10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 
FORM 10-Q
 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 

For the quarter ended June 30, 2003

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

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

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 o .

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o .

Number of Common Shares outstanding at July 24, 2003: 89,040,960 shares.

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PHELPS DODGE CORPORATION

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2003

 
Table of Contents

			Page
Part I. Financial Information
	Item 1. Financial Statements (unaudited)
		Statement of Consolidated Operations		1
		Consolidated Balance Sheet		2
		Consolidated Statement of Cash Flows		3
		Consolidated Statement of Shareholders’ Equity		4
		Financial Data by Business Segment		5
		Notes to Consolidated Financial Information		7
		Review by Independent Accountants		25
		Report of Independent Accountants		26
	Item 2. Management’s Discussion and Analysis
		Results of Operations		27
		Results of Phelps Dodge Mining Company		31
		Results of Phelps Dodge Industries		49
		Other Matters Relating to the Statement of Consolidated Operations		51
		Changes in Financial Condition		54
	Item 3. Quantitative and Qualitative Disclosure About Market Risk			57
	Item 4. Controls and Procedures			57
Part II. Other Information
	Item 1. Legal Proceedings			57
	Item 4. Submission of Matters to a Vote of Security Holders			58
	Item 6. Exhibits and Reports on Form 8-K			58
	Signatures			58
	Certifications			58
	Index to Exhibits			60

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PHELPS DODGE CORPORATION AND SUBSIDIARIES

Part I. Financial Information

Item 1. Financial Statements

STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited; in millions except per share data)

								Six Months Ended
		Second Quarter						June 30,
		2003			2002			2003			2002
					(As Restated)*						(As Restated)*
Sales and other operating revenues		$	962.2			966.8			1,940.2			1,885.3
Operating costs and expenses
	Cost of products sold (exclusive of items shown separately below)		787.0			804.6			1,594.3			1,570.4
	Depreciation, depletion and amortization		107.2			103.1			208.8			206.0
	Selling and general administrative expense		35.8			29.8			68.5			62.0
	Exploration and research expense		12.9			9.2			22.5			17.9
	Special items and provisions, net (see Note 5)		2.1			30.3			0.2			26.5
			945.0			977.0			1,894.3			1,882.8
Operating income (loss)			17.2			(10.2	)		45.9			2.5
	Interest expense		(37.0	)		(49.2	)		(73.0	)		(102.0	)
	Capitalized interest		0.1			—			0.2			—
	Miscellaneous income (expense), net		12.3			(0.3	)		13.2			1.7
Loss before taxes, minority interests, equity in net earnings of affiliated companies and cumulative effect of accounting change			(7.4	)		(59.7	)		(13.7	)		(97.8	)
	Benefit (provision) for taxes on income (see Note 10)		(6.5	)		27.5			(21.9	)		64.5
	Minority interests in consolidated subsidiaries		(1.9	)		(2.7	)		(4.0	)		(4.0	)
	Equity in net earnings of affiliated companies		0.6			0.6			1.0			1.1
Loss before cumulative effect of accounting change			(15.2	)		(34.3	)		(38.6	)		(36.2	)
	Cumulative effect of accounting change, net of tax of $(1.3) in 2003 and $10.1 in 2002		—			—			8.4			(22.9	)
Net loss		$	(15.2	)		(34.3	)		(30.2	)		(59.1	)
	Preferred stock dividends		(3.4	)		(2.4	)		(6.8	)		(2.4	)
Loss applicable to common shares		$	(18.6	)		(36.7	)		(37.0	)		(61.5	)
Average number of common shares outstanding — basic			88.6			80.6			88.6			79.6
Basic loss per common share before cumulative effect of accounting change		$	(0.21	)		(0.46	)		(0.51	)		(0.48	)
	Cumulative effect of accounting change		—			—			0.09			(0.29	)
Basic loss per common share		$	(0.21	)		(0.46	)		(0.42	)		(0.77	)
Average number of common shares outstanding — diluted**			88.6			80.6			88.6			79.6
Diluted loss per common share before cumulative effect of accounting change		$	(0.21	)		(0.46	)		(0.51	)		(0.48	)
	Cumulative effect of accounting change		—			—			0.09			(0.29	)
Diluted loss per common share**		$	(0.21	)		(0.46	)		(0.42	)		(0.77	)

*	Refer to Note 2 to Consolidated Financial Information.
**	Diluted loss per share would have been anti-dilutive if based on fully diluted shares adjusted to reflect the assumed conversion of mandatory convertible preferred shares to common shares and stock option exercises.

See Notes to Consolidated Financial Information

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CONSOLIDATED BALANCE SHEET
(Unaudited; in millions except per share prices)

			June 30,			December 31,
			2003			2002
Assets
	Current assets:
		Cash and cash equivalents	$	298.2			349.8
		Accounts receivable, less allowance for doubtful accounts (2003 - $15.4; 2002 - $14.1)		492.1			391.1
		Mill and leach stockpiles		32.6			48.9
		Inventories		385.4			398.5
		Supplies		142.2			142.8
		Prepaid expenses and other current assets		22.9			26.5
		Deferred income taxes		72.2			70.6
		Current assets		1,445.6			1,428.2
	Investments and long-term receivables			134.1			132.3
	Property, plant and equipment, net (see Note 3)			4,740.9			4,813.7
	Long-term mill and leach stockpiles			77.3			64.3
	Deferred income taxes			8.5			11.0
	Goodwill			99.6			90.7
	Intangible assets (see Note 3)			334.6			345.9
	Other assets and deferred charges			117.3			142.9
			$	6,957.9			7,029.0
Liabilities
	Current liabilities:
		Short-term debt	$	61.5			35.2
		Current portion of long-term debt		134.7			127.0
		Accounts payable and accrued expenses		562.9			609.1
		Dividends payable		3.4			3.4
		Accrued income taxes		22.0			9.4
		Current liabilities		784.5			784.1
	Long-term debt			1,864.9			1,948.4
	Deferred income taxes			434.7			430.8
	Other liabilities and deferred credits			983.0			986.8
				4,067.1			4,150.1
Minority interests in consolidated subsidiaries				71.8			65.3
Shareholders’ equity
	Common shares, par value $6.25; 200.0 shares authorized; 89.0 outstanding in 2003 and 88.9 outstanding in 2002			556.2			555.6
	Cumulative preferred shares, par value $1.00; 6.0 shares authorized; 2.0 outstanding in 2003 and 2002			2.0			2.0
	Capital in excess of par value			1,554.6			1,552.1
	Retained earnings			1,136.3			1,173.3
	Accumulated other comprehensive loss			(418.3	)		(458.5	)
	Other			(11.8	)		(10.9	)
				2,819.0			2,813.6
			$	6,957.9			7,029.0

See Notes to Consolidated Financial Information

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CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; in millions)

				Six Months Ended
				June 30,
				2003			2002
							(As Restated)*
Operating activities
	Net loss			$	(30.2	)		(59.1	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation, depletion and amortization			208.8			206.0
		Deferred income taxes			3.5			(3.1	)
		Equity earnings (losses), net of dividends received			(0.3	)		1.2
		Special items and provisions			(6.2	)		27.7
		Cumulative effect of accounting change			(9.7	)		33.0
		Changes in current assets and liabilities:
			Accounts receivable		(86.8	)		(24.2	)
			Proceeds from sale of accounts receivable		(5.3	)		4.7
			Mill and leach stockpiles		16.3			11.5
			Inventories		18.8			37.4
			Supplies		1.6			(0.3	)
			Prepaid expenses		(2.7	)		(9.9	)
			Interest payable		0.5			(7.5	)
			Other accounts payable		(9.2	)		(29.7	)
			Accrued income taxes		13.9			1.5
			Other accrued expenses		(47.9	)		(15.6	)
		Other adjustments, net			(28.1	)		6.1
			Net cash provided by operating activities		37.0			179.7
Investing activities
	Capital outlays				(76.7	)		(48.9	)
	Capitalized interest				(0.2	)		—
	Investment in subsidiaries, net of cash received				(0.6	)		(1.9	)
	Proceeds from asset dispositions				13.1			24.6
	Other investing, net				3.4			(28.7	)
			Net cash used in investing activities		(61.0	)		(54.9	)
Financing activities
	Proceeds from issuance of debt				23.2			16.8
	Payment of debt				(78.3	)		(246.7	)
	Preferred dividends				(6.8	)		—
	Issuance of shares				—			592.2
	Other financing, net				34.3			(3.7	)
			Net cash provided by (used in) financing activities		(27.6	)		358.6
(Decrease) increase in cash and cash equivalents					(51.6	)		483.4
Cash and cash equivalents at beginning of period					349.8			386.9
Cash and cash equivalents at end of period				$	298.2			870.3

* Refer to Note 2 to Consolidated Financial Information.

