Phelps Dodge ( PD) said second-quarter earnings fell from a year ago as derivatives to protect against swings in copper prices were written down. Phelps earned $471.7 million, or $2.32 a share, in the quarter, compared with earnings of $682.3 million, or $3.38 a share, last year. The latest quarter had a charge to write down copper derivatives of $514.6 million, or $2.53 a share, and a charge for environmental provisions of $9.8 million, or 5 cents a share. The year-ago quarter had a gain of $225.8 million, or $1.12 a share, to mark up the value of the copper derivatives. Sales rose 52% from a year ago to $2.99 billion, missing the $3.16 billion Thomson First Call consensus. Phelps Dodge continued to benefit from rallying copper prices: the metal's price averaged $3.38 a pound on the Nymex during the quarter, up from $1.53 a pound in the first quarter and $2.25 a pound a year ago. Some of that appreciation is offset by the company's derivatives book, which covers about 25% of its expected copper sales for 2006 and about 20% for 2007. Since such put options give their holder the right to sell copper at a set price, when the market price rises above that level, the privilege loses luster and the value of the contract falls. Phelps said cash flow from operating activities was $1.1 billion in the most recent quarter, up from $628.6 million a year ago. Last month, Phelps Dodge announced a $40 billion deal in which it will swallow Canadian nickel producers Inco ( N) and Falconbridge ( FAL).