption declined approximately 1 percent in 2002. Our estimates for worldwide production indicate an approximate 4 percent decline in 2002 compared with 2001. The decline in 2002 was primarily due to production curtailments at several large copper mines that produce molybdenum as a by-product. Overall, primary molybdenum mines appear to have maintained production cuts, which took place in prior years. The additional production curtailments in 2002 and relatively flat global consumption levels placed the overall molybdenum market in slight deficit for 2002. The molybdenum business and prices improved during the year from 2001 levels as a result of the tight supply market.

Molybdenum prices experienced a steady rise during the first five months of 2002. In the month of June, molybdenum prices spiked hitting a Metals Week dealer oxide weekly average high of $7.90 per pound and a monthly Metals Week dealer oxide mean price of $6.93 per pound. Molybdenum prices moved downwards in the following months ending at $3.26 per pound for the month of December. Metals Week dealer oxide mean prices averaged $3.77 per pound in 2002 compared with $2.36 per pound in 2001. The production curtailments and tightness of supply caused molybdenum prices to improve from their previous low levels. Phelps Dodge received an average realized price of $4.57 per pound in 2002, compared with $3.64 per pound in 2001, reflecting a broad mix of upgraded molybdenum products as well as technical grade molybdic oxide.

Costs

Worldwide Copper Mining Operations

“Implied unit cost of copper production” measures the “all-in” cost of each pound of copper produced by PDMC. As the title indicates, this measure is the cost implied by the market price of copper (i.e., LME average spot) for a given period versus PDMC’s operating income (loss) for the same period.

There is no established common standard for calculating unit production costs in the copper industry. PDMC’s implied unit production costs indicator (which is based on readily accessible, publicly disclosed data) acts as a proxy to enable investors to follow and interpret cost trends over historical periods.

PDMC calculates its “all-in operating margin per pound of copper sold” by dividing its operating income (loss) excluding special items by the total pounds of copper sold from its own mines for its own account. This results in an all-in operating margin (i.e., inclusive of cost of products sold; depreciation, depletion and amortization; selling and general administrative expense; and exploration and research expense for the segment’s operations) that is compared with the market price of copper to render an implied cost of copper production.

In 2002, the full and cash implied unit cost of copper production each decreased 7 cents per pound compared with 2001. In 2002, approximately 3 cents of the cost improvement was due to lower energy costs, and the remainder was primarily due to operational improvements associated with the Company’s Quest for Zero program.

In 2001, the full and cash implied unit cost of copper production increased 4 and 2 cents per pound, respectively, compared with 2000, primarily due to slightly higher energy costs (approximately 1 cent). The remainder of the increase in the full implied unit cost was primarily due to depreciation expense.

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Energy, including electricity, diesel fuel and natural gas, represents a significant portion of the production costs for our operations. During the first quarter of 2001 and much of 2000, our Arizona and New Mexico operations were affected adversely by significantly higher costs for all three.

In response, the Company implemented a power cost stabilization plan in March 2001 that consisted of an additional negotiated firm power contract; the construction of a power co-generation plant in New Mexico; short-term, alternating production curtailments at the Company’s Tyrone, Sierrita, Bagdad and Henderson operations; and a partial production curtailment at Chino.

Additionally, to mitigate the Company’s exposure to increases in diesel fuel and natural gas prices, we implemented several price protection programs in late 2000 and early 2001 designed to protect the Company against a significant upward movement in energy prices. The Company’s diesel fuel price protection program consisted of a combination of purchasing out-of-the-money (OTM) diesel fuel call options and fixed-price diesel fuel swaps for our North American operations. The OTM call options give the holder the right, but not the obligation, to purchase a specific commodity at a pre-determined dollar cost, or “strike price.” OTM call options are options with a “strike price” above the prevailing market price for that commodity when purchased.

The OTM diesel fuel call options mitigated a portion of our exposure to volatile markets by capping the cost of the commodity if prices were to rise above the strike price. If the price of diesel fuel is lower than the strike price, the Company has the flexibility to purchase diesel fuel at prices lower than the strike price and the options expire with no value. The swaps allow us to establish a fixed price for a specific commodity product for delivery during a specific future period.

Our natural gas price protection program consisted of purchasing OTM call options or OTM collars for our North American operations. OTM call options capped the commodity purchase cost at the strike price while allowing the Company the ability to purchase natural gas at a lower cost when market prices were lower than the strike price. The purchase of collars (the simultaneous purchase of an OTM call option and the sale of an OTM put option) allows us to establish both a price ceiling and a price floor for natural gas costs.

As a result of the above-mentioned plans and programs, in 2002 and 2001 Phelps Dodge was able to reduce and partially mitigate the impacts of volatile electricity markets and rising diesel fuel and natural gas prices.

Environmental and Other Regulatory Matters

U.S. Mining Operations

Significant Federal Environmental Programs

Our operations in the United States are subject to stringent federal, state and local laws and regulations relating to improving or maintaining environmental quality. Our global operations are also subject to many environmental protection laws in the jurisdictions where we operate. We pursue environmental performance at all of our operations with the same diligence that we pursue financial, health and safety performance. We are committed to pollution prevention and responsible environmental stewardship worldwide.

Environmental regulatory programs create potential liability for our domestic operations, which may result in requirements to perform environmental investigations or corrective actions under federal and state laws, in addition to federal and state Superfund requirements (refer to the discussion of Superfund requirements in OTHER ENVIRONMENTAL MATTERS). Major environmental programs and developments of particular interest are summarized in the paragraphs that follow.

Most air emissions from our domestic operations are subject to regulation under the federal Clean Air Act (CAA) and related state laws. These laws impose permitting, performance standards, emission limits, and monitoring and reporting requirements on sources of regulated air pollutants.

Several of our domestic operations have obtained, or are in the process of obtaining, major source operating permits under Title V of the CAA and related state laws. Facilities with smelters, rod mills, molybdenum roasters and power plants are the primary examples of our operations that are subject to this program. These permits typically do not impose new substantive requirements, but rather incorporate in one permit all existing requirements. However, they can increase compliance costs by imposing new monitoring requirements, such as more frequent emission testing, to demonstrate compliance with existing requirements. The process of developing these comprehensive permits also can bring to light new or previously unknown agency interpretations of existing regulations, which also may increase compliance costs.

At least one of our smelters will be subject to one or more Maximum Achievable Control Technology (MACT) standards under the CAA. These standards do not have immediate compliance dates; instead they allow two or three years after promulgation to provide the opportunity to come into compliance or to reduce

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emissions to avoid regulation before the compliance date. For example, the copper smelter MACT standard was issued in 2002, and the compliance date for that standard is June 2005. Other potentially applicable MACT standards are still in development. Therefore, we still are in the process of determining applicability and compliance strategies.

Most discarded materials from our domestic operations are subject to regulation as solid waste under the federal Resource Conservation and Recovery Act (RCRA) and related state laws. These laws impose design, operating, closure and post-closure care requirements on facilities used to store, treat or dispose of solid waste.

Mineral extraction (mining) and beneficiation (the concentration of economic minerals) occurs at our mining operations. The solid wastes uniquely associated with these activities are exempt from hazardous waste regulation. Mineral processing (the alteration of a mineral from one mineralogic state to another) occurs at our smelter, refinery and molybdenum roasting operations. Except for a list of 20 exempt processing wastes (three of which include wastes from copper mineral processing operations), all mineral processing wastes generated at our domestic mining operations are subject to hazardous waste regulation if they exhibit a hazardous waste characteristic or if the U.S. Environmental Protection Agency (EPA) specifically designates them as a listed hazardous waste. In 1998, EPA finalized its supplemental Land Disposal Restriction Phase IV (LDR) rules that imposed regulation on hazardous mineral processing wastes that are stored before they are recycled or disposed. This final LDR rule also subjects mineral processing wastes that exhibit a hazardous waste characteristic to stringent treatment standards if the materials are disposed on land. A portion of the LDR rule was judicially vacated on appeal. While EPA’s final LDR rule likely will require us to continue to make expenditures to manage hazardous mineral processing wastes, it is not possible to determine the full impact on us of the new LDR requirements until the requirements are fully adopted and implemented.

The federal Emergency Planning and Community Right-to-Know Act was expanded in 1997 to cover mining operations. This law, which has applied to other Phelps Dodge businesses for more than a decade, requires companies to report to EPA the amount of certain materials managed in or released from their operations each year. Annually, we report the volume of naturally occurring minerals and other substances that we managed during the previous year once the usable metals were extracted. These materials are very high in volume and how they are managed is covered by existing regulations and permit requirements.

The federal National Pollutant Discharge Elimination System (NPDES) program requires a permit for the point source discharge of pollutants to surface waters that qualify as waters of the United States. Although most states have received authorization to implement this program in lieu of EPA, New Mexico has not received such authorization and therefore the NPDES permit program in New Mexico continues to be implemented primarily by EPA. On December 5, 2002, Arizona obtained authorization to implement the NPDES permit program in the state. Colorado has maintained authorization of the NPDES program for several years. The NPDES permit program also regulates the discharge of storm water runoff from active and inactive mines and construction activities. EPA and authorized states have issued general permits that cover discharges from active and inactive mines. We likely will continue to have to make expenditures to comply with the NPDES permit program, especially as the program continues to expand as applied to storm water discharges.

Significant Arizona Environmental and Reclamation Programs

The Arizona Department of Environmental Quality (ADEQ) has adopted regulations for its aquifer protection permit (APP) program that replaced the previous Arizona groundwater quality protection permit regulations. Several of our properties continue to operate pursuant to the transition provisions for existing facilities under the APP regulations. The APP regulations require permits for certain facilities, activities and structures for mining, concentrating and smelting. The APP requires compliance with aquifer water quality standards at an applicable point of compliance well or location. The APP also may require mitigation and discharge reduction or elimination of some discharges. Existing facilities operating under the APP transition provisions are not required to modify operations until requested by the state of Arizona, or unless a major modification at the facility alters the existing discharge characteristics. We have received an APP for our Morenci operations, for portions of our Bagdad and Miami mines, for the sewage treatment facility at Ajo, and for a closed tailing pile in Clarkdale, Arizona. We have also conducted groundwater studies and submitted APP applications for several of our other properties and facilities, including the Bagdad, Sierrita and Miami mines, our Safford development property and Ajo, Copper Queen and United Verde branches. We will continue to submit all required APP applications for our remaining properties and facilities, as well as for any new properties or facilities. We do not know what the APP requirements are going to be for all existing and new facilities and, therefore, it is not possible for us to estimate costs associated with those requirements. We are likely to continue to have to make expenditures to comply with the APP program.

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An application for an APP requires a description of a closure strategy to meet applicable groundwater protection requirements following cessation of operations and a cost estimate to implement the closure strategy. An APP may specify closure requirements, which may include postclosure monitoring and maintenance requirements. A more detailed closure plan must be submitted within 90 days after a permittee notifies ADEQ of its intent to cease operations. A permit applicant must demonstrate its financial capability to meet the costs required under the APP, including closure costs.

Portions of the Company’s Arizona mining operations that operated after January 1, 1986, also are subject to the Arizona Mined Land Reclamation Act (AMLRA). AMLRA requires reclamation to achieve stability and safety consistent with post-mining land use objectives specified in a reclamation plan. Reclamation plans require approval by the State Mine Inspector and must include a cost estimate to perform the reclamation measures specified in the plan. Financial assurance must be provided under AMLRA covering the estimated cost of performing the reclamation plan.

Under both APP regulations and AMLRA, a publicly traded company may satisfy the financial assurance requirements by showing that its unsecured debt rating is investment grade and that it meets certain requirements regarding assets in relation to the estimated closure and post-closure cost and reclamation cost estimates. If this test is not met, the permittee must provide an alternative form of financial assurance that meets the requirements of the applicable regulations or that is approved by ADEQ or the State Mine Inspector, as applicable. The Company’s Arizona operations have met the applicable financial assurance requirements by supplying a demonstration of the Company’s investment-grade bond rating.

At December 31, 2002 and 2001, we had accrued closure costs of approximately $43 million and $38 million, respectively, for our Arizona operations. The amount of financial assurance currently provided under both regulatory programs is approximately $115 million. If the Company’s bond rating falls below investment-grade, the Arizona mining operations would be required to supply financial assurance in another form.

Cyprus Tohono Corporation (Cyprus Tohono), a wholly owned subsidiary of Cyprus Amax, leases lands on the Tohono O’odham Indian Nation (the Nation). The leased lands include the site of a mining operation, currently on care-and-maintenance status, comprising an open pit, underground mine workings, leach and non-leach rock stockpiles, tailing and evaporation ponds, SX/EW operations, and ancillary facilities. Many of these facilities are covered by Mine Plans of Operations (MPOs) that were issued by the federal Bureau of Land Management (BLM). The leases and MPOs impose certain environmental compliance, closure and reclamation requirements upon Cyprus Tohono. The closure and reclamation requirements under the leases require action to be taken upon termination of the leases, which currently expire between 2012 and 2017, unless terminated earlier in accordance with the terms of the leases. Preliminary studies indicate that closure and reclamation requirements, excluding the potential Superfund environmental response costs discussed in “OTHER ENVIRONMENTAL MATTERS,” are estimated to cost $5.0 million.

The Nation, along with several federal agencies, have notified Cyprus Tohono of groundwater quality concerns and concerns with other environmental impacts of historical mining operations. In 2001, Cyprus Tohono conducted additional groundwater investigations at the site. Analytical results from samples taken from newly installed groundwater monitoring wells show contaminants above primary or secondary drinking water standards. A neighboring Native American village’s water supply has been contaminated with sulfate. Cyprus Tohono is providing an alternative supply to the village and has installed two new water wells for the village. A pipeline to connect the two new water wells to the village water system was completed in 2003. The cost of the new wells was $175,000; the cost to complete the pipeline to the village was approximately $175,000.

The Company’s historic United Verde Mine has obtained an APP for closure of a tailing pond located near Clarkdale, Arizona, and is awaiting approval of an APP for existing mine water discharge containment facilities at the mine near Jerome, Arizona. The tailing pond has not received tailing discharges since the early 1950s, but has received discharges of municipal sewage effluent from the town of Clarkdale since the late 1970s. Closure work under the APP for the tailing pond has been partially completed, but the remaining work has not been completed pending the issuance of a stormwater discharge permit under the Clean Water Act for construction of a related development project. Construction of improvements under the proposed APP for the mine are expected to begin following issuance of the APP, and implementation of the plan under the proposed APP may be used to partially address the claims asserted by EPA and the Department of Justice as described in Item 3 of the Legal Proceedings section. A voluntary remediation project also is under way under supervision of ADEQ at the nearby historic Iron King mine to treat potential discharges of acidic water from an adit. Additional work may be required at historical mine workings in the district that are owned by the Company to satisfy requirements under storm water discharge permits. At the United Verde Mine, APP costs are estimated to be

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$13.6 million; at the Clarkdale tailing, APP costs are estimated to be $12.2 million; and at the Iron King Mine, voluntary remediation costs are estimated to be $2.2 million. These amounts, totaling $28.0 million, are included in environmental reserves.

Significant New Mexico Environmental and Reclamation Programs

Mining and smelting operations with leaching, tailing ponds, surface impoundments and other discharging facilities in New Mexico are subject to regulation under the New Mexico Water Quality Act and Water Quality Control Commission (WQCC) Regulations. The Chino, Cobre and Tyrone mines and the Hidalgo smelter each have obtained multiple discharge permits for their operations, which specify operational, monitoring and notification requirements. These permits are issued for five-year terms and require renewal following the end of each permit term. The WQCC Regulations authorize the New Mexico Environment Department (NMED), which administers the discharge permit program, to require the submission of closure plans showing how applicable discharge permit requirements will be met following closure. Under certain circumstances, NMED also may require submission and approval of abatement plans to address the exceedance of applicable water quality standards.