See Notes to Consolidated Financial Information

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CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited; in millions)

				Common Shares				Preferred Shares									Accumulated
												Capital in					Other
				Number		At Par		Number		At Par		Excess of		Retained			Comprehensive						Shareholders’
				of Shares		Value		of Shares		Value		Par Value		Earnings			Income (Loss)			Other			Equity
Balance at December 31, 2002					88.9	$	555.6		2.0	$	2.0	$	1,552.1	$	1,173.3		$	(458.5	)	$	(10.9	)	$	2,813.6
	Stock options exercised												0.1											0.1
	Restricted shares issued/cancelled, net				0.1		0.6						2.4								(0.9	)		2.1
	Dividends on preferred shares														(6.8	)								(6.8	)
	Comprehensive income (loss):
		Net loss													(30.2	)								(30.2	)
		Other comprehensive income (loss), net of tax:
			Translation adjustment															35.7						35.7
			Net gain on derivative instruments															4.1						4.1
			Other investment adjustments															(0.2	)					(0.2	)
			Unrealized gains on securities															0.6						0.6
			Other comprehensive income															40.2						40.2
		Comprehensive loss																						10.0
Balance at June 30, 2003					89.0	$	556.2		2.0	$	2.0	$	1,554.6	$	1,136.3		$	(418.3	)	$	(11.8	)	$	2,819.0

See Notes to Consolidated Financial Information

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FINANCIAL DATA BY BUSINESS SEGMENT
(Unaudited; in millions)

		U.S. Mines													South American Mines
				Bagdad/		Miami/			Chino/								Cerro				Primary
		Morenci		Sierrita		Bisbee			Cobre			Tyrone			Candelaria		Verde		El Abra		Molybdenum
Second Quarter 2003
Sales and other operating revenues:
	Unaffiliated customers		—		—		—			0.1			—			60.0		9.0		30.0		93.4
	Intersegment		138.1		119.4		9.2			8.4			21.9			7.1		28.4		20.8		—
Depreciation, depletion and amortization			20.3		7.8		1.5			2.0			3.5			9.7		7.3		17.1		6.8
Operating income (loss) before special items and provisions			4.9		18.3		(2.6	)		(2.8	)		(4.5	)		13.6		8.6		5.2		0.4
Special items and provisions			—		—		(0.5	)		—			—			—		—		—		—
Operating income (loss)			4.9		18.3		(3.1	)		(2.8	)		(4.5	)		13.6		8.6		5.2		0.4
Assets at June 30			1,051.2		749.0		122.0			297.1			164.3			643.6		433.4		539.9		784.3
Expenditures for segment assets			3.8		4.6		0.1			0.6			—			1.0		0.9		0.5		2.7
Second Quarter 2002 (as restated)
Sales and other operating revenues:
	Unaffiliated customers		—		—		—			0.3			—			37.6		10.7		47.7		63.0
	Intersegment		138.0		72.9		2.4			12.1			25.8			40.4		23.6		30.5		—
Depreciation, depletion and amortization			19.9		6.6		1.3			2.7			3.1			9.4		7.6		16.2		6.2
Operating income (loss) before special items and provisions			12.9		4.5		(3.8	)		1.3			0.6			13.2		6.8		0.2		0.5
Special items and provisions			—		—		—			—			—			—		—		—		—
Operating income (loss)			12.9		4.5		(3.8	)		1.3			0.6			13.2		6.8		0.2		0.5
Assets at June 30			1,121.0		767.5		129.0			407.4			145.9			646.9		441.0		542.8		792.5
Expenditures for segment assets			0.6		8.8		0.1			0.8			2.5			0.6		1.2		1.1		2.6

																				Corporate,
		Manufacturing						PDMC												Other &
		and			Other			Elimi-			PDMC			Specialty		Wire &		PDI		Elimi-
		Sales			Mining			nations			Subtotal			Chemicals		Cable		Subtotal		nations			Totals
Second Quarter 2003
Sales and other operating revenues:
	Unaffiliated customers		443.4			5.7			—			641.6			166.1		154.5		320.6		—			962.2
	Intersegment		70.1			17.7			(410.2	)		30.9			—		0.1		0.1		(31.0	)		—
Depreciation, depletion and amortization			4.0			2.0			—			82.0			11.7		8.9		20.6		4.6			107.2
Operating income (loss) before special items and provisions			6.5			(21.3	)		—			26.3			15.0		3.5		18.5		(25.5	)		19.3
Special items and provisions			—			—			—			(0.5	)		—		—		—		(1.6	)		(2.1	)
Operating income (loss)			6.5			(21.3	)		—			25.8			15.0		3.5		18.5		(27.1	)		17.2
Assets at June 30			486.2			1,490.6			(1,593.4	)		5,168.2			737.0		518.2		1,255.2		534.5			6,957.9
Expenditures for segment assets			1.9			1.0			—			17.1			5.9		4.1		10.0		22.9			50.0
Second Quarter 2002 (as restated)
Sales and other operating revenues:
	Unaffiliated customers		478.8			6.4			—			644.5			140.5		181.8		322.3		—			966.8
	Intersegment		109.3			13.0			(430.7	)		37.3			—		—		—		(37.3	)		—
Depreciation, depletion and amortization			6.0			0.6			—			79.6			10.7		10.7		21.4		2.1			103.1
Operating income (loss) before special items and provisions			(1.0	)		(17.9	)		—			17.3			17.0		3.3		20.3		(17.5	)		20.1
Special items and provisions			—			20.9			—			20.9			—		—		—		(51.2	)		(30.3	)
Operating income (loss)			(1.0	)		3.0			—			38.2			17.0		3.3		20.3		(68.7	)		(10.2	)
Assets at June 30			528.5			1,724.5			(1,831.5	)		5,415.5			687.8		572.3		1,260.1		1,216.8			7,892.4
Expenditures for segment assets			1.5			0.9			—			20.7			3.2		2.6		5.8		1.5			28.0

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FINANCIAL DATA BY BUSINESS SEGMENT
(Unaudited; in millions)

		U.S. Mines													South American Mines
				Bagdad/		Miami/			Chino/								Cerro				Primary
		Morenci		Sierrita		Bisbee			Cobre			Tyrone			Candelaria		Verde		El Abra		Molybdenum
Six Months Ended 2003
Sales and other operating revenues:
	Unaffiliated customers		—		—		—			0.2			—			119.2		18.9		61.5		169.3
	Intersegment		274.3		214.8		18.2			17.8			48.6			30.6		55.6		41.8		—
Depreciation, depletion and amortization			39.0		15.1		3.4			4.0			6.8			20.5		14.6		31.6		12.9
Operating income (loss) before special items and provisions			17.3		25.0		(3.3	)		(4.9	)		(8.9	)		36.7		16.1		10.8		0.5
Special items and provisions			—		—		(0.5	)		—			—			—		—		—		—
Operating income (loss)			17.3		25.0		(3.8	)		(4.9	)		(8.9	)		36.7		16.1		10.8		0.5
Assets at June 30			1,051.2		749.0		122.0			297.1			164.3			643.6		433.4		539.9		784.3
Expenditures for segment assets			9.9		10.8		0.1			1.6			0.2			1.6		1.9		0.7		5.2
Six Months Ended 2002 (as restated)
Sales and other operating revenues:
	Unaffiliated customers		—		—		—			0.5			—			85.4		19.2		85.5		124.3
	Intersegment		268.5		172.4		11.9			34.0			50.1			59.7		48.4		48.3		—
Depreciation, depletion and amortization			39.4		13.2		2.6			5.8			6.1			19.4		15.0		32.7		11.7
Operating income (loss) before special items and provisions			24.7		0.2		(8.3	)		7.0			(1.1	)		33.4		13.6		0.7		0.2
Special items and provisions			—		—		—			—			—			—		—		—		—
Operating income (loss)			24.7		0.2		(8.3	)		7.0			(1.1	)		33.4		13.6		0.7		0.2
Assets at June 30			1,121.0		767.5		129.0			407.4			145.9			646.9		441.0		542.8		792.5
Expenditures for segment assets			2.3		16.4		0.1			0.9			2.6			1.0		3.4		2.6		4.5

