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Phelps Dodge

(PD) - Get PagerDuty, Inc. Report

slashed fourth-quarter earnings guidance Tuesday as derivatives that the company bought to protect itself from declining copper prices backfired in a bull market.

Phelps expects to earn $1 to $1.30 a share in the quarter, down from previous guidance for $4.15 to $4.40 a share. The new estimate includes a charge of $2.05 a share related to a "price protection program" that the company previously described as collars and put options designed to preserve the price of future production.

The derivatives are marked to market at the end of each reporting period.

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Phelps noted that copper prices during the fourth quarter averaged $1.95 per pound on the London Metal Exchange and $2.03 per pound on Nymex. The company's previous fourth quarter guidance was based on a projection of $1.80 per pound.

"The positive effects of these improved prices will be more than offset by the impact of the company's previously disclosed price protection programs, which are expected to reduce fourth quarter operating earnings by approximately $200 million," it said.

If current futures prices hold, Phelps noted, a "meaningful benefit" will be realized when the company sells its copper in 2006.

Another factor in the earnings shortfall was lower-than-expected production of copper and molybdenum sales in the quarter. Phelps produced copper sales of 623 million pounds in the period, 7 million below guidance, and produced 613 million pounds, 37 million below the low end of guidance.

Shares tanked $13.05, or 8.4%, to $141.50.