Further, Chino, Cobre, Tyrone and Hidalgo must submit closure plans for their operations. Hidalgo has an approved closure plan under its discharge permit. The three mines have submitted closure plans, which have been combined with closeout plans under the New Mexico Mining Act (NMMA), as discussed below. The proposed closure plans currently are subject to approval by NMED as part of separate discharge permits for closure for each of the three operations that would supplement the existing discharge permits (hereinafter referred to as “closure permits”). The proposed closure permits contain a number of permit conditions that would modify the proposed closure plans. Chino Mines Company and NMED reached agreement in December 2001 on proposed closure permit conditions presented at a public hearing in February 2002. On January 23, 2003, NMED’s hearing officer issued a decision approving the closure permit as proposed by NMED and Chino, with minor changes. NMED issued a permit consistent with the hearing officer’s decision on February 24, 2003. An appeal has been filed by a local environmental group. Phelps Dodge Tyrone, Inc. and NMED were unable to reach agreement on permit terms before a public hearing held in May 2002, and presented competing permit proposals. Other parties who participated in the public hearing presented their own proposals. On March 7, 2003, Tyrone received the hearing officer’s decision on its permit, which generally adopted NMED’s proposal. On April 2, 2003, Tyrone filed an appeal of the hearing officer’s decision with the WQCC. NMED issued a permit in accordance with the hearing officer’s decision on April 8, 2003, which Tyrone also expects to appeal. Cobre Mining Company and NMED also have not reached agreement on the terms of a closure permit. The closure permit for Cobre Mining Company does not require a public hearing, and may be issued by NMED at any time.

Chino, Cobre and Tyrone also are subject to permit requirements under NMMA, which was passed in 1993. Following adoption of the New Mexico Mining Act Rules (NMMAR) in 1994, Chino, Cobre and Tyrone received initial permits as existing mining operations under NMMAR in 1997. These permits require revisions to incorporate approved closeout plans, which consist of plans for reclamation of the mining operations to achieve a self-sustaining ecosystem or an approved post-mining land use following cessation of operations at a mine. Existing mining operations may seek a waiver of these reclamation standards for open pits and waste units based upon a demonstration that achieving these standards is technically or economically infeasible or environmentally unsound, as long as measures will be taken to meet air and water quality standards following closure.

NMMAR originally required approval of a closeout plan for an existing mining operation by December 31, 1999, based upon an extension granted by the Director of the Mining and Minerals Division (MMD). NMMAR subsequently was amended to extend the deadline for closeout plan approval until December 31, 2001, and later to October 1, 2002. NMMAR contains a requirement that NMED must provide MMD with a determination that a closeout plan meets applicable environmental standards, including air and water quality standards, before MMD can approve the closeout plan. NMED’s policy is to issue this determination after it has issued closure permits for the facility that submits the closeout plan. In early 2001, Chino, Cobre and Tyrone submitted comprehensive “closure/closeout plans” (CCPs) to both NMED and MMD intended to address the requirements of both the WQCC Regulations and NMMAR. Approval of the CCPs under NMMAR would require the granting of waivers by MMD as authorized under NMMAR. The CCPs were the subject of the public hearings before NMED for Chino and Tyrone, as discussed above.

As of October 1, 2002, NMED had not issued closure permits for Chino, Cobre or Tyrone. Consequently, as of October 1, 2002, MMD had not approved closeout permits for these three mines. As discussed in Item 3 of the Legal Proceedings section, MMD issued Notices of Violation (NOVs) to Chino, Cobre and Tyrone because the three mines did not obtain approved closeout plans by the October 1, 2002, deadline. The NOVs were modified by the Mining Commission following a public hearing to set new deadlines for closeout plan approval tied to NMED permit actions.

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Based on NMED’s permit actions, closeout plan approval for Chino is now due by September 24, 2003, and the closeout plan approval date for Tyrone should be about April 8, 2004. The closeout plan approval deadline for Cobre will be nine months from the date of NMED’s permit issuance, which is currently pending.

NMMAR contains specific requirements regarding financial assurance that must be provided to MMD to assure that sufficient funds would be available to MMD to carry out the closeout plan in the event of a default by the permittee. NMED also may require financial assurance under the WQCC Regulations. The financial assurance requirements are based upon the net present value of estimated costs to carry out the requirements of the closure permit and the approved closeout plan, assuming the state would hire a third-party contractor to conduct the work. Actual reclamation costs may differ significantly from the costs estimated under the permits due to advances in technology and reclamation techniques and opportunities to prepare each site for more efficient reclamation through careful development of the site over time. Consequently, the estimated costs under the permits are higher than the cost the Company would be expected to incur if the Company performed the work.

The CCPs submitted in early 2001 contained cost estimates of approximately $100 million for Chino, $121 million for Tyrone, and $9 million for Cobre, based upon unescalated and undiscounted capital and operating costs over a 30-year operating period. The closure permit negotiated by NMED and Chino Mines Company and approved by the NMED hearing officer has an estimated cost of approximately $391 million, based upon third-party unescalated and undiscounted capital and operating costs over a 100-year operating period. This cost estimate will be adjusted to include the cost of technical studies required under the permit conditions after a cost estimate for those costs has been approved by NMED. The Company’s two-thirds share of NMED’s $391 million estimate is approximately $261 million and our joint venture partner’s cost share is approximately $130 million. We estimate total costs to achieve the closure standards required by NMED to be approximately $261 million. The Company’s cost estimate to achieve the New Mexico closure standards is approximately one-third lower than the financial assurance cost estimate as a result of the Company’s historical cost advantages, savings from the use of the Company’s own personnel and equipment versus third-party contract costs, and opportunities to prepare the site for more efficient reclamation. The financial assurance cost estimate includes approximately $10 million (100 percent basis) of costs the Company has recognized in environmental reserves. The Company’s two-thirds share of these costs is approximately $174 million and our joint venture partner’s cost share is approximately $87 million. At December 31, 2002 and 2001, we had accrued approximately $8 million and $5 million, respectively, (two-thirds basis) for reclamation at Chino. The NMED cost estimate for Chino is subject to further review, and possible adjustment, by MMD under NMMAR.

NMED estimated the cost to carry out the requirements of its proposed closure permit for Tyrone at approximately $440 million, without discounting or escalation, under NMED’s proposal at the May 2002 hearing; Tyrone estimated the cost of its proposal at approximately $328 million, without discounting or escalation over a 100-year operating period. NMED has not yet supplied its proposed cost estimate for Cobre. The proposed terms of the closure permits would require additional studies over the five-year term of the permits to refine the closure plan. The plan requirements and cost estimates may increase or decrease based upon the results of the studies and other factors, including changes in technology, completion of some closure and reclamation work, and inflation.

Based upon NMED’s undiscounted financial assurance cost estimates for the Tyrone plan of approximately $440 million, and considering the same cost advantages as indicated in the above discussion regarding Chino, we estimate the Company’s costs to achieve the closure standards under that estimate to be approximately $288 million for Tyrone. The Company has not obtained approval from NMED of an estimate of its cost to achieve the closure standards that would be required by the hearing officer’s decision. The Company’s current cost estimate for Cobre of approximately $9 million will be updated with the issuance of the discharge permit. At December 31, 2002 and 2001, we had accrued closure costs of approximately $27 million and $8 million, respectively, at Tyrone and approximately $2 million at Cobre.

Following NMED’s issuance of the closure permits, Chino, Cobre and Tyrone are required to submit proposals for financial assurance based upon the permit requirements and subject to NMED’s approval. Under the proposed closure permit terms, the amount of financial assurance may be based upon the net present value of the estimated cost for a third-party to implement the plan, using discount and escalation rates specified in the permit. These amounts are expected to be substantially lower than the undiscounted and unescalated cost estimates. For example, based upon the cost estimate approved by the hearing officer, the financial assurance amount for Chino could be approximately $189 million. This amount is based on annual escalation rates of approximately 3.2 percent for long-term water treatment costs and approximately 3.6 percent for other costs and discount rates of 5 percent for years one through 12 of the plan and 8 percent for years 13 through 100.

NMMAR requires that financial assurance for a closeout plan be approved and put in place before

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MMD can approve the closeout plan. Currently, under “interim” financial assurance required under the terms of their NMED closure permits, Chino and Tyrone have provided approximately $56 million and $58 million of financial assurance, respectively, which is held by NMED. Cobre also has approximately $2 million of financial assurance in place held jointly by NMED and MMD. Following NMED’s issuance of the closure permits, and prior to MMD’s approval of the closeout plans, Chino, Tyrone and Cobre will be required to provide substantial amounts of additional financial assurance to cover the amounts of the approved cost estimates and may involve material cost depending on the form of financial assurance provided. Hidalgo currently has provided financial assurance in the amount of approximately $11 million under its discharge permit.

In December 1994, Chino Mines Company entered into an Administrative Order on Consent (AOC) with NMED. This AOC requires Chino to perform a Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) quality investigation of environmental impacts and potential risks to human health and the environment associated with portions of the Chino property affected by historical mining operations. The remedial investigations began in 1995 and are still under way, although substantial portions of the remedial investigations are near completion. While some remediation is expected to be required, no feasibility studies have yet been completed, and NMED has not yet issued a record of decision regarding any remediation that may be required under the AOC. The Company’s estimated cost is $14.1 million (two-thirds share basis). In addition to work under the AOC, Chino is continuing ongoing projects to place interim caps on inactive tailing ponds to control blowing dust at an estimated cost of $2.5 million (two-thirds share basis) and to excavate and remove copper-bearing sediments from an area known as “Lake One” for copper recovery in existing leach stockpiles at the mine. The Company’s estimated cost for Lake One is $4.3 million (two-thirds share basis). The Company’s aggregate reserve for its share of liability under the Chino AOC and for the interim work on the tailing ponds and Lake One is $20.9 million.

At Tyrone, an interim dust control cap has been placed on a historic tailing pile. Tyrone is considering implementing additional measures to address the ponding of storm water that accumulates seasonally on inactive tailing ponds and to reduce financial assurance requirements. Tyrone currently is neutralizing the ponded water. Tyrone continues to operate groundwater corrective action systems under the terms of its NMED discharge permits. The current amount reserved for these items at Tyrone is $17.5 million.

The discharge permit issued by NMED for the Hidalgo smelter contains corrective action requirements for contaminated groundwater near the smelter’s closed former wastewater evaporation pond. The evaporation pond has been closed by construction of a soil cap approved by NMED. Impacted groundwater is pumped from a series of wells, treated in a neutralization facility, and discharged to a series of lined impoundments or to an irrigation system. The discharge permit requires a comprehensive groundwater study to characterize groundwater at the site. NMED could require future enhancement of the system based upon the results of the ongoing study.

Primary Molybdenum Segment

Significant Colorado Reclamation Program

Our Climax and Henderson mines in Colorado are subject to permitting requirements under the Colorado Mined Land Reclamation Act, which requires approval of reclamation plans and provisions for financial assurance. These mines have had approved mined land reclamation plans for several years and have provided the required financial assurance to the state of Colorado in the amount of $52.4 million and $10.1 million, for Climax and Henderson, respectively. As a result of adjustments to the approved cost estimates for various reasons, the amount of financial assurance requirements can increase or decrease over time. At December 31, 2002 and 2001, we had accrued closure costs of approximately $19 million and $18 million, respectively, for our Colorado operations.

Other Mining

Some portions of our mining operations located on public lands are subject to mine plans of operation approved by the federal BLM. BLM’s regulations include financial assurance requirements for reclamation plans required as part of the approved plans of operation. As a result of recent changes to BLM’s regulations, including more stringent financial assurance requirements, increases in existing financial assurance amounts held by BLM could be required. Currently, financial assurance for the Company’s operations held by BLM totals $2.7 million.

The Company is investigating available options to provide additional financial assurance and, in some instances, to replace existing financial assurance. The cost of surety bonds, the traditional source of financial assurance, has increased significantly over the past year, and many surety companies are now requiring an increased level of collateral supporting the bonds such that they no longer are economically prudent. Some surety companies that issued surety bonds to the Company are seeking to exit the market for reclamation bonds. The terms and conditions presently available from our principal surety bond provider for reclamation and other types of long-lived surety bonds have made this type of financial assurance economically

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impractical. We are working with the impacted state and federal agencies to put in place acceptable alternative forms of financial assurance in a timely fashion.

We also are subject to federal and state laws and regulations pertaining to plant and mine safety and health conditions. These laws include the Occupational Safety and Health Act of 1970 and the Mine Safety and Health Act of 1977. Present and proposed regulations govern worker exposure to a number of substances and conditions present in work environments. These include dust, mist, fumes, heat and noise. We are making and will continue to make expenditures to comply with health and safety laws and regulations.

We estimate that our share of capital expenditures for programs to comply with applicable environmental laws and regulations that affect our mining operations will total approximately $21 million in 2003 and approximately $19 million in 2004; approximately $13 million was spent on such programs in 2002. We also anticipate making significant capital and other expenditures beyond 2004 for continued compliance with such laws and regulations. In light of the frequent changes in the laws and regulations and the uncertainty inherent in this area, we are unable to reasonably estimate the total amount of such expenditures over the longer term, but it may be material. (Refer to the discussion of OTHER ENVIRONMENTAL MATTERS.)

We do not expect that additional capital and operating costs associated with achieving compliance with the many environmental, health and safety laws and regulations will have a material adverse affect on our competitive position relative to other U.S. copper producers. These domestic copper producers are subject to comparable requirements. However, because copper is an internationally traded commodity, these costs could significantly affect us in our efforts to compete globally with those foreign producers not subject to such stringent requirements.

Ownership of Property

U.S. Mining Operations

In the United States, most of the land occupied by our copper mines, concentrators, SX/EW facilities, smelters, refineries, rod mills, and molybdenum roasters or processing facilities generally is owned by, or is located on unpatented mining claims owned by, the Company. Certain portions of our Henderson, Miami, Bagdad, Sierrita, Tyrone, Chino and Cobre operations are located on government-owned land and are operated under a Mine Plan of Operations. The Sierrita operation leases property adjacent to its mine upon which its electrowinning tankhouse facility is located. The current lease agreement expires in the year 2003 and future alternatives, including extension of the lease, are being considered. Cyprus Tohono Corporation holds leases for land, water and business purposes on land owned by the Tohono O’odham Indian Nation for its operation that is presently on care-and-maintenance status. Various federal and state permits or leases on government land are held for purposes incidental to mine operations.

South American Mining

At the Candelaria, Ojos del Salado, El Abra and Cerro Verde operations in South America, mine properties and facilities are controlled through mining concessions under the general mining laws of the relevant country. The concessions are owned or controlled by the operating companies in which the Company or its subsidiaries have an ownership interest.

PHELPS DODGE INDUSTRIES

PDI is our manufacturing division comprising two business segments that produce engineered products principally for the global energy, telecommunications, transportation and specialty chemicals sectors. Its operations are characterized by products with significant market share, internationally competitive cost and quality, and specialized engineering capabilities. The two segments are Specialty Chemicals and Wire and Cable. In December 2000, we announced our intention to explore strategic alternatives, including restructuring, selective asset sales, commercial arrangements (including joint ventures) and mergers, for PDI. In May 2001, we terminated the sales process, noting that the then current economic environment was not delivering transactions that offered appropriate value to our shareholders.

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Specialty Chemicals Segment

Columbian Chemicals Company and its subsidiaries (Columbian Chemicals or Columbian), our Specialty Chemicals segment headquartered in Marietta, Georgia, is an international producer and marketer of carbon blacks. At Columbian Chemicals, we produce a full range of rubber and industrial carbon blacks in 12 plants worldwide (although our El Dorado, Arkansas, plant is temporarily closed), with approximately 35 percent of our production in North America and the remaining 65 percent at facilities in Europe, Asia and South America. Our rubber carbon blacks improve the tread wear and durability of tires, and extend the service life of many rubber products such as belts and hoses. Our industrial carbon blacks are used in such diverse applications as pigmentation of coatings, inks and plastics; ultraviolet stabilization of plastics; and as conductive insulation for wire and cable. We also maintain sales offices in 11 countries and make use of distributors worldwide.

Extensive research and development is performed at our technology centers located at Marietta, Georgia, and Avonmouth, United Kingdom. These technology centers are responsible for studies specific to both industrial and rubber applications of carbon black. Carbon black product and process development at these technology centers are supported by development work at Columbian’s plants worldwide.

Beginning in December 2001, Columbian Chemicals curtailed 54,000 metric tons of annual North American carbon black production at its El Dorado, Arkansas, plant due to significant over-capacity in the U.S. market caused by the economic recession. The facility is expected to reopen when economic conditions improve.

In the second quarter of 2000, we acquired the remaining 40 percent share in the carbon black manufacturing business of Columbian Tiszai Carbon Ltd. in Hungary for $19.0 million, bringing our total interest to 100 percent.

In the first quarter of 2000, we acquired an additional 18 percent ownership in Columbian Carbon Japan, a sales and distribution company serving the Japanese market, bringing our total ownership interest to 68 percent.

In January 1999, we acquired an 85 percent interest in the Korean carbon black manufacturing business of Korea Kumho Petrochemical Co., Ltd., for $76.1 million. This business includes a 110,000 metric-ton-per-year manufacturing plant.