																				Corporate,
		Manufactur-						PDMC												Other &
		ing and			Other			Elimi-			PDMC			Specialty		Wire &		PDI		Elimi-
		Sales			Mining			nations			Subtotal			Chemicals		Cable		Subtotal		nations			Totals
Six Months Ended 2003
Sales and other operating revenues:
	Unaffiliated customers		916.8			10.7			—			1,296.6			328.2		315.4		643.6		—			1,940.2
	Intersegment		155.4			34.0			(830.2	)		60.9			—		0.1		0.1		(61.0	)		—
Depreciation, depletion and amortization			8.2			3.1			—			159.2			22.7		17.8		40.5		9.1			208.8
Operating income (loss) before special items and provisions			15.0			(42.3	)		—			62.0			25.9		6.9		32.8		(48.7	)		46.1
Special items and provisions			—			—			—			(0.5	)		3.2		—		3.2		(2.9	)		(0.2	)
Operating income (loss)			15.0			(42.3	)		—			61.5			29.1		6.9		36.0		(51.6	)		45.9
Assets at June 30			486.2			1,490.6			(1,593.4	)		5,168.2			737.0		518.2		1,255.2		534.5			6,957.9
Expenditures for segment assets			3.5			1.5			—			37.0			9.7		6.7		16.4		23.9			77.3
Six Months Ended 2002 (as restated)
Sales and other operating revenues:
	Unaffiliated customers		932.5			8.8			—			1,256.2			269.8		359.3		629.1		—			1,885.3
	Intersegment		205.5			28.7			(853.2	)		74.3			—		0.2		0.2		(74.5	)		—
Depreciation, depletion and amortization			12.0			1.4			—			159.3			21.2		21.4		42.6		4.1			206.0
Operating income (loss) before special items and provisions			(2.7	)		(36.9	)		—			30.8			30.2		6.1		36.3		(38.1	)		29.0
Special items and provisions			—			34.7			—			34.7			—		—		—		(61.2	)		(26.5	)
Operating income (loss)			(2.7	)		(2.2	)		—			65.5			30.2		6.1		36.3		(99.3	)		2.5
Assets at June 30			528.5			1,724.5			(1,831.5	)		5,415.5			687.8		572.3		1,260.1		1,216.8			7,892.4
Expenditures for segment assets			3.0			1.3			—			38.1			5.2		4.3		9.5		3.2			50.8

-7-

NOTES TO CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)

1.	General Information
	The unaudited consolidated financial information of Phelps Dodge Corporation (the Company, which may be referred to as Phelps Dodge, PD, we, us or ours) presented herein has been prepared in accordance with the instructions to Form 10-Q and does not include all of the information and note disclosures required by generally accepted accounting principles. Therefore, this information should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2002. This information reflects all adjustments that are, in the opinion of management, necessary to a fair statement of the results for the interim periods reported. Our business consists of two divisions, Phelps Dodge Mining Company (PDMC) and Phelps Dodge Industries (PDI).
	The results of operations for the quarter and six-month periods ended June 30, 2003, are not necessarily indicative of the results to be expected for the full year.
2.	Restatements
	In Note 1, Summary of Significant Accounting Policies, and Note 22, Restatement of Consolidated Financial Statements, in the Company’s Form 10-K for the year ended December 31, 2002, we identified certain accounting matters in the fourth quarter of 2002 that required restatement of our December 31, 2001 and 2000, Consolidated Financial Statements and our financial information for the quarterly periods ended March 31, 2001, through September 30, 2002. Additionally, our presentation of reportable segment information for PDMC for the quarter and six months ended June 30, 2002, has been revised to reflect additional segments.
	Following are summaries of selected unaudited quarterly financial data, as restated for the quarter and six months ended June 30, 2002:

(Unaudited; $ in millions except per share data)

	Second Quarter 2002
	As
	Previously			Adjust-		As
	Reported			ments		Restated
Sales and other operating revenues	$	966.8			—	$	966.8
Operating loss		(15.8	)		5.6		(10.2	)
Loss before cumulative effect of accounting change		(36.4	)		2.1		(34.3	)
Net loss		(36.4	)		2.1		(34.3	)
Basic and diluted loss per common share before cumulative effect of accounting change		(0.48	)		0.02		(0.46	)
Basic and diluted loss per common share		(0.48	)		0.02		(0.46	)

Adjustments comprise the following:

(1)	To adjust the units-of-production depreciation rate calculation for PDMC’s mining, smelting and refining operations. This change reduced our depreciation and amortization expense and reduced our operating loss by $3.0 million in the second quarter of 2002. Additionally, this change decreased our net loss by $2.4 million, or 3 cents per common share, in the second quarter of 2002.
(2)	To adjust the acquired reclamation obligations assumed in the Cyprus Amax Minerals Company acquisition. This change increased our cost of products sold and our operating loss by $0.9 million in the second quarter of 2002. Additionally, this change increased our net loss by $0.7 million, or 1 cent per common share, in the second quarter of 2002.
(3)	To adjust the estimated reclamation obligation at our Tyrone mine in 2002 to exclude mineralized material from the determination of the unit reclamation and closure accrual rate. This change increased both our cost of products sold and our operating loss and increased our net loss by $2.1 million, or 3 cents per common share, in the second quarter of 2002.
(4)	To capitalize costs associated with material in mill and leach stockpiles and the consequent in-process material being converted to salable copper products, which were stated at lower of cost or market. This change decreased both our cost of products sold and our operating loss by $5.6 million in the second quarter of 2002. Additionally, this change decreased our net loss by $5.1 million, or 7 cents per common share, in the second quarter of 2002.
(5)	In 2001, a deferred tax asset valuation allowance of $57.9 million associated with our El Abra copper mine in Chile was established. The adjustment to the deferred tax asset caused an increase to our net loss by $2.2 million, or 3 cents per common share, in the second quarter of 2002.
(6)	The overall effect of the aforementioned adjustments resulted in an incremental income tax expense that increased our net loss by $0.4 million, or 1 cent per common share, in the second quarter of 2002.

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(Unaudited; $ in millions except per share data)

	Six Months Ended
	June 30, 2002
	As
	Previously			Adjust-		As
	Reported			ments		Restated
Sales and other operating revenues	$	1,885.3			—	$	1,885.3
Operating income (loss)		(8.8	)		11.3		2.5
Loss before cumulative effect of accounting change		(41.2	)		5.0		(36.2	)
Net loss		(64.1	)		5.0		(59.1	)
Basic and diluted loss per common share before cumulative effect of accounting change		(0.55	)		0.07		(0.48	)
Basic and diluted loss per common share		(0.84	)		0.07		(0.77	)

Adjustments comprise the following:

(1)	To adjust the units-of-production depreciation rate calculation for PDMC’s mining, smelting and refining operations. This change reduced our depreciation and amortization expense and decreased our operating loss by $5.7 million for the six months ended June 30, 2002. Additionally, this change decreased our net loss by $4.6 million, or 6 cents per common share, for the six months ended June 30, 2002.
(2)	To adjust the acquired reclamation obligations assumed in the Cyprus Amax Minerals Company acquisition. This change increased both our cost of products sold and our operating loss by $1.8 million for the six months ended June 30, 2002. Additionally, this change increased our net loss by $1.5 million, or 2 cents per common share, for the six months ended June 30, 2002.
(3)	To adjust the estimated reclamation obligation at our Tyrone mine in 2002 to exclude mineralized material from the determination of the unit reclamation and closure accrual rate. This change increased our cost of products sold and our operating loss and net loss by $4.2 million, or 5 cents per common share, for the six months ended June 30, 2002.
(4)	To capitalize costs associated with material in mill and leach stockpiles and the consequent in-process material being converted to salable copper products, which were stated at lower of cost or market. This change decreased our cost of products sold and our operating loss by $11.6 million for the six months ended June 30, 2002. Additionally, this change decreased our net loss by $10.7 million, or 14 cents per common share, for the six months ended June 30, 2002.
(5)	In 2001, a deferred tax asset valuation allowance of $57.9 million associated with our El Abra copper mine in Chile was established. The adjustment to the deferred tax asset caused an increase to our net loss by $4.2 million, or 5 cents per common share, for the six months ended June 30, 2002.
(6)	The overall effect of the aforementioned adjustments resulted in an incremental income tax expense that increased our net loss by $0.4 million, or 1 cent per common share, for the six months ended June 30, 2002.
3.	Reclassification of Intangible Assets
	The Company has recently had discussions with the Staff of the Securities and Exchange Commission regarding the balance sheet classification of certain mining concessions, primarily mining concessions containing proven and probable ore reserves and mineralized material at the Company’s South American mines, and whether such assets constitute tangible or intangible assets based upon certain guidance contained in Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Historically the Company has classified such assets less the related accumulated depreciation, depletion and amortization, as “Property, plant and equipment, net” on its consolidated balance sheet. The Company has reclassified such mining concessions as intangible assets. Previously reported historical amounts also have been reclassified for comparative purposes. These assets will continue to be amortized over their respective useful lives. The reclassifications had no effect on the Company’s net loss or shareholders’ equity.
	The following table summarizes the gross and net carrying amount of intangible assets at December 31, 2002, and June 30, 2003:
	(Unaudited; $ in millions)

	June 30,			December 31,
	2003			2002
Gross carrying amount	$	443.6	*		439.5
Less accumulated amortization		(109.0	)*		(93.6	)
	$	334.6			345.9

* Includes amounts for recording an asset retirement cost associated with the implementation of SFAS No. 143. (See Note 6, Accounting Standards, for further discussion.)

Amortization expense related to intangible assets was $6.2 million and $6.5 million for the three months ended June 30, 2003 and 2002, respectively, and $13.4 million and $13.1 million for the six months ended June 30, 2003 and 2002, respectively.

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The estimated annual aggregate amortization expense for intangibles is as follows:

(Unaudited; $ in millions)

2004	$	27.2
2005		27.3
2006		27.3
2007		27.4
2008		27.6

4.

Stock Compensation

We account for our stock option plans by measuring compensation cost using the intrinsic-value-based method presented in Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No compensation cost is reflected in consolidated net loss, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table presents the effect on net loss and loss per common share as if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to compensation cost.

