Phelps Dodge Earnings Slide

Copper derivatives are marked to market.
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Earnings fell 14% from a year ago in

Phelps Dodge's

(PD) - Get Report

first quarter despite an 18% rise in sales, as derivatives that the mining company uses to protect against price declines in copper lost value in a bull market for the metal.

The company's cash flow surged in the quarter and the company's balance sheet looked strong despite a program of higher dividends and buybacks that has been encouraged by a hedge fund shareholder, among others.

Phelps Dodge earned $338.8 million, or $1.65 a share, in the quarter, compared with $383.3 million, or $2 a share, a year ago. The latest period included a writedown of $298.4 million, or $1.46 a share, related to the copper options, and charges of $44.9 million, or 22 cents a share.

Analysts surveyed by Thomson First Call were forecasting $2.61 a share in the quarter, although it wasn't clear whether the estimates reflected the writedowns. Sales totaled $2.22 billion, up from $1.89 billion a year ago. Analysts surveyed by Thomson First Call were forecasting sales of $2.31 billion.

Sales and earnings were hurt in the quarter by the copper derivatives that cover 25% of its expected annual copper sales in 2006 and 20% of expected 2007 results.

"As these sales do not qualify for hedge accounting treatment, the entire quantity hedged for both years must be adjusted to fair market value based on the forward curve price at March 31, 2006, and the loss recorded in revenues," Phelps said.

"The actual impact of our 2006 and 2007 zero-premium copper collar price protection programs will not be fully determinable until the maturity of the copper collars at each respective year end, with final adjustments based on the average annual price. The approximate 75% of sales in 2006 and 80% in 2007 not covered by the copper collar price protection programs participate fully in the higher LME and Comex copper prices."

Phelps Dodge produced cash flow from operating activities of $533.3 million in the quarter, up from $316.1 million, and ended the quarter with cash and equivalents of $2.16 billion, up from $1.40 billion.

In the company's main unit, Phelps Dodge Mining Co., operating income before special items rose 10% from a year ago to $614.2 million, mostly reflecting higher copper prices offset by the price collars and higher production costs.

The stock closed at $85.59 Wednesday. It fell $2.59, or 3%, to $83 in premarket trading.