In October 1998, we acquired the Brazilian carbon black manufacturing business of Copebras S.A., a subsidiary of Minorco, for $220 million. This manufacturing facility has an annual production capacity of 170,000 metric tons of carbon black.

In November 1999, our manufacturing facility in Bataan, the Philippines, was permanently closed as it did not have the economies of scale to compete profitably with imports from larger regional producers.

Competition and Markets

The principal competitive factors in the various markets in which our Specialty Chemicals segment competes are product quality, customer service, price, dependability of supply, delivery lead time, breadth of product line, and technical service and innovation.

Columbian Chemicals is among the world’s largest producers of carbon black. Approximately 90 percent of the carbon black it produces is used in rubber applications, a substantial portion of which is used in the tire industry. Major tire manufacturers worldwide account for a substantial portion of our carbon black sales. In addition, we maintain a strong competitive position in both the mechanical rubber goods market and the industrial carbon black market based on our commitment to quality, service and technical innovation. Despite ongoing attempts to substitute carbon black with silica, reclaimed rubber or other materials, none has been able to match the cost and performance of carbon black in its principal applications. The closest successful substitute is a silane-treated silica which has made some in-roads in the tire market due to its increased wet traction characteristics for specific applications.

Including Columbian Chemicals, there are a total of five major carbon black producers in the United States, three in Canada, three in western Europe and three in South America. There also are many producers in Asia. The carbon black industry is highly competitive, particularly in the rubber black market.

Raw Materials and Energy Supplies

Carbon black is produced primarily from heavy residual oil, a by-product of the crude oil refining process. At Columbian Chemicals, we purchase substantially all of our feedstock at market prices that fluctuate with world oil prices. Our residual oil feedstock and other raw materials for our specialty chemicals business are purchased from various suppliers. The cost of feedstock is a significant factor in the cost of carbon black. To achieve satisfactory financial results during periods of high and/or increasing oil prices, we must be able to pass through these high and/or increasing prices to our customers. We do not believe that the loss of any one supplier would have a material adverse effect on our financial condition or on the results of our operations.

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Our specialty chemical operations generally use purchased or internally generated electricity and natural gas as their principal sources of energy.

Ownership of Property

Columbian Chemicals owns all property other than the leased land at its Sevalco, Hannover and Korean facilities. This leased land is not material to our overall operations.

Wire and Cable Segment

The Wire and Cable segment, headquartered in Phoenix, Arizona, consists of three worldwide product line businesses comprising magnet wire, energy and telecommunications cables, and specialty conductors.

Magnet wire, the insulated conductor used in most electrical motors, is manufactured in the United States at plants in Fort Wayne, Indiana, and El Paso, Texas. We also manufacture magnet wire at wholly owned subsidiaries in Mureck, Austria, and Monterrey, Mexico. As part of a manufacturing rationalization program aimed at significant cost reductions, our Laurinburg, North Carolina, plant was temporarily closed in 2002 and our Hopkinsville, Kentucky, plant was closed in 2000 and its value was written down by $3.3 million in the second quarter of 2001. The productive assets of our Hopkinsville, Kentucky, plant were moved to other facilities in the United States and Mexico. In 2000, a special, pre-tax charge of $5.8 million was recognized for our wire and cable operations in Austria as a result of the long-term impact of continuing extremely competitive pricing conditions in Europe. Those conditions led to a determination that we should assess the recoverability of our Austrian wire and cable asset values. In addition, we permanently ceased the relatively small production of magnet wire at our company in Venezuela in 1999.

Phelps Dodge International manufactures energy and telecommunication cables for international markets and manufactures products in factories located in 10 countries. We provide management, marketing assistance, technical support, and engineering and purchasing services to these companies. Three of our international wire and cable companies have continuous-cast copper rod facilities (a fourth facility was closed in 1999), and three of our international wire and cable companies have continuous-cast aluminum rod facilities. We have majority interests in companies with production facilities in seven countries – Brazil, Chile, Costa Rica, Honduras, Thailand, Venezuela and Zambia. We also have minority interests in companies located in Hong Kong and Thailand, accounted for on the equity basis, and in companies located in Greece and India, accounted for on the cost basis.

In December 1997, we acquired a 60 percent interest in the Brazilian copper and aluminum wire and cable manufacturing business (the Business) of Alcoa Aluminio, S.A. (Aluminio) for $72 million. At that time, the fair value of the Business was $120 million. As part of the purchase agreement, Aluminio was given an optional exit mechanism to sell to the Company all, but not less than all, of its remaining shares in the Business. The agreement stipulated that Aluminio could exercise its option between December 31, 2000, and January 1, 2006. Under the terms of the agreement, the exit price would be the greater of (a) the sum of (i) the aggregate amount of paid in cash by Aluminio to subscribe to capital increases, plus (ii) $48 million, or (b) the value of shareholders’ equity represented by Aluminio’s shares. In January 2001, Aluminio gave the Company notice of its intent to exercise the option. As a result of other commitments by Aluminio under the purchase agreement, the exit price was renegotiated and the transaction to acquire Aluminio’s remaining 40 percent interest in the Business closed in March 2001 for $44.8 million. Given the option price at the time of the transaction was equal to fair value, the value of the put option was deminimus.

During the second quarter of 2000, we ceased production at two wire and cable plants in Venezuela due to low forecast plant utilization levels as a result of significantly reduced infrastructure spending in the Latin America region. These plant closures resulted in a special, pre-tax loss of $26.1 million. We also ceased production at our majority-owned telephone cable operation in El Salvador in the fourth quarter of 2000 due to low plant utilization levels as a result of heightened global competition for telecommunication cable. The plant closure resulted in a special, pre-tax loss of $5.5 million. A charge of $7.2 million to miscellaneous income and expense was recognized to reflect the impairment of our 40 percent equity interest in a wire and cable operation in the Philippines. The impairment was based upon an analysis of future cash flows of the operation, continuing economic uncertainty in the Philippines and the erosion of our strategic and operating influence.

During 1999, we converted a small manufacturing facility in Ecuador to a distribution center. Also in 1999, we opened a distribution center in Colombia. In all, we operate distribution centers in nine countries in addition to the United States – Guatemala, El Salvador, Honduras, Panama, Puerto Rico, Colombia, Ecuador, Belgium and South Africa. At the end of 1999, we recognized impairments of our equity basis investment in China as well as an impairment of our telecommunications business in the Philippines.

We manufacture and market highly engineered conductors of copper and copper alloy wire electroplated with silver, tin or nickel for sophisticated, specialty product niches in the aerospace, automotive,

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biomedical, computer and consumer electronics markets. Those products are manufactured in plants located in Inman, South Carolina; Trenton, Georgia; and Elizabeth, New Jersey. As part of the manufacturing rationalization program initiated in 1999, leased plants in Fairfield and Montville, New Jersey, were closed in 2000, and the West Caldwell, New Jersey, plant was temporarily closed in 2002. Their productive capacities were transferred to the remaining facilities.

On September 10, 2002, we announced the temporary closure of two U.S. wire and cable plants and other actions to improve efficiencies and consolidate certain wire and cable operations. These temporary closures and internal changes are expected to reduce our costs and align our business with current market conditions. The actions included: (i) the temporary closure of the Laurinburg, North Carolina, magnet wire plant at the end of 2002, with production being shifted to the El Paso, Texas, and Fort Wayne, Indiana, facilities; (ii) the temporary closure of the West Caldwell, New Jersey, High Performance Conductors facility pending recovery of markets served by this location, with production of certain products relocated to our Inman, South Carolina, facility; (iii) operational and production support at other High Performance Conductors facilities being streamlined in order to reduce costs and increase operating efficiencies; and (iv) the restructuring and consolidation of certain administrative functions. These actions resulted in special, pre-tax charges of $23.0 million ($22.2 million after-tax) in the 2002 third quarter and $0.6 million ($0.8 million after-tax) in the 2002 fourth quarter. Of these amounts, $16.9 million (before and after taxes) was recognized as asset impairments and $6.7 million ($6.1 million after-tax) was recognized for severance-related and relocation expenses associated with the restructuring and temporary closures. The amount of the asset impairment was determined through an assessment of fair market value, which was based on independent appraisals, of the existing assets at the wire and cable plants. We also performed an event-driven impairment test on the goodwill at our wire and cable plants through a comparison of the carrying value to the respective fair value (using an estimate of discounted cash flows) and determined that an additional impairment loss was not required. The restructuring plan includes the reduction of approximately 300 positions and charges associated with employee severance and relocation ($3.9 million, of which $0.7 million and $1.9 million was paid in the 2002 third and fourth quarters, respectively) and pension and other postretirement obligations ($2.8 million).

Competition and Markets

Phelps Dodge is one of the world’s largest manufacturers of magnet wire. Our plants draw, roll and insulate copper and aluminum wire which is sold as magnet wire and bare conductors to original equipment manufacturers for use in electric motors, generators, transformers, televisions, automobiles and a variety of small electrical appliances. Magnet wire also is sold to electrical equipment repair shops and smaller original equipment manufacturers through a network of distributors. We principally compete with two international and two U.S. magnet wire producers.

Our international energy and telecommunication cable companies primarily sell products to contractors, distributors, and public and private utilities. Our products are used in lighting, power distribution, telecommunications and other electrical applications. Our competitors range from worldwide wire and cable manufacturers to small local producers.

Our specialty conductors are sold primarily to intermediaries (insulators, assemblers, subcontractors and distributors). Approximately 40 percent of these products ultimately are sold to commercial and military aerospace companies for use in airframes, avionics, space electronics, radar systems and ground control electronics. Specialty conductors also are used in appliances, instrumentation, computers, telecommunications, military electronics, medical equipment and other products. We have two primary U.S. competitors and compete with three importers in the specialty conductor market; however, in those few markets where we compete for high volume products, we face competition from several U.S. fabricators.

Raw Materials and Energy Supplies

The principal raw materials used by our magnet wire manufacturing operations are copper, aluminum and various chemicals and resins used in the manufacture of electrical insulating materials. Most of the copper purchased for our magnet wire operations is from our PDMC division.

The principal raw materials used by our international energy and telecommunication cable companies are copper, copper alloy, aluminum, aluminum alloy, copper-clad steel and various electrical insulating materials.

The specialty conductor product line usually is plated with silver, nickel or tin. With the exception of copper needed in specialty conductors, a majority of the materials used by these companies is purchased from others. We do not believe that the loss of any one supplier would have a material adverse effect on our financial condition or on the results of our operations.

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Most of our wire and cable operations generally use purchased electricity and natural gas as their principal sources of energy. Our magnet wire company’s principal manufacturing equipment uses natural gas; however, it is also equipped to burn alternative fuels.

Ownership of Property

We own most of the plants and land on which our wire and cable operations are located. The exceptions are the leased land and buildings of our magnet wire facilities in Austria and closed specialty conductor facilities in Fairfield and Montville, New Jersey. This land is not material to our overall operations.

Environmental Matters

Federal and state environmental laws and regulations affect many aspects of our domestic industrial operations. We estimate that capital expenditures for programs to comply with applicable environmental laws and regulations within our PDI division will total approximately $8 million in 2003 and approximately $11 million in 2004; approximately $3 million was spent on such programs in 2002. We anticipate making significant capital and other expenditures after 2003 for continued compliance with environmental laws and regulations.

It is expected that most, and perhaps all, of our domestic carbon black plants and magnet wire plants are or will become subject to one or more MACT standards under the federal CAA. These standards do not have immediate compliance dates; instead they allow two or three years after promulgation to provide the opportunity to come into compliance or to reduce emissions to avoid regulation before the compliance date. For example, the carbon black MACT standard was issued in 2002, and the compliance date for the carbon black MACT standard is July 2005. Other potentially applicable MACT standards are still in development. We are in the process of determining applicability and compliance strategies.

The European Union (EU) has commenced work on the development of Best Available Technology (BAT) for the carbon black industry. The current BAT Reference Document (BREF Note) proposes to control sulfur dioxide emissions by limiting the annual sulfur content in feedstocks to 0.5 percent. This limit, if adopted, could negatively impact the carbon black industry, including Columbian. Columbian, through the carbon black industry trade association, is actively involved in this process. It is expected that it will be approximately two years before any final action will be taken.

Because of the frequent changes in environmental laws and regulations and the uncertainty these changes create for us, we are unable to estimate reasonably the total amount of such expenditures over the longer term, but it may be material. (Refer to the discussion of OTHER ENVIRONMENTAL MATTERS.)

LABOR MATTERS

Employees at PDMC’s Arizona operations, El Paso refinery and rod mill, Tyrone, Hidalgo smelter, the Norwich and Chicago rod mills, the Henderson mine in Colorado, the Fort Madison, Iowa, molybdenum processing facility, and some employees at Chino are not represented by any unions.

Our El Abra mine in Chile had labor agreements that expired on October 30, 2001. Two new three-year agreements, covering approximately 593 employees, were ratified with effective dates of November 1, 2001, through October 31, 2004. Candelaria has two labor agreements, covering approximately 700 employees, which expired in March 2003. On March 31, 2003, the 556 employees represented by the Candelaria union elected to go on strike. A labor agreement was reached earlier with the remaining non-union hourly employees. The mine will remain in production as negotiations continue with the Candelaria union. Cerro Verde has a three-year labor agreement, covering approximately 295 employees, that expires December 31, 2003. Our Chino mine in Hurley, New Mexico, has an agreement covering approximately 447 employees that expired on November 18, 2002; negotiations are still ongoing in regard to this agreement. Our molybdenum operations in Stowmarket and Rotterdam have agreements covering approximately 38 and 50 employees, respectively, that expire (or expired) on May 31 and March 31, 2003.

In addition, we currently have labor agreements covering most of our U.S. and international manufacturing division plants. Our specialty chemicals plant in Trecate, Italy, has an agreement covering 89 employees that expires on December 31, 2003, and an agreement covering seven employees that expired on December 31, 2001; negotiations are still ongoing in regard to this agreement. Our specialty chemicals plant in Hamilton, Ontario, Canada, had an agreement that expired on September 30, 2002. In March 2003, a new four-year agreement was reached covering 65 employees. The plant remained fully operational and staffed by salaried and contract employees during the work stoppage enacted in November 2002. Our specialty chemicals facilities in Cubatao and Sao Paulo, Brazil, have agreements covering 211 and 26 employees, respectively, that expire on October 31, 2003. Our specialty chemicals plant in Bristol, United Kingdom, has an agreement covering 107 employees that expires on May 8, 2003; negotiations are expected to begin in April 2003. Our specialty chemicals plant in Hannover, Germany, has an agreement covering 74 employees that expires on July 31, 2003. Our spe-

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cialty chemicals plant in Yosu, South Korea, has a wage agreement covering 49 employees that expired March 31, 2003; negotiations are expected to begin during the 2003 second quarter. Our specialty chemicals plant in Santander, Spain, has an agreement covering 48 employees that expired on December 31, 2002; negotiations are expected to begin during the 2003 second quarter. Our specialty chemicals plant in Marshall, West Virginia, has two agreements covering 60 employees that expire in June 2003. Our specialty chemicals North Bend plant in Franklin, Louisiana, had an agreement that expired on February 28, 2003. In February 2003, a new three-year agreement was reached covering 113 employees.

Our wire plant in Elizabeth, New Jersey, has an agreement covering 45 employees that expired on July 31, 2000; negotiations are still ongoing in regard to this agreement. Our wire plant in West Caldwell, New Jersey, has an agreement covering 88 employees that expires in September 2003; this facility was temporarily closed in December 2002. Our plant in Zambia has an agreement covering approximately 98 employees that expires in July 2003. Our magnet wire plant in Monterrey, Mexico, has an agreement covering approximately 143 employees that expired in March 2003; negotiations began in April 2003. Our magnet wire plant in Fort Wayne, Indiana, has an agreement covering approximately 210 employees that expires in May 2005. Our magnet wire plant in Austria has an agreement covering approximately 70 employees that expires in October 2003. Our wire and cable facilities in Brazil have agreements covering approximately 279 and 30 employees that expire in September and November 2003, respectively. Our wire and cable facilities in Venezuela have agreements covering approximately 80 and 78 employees that expire in March 2004 and December 2005, respectively. Our wire and cable plant in Chile has an agreement covering approximately 184 employees that expires in May 2007.

RESEARCH AND DEVELOPMENT

We conduct research and development programs relating to technology for exploration for minerals, mining and recovery of metals from ores, concentrates and solutions, smelting and refining of copper, metal processing and product development. We also conduct research and development programs related to our carbon products through Columbian Chemicals, and our wire insulating processes and materials and conductor materials and processes through our Wire and Cable segment. Expenditures for all of these research and development programs, together with contributions to industry and government-supported programs, totaled $26.0 million in 2002, compared with $27.1 million in 2001 and $24.7 million in 2000.