(Unaudited; $ in millions except per share data)

		Second Quarter
		2003			2002
					(As Restated)*
Net loss as reported		$	(15.2	)		(34.3	)
Deduct:
	Total compensation cost determined under fair value based method for all awards, net of tax		(3.1	)		(2.9	)
Pro forma net loss		$	(18.3	)		(37.2	)
Loss per common share
	Basic — as reported	$	(0.21	)		(0.46	)
	Basic — pro forma	$	(0.24	)		(0.49	)
Loss per common share
	Diluted — as reported	$	(0.21	)		(0.46	)
	Diluted — pro forma	$	(0.24	)		(0.49	)

* Refer to Note 2, Restatements, for further discussion.

(Unaudited; $ in millions except per share data)

		Six Months Ended
		June 30,
		2003			2002
					(As Restated)*
Net loss as reported		$	(30.2	)		(59.1	)
Deduct:
	Total compensation cost determined under fair value based method for all awards, net of tax		(6.5	)		(6.9	)
Pro forma net loss		$	(36.7	)		(66.0	)
Loss per common share
	Basic — as reported	$	(0.42	)		(0.77	)
	Basic — pro forma	$	(0.49	)		(0.86	)
Loss per common share
	Diluted — as reported	$	(0.42	)		(0.77	)
	Diluted — pro forma	$	(0.49	)		(0.86	)

* Refer to Note 2, Restatements, for further discussion.

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5.

Special Items and Provisions

Special items and provisions are unpredictable and atypical of the Company’s operations in a given 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. In addition, management measures the performance of its reportable segments excluding special items. 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.

Note: Supplemental Data

The following schedule summarizes the special items and provisions for the quarter and six months ended June 30, 2003:

(Unaudited; gains (losses) in millions except per share amounts)

			Second Quarter 2003
Statement of Consolidated			Pre-tax			After-tax			$/Share
Operations Line Item			Earnings			Earnings			After-tax
Special items and provisions, net:
	PDMC —
		Environmental provisions	$	(0.5	)		(0.4	)		—
	Corporate and Other —
		Environmental provisions		(2.1	)		(2.0	)		(0.02	)
		Environmental insurance recoveries, net		0.5			0.5			—
				(1.6	)		(1.5	)		(0.02	)
				(2.1	)		(1.9	)		(0.02	)
Miscellaneous income (expense), net:
		Sale of cost investment		6.4			6.4			0.07
			$	4.3			4.5			0.05

(Unaudited; gains (losses) in millions except per share amounts)

			Six Months Ended
			June 30, 2003
Statement of Consolidated			Pre-tax			After-tax			$/Share
Operations Line Item			Earnings			Earnings			After-tax
Special items and provisions, net:
	PDMC —
		Environmental provisions	$	(0.5	)		(0.4	)		—
	PDI —
		Termination of a foreign postretirement benefit plan	$	3.2			2.4			0.03
	Corporate and Other —
		Environmental provisions		(3.4	)		(3.3	)		(0.03	)
		Environmental insurance recoveries, net		0.5			0.5			—
				(2.9	)		(2.8	)		(0.03	)
				(0.2	)		(0.8	)		—
Miscellaneous income (expense), net:
		Sale of cost investment		6.4			6.4			0.07
Cumulative effect of accounting change				9.7			8.4			0.09
			$	15.9			14.0			0.16

In the 2003 second quarter, a special, net pre-tax gain of $4.3 million was recognized consisting of (i) a pre-tax gain of $6.4 million (before and after taxes) for the sale of a cost-basis wire and cable investment; (ii) a $2.6 million charge ($2.4 million after-tax) for environmental provisions (refer to Note 7, Environmental, and Reclamation and Closure Matters); and (iii) a $0.5 million net gain (before and after taxes) from recoveries associated with insurance settlements on historic environmental claims.

In the 2003 first quarter, a special, net pre-tax gain of $11.6 million was recognized consisting of (i) a pre-tax gain of $9.7 million ($8.4 million after-tax) for the cumulative effect of an accounting change (refer to Note 6, Accounting Standards, for further discussion); (ii) a $1.3 million charge (before and after taxes) for environmental provisions (refer to Note 7, Environmental, and Reclamation and Closure Matters); and (iii) a $3.2 million gain ($2.4 million after-tax) from the termina-

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tion of a foreign postretirement benefit plan.

Note: Supplemental Data

The following schedule summarizes the special items and provisions for the quarter and six months ended June 30, 2002:

(Unaudited; gains (losses) in millions except per share amounts)

			Second Quarter 2002
Statement of Consolidated			Pre-tax			After-tax			$/Share
Operations Line Item			Earnings			Earnings			After-tax
Special items and provisions, net:
	PDMC —
		Environmental insurance recoveries, net	$	(1.7	)		(1.5	)		(0.02	)
		Sale of non-core real estate		22.6			22.6			0.28
				20.9			21.1			0.26
	Corporate and Other —
		Environmental provisions		—			2.4			0.03
		Environmental insurance recoveries, net		6.5			5.0			0.06
		Historic Cyprus Amax lawsuit settlement		(11.2	)		(8.9	)		(0.11	)
		Historic Cyprus Amax arbitration award with regard to Plateau Mining		(46.5	)		(44.5	)		(0.55	)
				(51.2	)		(46.0	)		(0.57	)
				(30.3	)		(24.9	)		(0.31	)
Miscellaneous income (expense), net:
		Cost investment write-downs		(0.7	)		(0.8	)		(0.01	)
Taxes:
	Release of taxes provided with regard to Plateau Mining			—			13.0			0.16
			$	(31.0	)		(12.7	)		(0.16	)

(Unaudited; gains (losses) in millions except per share amounts)

			Six Months Ended
			June 30, 2002
Statement of Consolidated			Pre-tax			After-tax			$/Share
Operations Line Item			Earnings			Earnings			After-tax
Special items and provisions, net:
	PDMC —
		Environmental insurance recoveries, net	$	12.1			9.7			0.12
		Sale of non-core real estate		22.6			22.6			0.28
				34.7			32.3			0.40
	Corporate and Other —
		Environmental provisions		(12.1	)		(9.7	)		(0.12	)
		Environmental insurance recoveries, net		8.6			6.9			0.08
		Historic Cyprus Amax lawsuit settlement		(11.2	)		(8.9	)		(0.11	)
		Historic Cyprus Amax arbitration award with regard to Plateau Mining		(46.5	)		(44.5	)		(0.56	)
				(61.2	)		(56.2	)		(0.71	)
				(26.5	)		(23.9	)		(0.31	)
Miscellaneous income (expense), net:
		Cost investment write-downs		(1.2	)		(1.2	)		(0.01	)
Taxes:
	Release of taxes provided with regard to Plateau Mining			—			13.0			0.16
	Tax benefit for 2001 net operating loss carryback			—			38.5			0.49
				—			51.5			0.65
Cumulative effect of accounting change				(33.0	)		(22.9	)		(0.29	)
			$	(60.7	)		3.5			0.04

In the 2002 second quarter, a special, net pre-tax loss of $31.0 million was recognized consisting of (i) pre-tax charges of $46.5 million ($44.5 million after-tax) associated with an award made in a binding arbitration proceeding filed against Cyprus Amax Minerals Company (Cyprus Amax) by Plateau Mining Corporation (a former subsidiary of Cyprus Amax); (ii) an $11.2 million charge including expenses ($8.9 million after-tax) for the settlement of a lawsuit related to Amax Oil & Gas acquired with the Cyprus Amax purchase; (iii) a $0.7 million loss on the write-off of a

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cost investment; (iv) a $22.6 million gain (before and after taxes) on the sale of a non-core parcel of real estate in New Mexico; and (v) a $4.8 million net gain ($3.8 million after-tax) from recoveries associated with insurance settlements on historic environmental claims. The taxes associated with special items were a net benefit of $18.3 million, including release of deferred taxes previously provided ($13.0 million) and year-to-date adjustments ($2.0 million) reflecting refinements in forecast estimates of U.S. net operating loss carrybacks prior to 2002 (refer to Note 10, Benefit (Provision) for Taxes on Income).

In the 2002 first quarter, a special, net pre-tax loss of $29.7 million was recognized consisting of (i) pre-tax charges of $33.0 million ($22.9 million after-tax) for the cumulative effect of an accounting change (refer to Note 6, Accounting Standards, for further discussion); (ii) a $12.1 million charge (before and after taxes) for environmental provisions; (iii) a $0.5 million ($0.4 million after-tax) write-off of a cost-basis investment; and (iv) a $15.9 million gain ($13.1 million after-tax), net of fees and expenses, from recoveries associated with insurance settlements reached with companies on historic environmental claims. In addition, the 2002 first quarter included a tax benefit of $38.5 million for net operating loss carryback prior to 2002 resulting from recent U.S. tax legislation (refer to Note 10, Benefit (Provision) for Taxes on Income).

In September 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. Refer to the Company’s Form 10-K for the year ended December 31, 2002, for additional discussion.

