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DCR Lowers Phelps Dodge's Debt Ratings

9 December 1999

DCR Lowers Phelps Dodge's Debt Ratings

    CHICAGO, Dec. 8 -- Duff & Phelps Credit Rating Co. (DCR) has
lowered the senior unsecured debt and commercial paper ratings of Phelps Dodge
Corporation .  The rating on the company's notes and debentures has
been changed to 'BBB+' (Triple-B-Plus) from 'A' (Single-A), and the commercial
paper rating has been revised to 'D-2' (D-Two) from 'D-1' (D-One).  The
ratings changes follow a review of the company's strategic, operational and
financial situation in light of the completion last week of the acquisition of
Cyprus Amax Minerals.  (The 'BBB+' (Triple-B-Plus) rating also applies to the
senior unsecured debt of Cyprus Amax, which was assumed by Phelps Dodge.)
    Both ratings have been removed from Rating Watch-Down, where they were
placed on September 22, 1999, following the announcement that Phelps Dodge had
added an almost $1 billion cash component to its combined offers for Cyprus
Amax and Asarco Incorporated.  The rating outlook is Stable.
    The downgrades primarily reflect the additional debt that has been added
to the company's balance sheet relative to its post-acquisition cash-flow
generating prospects.  The reduced proportion of debt service that can be
covered from noncopper operations is also a consideration.
    Phelps Dodge now has an additional $1.5 billion in debt, comprised of the
nearly $700 million cash portion of its payment for the Cyprus Amax shares and
about $800 million in net debt (total debt less cash) assumed in the
acquisition.  Phelps Dodge's debt-to-total capitalization is currently
43 percent, compared with 31 percent at September 30, 1999 (before the
acquisition).
    Phelps Dodge has acquired about one billion pounds per year in copper
production capability.  That new capacity comes at higher per-unit copper cash
costs, at least until the $100 million in anticipated annual cost savings and
synergies are realized.  As with most acquisitions, the timing and amount of
such cost savings and synergies are uncertain until they happen.  However, the
rating incorporates DCR's view that the $100 million goal is attainable by the
end of 2001, the time frame specified by the company.
    The existence of Phelps Dodge Industries (PDI) as a noncopper source of
substantial cash flow has been an important positive consideration in Phelps
Dodge's rating.  Because of the growth in the debt burden due to the
acquisition, the impact of PDI cash flows, expressed in terms of how many
times they cover annual interest expense, has significantly diminished.
    Phelps Dodge continues to have sound operational and financial management
with prospects for growth in both its copper and noncopper businesses.  The
company cites debt reduction as a top priority.  How fast that debt can be
reduced depends largely on copper prices.  With Phelps Dodge's large copper
production (about 2.4 billion pounds in 2000), sustained periods of high
copper prices would enable the company to pay down a large amount of debt
quickly.  Conversely, a protracted period of low copper prices and/or further
acquisitions would make meaningful debt reduction difficult.
    DCR is a leading global rating agency with 34 local market offices
providing ratings and research on debt issues and insurance claims paying
ability in more than 50 countries. For additional research on Phelps Dodge,
visit DCR' s web site at http://www.dcrco.com (Quick Search: Phelps Dodge).
DCR' s research is also available on Bloomberg at DCR and First Call' s
BondCall Direct/Research Direct at http://www.firstcall.com, as well as
through other third-party providers.