OTHER ENVIRONMENTAL MATTERS

Phelps Dodge or its subsidiaries have been advised by EPA, the U.S. Forest Service and several state agencies that they may be liable under CERCLA or similar state laws and regulations for costs of responding to environmental conditions at a number of sites that have been or are being investigated by EPA, the U.S. Forest Service or states to determine whether releases of hazardous substances have occurred and, if so, to develop and implement remedial actions.

Phelps Dodge has provided reserves for potential environmental obligations that management considers probable and for which reasonable estimates can be made. For closed facilities and closed portions of operating facilities with closure obligations, an environmental liability is considered probable and is accrued when a closure determination is made and approved by management. Environmental liabilities attributed to CERCLA or analogous state programs are considered probable when a claim is asserted, or is probable of assertion, and we have been associated with the site. Other environmental remediation liabilities are considered probable based upon specific facts and circumstances. Liability estimates are based on an evaluation of, among other factors, currently available facts, existing technology, presently enacted laws and regulations, Phelps Dodge’s experience in remediation, other companies’ remediation experience, Phelps Dodge’s status as a potentially responsible party (PRP), and the ability of other PRPs to pay their allocated portions. Accordingly, total environmental reserves of $305.9 million and $311.2 million were recorded as of December 31, 2002 and 2001, respectively. The long-term portion of these reserves is included in other liabilities and deferred credits on the consolidated balance sheet and amounted to $261.7 million and $264.3 million at December 31, 2002 and 2001, respectively.

The sites for which we have received a liability claim, a notice of potential liability or an information request that currently are considered to be the most significant are the Pinal Creek site near Miami, Arizona; the Laurel Hill site at Maspeth, New York; the former American Zinc and Chemical site in Langeloth, Pennsylvania; and the Cyprus Tohono site near Casa Grande, Arizona.

Pinal Creek Site

The Pinal Creek site was listed under the ADEQ Water Quality Assurance Revolving Fund program in 1989 for contamination in the shallow alluvial aquifers within the Pinal Creek drainage near Miami, Arizona. Since that time, environmental remediation has been performed by the members of the Pinal Creek Group (PCG), comprising Phelps Dodge Miami, Inc. (a wholly owned subsidiary of the Company) and

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two other companies. In 1998, the District Court approved a Consent Decree between the PCG members and the state of Arizona resolving all matters related to an enforcement action contemplated by the state of Arizona against the PCG members with respect to the groundwater matter. The Consent Decree committed Phelps Dodge Miami, Inc. and the other PCG members to complete the remediation work outlined in the Consent Decree. That work continues at this time pursuant to the Consent Decree and consistent with the National Contingency Plan prepared by EPA under CERCLA.

Phelps Dodge Miami, Inc. and the other members of the PCG are pursuing contribution litigation against three other parties involved with the site. At least two of the three defendants now have admitted direct liability as responsible parties. The case is expected to be assigned a trial date in 2004. Phelps Dodge Miami, Inc. also asserted claims against certain past insurance carriers. As of November 2002, all of the carriers have settled or had their liability adjudicated. One carrier has appealed the judgment against it.

In addition, a dispute between one dissenting PCG member and Phelps Dodge Miami, Inc. and the other PCG member was filed in Superior Court in 2002. The litigation seeks a declaratory judgment on the dissenting member’s contract liability under the PCG agreement. Trial for this matter is scheduled for early 2004.

While significant recoveries may be achieved in the contribution litigation, the Company cannot reasonably estimate the amount and, therefore, has not taken potential recoveries into consideration in the recorded reserve.

Phelps Dodge Miami, Inc.’s share of the planned remediation work has a cost range for reasonable expected outcomes estimated to be from $117 million to $219 million, and, as no point within that range is more likely than any other, the lower end of the range has been reserved as required by generally accepted accounting principles. Approximately $117 million remained in the Company’s Pinal Creek remediation reserve at December 31, 2002.

Laurel Hill Site

Phelps Dodge Refining Corporation, a subsidiary of the Company, owns the Laurel Hill property in Maspeth, New York, that formerly was used for metal-related smelting, refining and manufacturing. All industrial operations at the Laurel Hill site ceased in 1984. In June 1999, the Company entered into an Order on Consent with the New York State Department of Environmental Conservation (NYSDEC) that required the Company to perform, among other things, a remedial investigation and feasibility study relating to environmental conditions and remedial options at the Laurel Hill site.

The Company’s final feasibility study, which was submitted to NYSDEC in May 2002, recommended that the Laurel Hill site be remediated by removing certain “hot spots” of contaminated soils, capping most of the surface of the site, installing and operating a groundwater extraction, containment and treatment system, long-term groundwater monitoring, and implementing institutional controls concerning future land uses. In June 2002, NYSDEC issued a Proposed Remedial Action Plan (PRAP) adopting Phelps Dodge’s remedial recommendation. NYSDEC has held public meetings concerning its PRAP and issued a final remedial decision in January 2003 in the form of a Record of Decision. Phelps Dodge expects to commence implementation of the remedy sometime during the second or third quarter of 2003. While the Laurel Hill site is under a contract for sale for $34 million, and the contract vendee has assumed the obligation of capping the site at a cost of about $5 million, implementing the remainder of the remedy is expected to cost the Company as much as $16 million. The Company has reserved the entire estimated cost of $21 million.

In July 2002, Phelps Dodge entered into another Order on Consent with NYSDEC requiring the Company to conduct a remedial investigation and feasibility study relating to sediments in Newtown and Maspeth Creeks, which are located contiguous to the Laurel Hill site. The Company expects to commence the remedial investigation in mid to late 2003. It cannot be determined what, if any, remedial action will be required by NYSDEC concerning the Newtown and Maspeth Creek sediments until the remedial investigation and feasibility studies are complete.

American Zinc and Chemical Site

In June 1999, Cyprus Amax, now a subsidiary of Phelps Dodge, received an information request from the Pennsylvania Department of Environmental Protection (PADEP) regarding the former American Zinc and Chemical (AZC) site in Langeloth, Pennsylvania. For PADEP, the AZC site consists of a former zinc smelter facility operated until 1947 by the former American Zinc and Chemical Company and a contiguous, currently operating molybdenum refinery formerly owned by the Climax Molybdenum Company, a Cyprus Amax subsidiary. The American Zinc and Chemical Company, which was dissolved in 1951, also was a subsidiary of a corporate predecessor to Cyprus Amax.

In discussions with Cyprus Amax in 2001 and early 2002, PADEP informally indicated that it expects Cyprus Amax to investigate and remediate environ-

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mental conditions at the AZC site, which predominates at and about the former zinc smelter facility. Preliminary evaluations of the nature and extent of environmental conditions at and about the zinc smelter facility indicate that remediation of the AZC site may range in cost from $18 million to $52 million. While the Company has reserved $20 million for possible remediation work at the AZC site, which represents the most likely point within the range of estimates, Cyprus Amax has indicated to PADEP that the Company is not liable for the actions of its former subsidiary, American Zinc and Chemical Company, under existing federal and state environmental laws. To date, PADEP has not responded to Cyprus Amax’s assertion of non-liability.

Cyprus Tohono Site

Cyprus Tohono holds three leases for lands on the Tohono O’odham Indian Nation. The leased lands include the site of a mining operation, currently on care-and-maintenance status, comprising an open pit, underground mine workings, leach and non-leach rock stockpiles, tailing and evaporation ponds, SX/EW operations, and ancillary facilities.

EPA has started a Preliminary Assessment and Site Investigation of Cyprus Tohono to evaluate the need to conduct remedial actions under CERCLA. We are unable to project the remedial action measures, if any, that may be required as a result of these investigations; however, based upon our best estimate of remedial actions that Cyprus Tohono may undertake, the Company reserved $11 million for Cyprus Tohono for the CERCLA matter.

Other

In 2002, the Company recognized charges of $14.0 million for environmental remediation primarily for the Laurel Hill site ($13.5 million) and the remainder at closed sites, none of which increased or decreased individually more than $2 million.

At December 31, 2002, the cost range for reasonably possible outcomes for all reservable environmental remediation sites other than Pinal Creek, Laurel Hill, AZC and Cyprus Tohono was estimated to be from $119 million to $219 million of which $137 million has been reserved. Work on these sites is expected to be substantially completed in the next several years, subject to inherent delays involved in the remediation process.

Phelps Dodge believes certain insurance policies partially cover the foregoing environmental liabilities; however, some of the insurance carriers have denied coverage. We presently are negotiating with the carriers over some of these disputes. Further, Phelps Dodge believes it has other potential claims for recovery from other third parties, including the United States Government and other PRPs. Neither insurance recoveries nor other claims or offsets are recognized unless such offsets are considered probable of realization. In 2002 and 2001, the Company recognized proceeds from settlements reached with several insurance companies on historic environmental liability claims of $34.3 million and $61.8 million, net of fees and expenses, respectively.

Phelps Dodge has a number of sites that are not the subject of an environmental reserve because it is not probable that a successful claim will be made against the Company for those sites, but for which there is a reasonably possible likelihood of an environmental remediation liability. At December 31, 2002, the cost range for reasonably possible outcomes for all such sites was estimated to be from $4 million to $37 million. The liabilities arising from potential environmental obligations that have not been reserved at this time may be material to the results of any single quarter or year in the future. Management, however, believes the liability arising from potential environmental obligations is not likely to have a material adverse effect on the Company’s liquidity or financial position as such obligations could be satisfied over a period of years.

Our operations are subject to many environmental laws and regulations in jurisdictions both in the United States and in other countries in which we do business. For further discussion of these laws and regulations, refer to PDMC - Environmental and Other Regulatory Matters and PDI - Environmental Matters. The estimates given in those discussions of the capital expenditures to comply with environmental laws and regulations in 2003 and 2004, and the expenditures in 2002, are separate from the reserves and estimates described above.

The Environmental, Health and Safety Committee of the Board of Directors comprises five non-employee directors. The Committee met two times in 2002 to review, among other things, the Company’s policies with respect to environmental, health and safety matters, and the adequacy of management’s programs for implementing those policies. The Committee reports on such reviews and makes recommendations with respect to those policies to the Board of Directors and to management.

Item 3. Legal Proceedings

I. We are a member of several trade associations that, from time to time, initiate legal proceedings challenging administrative regulations or court decisions that the membership considers to be improper and potentially adverse to their business interests. These legal proceedings are conducted in the name of

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the trade associations, and the members of the trade association are not parties, named or otherwise.

II. Arizona water regulations, water rights adjudications and other related water cases.


	A. General Background

Arizona surface water law is based on the doctrine of prior appropriation (first in time, first in right). Surface water rights in Arizona are usufructuary rights, and as such the water right holder is granted only the right to use public waters for a statutorily defined beneficial use, at a designated location. Groundwater in Arizona is governed by the doctrine of reasonable use. Arizona has initiated two water rights adjudications in order to quantify and prioritize all of the surface water rights and water right claims to two of the state’s river systems and sources. Groundwater is not subject to the adjudication; however, wells may be adjudicated to the extent that they are found to produce or impact appropriable surface water. The two adjudication cases that could potentially impact Phelps Dodge’s surface water rights and claims (including some wells) are entitled “In Re The General Adjudication of All Rights to Use Water in the Little Colorado Water System and Source, Superior Court Case No. 6417 (Superior Court of Arizona, Apache County; petition filed on or about February 17, 1978),” and “In Re The General Adjudication of All Rights to Use Water in the Gila River System and Source, Superior Court, Case Nos. W-1 (Salt), W-2 (Verde), W-3 (Upper Gila); W-4 (San Pedro); Consolidated (Superior Court of Arizona, Maricopa County; petition filed on February 17, 1978).” The major parties in addition to Phelps Dodge in the Gila River Adjudication are: Gila Valley Irrigation District, the San Carlos Irrigation and Drainage District, the state of Arizona, the San Carlos Apache Tribe, the Gila River Indian Community, and the United States on behalf of those Tribes, on its own behalf and on the behalf of the White Mountain Apache Tribe, Ft. McDowell Mohave-Apache Indian Community, Salt River Pima-Maricopa Indian Community and the Payson Community of Yavapai Apache Indians. The major parties in addition to Phelps Dodge in the Little Colorado Adjudication are: the state of Arizona, the Salt River Project, Arizona Public Service Company, the Navajo Nation, the Hopi Indian Tribe, the San Juan Southern Paiute Tribe and the United States on behalf of those Indian Tribes, on its own behalf and on behalf of the White Mountain Apache Tribe.

Phelps Dodge has four active operations in the state of Arizona: Morenci, Miami, Sierrita and Bagdad. Each operation requires water for mining and all related support facilities. With the exception of Bagdad, each operation is located in a watershed within an ongoing surface water adjudication. Each operation has sufficient water claims to cover its operational demands. In many instances, the water supply may come from a variety of possible sources. The potential impact of the surface water adjudications on each active operation is discussed below.


	B. Operations


	Morenci

The Morenci operation is located in eastern Arizona. Morenci water is supplied by a combination of sources, including decreed surface water rights in the San Francisco River, Chase Creek and Eagle Creek drainages, groundwater from the Upper Eagle Creek wellfield, and Central Arizona Project (CAP) water leased from the San Carlos Apache Tribe and delivered to Morenci via exchange through the Black River Pump Station. Phelps Dodge has filed Statements of Claimants in the adjudication for each of its water sources for Morenci except the CAP water.

Phelps Dodge’s decreed water rights are subject to the Gila River Adjudication and potentially could be impacted. Although the purpose of the adjudication is to determine only surface water rights, wells such as those in the Eagle Creek wellfield may be subject to the Gila River Adjudication, but only to the extent those wells may be determined to capture or impact appropriable surface water. The CAP water provided via exchange is not subject to any state adjudication process. The CAP lease became effective as of January 1, 1999, and has a 50-year term.


	Miami

The Miami operation obtains water from a number of sources in the Salt River watershed. Statements of Claimants have been filed in connection with these water sources, each of which is subject to the adjudication and could be potentially impacted. Miami currently holds a CAP subcontract, although CAP water is not currently used at the operation. CAP water is not subject to adjudication; however, an exchange agreement will need to be negotiated in order to deliver this water to Miami.

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	Sierrita

The Sierrita operation is located in the Santa Cruz River watershed. The water for the operation is groundwater. The wells that supply the water may be subject to the Gila River Adjudication only to the extent that such wells are determined to be pumping or impacting appropriable surface water. Phelps Dodge has filed Statements of Claimants in the adjudication for these water sources in case any are later determined to produce or impact appropriable surface water. In 1980, the Arizona legislature enacted the Arizona Groundwater Code. The Code established Active Management Areas (AMA’s) in several groundwater basins, including the Santa Cruz Groundwater Basin. The groundwater at this operation is subject to regulation under the Tucson AMA.


	Bagdad

The Bagdad operation is located in the Bill Williams River watershed. The water supply includes claims to both surface water and groundwater. There is not an active adjudication proceeding in this watershed; however, the legal precedent set in the active adjudications regarding the determination of whether water pumped from wells is treated as surface water or groundwater may impact the use of water from some wells.


	C. Other Arizona Mining Properties


	The potential impact of the ongoing adjudication on other mining properties is discussed below.


	Safford

Water for the planned future operation at Safford may come from a combination of sources. Wells that supply groundwater may be used and those wells will be subject to the adjudication only to the extent that such wells are determined to be pumping or impacting appropriable surface water. CAP water may also be considered for use at the operation some time in the future. CAP water is not subject to adjudication; however, an exchange agreement will need to be negotiated in order to deliver the water. The implementation of such an exchange will require approval of the Globe Equity Court as well as environmental reviews and related agency approvals.


	Ajo

The potential water supply for Ajo is groundwater. The wells that supply the water may be subject to the Gila River Adjudication to the extent that such wells are determined to be pumping or impacting appropriable surface water. Phelps Dodge has filed a Statement of Claimant in the adjudication for these water sources in case any are later determined to produce or impact appropriable surface water.


	Bisbee

The potential water supply for Bisbee is groundwater. The wells that supply the water may be subject to the Gila River Adjudication to the extent that such wells are determined to be pumping or impacting appropriable surface water. Phelps Dodge has filed a Statement of Claimant in the adjudication for these water sources in case any are later determined to produce or impact appropriable surface water.