The following schedule presents a roll-forward from December 31, 2002, of the liabilities incurred in connection with the September 2002 restructuring program, which were reflected as current liabilities in our consolidated balance sheet:

(Unaudited; $ in millions)

		12/31/02		Payments			6/30/03
PDI —
Wire and Cable
	Employee severance	$	1.3		(1.1	)		0.2

Note: In the 2003 second quarter, payments were $(0.2) million.

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. Also in the fourth quarter of 2001, we announced a series of actions to address the then-current economic environment, including changes in copper operations that led us to 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. Additionally, in the second quarter of 2000 and 1999, we announced plans to reduce operating costs and restructure operations at our PDMC division and our Wire and Cable segment. Refer to the Company’s Form 10-K for the year ended December 31, 2002, for additional discussion.

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The following schedules present a roll-forward from December 31, 2002 and 2001, of the liabilities incurred in connection with the 2001 restructuring programs, which were reflected as current liabilities in our consolidated balance sheet:

(Unaudited; $ in millions)

			12/31/02		Payments			6/30/03
PDMC —
U.S. Mines
	Morenci
		Employee severance	$	0.1		(0.1	)		—
	Bagdad/Sierrita
		Mothballing/take-or-pay contracts		0.2		(0.2	)		—
	Miami/Bisbee
		Mothballing/take-or-pay contracts		0.1		(0.1	)		—
	Chino/Cobre
		Employee severance		0.1		(0.1	)		—
				0.5		(0.5	)		—
Manufacturing and Sales
	Employee severance			0.1		(0.1	)		—
			$	0.6		(0.6	)		—

Note: All payments were made in the 2003 first quarter.

(Unaudited; $ in millions)

			12/31/01		Payments			6/30/02
PDMC —
U.S. Mines
	Morenci
		Employee severance	$	0.3		(0.3	)		—
	Bagdad/Sierrita
		Employee severance		3.5		(1.0	)		2.5
		Mothballing/take-or-pay contracts		3.1		(1.4	)		1.7
				6.6		(2.4	)		4.2
	Miami/Bisbee
		Employee severance		1.8		(1.0	)		0.8
		Mothballing/take-or-pay contracts		1.0		(0.4	)		0.6
				2.8		(1.4	)		1.4
	Chino/Cobre
		Employee severance		1.2		(0.4	)		0.8
		Mothballing/take-or-pay contracts		0.2		(0.2	)		—
				1.4		(0.6	)		0.8
	Tyrone
		Employee severance		0.2		(0.2	)		—
				11.3		(4.9	)		6.4
Manufacturing and Sales
	Employee severance			1.4		(0.4	)		1.0
	Mothballing/take-or-pay contracts			4.1		(2.9	)		1.2
				5.5		(3.3	)		2.2
Primary Molybdenum
	Employee severance			0.1		(0.1	)		—
Other Mining
	Employee severance			0.8		(0.5	)		0.3
			$	17.7		(8.8	)		8.9

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		12/31/01		Payments			6/30/02
PDI —
Specialty Chemicals
	Disposal and dismantling		0.5		(0.1	)		0.4
	Employee severance		0.8		(0.5	)		0.3
			1.3		(0.6	)		0.7
		$	19.0		(9.4	)		9.6

Note: In the 2002 second quarter, payments were $(3.0) million.

The following schedules present a roll-forward from December 31, 2002 and 2001, of the liabilities incurred in connection with the June 2000 restructuring program, which were reflected as current liabilities in our consolidated balance sheet:

(Unaudited; $ in millions)

		12/31/02		Payments		6/30/03
PDI —
Wire and Cable
	Plant removal and dismantling	$	0.5		—		0.5

(Unaudited; $ in millions)

				Reassess-
		12/31/01		ments			6/30/02
PDI —
Wire and Cable
	Plant removal and dismantling	$	1.9		(0.6	)		1.3

Note: In the 2002 second quarter, reassessments were $(0.4) million.

PDI’s Wire and Cable segment reassessment related to a non-cash deduction associated with the devaluation of Venezuelan currency.

The following schedules present a roll-forward from December 31, 2002 and 2001, of the liabilities incurred in connection with the June 1999 restructuring program, which were reflected as current liabilities in our consolidated balance sheet:

(Unaudited; $ in millions)

		12/31/02		Payments		6/30/03
PDMC —
Other Mining
	Mothballing/take-or-pay contracts	$	0.6		—		0.6
PDI —
Wire and Cable
	Take-or-pay contracts		1.0		—		1.0
		$	1.6		—		1.6

(Unaudited; $ in millions)

				Reassess-			Pay-
		12/31/01		ments			ments			6/30/02
PDMC —
Other Mining
	Employee severance	$	0.2		—			(0.1	)		0.1
	Mothballing/take-or-pay contracts		1.4		—			(0.6	)		0.8
			1.6		—			(0.7	)		0.9
PDI —
Specialty Chemicals
	Disposal and dismantling		0.3		0.1			—			0.4
	Environmental		0.6		—			—			0.6
			0.9		0.1			—			1.0
Wire and Cable
	Take-or-pay contracts		1.1		—			—			1.1
	Plant removal and dismantling		0.2		(0.1	)		—			0.1
			1.3		(0.1	)		—			1.2
			2.2		—			—			2.2
		$	3.8		—			(0.7	)		3.1

Note: The reassessments occurred in the 2002 second quarter.

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	PDI’s Specialty Chemicals segment reassessment related to an adjustment to disposal and dismantling charges at a Philippine plant.
	PDI’s Wire and Cable segment reassessment related to a non-cash deduction resulting from the devaluation of Venezuelan currency.
6.	Accounting Standards
	On January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” With the adoption of this Statement, we recognize asset retirement obligations (AROs) as liabilities when incurred, with the initial measurement at fair value. These liabilities will be accreted to full value over time through charges to income. In addition, an asset retirement cost was capitalized as part of the related asset’s carrying value and will subsequently be depreciated over the asset’s useful life. Our AROs consist primarily of costs associated with mine reclamation and closure activities. These activities, which tend to be site specific, generally include costs for earthwork, revegetation, water treatment and demolition. Upon adoption, we recorded an increase to our closure and reclamation reserve of approximately $2.5 million, net, an increase to our mining properties assets of approximately $12.2 million and a cumulative gain of $8.4 million, net of deferred income taxes. For the three and six months ended June 30, 2003, the effect of adopting SFAS No. 143 decreased loss before cumulative effect of accounting change by approximately $8 million, or 9 cents per common share, and $11 million, or 12 cents per common share, respectively.
	The following table summarizes the balance sheet impact associated with the adoption of SFAS No. 143:

(Unaudited; $ in millions)

					SFAS			January 1,
		December 31,			No. 143			2003
		2002			Adoption			After
		As Reported*			Impact			Adoption
Mining properties		$	907.4			63.8	**		971.2
Mining properties accumulated depreciation			(197.1	)		(53.2	)		(250.3	)
	Net mining properties assets	$	710.3			10.6			720.9
Intangibles		$	439.5			3.6	**		443.1
Intangibles - accumulated amortization			(93.6	)		(2.0	)		(95.6	)
		$	345.9			1.6			347.5
Asset retirement obligation liability		$	138.6			10.4	***		149.0

*	Reflects the reclassification of mining concessions from property, plant and equipment, net to intangible assets (refer to Note 3, Reclassification of Intangible Assets, for further discussion).
**	Amounts include $84.0 million and $7.5 million of additions related to recording an asset retirement cost, offset by $20.2 million and $3.9 million to reclassify amounts recognized as ore reserves in purchase accounting.
***	Amount consists of $2.5 million of liabilities recognized at adoption and $7.9 million of reclassifications related to closure obligations from other liabilities at adoption.

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The pro forma effects of the application of SFAS No. 143 as if this Statement had been adopted on January 1, 2002, are presented below:

(Unaudited; $ in millions except per share data)

			Three Months
			Ended
			June 30, 2002
Loss before cumulative effect of accounting change as reported			$	(34.3	)
Reduced cost of products sold, net of tax				4.5
Additional depreciation expense, net of tax benefit				(0.5	)
Pro forma loss before cumulative effect of accounting change			$	(30.3	)
Loss per common share before cumulative effect of accounting change:
		Basic and diluted — as reported	$	(0.46	)
		Basic and diluted — pro forma	$	(0.41	)
Net loss as reported			$	(34.3	)
Pro forma net loss			$	(30.3	)
Loss per common share:
	Basic and diluted — as reported		$	(0.46	)
	Basic and diluted — pro forma		$	(0.41	)

(Unaudited; $ in millions except per share data)

			Six Months Ended
			June 30,
			2003			2002
Loss before cumulative effect of accounting change as reported			$	(38.6	)		(36.2	)
Reduced cost of products sold, net of tax				—			9.3
Additional depreciation expense, net of tax benefit				—			(1.0	)
Pro forma loss before cumulative effect of accounting change			$	(38.6	)		(27.9	)
Loss per common share before cumulative effect of accounting change:
		Basic and diluted — as reported	$	(0.51	)		(0.48	)
		Basic and diluted — pro forma	$	(0.51	)		(0.38	)
Net loss as reported			$	(30.2	)		(59.1	)
Pro forma net loss			$	(38.6	)		(50.8	)
Loss per common share:
	Basic and diluted — as reported		$	(0.42	)		(0.77	)
	Basic and diluted — pro forma		$	(0.51	)		(0.67	)

The pro forma asset retirement obligation liability balances as if SFAS No. 143 had been adopted on January 1, 2002, are as follows:

(Unaudited; $ in millions)

Pro forma asset retirement obligation liability —
	January 1, 2002	$	138.1
Pro forma asset retirement obligation liability —
	December 31, 2002	$	149.0

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives are not amortized, but rather tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Upon completion of the transitional impairment tests, the fair value of three of the Company’s international wire and cable reporting units was determined to be less than the related carrying amount. The resulting impairment loss recognized upon adoption of SFAS No. 142 in the first quarter of 2002 was $33.0 million, pre-tax ($22.9 million after-tax), and was recognized as a cumulative effect of a change in accounting principle.

Subsequently, the Company completed its annual goodwill impairment test as of December 31, 2002, with no additional impairments. The Company will continue to test its goodwill annually as of December 31, unless events occur or circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

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The changes in the carrying amount of goodwill for the year ended December 31, 2002, and six months ended June 30, 2003, were as follows:

(Unaudited; $ in millions)

	Specialty			Wire and
	Chemicals			Cable
	Segment			Segment			Total
Balance as of December 31, 2001	$	88.5			54.6			143.1
Goodwill acquired during period		—			—			—
Impairment losses upon adoption of SFAS No. 142		—			(33.0	)		(33.0	)
Goodwill included in the disposal of a business unit		—			—			—
Foreign currency translation adjustments		(19.4	)		—			(19.4	)
Balance as of December 31, 2002		69.1			21.6			90.7
Goodwill acquired during period		—			—			—
Impairment losses		—			—			—
Goodwill included in the disposal of a business unit		—			—			—
Foreign currency translation adjustments		8.9			—			8.9
Balance as of June 30, 2003	$	78.0			21.6			99.6

In April 2002, FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Under SFAS No. 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. This Statement eliminates SFAS No. 4 and, thus, the exception to applying APB No. 30 to all gains and losses related to extinguishments of debt. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. Applying the provisions of APB No. 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. Under SFAS No. 13, the required accounting treatment of certain lease modifications that have economic effects similar to sale-leaseback transactions was inconsistent with the required accounting treatment for sale-leaseback transactions. This Statement amends SFAS No. 13 to require that those lease modifications be accounted for in the same manner as sale-leaseback transactions. This Statement was adopted by the Company on January 1, 2003. As a result of this Statement being adopted, we will reclassify the third quarter 2002 extraordinary item for debt extinguishment to recurring operations in our Form 10-Q filing for the quarter ended September 30, 2003.

In June 2002, FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between this Statement and EITF 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability was recognized at the date of an entity’s commitment to an exit plan. This Statement is effective for exit or disposal activities initiated after December 31, 2002.

In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that upon issuance of certain guarantees, a guarantor must recognize a liability for the fair value of an obligation assumed under the guarantee. FIN 45 also requires significant new disclosures by guarantors, in both interim and annual financial statements, about obligations associated with guarantees issued. FIN 45 disclosure requirements were adopted for our year ended December 31, 2002; the initial recognition and measurement provisions were adopted on a prospective basis to guarantees issued or modified after December 31, 2002. There were no such

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	guarantees issued or modified in the first six months of 2003.
	In December 2002, FASB issued SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure — an Amendment of SFAS No. 123.” The Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This Statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of stock-based employee compensation and the effect of the method used on reported results. This Statement was effective for fiscal years ending after December 15, 2002. The Company adopted this Statement in regards to disclosure provisions for the year ended December 31, 2002, and has provided the interim information in Note 4, Stock Compensation.
	In January 2003, FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46) to clarify when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest entity. FIN 46 provides general guidance as to the definition of a variable interest entity and requires a variable interest entity to be consolidated if a company absorbs the majority of the variable interest entity’s expected losses, or is entitled to receive a majority of the variable interest entity’s residual returns, or both. FIN 46 is effective immediately for all new variable interest entities created after January 31, 2003. For variable interest entities created before February 1, 2003, the consolidation provisions of FIN 46 must be applied for the first interim or annual reporting period beginning after June 15, 2003. The disclosure provisions of FIN 46 apply to financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN 46 did not have a material impact on the Company’s financial reporting and disclosures.
	In April 2003, FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003. We are currently analyzing the impact of adoption of SFAS No. 149 on our financial reporting and disclosures.
	In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or “mezzanine” equity, by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 generally is effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. We have evaluated SFAS No. 150 and determined that it does not have an impact on our financial reporting and disclosures.
7.	Environmental, and Reclamation and Closure Matters
	As of December 31, 2002, we had a reserve balance of $305.9 million for estimated future costs associated with environmental matters at closed facilities and closed portions of certain operating facilities. During the first six months of 2003, we had a $2.6 million net decrease in the reserve estimate ($3.9 million of additions and $6.5 million of reclassification to asset retirement obligation liability) and $8.4 million of spending against the reserve. As

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of June 30, 2003, the reserve balance was $294.9 million.

The sites for which Phelps Dodge has received a notice of potential liability or an information request that currently are considered to be 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. At June 30, 2003, the cost range for reasonably possible outcomes for all reservable remediation sites was estimated to be from $266 million to $520 million of which approximately $295 million has been reserved.

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. As of June 30, 2003, 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 operating results of a 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.

On January 1, 2003, we adopted SFAS No. 143 (refer to Note 6, Accounting Standards, for further discussion). The following table summarizes our asset retirement obligation liability as of June 30, 2003:

(Unaudited; $ in millions)

	2003			Six Months
	Second			Ended
	Quarter			June 30, 2003
Beginning balance	$	152.0			138.6
Liability recorded upon adoption of SFAS No. 143		—			10.4
New liabilities during the period		0.6			0.6
Accretion expense		3.5			6.9
Payments		(0.4	)		(0.8	)
Revisions to cash flow estimates		21.3			21.3
Foreign currency translation adjustments		0.1			0.1
Ending balance	$	177.1			177.1

During the second quarter 2003, we revised our cash flow estimates ($21.3 million discounted) for the Chino and Tyrone mines based on an agreement with NMED on the cost estimate for Chino reached in April 2003 and preliminary cost estimate for Tyrone identified in May 2003 by NMED for the financial assurance requirements as part of the closure plans related to the operations at Chino, Cobre and Tyrone (refer to Note 8, Contingencies, for further discussion). The effect of this change in estimate did not have a material impact on our results of operations for the three and six months ended June 30, 2003.

We have estimated the total cost of asset retirement obligations at approximately $1.1 billion (unescalated, undiscounted and on a third-party cost basis), leaving approximately $912 million remaining to be accreted over time. These aggregate costs may increase or decrease materially in the future as a result of changes in regulations, technology, mine plans or other factors. Asset retirement obligation activities and expenditures generally are made over a number of years or potentially greater periods commencing near the end of the mine life.

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8.	Contingencies
	Significant New Mexico Closure 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 the 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 has appealed. 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

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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. 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. 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 is 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 $394 million, based upon third-party unescalated and undiscounted capital and operating costs over a 100-year operating period, including the cost of technical studies required under the permit. The Company’s two-thirds share of NMED’s $394 million estimate is approximately $263 million and our joint venture partner’s cost share is approximately $131 million. We estimate total costs for Chino Mines Company to achieve the closure standards required by NMED to be approximately $264 million (100 percent basis); that estimate 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 $176 million and our joint venture partner’s cost share is approximately $88 million. At June 30, 2003, and December 31, 2002, we had accrued approximately $18 million and $8 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 permits 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

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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 June 30, 2003, and December 31, 2002, we had accrued closure costs of approximately $60 million and $27 million, respectively, at Tyrone and approximately $6 million and $2 million, respectively, 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 (NPV) 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 NMED, the financial assurance amount for Chino could be approximately $191 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 MMD can approve the closeout plan. Chino and Tyrone have provided approximately $56 million and $58 million of financial assurance in the form of surety bonds, respectively, to NMED under the terms of several discharge permits. The closure and financial assurance requirements of these permits have been superseded by the recently issued NMED closure permits. Consequently, the Company has advised NMED that this financial assurance should be terminated and replaced by new financial assurance under the terms of the new closure permits. Chino and Tyrone have submitted financial assurance proposals in accordance with the schedules under their NMED closure permit proposing financial assurance primarily in the form of corporate performance guarantees from the Company. 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. Hidalgo currently has provided financial assurance in the amount of approximately $11 million under its discharge permit.