	D. Water Settlements


	1. Gila River Indian Community Water Settlement

On May 4, 1998, Phelps Dodge executed a settlement agreement with the Gila River Indian Community (the Community) that resolves the issues between Phelps Dodge and the Community pertinent to the Gila River Adjudication. Since that time, comprehensive settlement negotiations with users all along the Gila River have been initiated. Phelps Dodge’s settlement with the Community is now included in the comprehensive settlement. This settlement is subject to the approval of the Secretary of the Interior and the passage of federal legislation.


	2. San Carlos Apache Tribe

In 1997, issues of dispute arose between Phelps Dodge and the San Carlos Apache Tribe (the Tribe) regarding Phelps Dodge’s use and occupancy of the Black River Pump Station, which delivers water to the Morenci operation. In May 1997, Phelps Dodge reached an agreement with the Tribe, and subsequently federal legislation (Pub. L. No. 105-18, 5003, 111 stat. 158, 181-87) was adopted. The legislation prescribes arrangements intended to ensure a future supply of water for the Morenci mining

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	complex in exchange for certain payments by Phelps Dodge. The legislation does not address any potential claims by the Tribe relating to Phelps Dodge’s historical occupancy and operation of Phelps Dodge facilities on the Tribe’s Reservation, but does require that any such claims be brought, if at all, exclusively in federal district court. As of this writing, no such claims have been filed.

The 1997 legislation required that the Company and the Tribe enter a lease for the delivery of CAP water through the Black River Pump Station to Morenci on or before December 31, 1998. In the event a lease was not signed, the legislation expressly provided that the legislation would become the lease. On January 24, 2002, a lease between the San Carlos Apache Tribe, Phelps Dodge and the United States was executed (effective as of January 1, 1999) in accordance with that legislation. On the same date, and in accordance with the legislation, an Exchange Agreement between the San Carlos Apache Tribe, the United States and the Salt River Project Water User’s Association was executed and subsequently approved by Phelps Dodge. Since that date, CAP water has been delivered to Morenci. Phelps Dodge has not reached a settlement with the Tribe on general water issues and Phelps Dodge water claims within the Gila River Adjudication are still subject to litigation with the Tribe and other parties.


	3. Salt River Pima-Maricopa Indian Community

The Salt River Pima-Maricopa Indian Community, Salt River Valley Water Users’ Association, the principal Salt River Valley Cities, the state of Arizona and others have negotiated a settlement among themselves for the Verde and Salt River system. The settlement has been approved by Congress, the President and the Arizona Superior Court. Under the settlement, the Salt River Pima-Maricopa Indian Community waived all water claims it has against all other water claimants (including Phelps Dodge) in Arizona.


	4. Fort McDowell Mohave-Apache Indian Community

The Fort McDowell Mohave-Apache Indian Community, Salt River Valley Water Users’ Association, the principal Salt River Valley Cities, the state of Arizona and others have negotiated a settlement as among themselves for the Verde River system. This settlement has been approved by Congress, the President and the Arizona Superior Court. Under this settlement, the Fort McDowell Mohave-Apache Indian Community waived all water claims it has against all other water claimants (including Phelps Dodge) in Arizona.


	E. Other Related Cases


	The following proceedings involving water rights adjudications are pending in the U.S. District Court of Arizona:

1. On June 29, 1988, the Gila River Indian Community filed a complaint-in-intervention in United States v. Gila Valley Irrigation District, et al., and Globe Equity No. 59 (D. Ariz.). The underlying action was initiated by the United States in 1925 to determine conflicting claims to water rights in certain portions of the Gila River watershed. Although Phelps Dodge was named and served as a defendant in that action, Phelps Dodge was dismissed without prejudice as a defendant in March 1935. In June 1935, the Court entered a decree setting forth the water rights of numerous parties, but not Phelps Dodge’s. The Court retained, and still has, jurisdiction of the case. The complaint-in-intervention does not name Phelps Dodge as a defendant; however, it does name the Gila Valley Irrigation District as a defendant. Therefore, the complaint-in-intervention could affect the approximately 3,000 acre-feet of water that Phelps Dodge has the right to divert annually from Eagle Creek, Chase Creek or the San Francisco River pursuant to Phelps Dodge’s decreed rights and an agreement between Phelps Dodge and the Gila Valley Irrigation District.


	During 1998, Phelps Dodge purchased farmlands with associated water rights that are the subject of this litigation. As a result, Phelps Dodge has been named and served as a party in this case. The lands and associated water rights are not currently used in connection with any Phelps Dodge mining operation.


	Phelps Dodge’s Miami operation (formerly named Cyprus Miami Mining Corporation) was named and served as a defen-

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	dant in this action in 1989. These proceedings may affect water rights associated with former Cyprus Miami lands in the Gila River Watershed.

2. Prior to January 1, 1983, various Indian tribes filed several suits in the U.S. District Court for the District of Arizona claiming prior and paramount rights to use waters, which at present are being used by many water users, including Phelps Dodge, and claiming damages for prior use in derogation of their allegedly paramount rights. These federal proceedings have been stayed pending state court adjudication.

3. Cyprus Sierrita Corporation’s predecessor in interest was a defendant in United States, et al. v. City of Tucson, et al., No. CIV 75-39 (D. Ariz.). This is a consolidation of several actions seeking a declaration of the rights of the United States, the Papago Indian Tribe (now known as the Tohono O’odham Nation), and individual allottees of the Tohono O’odham Nation, to surface water and groundwater in the Santa Cruz River Watershed; damages from the defendants’ use of surface water and groundwater from the watershed in derogation of those rights; and injunctive relief. Congress in 1982 enacted the Southern Arizona Water Rights Settlement Act, which was intended to resolve the water right claims of the Tohono O’odham Nation and its member allottees relating to the San Xavier Reservation and the Schuk Toak District of the Sells Papago Reservation. The allottees contested the validity of the Act and contended that the Court could not dismiss the litigation without their consent. This prompted additional litigation, and eventually culminated in settlement negotiations. The Court suspended most aspects of the litigation to enable the parties to negotiate a settlement with the allottees. The Court’s recent attention has been devoted to the composition of appropriate classes of allottees and identification of class representatives, so that any settlement that is reached would bind the allottees. It is anticipated that a settlement and authorizing legislation would conclude all litigation on behalf of the Tohono O’odham Nation, its allottee members, and the United States as Trustee for the nation and its allottee members, relating to water rights. As of this writing, however, a settlement has not been reached. The outcome of this dispute could impact water right claims associated with the acquired Cyprus operations at Sierrita, and miscellaneous former Cyprus land holdings in the Santa Cruz River Watershed.

III. The Company entered into a Consent Decree in December 2000 with the Connecticut Department of Environmental Protection (CDEP) regarding purported violations of state air emissions limitations associated with the Phelps Dodge Norwich rod mill in Norwich, Connecticut. Under the terms of the Consent Decree, the Company agreed to pay a penalty of $0.5 million, fund a supplemental environmental project to be administered by CDEP, test the rod mill’s newly installed state-of-the-art air pollution control equipment, and perform a study on environmental impacts near the rod mill. CDEP has accepted the completion of the first three requirements identified above. The Company submitted the required environmental study to CDEP on July 2, 2002.

IV. On October 1, 1997, the U.S. Environmental Protection Agency (EPA) issued a Notice of Violation (NOV) to Cyprus Amax’s (now the Company’s) Sierrita operations in southeastern Arizona. The NOV alleged certain emission standards and permitting violations associated with the molybdenum roasting facility at Sierrita. On September 6, 2000, EPA also issued an NOV to Phelps Dodge Sierrita for alleged violations of Prevention of Significant Deterioration permitting requirements, and New Source Performance Standards under the federal Clean Air Act. No action has been filed at this time, and the Company has asserted defenses to the NOVs in its response to EPA. EPA and the Company have entered into a series of agreements tolling the running of the statute of limitations on certain of the alleged violations while the parties attempt to negotiate a settlement of the issues raised in the NOVs.

V. The Pinal Creek site was listed under the Arizona Department of Environmental Quality’s Water Quality Assurance Revolving Fund program in 1989 for contamination in the shallow alluvial aquifer within the Pinal Creek drainage near Miami, Arizona. Since that time, environmental remediation has been performed by the Pinal Creek Group (PCG), comprising Phelps Dodge Miami, Inc. (a wholly owned subsidiary of the Company) and two other companies. In 1998, the District Court approved a Consent Decree between the PCG members and the state of Arizona resolving all matters related to an enforcement action contemplated by the state of Arizona against the PCG members with respect to the groundwater matter. The Consent Decree committed Phelps Dodge Miami, Inc. and the other PCG members to complete the remediation work outlined in the Consent Decree. That work continues at this time pursuant to the Consent Decree and consistent with the National Contingency Plan

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prepared by EPA under the Comprehensive Environmental Response, Compensation and Liability Act.

In addition, a dispute between one dissenting PCG member and Phelps Dodge Miami, Inc. and the other PCG member was filed in Superior Court in mid-2002. The litigation seeks a declaratory judgment on the dissenting member’s contract liability under the PCG agreement. Trial for this matter is scheduled for early 2004.

Approximately $117 million remained in the Company’s Pinal Creek remediation reserve at December 31, 2002. While significant recoveries may be achieved in the contribution litigation, the Company cannot reasonably estimate the amount and, therefore, has not taken potential recoveries into consideration in the recorded reserve.

VI. On February 28, 2000, Cobre Mining Company (Cobre) received an Administrative Order (Docket No. CWA-6 1014-00, the “February 2000 Order”) from EPA. The February 2000 Order alleged violations of the Clean Water Act, required Cobre to deliver a response stating the steps it has taken to address each of the incidents leading to the alleged violations, and required Cobre to show cause why no further action is necessary. Cobre submitted its response to EPA and indicated that it was prepared to construct certain storm water control upgrades. On September 18, 2001, EPA issued a second Administrative Order (Docket No. CWA-06-2001-1206) stating that Cobre’s response to the February 2000 Order was acceptable and ordered Cobre to complete the proposed storm water control upgrades. On January 7, 2002, EPA issued its Final Order and entered into a Consent Agreement with Cobre to resolve the civil penalty claims for this matter for $137,500. The penalty has been paid and Cobre is implementing the required upgrades.

VII. The Company’s wholly owned subsidiary, Cyprus Amax Minerals Company (Cyprus), is the plaintiff in an action entitled Cyprus Amax Minerals Company v. Asarco Incorporated, 99 Civ. 1198 (JSM), which was filed on November 9, 1999, in the U.S. District Court for the Southern District of New York. The action arises out of the merger agreement between Cyprus and Asarco dated as of July 15, 1999 (the “merger agreement”). The complaint alleges, among other things, that Asarco breached the merger agreement and subsequent agreement by soliciting an alternative takeover proposal for Asarco from another company. Cyprus seeks compensatory damages of not less than $90 million. Asarco filed an answer to the complaint on November 30, 1999. On November 8, 2000, Asarco filed a motion for judgment on the pleadings pursuant to federal rules. On March 14, 2001, the Court denied the motion by Asarco for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c). On April 10, 2001, Asarco filed an amended answer and counterclaims against Cyprus and the Company for recovery of a $30 million termination fee paid to the Company in October 1999 and for other unspecified damages related to the bidding process for Asarco.

VIII. In September 2000, RAG American Coal Company (RAG) filed a complaint against Cyprus Amax Minerals Company and Amax Energy Inc. (Cyprus) in the Supreme Court of New York, County of New York (RAG American Coal Company v. Cyprus Amax Minerals Company and Amax Energy Inc., (CV 00-604200)). The complaint alleged claims relating to breach of contract, fraud, negligent misrepresentation, and negligence arising from alleged inaccuracies in financial statements relating to the sale by Cyprus of its coal subsidiary to RAG in June 1999. The complaint sought damages in the amount of $115 million under four different legal theories (breach of contract, fraud, negligent misrepresentation and negligence). Cyprus filed a motion to dismiss the complaint. On April 18, 2002, the Court issued its decision on this motion to dismiss. The Court granted Cyprus’ motion to dismiss with respect to the negligent misrepresentation and negligence claims, and denied Cyprus’ motion to dismiss with respect to the contract and fraud claims. In a November 21, 2002 decision, the appellate division denied Cyprus’ appeal of the lower court’s decision on the contract and fraud claims. On January 17, 2003, RAG and Cyprus entered into a mediated settlement agreement. Under the settlement agreement, Cyprus paid $43.5 million on February 7, 2003, to RAG, all RAG’s claims under this action were released, and the parties filed with the Court a stipulation of discontinuance with prejudice.

IX. On June 14, 2001, the New Mexico Environment Department (NMED) issued Compliance Orders to Chino Mines Company and Phelps Dodge Tyrone, Inc., alleging the companies failed to obtain air quality construction permits for construction of their solution extraction electrowinning plants in the 1980s. On July 3, 2002, Chino Mines Company and Phelps Dodge Tyrone, Inc. joined with the Department in filing Stipulated Voluntary Dismissals with the Hearing Officer. This action dismissed the Compliance Orders.

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NMED recognized that agency management in the 1980s had indicated that permits were not required. Also, the facilities had, in fact, obtained permits before the Compliance Orders were issued. Therefore, it agreed to stop the enforcement action. This matter is now resolved.

X. On May 30, 2001, the U.S. Department of Justice (DOJ) notified the Company of alleged violations of the Clean Water Act at the United Verde Mine. The Company has entered into settlement discussions with DOJ and EPA regarding these claims.

XI. On June 25, 2001, Plateau Mining Corporation (Plateau Mining), now a subsidiary of RAG, initiated binding arbitration proceedings against the Company’s subsidiary, Cyprus, demanding payment under the terms of a 1997 tax sharing agreement previously entered into by the parties. Plateau Mining is a former subsidiary of Cyprus. On July 18, 2002, the arbitration panel awarded Plateau Mining the amount of $36.5 million on its claim, plus interest. On August 15, 2002, Cyprus paid to Plateau Mining Corporation approximately $47 million (including approximately $11 million in interest) in satisfaction of the July 18, 2002, arbitration award. This payment was made without prejudicing the rights of Cyprus to seek indemnification for this payment from RAG under the provisions of other agreements entered into by Cyprus and RAG. On October 22, 2002, Cyprus served the required notice on RAG that it was seeking indemnification of this amount under a 1999 tax sharing and indemnification agreement entered into by Cyprus and RAG. In November 2002, RAG commenced an action in the New York State Supreme Court, which seeks to bar Cyprus from asserting its indemnification claim against RAG. In December 2002, Cyprus filed its response to this legal action and asserted its claim for indemnification with respect to this arbitration award (Indemnification Action). In addition, potential claims continued to exist between Cyprus and RAG with respect to the status of Plateau Mining in the Cyprus consolidated tax group for certain tax periods prior to RAG’s acquisition of Plateau Mining (Potential Claims). On April 11, 2003, RAG and its subsidiaries and affiliates entered into a settlement agreement with Cyprus whereby the parties agreed not to pursue further the Indemnification Action and the Potential Claims. Under the terms of the settlement, no further payments were required, other than certain ongoing reimbursements to Cyprus for Black Lung Excise Tax refunds and related state tax refunds which are not in dispute; the claims included in the Indemnification Action and Potential Claims were released; and the parties agreed to discontinue the Indemnification Action with prejudice.

XII. On September 26, 2002, Chino Mines Company (Chino), Phelps Dodge Tyrone, Inc. (Tyrone), and Cobre Mining Company (Cobre) each filed Petitions for Review with the New Mexico Water Quality Control Commission (WQCC) regarding notifications from NMED dated August 30, 2002, that NMED had determined that the Chino Mine, the Tyrone Mine and Cobre’s Continental Mine each “pose a hazard to public health.” According to NMED, the determinations were intended to preclude Chino, Tyrone and Cobre from asserting certain exemptions from the requirement to obtain a discharge permit for portions of the three facilities under the WQCC regulations. Each of the Petitions for Review alleged that NMED failed to follow proper procedures in issuing the August 30, 2002, letters and failed to undertake certain investigations and make certain findings required before it can make a determination of a “hazard to public health,” and that there was no basis in law or fact for NMED to make this determination for any of the three mines. The WQCC held a public hearing on the three Petitions on December 17, 2002. Prior to the presentation of evidence in support of the appeals, NMED agreed to completely withdraw all of its letters to Chino, Tyrone and Cobre regarding NMED’s determinations, and the WQCC dismissed the appeals as moot.

XIII. On October 18, 2002, the Mining and Minerals Division (MMD) of the New Mexico Energy, Minerals and Natural Resources Department issued NOVs under the New Mexico Mining Act Rules (NMMAR) to Chino Mines Company (Chino), Phelps Dodge Tyrone, Inc. (Tyrone) and Cobre Mining Company (Cobre). The NOVs allege that Chino, Tyrone and Cobre failed to obtain approval of closeout plans as required by NMMAR by October 1, 2002. A closeout plan under NMMAR consists of a plan for reclamation of a mining operation following cessation of operations and financial assurance sufficient for MMD to complete the closeout plan if the operator defaults. The NOVs would have established schedules requiring that the alleged violations be abated by April 20, 2003, for Chino, June 30, 2003, for Cobre and September 30, 2003, for Tyrone. The NOVs did not assess civil penalties, but reserved the right to assess penalties in the future in accordance with the penalty assessment procedures in NMMAR. The NOVs further stated that if the alleged violations were not abated by the dates set in the NOVs, MMD would issue “cessation orders” in accordance with NMMAR requiring that mining operations cease until the alleged violation is abated. On November 1, 2002, Chino, Tyrone and Cobre each filed Petitions for Review of the NOVs with the New Mexico Mining Commission (Commission). The Petitions contended that closeout plan approval was not possible by October 1, 2002, because of delays by the NMED in issuing discharge permits for closure and issuing determinations that the closeout plans for Chino, Tyrone and Cobre are expected to achieve compliance with environmental standards, including

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compliance with water quality standards. The Petitions requested that the NOVs be vacated or, in the alternative, that different dates be set for abatement of the alleged violations which allow a reasonable period of time after NMED issues its discharge permits to obtain approval of the closeout plans. The Commission held a public hearing on December 13-14, 2002, on the Petitions for Review. The Commission upheld the Notices of Violation but modified the period for abatement for each mine to run from the dates when NMED issues the discharge permits for closure for the mines. Under the modified NOVs, Chino, Cobre and Tyrone will have seven, nine and 12 months, respectively, after NMED issues their closure permits to obtain approval of their closeout plans.

XIV. On September 30, 2002, EPA issued an administrative complaint for alleged violations of the Clean Water Act at the inactive Christmas Facility owned indirectly by the Company’s subsidiary, Cyprus Amax Minerals Company. The complaint alleged, among other things, that certain discharges in 2002 and 2001 failed to meet effluent limitations. On February 5, 2003, EPA signed a negotiated Consent Agreement and Final Order requiring the payment of a $105,000 civil penalty. No injunctive relief is required under the Consent Agreement and Final Order.

XV. Since approximately 1990, Phelps Dodge or its subsidiaries have been named as a defendant in a number of product liability or premises lawsuits brought by electricians and other skilled tradesmen or contractors claiming injury from exposure to asbestos found in limited lines of electrical wire products produced or marketed many years ago, or from asbestos at certain Phelps Dodge properties. Phelps Dodge believes its liability, if any, in these matters will not have a material adverse effect, either individually or in the aggregate, upon its business, financial condition, liquidity, results of operations or cash flow. There can be no assurance; however, that future developments will not alter this conclusion.

XVI. On September 30, 2002, Columbian Chemicals Company, a subsidiary of the Company, received an administrative complaint from EPA for alleged violations of the Clean Air Act at its El Dorado, Arkansas, carbon black plant. Columbian Chemicals Company has met with EPA to conduct settlement discussions in an effort to resolve the matter informally.

XVII. On November 7, 2002, the United Kingdom Environment Agency (Agency) issued an enforcement notice to Columbian Chemicals Company’s Sevalco plant in the United Kingdom. This notice followed Sevalco’s disclosure to the Agency in October 2002 that Sevalco had discovered irregularities in its effluent discharge reports, and requires the plant to implement procedures to ensure that discharges satisfy permit limits and are properly reported. Columbian Chemicals Company is cooperating with the Agency while the Agency continues its investigation of this matter.

XVIII. In November 2002, Columbian Chemicals Company was contacted by U.S. and European antitrust authorities regarding a joint investigation they initiated into alleged price fixing in the carbon black industry. European antitrust authorities have reviewed documents at three of Columbian Chemicals’ facilities in Europe, and U.S. authorities have contacted Columbian Chemicals’ headquarters in Marietta, Georgia.

XIX. The Company and Columbian Chemicals Company have been named as defendants in actions entitled Technical Industries, Inc. v. Cabot Corporation, et al., filed on January 30, 2003, in the U.S. District Court in Boston, Massachusetts, and Parker Hannifin Corporation v. Cabot Corporation, et al. in the Northern District of Ohio. The complaints, filed on behalf of a purported class of all individuals or entities who purchased carbon black directly from the defendants from January 30, 1999, to January 30, 2003, allege that the defendants fixed the prices of carbon black. The complaints seek treble damages in an unspecified amount and attorneys’ fees under the U.S. antitrust laws. The Company understands that a similar action has been filed against Columbian Chemicals Company in the District of New Jersey, but neither it nor Columbian Chemicals Company has been served with the complaint. The Company believes the claims are without merit and intends to defend the lawsuits vigorously.

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Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the fourth quarter of 2002 to a vote of security holders, through solicitation of proxies or otherwise.

Executive Officers of Phelps Dodge Corporation

The executive officers of Phelps Dodge Corporation are elected to serve at the pleasure of its Board of Directors. As of March 1, 2003, the executive officers of Phelps Dodge Corporation were as follows:


	Age at			Officer of the
Name	3/1/03		Position	Corporation Since

J. Steven Whisler		48	Chairman of the Board, President and Chief Executive Officer		1987
Timothy R. Snider		52	Senior Vice President; President, Phelps Dodge Mining Company		1997
S. David Colton		47	Senior Vice President, General Counsel		1998
Arthur R. Miele		61	Senior Vice President, Marketing; President, Phelps Dodge Sales Company		1987
Kalidas V. Madhavpeddi		47	Senior Vice President, Business Development; President, Phelps Dodge Wire and Cable Group		1999
Ramiro G. Peru		47	Senior Vice President and Chief Financial Officer		1995
David L. Pulatie		61	Senior Vice President, Human Resources		1999

Except as stated below, all of the above have been officers of Phelps Dodge Corporation for the past five years.

Mr. Colton was elected Senior Vice President in November 1999. He was elected Vice President and General Counsel in April 1998. Prior to that time, Mr. Colton was Vice President and Counsel for Phelps Dodge Exploration, a position he held since 1995.

Mr. Madhavpeddi was elected Senior Vice President, Business Development in November 2000. He was elected Vice President, Business Development in November 1999 and President, Phelps Dodge Wire and Cable Group in May 2002. Prior to that time, Mr. Madhavpeddi was Vice President, Business Development of Phelps Dodge Mining Company, a position he held since 1995.

Mr. Pulatie was elected Senior Vice President, Human Resources in March 1999. Mr. Pulatie joined Phelps Dodge in March 1999 after a 34-year career with Motorola Inc.

Mr. Manuel J. Iraola, an officer of the Corporation since 1995, retired on June 30, 2002, from his position as a Senior Vice President of the Corporation and President, Phelps Dodge Industries.

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Part II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

The information called for in Item 5 appears on pages 105 through 109 of this report.

Item 6. Selected Financial Data

The following financial and operating data should be read in conjunction with the information set forth in Item 7, Management’s Discussion and Analysis and the Consolidated Financial Statements and related notes thereto appearing in this Annual Report.

($ in millions except per share and per pound amounts)


	Year Ended December 31,

	2002 (a)			2001 (b)			2000 (c)			1999 (d)			1998 (e)

				As Restated (i)

Statement of Operations Data
Sales and other operating revenues	$	3,722.0			4,002.4			4,525.1			3,114.4			3,063.4
Operating income (loss)		(209.3	)		(28.8	)		268.2			(361.6	)		415.6
Income (loss) before extraordinary item and cumulative effect of accounting change		(288.6	)		(329.5	)		56.3			(278.3	)		189.0
Net income (loss)		(338.1	)		(331.5	)		56.3			(281.8	)		189.0
Basic earnings (loss) per common share before extraordinary item and cumulative effect of accounting change		(3.54	)		(4.19	)		0.72			(4.51	)		3.25
Diluted earnings (loss) per common share before extraordinary item and cumulative effect of accounting change		(3.54	)		(4.19	)		0.72			(4.51	)		3.23
Basic earnings (loss) per common share		(4.13	)		(4.22	)		0.72			(4.57	)		3.25
Diluted earnings (loss) per common share		(4.13	)		(4.22	)		0.72			(4.57	)		3.23
Balance Sheet Data (at period end)
Current assets	$	1,428.2			1,531.2			1,542.7			1,735.7			1,042.3
Total assets		7,029.0			7,584.3			7,841.2			8,212.1			5,096.7
Total debt		2,110.6			2,871.6			2,687.7			2,755.0			1,021.0
Long-term debt		1,948.4			2,538.3			1,963.0			2,172.5			836.4
Shareholders’ equity		2,813.6			2,730.1			3,184.4			3,328.9			2,663.5
Cash dividends declared per common share		—			0.75			2.00			2.00			2.00
Other Data
Net cash provided by operating activities	$	348.0			302.7			511.2			204.5			378.4
Capital expenditures and investments		133.2			311.0			422.3			240.4			668.3
Net cash provided by (used in) investing activities		(140.3	)		(266.8	)		(274.2	)		6.0			(184.0	)
Net cash provided by (used in) financing activities		(244.8	)		101.0			(221.2	)		(198.0	)		(130.6	)
Division Results
Phelps Dodge Mining Company operating income (loss)	$	(65.0	)		(83.6	)		276.0			(346.6	)		103.2
Phelps Dodge Industries operating income		30.6			74.0			70.3			49.7			353.6
Corporate and Other operating loss		(174.9	)		(19.2	)		(78.1	)		(64.7	)		(41.2	)

	$	(209.3	)		(28.8	)		268.2			(361.6	)		415.6

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		Year Ended December 31,

		2002 (a)		2001 (b)		2000 (c)		1999 (d)		1998 (e)

				As Restated (i)

Copper
Copper production (own production – thousand tons)			1,028.8		1,160.1		1,200.3		890.1		874.0
Copper sales (own production – thousand tons)			1,051.1		1,170.8		1,200.6		891.9		876.3
COMEX copper price (per pound) (f)		$	0.72		0.73		0.84		0.72		0.75
LME copper price (per pound) (g)		$	0.71		0.72		0.82		0.71		0.75
Implied full unit cost of copper production (per pound) (h)		$	0.68		0.75		0.71		0.69		0.69
Commercially recoverable copper (million tons)
	Ore reserves		19.6		22.1		23.1		23.7		13.7
	Stockpiles and in-process inventories		1.4		0.9		1.0		0.7		0.8

			21.0		23.0		24.1		24.4		14.5

(a)		Reported amounts included after-tax, special charges of $146.5 million, or $1.74 per common share, for asset impairment charges at Cobre of $115.5 million, Hidalgo of $12.9 million and Ajo of $18.1 million; $53.0 million, or 63 cents per common share, for settlement of lawsuits related to Cyprus Amax Minerals Company; $45.0 million, or 54 cents per common share, for a binding arbitration award for Plateau Mining Corporation (a subsidiary of Cyprus Amax Minerals Company); $26.6 million, or 32 cents per common share, extraordinary loss on early extinguishment of debt; $23.0 million, or 27 cents per common share, for restructuring activities; $22.9 million, or 27 cents per common share, for cumulative effect of an accounting change; $14.0 million, or 17 cents per common share, for environmental provisions; $7.0 million, or 8 cents per common share, for estimated remaining closure cost obligation at Hidalgo; and $1.2 million, or 1 cent per common share, for write-off of two cost basis investments and $1.0 million, or 1 cent per common share, for the settlement of legal matters. These were partially offset by $29.1 million, or 35 cents per common share, for environmental insurance recoveries; $22.6 million, or 27 cents per common share, for the sale of non-core parcel of real estate in New Mexico; $13.0 million, or 15 cents per common share, for the release of deferred taxes for Plateau Mining Corporation; and $66.6 million, or 79 cents per common share, for the tax benefit relating to the net operating loss carryback prior to 2002.

(b)		Reported amounts included after-tax, special gains of $61.8 million, or 79 cents per common share, for environmental insurance recoveries; $39.9 million, or 51 cents per common share, for the gain on the sale of Sossego and $9.0 million, or 11 cents per common share, for an insurance settlement associated with legal matters. These were partially offset by special provisions of $57.9 million, or 74 cents per share, to increase the deferred tax valuation allowance; $31.1 million, or 40 cents per common share, reflecting provisions for environmental costs; $29.8 million, or 38 cents per common share, for restructuring activities; $12.9 million, or 16 cents per common share, for investment impairments; $2.0 million, or 3 cents per common share, for the cumulative effect of an accounting change; and $3.4 million, or 4 cents per common share, for other items, net.

(c)		Reported amounts included after-tax, special provisions of $56.4 million, or 72 cents per common share, for restructuring activities; offset by income tax refund and related interest of $10.1 million, or 13 cents per common share; and an insurance settlement refund of $3.0 million, or 4 cents per common share.

(d)		Reported amounts included after-tax, special provisions of $222.5 million, or $3.61 per common share, for asset impairments; $17.8 million, or 29 cents per common share, reflecting provisions for environmental costs; $65.7 million, or $1.07 per common share, for costs associated with restructuring activities; and $3.5 million, or 6 cents per common share, for the cumulative effect of an accounting change. These were partially offset by a special gain of $30.0 million, or 49 cents per common share, for an adjustment of prior year’s taxes. PD acquired Cyprus Amax Minerals Company on October 16, 1999.

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(e)		Reported amounts included an after-tax gain of $131.1 million, or $2.24 per common share, for the disposition of Accuride Corporation; an after-tax loss of $26.4 million, or 45 cents per common share, from the sale of our 44.6 percent interest in a South African mining company; and a special, after-tax provision of $5.6 million, or 10 cents per common share, for curtailments and indefinite closures primarily at Phelps Dodge Mining Company (PDMC).

(f)		New York Commodity Exchange annual average spot price per pound - cathodes.

(g)		London Metal Exchange annual average spot price per pound - cathodes.

(h)		Based on PDMC’s “all-in operating margin per pound of copper sold” (i.e. PDMC operating income (loss) excluding special items, divided by pounds of copper sold from PDMC mines for its own account, plus or minus the LME copper price).

(i)		We have restated our previously reported annual financial statements to reflect certain adjustments as discussed in Item 7 and Note 22 of the Notes to the Consolidated Financial Statements of this Form 10-K.

Item 7. Management’s Discussion and Analysis

The information called for in Item 7 appears on pages 51 through 109 of this report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information called for in Item 7A appears on pages 51 and 93 through 97 of this report.

Item 8. Financial Statements and Supplementary Data

The information called for in Item 8 appears on pages 110 through 173 of this report.

Item 9. Disagreements on Accounting and Financial Disclosure

None.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

The following provides information that management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of Phelps Dodge Corporation (the Company, which also may be referred to as Phelps Dodge, PD, we, us or ours). It should be read in conjunction with the Consolidated Financial Statements and accompanying Notes. Our business consists of two major divisions, Phelps Dodge Mining Company (PDMC) and Phelps Dodge Industries (PDI).

The United States securities laws provide a “safe harbor” for certain forward-looking statements. This annual report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected in such forward-looking statements. Statements regarding the expected commencement dates of operations, projected quantities of future production, capital costs, production rates, cash flow and other operating and financial data are based on expectations that the Company believes are reasonable, but we can give no assurance that such expectations will prove to have been correct.

Factors that could cause actual results to differ materially include, among others: risks and uncertainties relating to general U.S. and international economic and political conditions; the cyclical and volatile price of copper and other commodities; political and economic risks associated with foreign operations; unanticipated ground and water conditions; geological problems; metallurgical and other processing problems; availability of materials and equipment; delays in the receipt of or failure to receive necessary government permits; appeals of agency decisions or other litigation; volatility in the price or availability of oil (the main feedstock for our carbon black operations), diesel fuel, electricity and natural gas; currency fluctuations; changes in laws or regulations or the interpretation and enforcement thereof (including changes in treaties or laws governing international trade or tariffs); the occurrence of unusual weather or operating conditions; force majeure events; lower than expected ore grades; the failure of equipment or processes to operate in accordance with specifications or expectations; unanticipated difficulties consolidating acquired operations and obtaining expected synergies; labor relations; accidents; delays in anticipated start-up dates; environmental risks; the ability to obtain anticipated cost savings and efficiencies; the ability to obtain satisfactory insurance coverages; the ability to obtain surety bonds or other financial assurance for reclamation obligations; and the results of financing efforts and financial market conditions.