In late May 2003, the Company and the state announced an agreement on a framework for the Company to provide financial assurance for Chino, Tyrone and Cobre under both NMMAR and WQCC regulations. Under this agreement, the Company will provide financial assurance based upon the NPV of the cost estimates in a total amount of approximately $484 million. Initially, approximately 70 percent of this amount will be covered by a corporate performance guarantee. At least $50 million will be provided in the form of trust funds, increasing to at least $75 million after five years. The balance will be provided as collateral, including liens on certain owned parcels of non-mining real estate located in New Mexico. In addition,

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	the Company will expend at least $30 million on accelerated closure and reclamation work over the next 10 years. The amount of the guarantee will be reduced to approximately 64 percent by the amount of accelerated reclamation performed. Finalization of the financial assurance is subject to completion of the permitting process, including additional public comment and hearings. MMD also has proposed some changes to NMMAR for consideration by the Mining Commission, which could affect the final financial assurance package.
9.	Earnings (Loss) Per Share
	Basic earnings (loss) per share is computed by dividing net income (loss) available to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is computed in a similar manner except that the denominator is increased to include the incremental number of common shares that would have been outstanding assuming the conversion of mandatory convertible preferred shares, the exercise of stock options where the exercise prices were less than the average market price of the Company’s common shares during the period, and the number of unvested restricted shares, but all of the foregoing only to the extent that the related impacts are not anti-dilutive. Additionally, dividends on mandatory convertible preferred shares that were deducted in arriving at net income (loss) available to common shares are added back to the numerator as a result of the assumed conversion of such preferred shares.
	As a result of the net loss experienced for the quarter and six-months ended June 30, 2003, the number of incremental common shares relating to the assumed conversion of the mandatory convertible preferred shares (5.0 million) and unvested restricted stock (0.5 million) were excluded from the calculation as the related impacts were anti-dilutive.
	As a result of the net loss experienced for the quarter and six-months ended June 30, 2002, the number of incremental common shares relating to the assumed conversion of the mandatory convertible preferred shares (1.1 million and 0.5 million, respectively), unvested restricted stock (0.2 million) and stock options (0.1 million) issued to employees were excluded from the calculation as the related impacts were anti-dilutive.
	Finally, common shares relating to stock options where the exercise prices exceeded the average market price of the Company’s common shares during the period were also excluded from the diluted earnings per share calculation as the related impact was anti-dilutive. Incremental shares relating to these options totaled 7.2 million shares at an average exercise price of $58.66 for the 2003 second quarter and 8.6 million at an average exercise price of $55.30 for the six months ended June 30, 2003; and 7.4 million shares at an average exercise price of $61.66 and $61.65 for the quarter and six months ended June 30, 2002.

(Unaudited; $ in millions except per share data)

			Second Quarter
			2003			2002
						(As Restated)*
Basic Earnings (Loss) Per Share Computation
	Numerator:
		Net loss	$	(15.2	)		(34.3	)
		Preferred stock dividends		(3.4	)		(2.4	)
		Net loss applicable to common shares	$	(18.6	)		(36.7	)
	Denominator:
		Weighted average common shares outstanding		88.6			80.6
	Basic loss per common share		$	(0.21	)		(0.46	)
Diluted Earnings (Loss) Per Share Computation
	Numerator:
		Net loss	$	(15.2	)		(34.3	)
	Denominator:
		Weighted average common shares outstanding**		88.6			80.6
	Diluted loss per common share		$	(0.21	)		(0.46	)

*	Refer to Note 2, Restatements, for further discussion.
**	Excludes mandatory convertible preferred shares, unvested restricted stock and stock options due to the anti-dilutive impact.

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(Unaudited; $ in millions except per share data)

			Six Months Ended
			June 30,
			2003			2002
						(As Restated)*
Basic Earnings (Loss) Per Share Computation
	Numerator:
		Net loss	$	(30.2	)		(59.1	)
		Preferred stock dividends		(6.8	)		(2.4	)
		Net loss applicable to common shares	$	(37.0	)		(61.5	)
	Denominator:
		Weighted average common shares outstanding		88.6			79.6
	Basic loss per common share		$	(0.42	)		(0.77	)
Diluted Earnings (Loss) Per Share Computation
	Numerator:
		Net loss	$	(30.2	)		(59.1	)
	Denominator:
		Weighted average common shares outstanding**		88.6			79.6
	Diluted loss per common share		$	(0.42	)		(0.77	)

*	Refer to Note 2, Restatements, for further discussion.
**	Excludes mandatory convertible preferred shares, unvested restricted stock and stock options due to the anti-dilutive impact.

10.	Benefit (Provision) for Taxes on Income
	The Company’s income tax provision for the 2003 second quarter principally resulted from (i) taxes on earnings at international operations ($12.2 million) that cannot be offset by losses at domestic operations and (ii) a benefit from finalizing year-end 2002 estimates in the Company’s 2002 U.S. tax return filed in June 2003 ($4.2 million). The Company’s income tax provision for the six months ended June 30, 2003, primarily comprised the following: (i) taxes on earnings at international operations ($26.3 million) that cannot be offset by losses at domestic operations and (ii) a benefit from finalizing year-end 2002 estimates in the Company’s 2002 U.S. tax return filed in June 2003 ($4.2 million).
	The Company’s income tax provision for the 2002 second quarter, primarily comprised the following: (i) a $21.9 million benefit recognized for the second quarter 2002 net operating losses that, based on the March enactment of the Job Creation and Worker Assistance Act of 2002, may be carried back to recover prior years’ taxes paid; (ii) a $13.0 million benefit for release of deferred taxes previously provided with regard to Plateau Mining Corporation; and (iii) a $4.1 million expense for taxes on earnings at international operations. The Company’s income tax benefit for the six months ended June 30, 2002, principally comprised the following items: (i) a $38.5 million tax benefit associated with the carryback of 2001 net operating losses that, based on the new tax legislation, may also be carried back to recover prior years’ taxes paid; (ii) a $34.8 million benefit recognized for the first half of 2002 net operating losses, based on the new tax legislation; (iii) a $15.8 million expense for taxes on earnings at international operations; and (iv) a $13.0 million benefit for release of deferred taxes previously provided.
11.	Accounting for Derivative Instruments and Hedging Activities
	The Company does not purchase, hold or sell derivative contracts unless we have an existing asset, obligation or anticipate a future activity that is likely to occur and will expose us to market risk. We do not enter into any contracts for speculative purposes. We use various strategies to manage our market risk, including the use of derivative contracts to limit, offset or reduce our market exposure. Derivative instruments are used to manage well-defined commodity price, energy, foreign exchange and interest rate risks from our primary business activities. The fair values of our derivative instruments are based on quoted market prices for similar instruments at period end. Refer to Management’s Discussion and Analysis and Note 20, Derivative Financial Instruments Held for Purposes Other Than Trading and Fair Value of Financial Instruments, to the Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2002, for a discussion on our derivative instruments.
	During the quarter and six months ended June 30, 2003, we reclassified approximately $2.8 million and $4.0 million, respectively, of other comprehensive losses to the statement of consolidated opera-

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	tions, principally as a result of our floating-to-fixed interest rate swaps.
	During the quarter and six month periods ended June 30, 2002, we reclassified approximately $3.2 million and $6.8 million, respectively, of other comprehensive losses to the statement of operations, principally as a result of our floating-to-fixed interest rate swaps.
12.	Shareholders’ Equity
	Series A Mandatory Convertible Preferred Stock
	Each share of Series A Mandatory Convertible Preferred Stock (Series A Stock) is convertible into 2.083 shares of Common Stock, subject to certain adjustments, at any time prior to August 15, 2005, and is entitled to an annual dividend of $6.75, paid quarterly. On August 15, 2005, each share of Series A Stock will automatically convert, subject to certain adjustments, into between 2.083 and 2.5 shares of Common Stock depending on the then-current market price of our Common Stock. Each share of Series A Stock is non-voting and entitled to a liquidation preference of $100 plus any accrued but unpaid dividends. There were 6 million authorized shares and 2 million outstanding shares of Series A Stock at June 30, 2003.

REVIEW BY INDEPENDENT ACCOUNTANTS

     The financial information as of June 30, 2003, and for the three-month and six-month periods ended June 30, 2003 and 2002, included in Part I pursuant to Rule 10-01 of Regulation S-X has been reviewed by PricewaterhouseCoopers LLP (PricewaterhouseCoopers), the Company’s independent accountants, in accordance with standards established by the American Institute of Certified Public Accountants. PricewaterhouseCoopers’ report is included in this quarterly report.

     PricewaterhouseCoopers does not carry out any significant or additional procedures beyond those that would have been necessary if its report had not been included in this quarterly report. Accordingly, such report is not a “report” or “part of a registration statement” within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply.