These and other risk factors are discussed in more detail herein. Many such factors are beyond our ability to control or predict. Readers are cautioned not to put undue reliance on forward-looking statements. We disclaim any intent or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

Restatements

As further discussed in Note 22 to the Consolidated Financial Statements, the Company identified certain accounting matters relating to our December 31, 2001 and 2000, Consolidated Financial Statements that require restatement. The after-tax effect of these items increased retained earnings by $52.1 million at January 1, 2000, increased net income for the year ended December 31, 2000, by $27.3 million, or 35 cents per share, and increased the net loss for the year ended December 31, 2001, by $56.5 million, or 72 cents per share. The cumulative adjustments increased retained earnings by $22.9 million at December 31, 2001. These adjustments were necessary (i) to change the Company’s units-of-production depreciation rate methodology for mining, smelting and refining assets to exclude estimates of future capital as well as any material other than proven and probable ore reserves, and to depreciate short-lived assets on a straight-line basis over their estimated useful lives, less salvage value; (ii) to adjust the fair value estimates of acquired reclamation obligations and to recognize the related annual accretion expense, and to revise certain reclamation cost estimates and associated changes for information obtained in 2001; (iii) to capitalize as inventory copper contained in low-grade mill and leach stockpiles, and consequent in-process materials being converted to salable products; (iv) to reverse a loss contingency reserve associated with legal matters; and (v) to increase the valuation allowance for deferred tax assets. Additionally, as discussed in Note 21, Business Segment Data, our presentation of reportable segment information for PDMC for 2001 and 2000 has been revised to reflect additional segments.

Critical Accounting Policies and Estimates

Phelps Dodge’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Phelps Dodge’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more sig -

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nificant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates and units-of-production depreciation and amortization calculations; environmental, reclamation and closure obligations; estimates of recoverable copper in mill and leach stockpiles; asset impairments (including estimates of future cash flows); postemployment, postretirement and other employee benefit liabilities; bad debts; restructuring reserves; valuation allowances for deferred tax assets; reserves for contingencies and litigation; and fair value of financial instruments. Phelps Dodge bases its estimates on the Company’s historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Phelps Dodge believes the following significant assumptions and estimates affect its more critical practices and accounting policies used in the preparation of its consolidated financial statements.

Phelps Dodge, at least annually, estimates its ore reserves at active properties and properties currently on care-and-maintenance status. There are a number of uncertainties inherent in estimating quantities of reserves, including many factors beyond the control of the Company. Ore reserve estimates are based upon engineering evaluations of assay values derived from samplings of drill holes and other openings. Additionally, declines in the market price of a particular metal may render certain reserves containing relatively lower grades of mineralization uneconomic to mine. Further, availability of permits, changes in operating and capital costs, and other factors could materially and adversely affect ore reserves. Phelps Dodge uses its ore reserve estimates in determining the unit basis for units-of-production depreciation and closure rates, as well as in evaluating mine asset impairments. Changes in ore reserve estimates could significantly affect these items. For example, a 10 percent increase in ore reserves at each mine would decrease total depreciation expense by approximately $20 million in 2003; a 10 percent decrease in ore reserves at each mine would increase total depreciation expense by approximately $24 million in 2003.

The per pound COMEX copper price over the past 10 years, 15 years and 20 years averaged 91 cents, 99 cents and 91 cents, respectively.

Phelps Dodge maintains allowances for doubtful accounts for estimated losses resulting from the assessed inability of its customers to make required payments. If the financial condition of Phelps Dodge’s customers were to deteriorate unexpectedly, impacting their ability to make payments, additional allowances may be required. Phelps Dodge routinely reviews the financial condition of its customers and makes assessments of collectibility. The total of these allowances for doubtful accounts at December 31, 2002 and 2001, was $14.1 million and $14.2 million, respectively.

Phelps Dodge capitalizes applicable costs for copper contained in mill and leach stockpiles that are expected to be processed in the future. The mill and leach stockpiles are evaluated periodically to ensure that they are stated at the lower of cost or market. Because the determination of copper contained in mill and leach stockpiles by physical count is impracticable, we employ reasonable estimation methods.

The quantity of material delivered to mill stockpiles is based on surveyed volumes of mined material and daily production records. Sampling and assaying of blast-hole cuttings determine the estimated amount of copper contained in the material delivered to the mill stockpiles. Expected copper recovery rates are determined by metallurgical testing. The recoverable copper in mill stockpiles can be extracted into copper concentrate almost immediately upon processing. Estimates of copper contained in mill stockpiles are reduced as material is removed and fed to the mill. At December 31, 2002, the estimated amount of recoverable copper contained in mill stockpiles was 0.2 million tons (PD share) and had a carrying value of $31.9 million.

The quantity of material in leach stockpiles is based on surveyed volumes of mined material and daily production records. Sampling and assaying of blast-hole cuttings determine the estimated amount of copper contained in material delivered to the leach stockpiles. Expected copper recovery rates are determined using small-scale laboratory tests, medium-scale column testing (which simulates the production-scale process), historical trends and other factors, including mineralogy of the ore and rock type. Estimated

- 53 -

amounts of copper contained in the leach stockpiles are reduced as stockpiles are leached, the leach solution is fed to the electrowinning process, and copper cathodes are produced. Ultimate recovery of copper contained in leach stockpiles can vary from a very low percentage to over 90 percent depending on several variables, including type of processing, mineralogy and particle size of the rock. Although as much as 70 percent of the copper ultimately recoverable may be extracted during the first year of processing, recovery of the remaining copper may take several years. At December 31, 2002, the estimated amount of recoverable copper contained in leach stockpiles was 1.2 million tons (PD share) and had a carrying value of $81.3 million.

Phelps Dodge records valuation allowances to reduce its deferred tax assets to the amount that is more likely than not to be realized. While Phelps Dodge has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances, in the event Phelps Dodge determined that it would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to valuation allowances would increase income in the period such determination was made. Likewise, should Phelps Dodge determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to valuation allowances would be charged to income in the period such determination was made. Phelps Dodge assesses these determinations on a quarterly basis. The total of these valuation allowances at December 31, 2002 and 2001, was $508.4 million and $550.4 million, respectively.

Phelps Dodge has trusteed, non-contributory pension plans covering substantially all its U.S. employees and some employees of international subsidiaries. The benefits are based on, in the case of certain plans, final average monthly compensation and years of service and depending on the applicable plan design and, in the case of other plans, a fixed amount for each year of service. Participants generally vest in their benefits after five years of service.

Under current financial accounting standards, any significant year-to-year movement in the rate of interest on long-term, high-quality corporate bonds necessitates a change in the discount rate used to calculate the actuarial present value of our accumulated pension and other postretirement benefit obligations. The discount rate was 6.75 percent at December 31, 2002, compared with 7.25 percent at December 31, 2001, and 7.75 percent at December 31, 2000. For our U.S. pension plans, the discount rate assumption is designed to reflect yields on high-quality, fixed-income investments for a given duration. We consider Moody’s Long-term AA Corporate Bond yield prevailing at the end of the plan year to be our principal guide in the determination of our discount rate. At the end of November 2002, the Moody’s Long-term AA Corporate Bond yield was equal to 6.77 percent and we chose 6.75 percent as our discount rate. Changes in this assumption are reflected in our benefit obligation and, therefore, in our liabilities and income or expense we record. For example, a 25 basis point increase/decrease in our assumed discount rate assumption as of the beginning of 2003 would decrease/increase our pension expense by approximately $2 million per year over the next three years. The change would not affect the minimum required contribution.

Our pension plans were valued between December 1, 2000, and January 1, 2001, and between December 1, 2001, and January 1, 2002. Obligations were projected to and assets were valued as of the end of 2001 and 2002. The majority of plan assets are invested in a diversified portfolio of stocks, bonds and cash or cash equivalents. A small portion of the plan assets is invested in pooled real estate and other private investment funds.

The Master Trust, which holds plan assets for the Phelps Dodge Retirement Plan and U.S. pension plans for bargained employees, constituted 95 percent of total plan assets as of year-end 2002. These plans accounted for approximately 91 percent of benefit obligations. The investment portfolio for this trust as of year-end 2002 had an asset mix that included 52 percent equities (37 percent U.S. equities, 12 percent international equities and 3 percent emerging market equities), 38 percent fixed income (20 percent U.S. fixed income, 5 percent international fixed income, 4 percent emerging market fixed income, 5 percent U.S. high yield, and 4 percent treasury inflation-protected securities), 7 percent real estate and real estate investment trusts, and 3 percent other.

Our policy for determining asset-mix targets for the Master Trust includes the periodic development of asset/liability studies by a nationally recognized third-party investment consultant (to determine our expected long-term rate of return and expected risk for various investment portfolios). Management considers these studies in the formal establishment of asset-mix targets that are presented to and approved by the Finance Committee of the Board of Directors.

Our expected long-term rate of return on plan assets is updated at least annually, taking into consideration our asset allocation, historical returns on the types of assets held in the Master Trust, and the current economic environment. Based on these factors, we expect our pension assets will earn an average of

- 54 -

8.75 percent per annum over the 20 years beginning December 1, 2002, with a standard deviation of 10.6 percent. The 8.75 percent estimation was based on a passive return on a compound basis of 8.5 percent with a premium for active management of 0.25 percent. On an arithmetic average basis, the passive return would have been 9.0 percent with a premium for active management of 0.25 percent. The expected return as of December 1, 2001, was 9.0 percent with a standard deviation of 11.1 percent.

For estimation purposes, we assume our long-term asset mix generally will be consistent with the current mix. Changes in our asset mix could impact the amount of recorded pension income or expense, the funded status of the plan and the need for future cash contributions. A lower-than-expected return on assets also would decrease plan assets and decrease the amount of recorded pension income (or increase recorded pension expense) in future years. When calculating the expected return on plan assets, the Company uses a market-related value of assets that spreads asset gains and losses over five years. As a result, changes in the fair value of assets prior to January 1, 2003, will be reflected in the results of operations by January 1, 2008. A 25 basis point increase/decrease in our expected long-term rate of return assumption as of the beginning of 2003 would decrease/increase our pension expense by approximately $2 million a year over the next three years. In addition, a 25 basis point decrease in the long-term rate of return assumption would increase the minimum required contribution to our pension plan by approximately $1 million per year, over the same three-year period. Cash contributions for 2003 are not expected to increase significantly; however, the effects of declining equity markets could result in significant increases in cash contributions in periods beginning after 2003.

Phelps Dodge has postretirement health care and life insurance benefit plans covering most of its U.S. employees and, in some cases, employees of international subsidiaries. Postretirement benefits vary among plans and many plans require contributions from employees. We account for these benefits on an accrual basis. Our funding policy provides that payments shall be at least equal to our cash basis obligation, plus additional amounts that may be approved by us from time to time.

A 1 percentage-point increase in the assumed health care cost trend rate would increase net periodic benefit cost by approximately $1.2 million and increase our postretirement benefit obligation by approximately $18.4 million; a 1 percentage-point decrease in the assumed health care cost trend rate would decrease net periodic benefit cost by approximately $1.1 million and decrease our postretirement benefit obligation by approximately $16.8 million. Our discount rate assumptions for postretirement benefits are determined on the same basis as our discount rate assumptions for our pension plans, as discussed previously. Changes in this assumption are reflected in our benefit obligation and, therefore, in our liabilities and income or expense we record. For example, a 25 basis point increase/decrease in our assumed discount rate assumption as of the beginning of 2003 would increase/decrease our periodic benefit cost by approximately $500,000 per year over the next three years.

Environmental expenditures are expensed or capitalized depending upon their future economic benefits. Liabilities for such expenditures are recorded when it is probable that obligations have been incurred and the costs can be estimated reasonably. For closed facilities and closed portions of operating facilities with closure obligations, an environmental liability is accrued when a closure determination is made and approved by management, and when the environmental liability is considered to be probable. Environmental liabilities attributed to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or analogous state programs are considered probable when a claim is asserted, or is probable of assertion, and we have been associated with the site. Other environmental remediation liabilities are considered probable based on the specific facts and circumstances. Our estimates of these costs are based upon available facts, existing technology and current laws and regulations, and are recorded on an undiscounted basis. Where the available information is sufficient to estimate the amount of liability, that estimate has been used. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. The possibility of recovery of some of these costs from insurance companies or other parties exists; however, we do not recognize these recoveries in our financial statements until they become probable. We recognize insurance receivables for environmental remediation when a settlement is reached with the insurance carrier.

At December 31, 2002, environmental reserves totaled $305.9 million. The cost range for reasonably possible outcomes for all reservable environmental remediation sites was estimated to be from $281 million to $527 million. In addition, Phelps Dodge has a number of sites that are not the subject of an environmental reserve because it is not probable that a successful claim will be made, but for which there is a reasonably possible likelihood of an environmental remediation liability. At December 31, 2002, the cost

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range for all such sites was estimated to be from $4 million to $37 million.

Reclamation is an ongoing activity and we generally recognize estimated final reclamation costs over the life of active mining properties on a units-of-production basis. Non-operating sites that are currently on care-and-maintenance status suspend accrual of mine closure costs until the site resumes production. When management determines a mine should be permanently closed, any unrecognized closure obligation is recognized. Phelps Dodge assesses mine closure costs at least annually or when facts and circumstances change. At December 31, 2002, closure and reclamation reserves totaled $138.6 million, compared with estimated total reclamation and closure costs of approximately $660 million, leaving approximately $521 million to be accrued over the respective remaining mine lives. See “Other Matters” for a discussion on the adoption of Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations” effective January 1, 2003.

Liabilities for contingencies and litigation are recorded when it is probable that obligations have been incurred and the costs reasonably can be estimated. Gains for contingencies and litigation are recorded when realized.

Refer to Summary of Significant Accounting Policies in Note 1 to the Consolidated Financial Statements.

Consolidated Financial Results

Consolidated financial results were as follows:

($ in millions except per share data)


	2002			2001			2000

				As Restated

Sales and other operating revenues	$	3,722.0			4,002.4			4,525.1
Operating income (loss)	$	(209.3	)		(28.8	)		268.2
Income (loss) before extraordinary item and cumulative effect of accounting change	$	(288.6	)		(329.5	)		56.3
Extraordinary item		(26.6	)		—			—
Cumulative effect of accounting change		(22.9	)		(2.0	)		—

Net income (loss)	$	(338.1	)		(331.5	)		56.3

Basic and diluted earnings (loss) per common share before extraordinary item and cumulative effect of accounting change	$	(3.54	)		(4.19	)		0.72
Extraordinary item		(0.32	)		—			—
Cumulative effect of accounting change		(0.27	)		(0.03	)		—

Basic and diluted net earnings (loss) per common share	$	(4.13	)		(4.22	)		0.72

In 2002, the Company had a consolidated loss of $338.1 million, or $4.13 per common share, including a special, net charge of $208.9 million, or $2.48 per common share, after taxes. (All references to per share earnings or losses are based on diluted earnings per share.) In 2001, consolidated losses were $331.5 million, or $4.22 per common share, including a special, net charge of $26.4 million, or 34 cents per common share. The $6.6 million increase in consolidated loss in 2002, compared with 2001, was primarily the result of asset impairment charges and provisions ($153.5 million), historic Cyprus Amax Minerals Company (Cyprus Amax) lawsuit settlement or awards expense ($101.2 million), lower average copper prices (approximately $19 million), an extraordinary loss on the early extinguishment of debt ($26.6 million), the cumulative effect of adopting SFAS No. 142 ($22.9 million), a decrease in profits at our Wire and Cable segment due primarily to the temporary closure of two facilities and restructuring charges ($23.6 million) and lower net environmental insurance recoveries/provisions ($10.4 million); partially offset by a lower implied unit cost of copper production, as defined on page 66 (approximately $145 million including higher molybdenum earnings of $20 million), the absence of the establishment of El Abra’s valuation allowance for deferred tax assets in 2001 ($57.9 million), lower inter-

- 56 -

est expense ($40.5 million), higher tax benefits primarily resulting from new tax legislation ($188.0 million), and the sale of non-core real estate ($22.6 million).

In 2000, consolidated earnings were $56.3 million, or 72 cents per common share, including a special, net charge of $43.3 million, or 55 cents per common share. The decrease in earnings in 2001 was primarily due to 11 cents per pound lower copper prices (approximately $251 million), higher implied unit cost of copper production (approximately $105 million), 59 million pounds of lower produced copper sales volumes (approximately $7 million), a net charge for environmental provisions ($31.1 million), lower miscellaneous income ($21.9 million), and higher interest expense ($9.7 million); partially offset by net insurance recoveries ($61.8 million) and a gain from the sale of our 50 percent interest in the Sossego project ($39.9 million).

Special Items

Throughout Management’s Discussion and Analysis there is disclosure and discussion of what management believes to be special items. We view special items as unpredictable and atypical of our operations in the period. We believe consistent identification, disclosure and discussion of such items, both favorable and unfavorable, provide additional information to assess the quality of our performance and our earnings or losses. This supplemental information is not a substitute for any U.S. generally accepted accounting principles (GAAP) measure and should be evaluated within the context of our U.S. GAAP results. Any supplemental information references to earnings, losses or results excluding special items or before special items is our non-GAAP measure of items that may not be comparable to similarly titled measures reported by other companies.

Note: Supplemental Data

The following table summarizes the consolidated special items for 2002, 2001 and 2000 and the resultant earnings (losses) excluding these special items:


($ in millions)
	2002			2001			2000

				As Restated

Special items, net of taxes	$	(208.9	)		(26.4	)		(43.3	)
Earnings (losses) excluding special items (after taxes)	$	(129.2	)		(305.1	)		99.6

Note: Supplemental Data

The following tables summarize the special items and provisions for 2002, 2001 and 2000:

($ in millions except per share data)


		2002

								$/Share
		Pre-tax			After-tax			After-tax

Special items and provisions, net:
	PDMC (see Business Division disclosure)	$	(116.9	)		(119.5	)		(1.42	)

	PDI (see Business Division disclosure)		(22.0	)		(21.4	)		(0.25	)

	Corporate and Other - Environmental provisions, net		(12.7	)		(12.7	)		(0.15	)
	Environmental insurance recoveries, net		17.4			14.8			0.18
	Historic Cyprus Amax lawsuit settlements		(54.7	)		(53.0	)		(0.63	)
	Historic Cyprus Amax arbitration award		(46.5	)		(45.0	)		(0.54	)
	Legal loss contingency		(1.0	)		(1.0	)		(0.01	)

			(97.5	)		(96.9	)		(1.15	)

			(236.4	)		(237.8	)		(2.82	)

Miscellaneous income and expense, net:
	Cost investment write-downs		(1.2	)		(1.2	)		(0.01	)

Taxes:
	Release of taxes provided with regard to Plateau Mining		—			13.0			0.15
	Tax benefit for 2001 net operating loss carryback		—			66.6			0.79

			—			79.6			0.94

Extraordinary loss - debt extinguishment			(31.3	)		(26.6	)		(0.32	)

Cumulative effect of accounting change			(33.0	)		(22.9	)		(0.27	)

		$	(301.9	)		(208.9	)		(2.48	)

- 57 -

($ in millions except per share data)


			2001

									$/Share
			Pre-tax			After-tax			After-tax

			As Restated

Special items and provisions, net:
	PDMC (see Business Division disclosure)		$	(2.1	)		(2.1	)		(0.03	)

	PDI (see Business Division disclosure)			(4.7	)		(4.7	)		(0.06	)

	Corporate and Other - Environmental provisions, net			(16.2	)		(16.2	)		(0.21	)
		Environmental insurance recoveries, net		61.8			61.8			0.79
		Insurance settlement for legal loss contingency		9.0			9.0			0.11
		Restructuring programs		(1.3	)		(1.3	)		(0.01	)
		Other		(5.9	)		(5.9	)		(0.07	)

				47.4			47.4			0.61

				40.6			40.6			0.52

Miscellaneous income and expense, net:
	Impairment loss on investments			(12.9	)		(12.9	)		(0.16	)
	Interest on prior years’ tax refunds			4.3			4.3			0.05
	Other			1.5			1.5			0.02

				(7.1	)		(7.1	)		(0.09	)

Taxes:
	El Abra deferred tax asset valuation allowance			—			(57.9	)		(0.74	)

Cumulative effect of accounting change				(2.0	)		(2.0	)		(0.03	)

			$	31.5			(26.4	)		(0.34	)

($ in millions except per share data)


		2000

								$/Share
		Pre-tax			After-tax			After-tax

Special items and provisions, net:
	PDMC (see Business Division disclosure)	$	(5.8	)		(3.8	)		(0.05	)

	PDI (see Business Division disclosure)		(46.0	)		(39.8	)		(0.51	)

			(51.8	)		(43.6	)		(0.56	)

Cost of products sold:
	PDI (see Business Segment disclosure)		(5.6	)		(5.6	)		(0.07	)

Miscellaneous income and expense, net:
	Philippines investment impairment		(7.2	)		(7.2	)		(0.09	)
	Interest on prior years’ tax refunds		5.8			3.6			0.05
	Settlement of insurance claim		4.5			3.0			0.04

			3.1			(0.6	)		—

Taxes:
	Income tax refund		—			6.5			0.08

		$	(54.3	)		(43.3	)		(0.55	)

Restructuring Programs/Asset Impairments

In December 2002, PDMC recorded special, pre-tax charges for asset impairments and closure provisions of $153.5 million (before and after taxes) at Cobre, Hidalgo and Ajo. The Company recognized an impairment charge to write-down Cobre’s assets by $115.5 million (before and after taxes). We took this action after revising mine plans and assessing recoverability. The impairment assessment used a copper price lower than the prior-year assumption, reflecting moving average historical copper prices representing full economic and pricing cycles. The amount of Cobre’s impairment was determined through an assessment of the discounted cash flows of the remaining ore reserves. The Hidalgo impairment included a $12.9 million (before and after taxes) write-down of assets. As a result of the Company’s ability to use acid more efficiently and an updated assessment of PDMC’s long-term acid production and consumption balance, the Company determined that Hidalgo will probably not be reconfigured to produce acid as originally anticipated and that the net book value of Hidalgo assets would probably not be recovered. Hidalgo’s power facilities will continue to generate electricity when needed, and the facility will continue to be a backup alternative as a reliable producer of acid if conditions warrant. The remaining Hidalgo assets were written down to their estimated fair value. The Company also recognized a $7.0 million (before and after taxes)

- 58 -

charge for the estimated remaining costs of its closure obligation at Hidalgo. Phelps Dodge has reclassified material previously characterized as reserves at Ajo to mineralized material and, as a result, recognized an impairment charge to write down Ajo’s assets by $18.1 million (before and after taxes). This action resulted from updating mine plans at this prospective development property. The amount of Ajo’s impairment was determined through an assessment of the fair value of its assets.

The following table presents a roll-forward of the liabilities incurred in connection with the September 2002 restructuring program, which were reflected as current liabilities in our consolidated balance sheet:

($ in millions)


		2002
		Provision*		Additions		Payments			12/31/02

PDI –
Wire and Cable
	Employee severance and relocation**	$	3.3		0.6		(2.6	)		1.3

*		Provision excluded $2.8 million of pension and other postretirement charges included in long-term liabilities.

**		Relocation costs were charged to expense as incurred.

In the fourth quarter of 2001, Phelps Dodge announced a series of actions to address the then current economic environment, including changes in copper operations that led us to temporarily curtail approximately 220,000 metric tons of copper production annually (including our partner’s share), and to curtail 54,000 metric tons of North American carbon black production annually in 2002. These actions resulted in the layoff of approximately 1,600 employees mostly in January 2002. The Chino and Miami mines were temporarily closed, the Bagdad and Sierrita mines are operating at approximately one-half capacity, the Chino smelter and the Miami refinery were temporarily closed (approximately 1,500 positions), and Columbian Chemicals Company temporarily closed its El Dorado, Arkansas, facility (approximately 100 positions).

In the second quarter of 2001, we announced a restructuring of our professional, administrative and operational support functions, as well as various other operational improvement initiatives, which led to a reduction of approximately 500 positions.

The restructuring plans for 2001 included charges of $15.0 million for employee severance and relocation costs, $8.7 million for mothballing/take-or-pay contracts, $0.6 million for asset disposal and dismantling charges, and $6.3 million for pension and other postretirement obligations.

- 59 -

The following tables present a roll-forward of the liabilities incurred in connection with the 2001 restructuring programs, which were reflected as current liabilities in our consolidated balance sheet:

($ in millions)


			2001		Reassess-
			Provision*		ments		Payments			12/31/01

PDMC –
U.S. Mines
	Morenci
		Employee severance and relocation**	$	1.7		—		(1.4	)		0.3

	Bagdad/Sierrita
		Employee severance and relocation**		3.6		—		(0.1	)		3.5
		Mothballing/take-or-pay contracts		3.1		—		—			3.1

				6.7		—		(0.1	)		6.6

	Miami/Bisbee
		Employee severance and relocation**		2.0		—		(0.2	)		1.8
		Mothballing/take-or-pay contracts		1.0		—		—			1.0

				3.0		—		(0.2	)		2.8

	Chino/Cobre
		Employee severance and relocation**		1.8		—		(0.6	)		1.2
		Mothballing/take-or-pay contracts		0.2		—		—			0.2

				2.0		—		(0.6	)		1.4

	Tyrone
		Employee severance and relocation**		0.5		—		(0.3	)		0.2

				13.9		—		(2.6	)		11.3

Manufacturing and Sales
	Employee severance and relocation**			1.7		—		(0.3	)		1.4
	Mothballing/take-or-pay contracts			4.4		—		(0.3	)		4.1

				6.1		—		(0.6	)		5.5

Primary Molybdenum
	Employee severance and relocation**			0.3		—		(0.2	)		0.1



			2001		Reassess-
			Provision*		ments		Payments			12/31/01

Other Mining
	Employee severance and relocation**			1.7		—	(	0.9	)		0.8

				22.0		—		(4.3	)		17.7

PDI –
Specialty Chemicals
	Disposal and dismantling			0.6		—	(	0.1	)		0.5
	Employee severance and relocation**			0.8		—		—			0.8

				1.4		—	(	0.1	)		1.3

Corporate and Other –
	Employee severance and relocation**			0.9		—	(	0.9	)		—

			$	24.3		—	(	5.3	)		19.0

*		Provision excluded $6.3 million of pension and other postretirement charges for the second quarter 2001 restructuring, included in long-term liabilities.

**		Relocation costs were charged to expense as incurred.

- 60 -

($ in millions)


					Reassess-
			12/31/01		ments			Payments			12/31/02

PDMC –
U.S. Mines
	Morenci
		Employee severance	$	0.3		0.1			(0.3	)		0.1

	Bagdad/Sierrita
		Employee severance		3.5		(1.1	)		(2.4	)		—
		Mothballing/take-or-pay contracts		3.1		(0.8	)		(2.1	)		0.2

				6.6		(1.9	)		(4.5	)		0.2

	Miami/Bisbee
		Employee severance		1.8		(0.5	)		(1.3	)		—
		Mothballing/take-or-pay contracts		1.0		(0.4	)		(0.5	)		0.1

				2.8		(0.9	)		(1.8	)		0.1

	Chino/Cobre
	Employee severance			1.2		(0.7	)		(0.4	)		0.1
		Mothballing/take-or-pay contracts		0.2		(0.1	)		(0.1	)		—

				1.4		(0.8	)		(0.5	)		0.1

	Tyrone
		Employee severance		0.2		—			(0.2	)		—

				11.3		(3.5	)		(7.3	)		0.5

Manufacturing and Sales
	Employee severance			1.4		(0.2	)		(1.1	)		0.1
	Mothballing/take-or-pay contracts			4.1		(1.2	)		(2.9	)		—

				5.5		(1.4	)		(4.0	)		0.1

Primary Molybdenum
	Employee severance			0.1		—			(0.1	)		—

Other Mining
	Employee severance			0.8		(0.2	)		(0.6	)		—

				17.7		(5.1	)		(12.0	)		0.6


				Reassess-
		12/31/01		ments			Payments			12/31/02

PDI –
Specialty Chemicals
	Disposal and dismantling		0.5		(0.4	)		(0.1	)		—
	Employee severance		0.8		(0.1	)		(0.7	)		—

			1.3		(0.5	)		(0.8	)		—

		$	19.0		(5.6	)		(12.8	)		0.6

A reassessment of $2.6 million for employee termination benefits at PDMC’s segments was made because subsequently, as the plan was being implemented, it was determined that certain employees identified in the restructuring plan would be retained to fill open positions or would not be eligible for supplemental unemployment as originally anticipated. In addition, there was reassessment of $2.5 million related to savings from renegotiated contracts or from reduced penalties on demand contracts. Further, a $6.4 million charge was recognized for additional pension-related benefits, which are included in long-term liabilities, for employees at our Chino, Miami, Sierrita and Bagdad operations because these operations were expected to remain curtailed beyond one year from their January 2002 curtailment.

PDI’s Specialty Chemicals segment reassessment related to (i) $0.4 million for an adjustment to disposal and dismantling charges for the El Dorado plant facility and (ii) a reclassification of $0.1 million to long-term pension benefits.

In the second quarter of 2000, we announced a plan to reduce operating costs and restructure operations at our Miami/Bisbee, Primary Molybdenum and Wire and Cable segments. This plan comprised the following actions during 2000:

(i) High-cost production was curtailed at the Miami copper mine in Arizona and production was reduced at the Henderson mine in Colorado. Molybdenum production at the Henderson mine was curtailed by approximately 20 percent, and its workforce was reduced by approximately 130 workers. The curtailment of production resulted in a special, pre-tax charge of $4.3 million for severance-related costs. Additionally, our Miami copper mine reduced its mining activities. The new mine plan temporarily suspended stripping in a higher cost portion of the mine and has allowed the redistribution of a variety of mining equipment, including shovels and haul trucks, to other PDMC operations to reduce overall

- 61 -


	capital expenditures. The reduction of mining activities resulted in a special, pre-tax charge of $1.5 million for severance and other related costs.

(ii) Production ceased at two wire and cable plants in Venezuela in the second quarter of 2000 due to low forecast plant utilization levels as a result of significantly reduced infrastructure spending in the Latin America region. These plant closures resulted in a total special, pre-tax loss of $26.1 million, consisting of an impairment in the carrying value of property, plant and equipment and other assets of $19.5 million; an impairment of goodwill of $1.7 million; and a restructuring accrual of $4.9 million associated with severance-related costs ($2.2 million) and plant dismantling costs ($2.7 million). In addition, working capital write-downs of $3.4 million were recorded to cost of products sold as a result of the decision to close the plants.

(iii) The closure of a telephone cable operation in El Salvador in the fourth quarter of 2000 was due to low plant utilization levels as a result of heightened global competition for telecommunication cable. The plant closure resulted in a special, pre-tax loss of $5.5 million, including $4.5 million relating to the impairment of the carrying value of property, plant and equipment and other assets and a restructuring accrual of $1.0 million associated with plant dismantling costs. In addition, working capital write-downs of $2.2 million were recorded to cost of products sold as a result of the decision to close the plant.

(iv) A special, pre-tax charge of $5.8 million was recognized for our wire and cable operations in Austria as a result of the long-term impact of continuing extremely competitive pricing conditions in Europe. The continuing competitive pricing environment led to a determination that we should assess the recoverability of our Austrian wire and cable asset values. Our assessment of the carrying value of the property, plant and equipment of $4.2 million and the goodwill balance of $2.8 million indicated impairments of $3.0 million and $2.8 million, respectively.

In addition to the above items, during 2000, we recognized net additional costs of $8.6 million at our wire and cable plants in conjunction with the June 30, 1999, restructuring programs.

The following tables present a roll-forward of the liabilities incurred in connection with the June 2000 restructuring program, which were reflected as current liabilities in our consolidated balance sheet:

($ in millions)


			2000
			Provision		Additions		Payments			12/31/00

PDMC –
U.S. Mines
	Miami/Bisbee Employee severance		$	0.9		—		(0.2	)		0.7
		Equipment relocation*		—		0.6		(0.6	)		—

				0.9		0.6		(0.8	)		0.7

Primary Molybdenum
Employee severance				4.3		—		(3.4	)		0.9

				5.2		0.6		(4.2	)		1.6

PDI –
Wire and Cable
	Employee severance			2.2		—		(2.2	)		—
	Plant removal and dismantling*			2.8		0.9		(0.7	)		3.0

				5.0		0.9		(2.9	)		3.0

			$	10.2		1.5		(7.1	)		4.6

Relocation costs were charged to expense as incurred.

($ in millions)


					Reassess-
			12/31/00		ments			Payments			12/31/01

PDMC –
U.S. Mines
	Miami/Bisbee
		Employee severance	$	0.7		(0.7	)		—			—

Primary Molybdenum
	Employee severance			0.9		(0.6	)		(0.3	)		—	&nb