-26-

Report of Independent Accountants

To the Board of Directors and Shareholders
of Phelps Dodge Corporation

We have reviewed the accompanying consolidated balance sheet of Phelps Dodge Corporation and its subsidiaries as of June 30, 2003, and the related statement of consolidated operations for each of the three-month and six-month periods ended June 30, 2003 and 2002, the consolidated statement of cash flows for the six-month periods ended June 30, 2003 and 2002, and the consolidated statement of shareholders’ equity for the six-month period ended June 30, 2003. This interim financial information is the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

As described in Note 2 to the consolidated interim financial information, the Company restated its consolidated interim financial information for the three-month and six-month periods ended June 30, 2002.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of operations, of cash flows and of shareholders’ equity for the year then ended (not presented herein), and in our report dated April 3, 2003 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2002, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
July 25, 2003

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Item 2. Management’s Discussion and Analysis

     The United States securities laws provide a “safe harbor” for certain forward-looking statements. This quarterly report contains forward-looking statements that express expectations of future events or results. All statements based on future expectations rather than historical facts are forward-looking statements that involve a number of risks and uncertainties, and Phelps Dodge Corporation (the Company, which may be referred to as Phelps Dodge, PD, we, us or ours) cannot give assurance that such statements will prove to be correct. Our business consists of two divisions, Phelps Dodge Mining Company (PDMC) and Phelps Dodge Industries (PDI). Refer to Management’s Discussion and Analysis in the Company’s report on Form 10-K for the year ended December 31, 2002, for a further discussion of such risks and uncertainties, our operations, and our critical accounting policies. Additionally, refer to Note 6, Accounting Standards, to our unaudited June 30, 2003, Consolidated Financial Information for a discussion on the adoption of Statement of Financial Accounting (SFAS) No. 143.

     Restatements

     As discussed in Note 2, Restatements, in this Form 10-Q for the quarter ended June 30, 2003, certain accounting matters were identified in the fourth quarter of 2002 that required restatement of our December 31, 2001 and 2000, Consolidated Financial Statements and our financial statements for the quarterly periods ended March 31, 2001, through September 30, 2002. The adjustments for the quarter and six months ended June 30, 2002, decreased operating loss by $5.6 million and $11.3 million, respectively, and decreased net loss by $2.1 million, or 2 cents per common share, and $5.0 million, or 7 cents per common share, respectively.

     Additionally, our presentation of reportable segment information for PDMC for the quarter and six months ended June 30, 2002, has been revised to reflect additional segments.

RESULTS OF OPERATIONS

Consolidated Financial Results

(Unaudited; $ in millions except per share amounts)

	Second Quarter
	2003			2002
				(As Restated)
Sales and other operating revenues	$	962.2			966.8
Operating income (loss)	$	17.2			(10.2	)
Loss before cumulative effect of accounting change	$	(15.2	)		(34.3	)
Cumulative effect of accounting change		—			—
Net loss	$	(15.2	)		(34.3	)
Net loss per common share, basic and diluted	$	(0.21	)		(0.46	)

     The Company had a consolidated net loss in the 2003 second quarter of $15.2 million, or 21 cents per common share, including a special, net gain of $4.5 million, or 5 cents per common share, after taxes. In the 2002 second quarter, the consolidated net loss was $34.3 million, or 46 cents per common share, including a special, net loss of $12.7 million, or 16 cents per common share, after taxes.

     The $19.1 million decrease in consolidated loss in the 2003 second quarter compared with the corresponding 2002 period primarily was due to higher copper prices (approximately $8 million), lower interest expense ($12.2 million) and a favorable change in special items and provisions ($35.3 million); partially offset by a higher tax provision ($34.0 million) resulting primarily from the absence of the effect of 2002 tax legislation that permitted a five-year carryback of our 2001 and 2002 net operating losses.

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(Unaudited; $ in millions except per share amounts)

	Six Months Ended
	June 30,
	2003			2002
				(As Restated)
Sales and other operating revenues	$	1,940.2			1,885.3
Operating income	$	45.9			2.5
Loss before cumulative effect of accounting change	$	(38.6	)		(36.2	)
Cumulative effect of accounting change		8.4			(22.9	)
Net loss	$	(30.2	)		(59.1	)
Loss before cumulative effect of accounting change per common share, basic and diluted	$	(0.51	)		(0.48	)
Cumulative effect of accounting change		0.09			(0.29	)
Net loss per common share, basic and diluted	$	(0.42	)		(0.77	)

     The Company had a consolidated loss for the six months ended June 30, 2003, of $30.2 million, or 42 cents per common share, including a special, net gain of $14.0 million, or 16 cents per common share, after taxes. For the six months ended June 30, 2002, the consolidated loss was $59.1 million, or 77 cents per common share, including a special, net gain of $3.5 million, or 4 cents per common share, after taxes.

     The $28.9 million decrease in consolidated loss for the six months ended June 30, 2003 compared with the corresponding 2002 period primarily was due to a higher cumulative income effect of accounting changes ($31.3 million) mostly due to the goodwill impairment losses upon adoption of SFAS No. 142 in 2002, higher LME copper prices (approximately $33 million), favorable change in special items and provisions ($33.9 million) and lower interest expense primarily resulting from extinguishment of debt in the third quarter of 2002 ($29 million); partially offset by a higher tax provision ($86.4 million) resulting primarily from the absence of the effect of 2002 tax legislation that permitted a five-year carryback of the 2001 and 2002 net operating losses.

     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. In addition, management measures the performance of its reportable segments excluding special items. 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, our non-GAAP measure of items, may not be comparable to similarly titled measures reported by other companies.

Note: Supplemental Data

(Unaudited; $ in millions)

	Second Quarter
	2003			2002
				(As Restated)
Special items, net of taxes	$	4.5			(12.7	)
Losses excluding special items (after taxes)	$	(19.7	)		(21.6	)

(Unaudited; $ in millions)

	Six Months Ended
	June 30,
	2003			2002
				(As Restated)
Special items, net of taxes	$	14.0			3.5
Losses excluding special items (after taxes)	$	(44.2	)		(62.6	)

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Note: Supplemental Data

     The following schedules summarize the special items and provisions for the quarter and six-month periods ended June 30, 2003 and 2002:

(Unaudited; gains (losses) in millions except per share amounts)

			2003 Second Quarter									2002 Second Quarter
			Pre-tax			After-tax			$/share			Pre-tax			After-tax			$/share
			Earnings			Earnings			After-tax			Earnings			Earnings			After-tax
Special items and provisions, net:
	PDMC (see Business Segment disclosure)		$	(0.5	)		(0.4	)		—			20.9			21.1			0.26
	PDI (see Business Segment disclosure)			—			—			—			—			—			—
	Corporate and Other — Environmental provisions			(2.1	)		(2.0	)		(0.02	)		—			2.4			0.03
		Environmental insurance recoveries, net		0.5			0.5			—			6.5			5.0			0.06
		Historic Cyprus Amax lawsuit settlement		—			—			—			(11.2	)		(8.9	)		(0.11	)
		Historic Cyprus Amax arbitration award with regard to Plateau Mining		—			—			—			(46.5	)		(44.5	)		(0.55	)
				(1.6	)		(1.5	)		(0.02	)		(51.2	)		(46.0	)		(0.57	)
				(2.1	)		(1.9	)		(0.02	)		(30.3	)		(24.9	)		(0.31	)
Miscellaneous income (expense), net:
	Cost investment write-downs			—			—			—			(0.7	)		(0.8	)		(0.01	)
	Gain on sale of cost investment			6.4			6.4			0.07			—			—			—
				6.4			6.4			0.07			(0.7	)		(0.8	)		(0.01	)
Benefit for taxes on income:
	Release of taxes provided with regard to Plateau Mining			—			—			—			—			13.0			0.16
	Total		$	4.3			4.5			0.05			(31.0	)		(12.7	)		(0.16	)

(Unaudited; gains (losses) in millions except per share amounts)

			Six Months Ended									Six Months Ended
			June 30, 2003									June 30, 2002
			Pre-tax			After-tax			$/share			Pre-tax			After-tax			$/share
			Earnings			Earnings			After-tax			Earnings			Earnings			After-tax
Special items and provisions, net:
	PDMC (see Business Segment disclosure)		$	(0.5	)		(0.4	)		—			34.7			32.3			0.40
	PDI (see Business Segment disclosure)			3.2			2.4			0.03			—			—			—
	Corporate and Other — Environmental provisions			(3.4	)		(3.3	)		(0.03	)		(12.1	)		(9.7	)		(0.12	)
		Environmental insurance recoveries, net		0.5			0.5			—			8.6			6.9			0.08
		Historic Cyprus Amax lawsuit settlement		—			—			—			(11.2	)		(8.9	)		(0.11	)
		Historic Cyprus Amax arbitration award with regard to Plateau Mining		—			—			—			(46.5	)		(44.5	)		(0.56	)
				(2.9	)		(2.8	)		(0.03	)		(61.2	)		(56.2	)		(0.71	)
				(0.2	)		(0.8	)		—			(26.5	)		(23.9	)		(0.31	)
Miscellaneous income (expense), net:
	Cost investment write-downs			—			—			—			(1.2	)		(1.2	)		(0.01	)
	Gain on sale of cost investment			6.4			6.4			0.07			—			—			—
				6.4			6.4			0.07			(1.2	)		(1.2	)		(0.01	)
Benefit for taxes on income:
	Release of taxes provided with regard to Plateau Mining			—			—			—			—			13.0			0.16
	Tax benefit for 2001 net operating loss carryback (see Note 10)			—			—			—			—			38.5			0.49
				—			—			—			—			51.5			0.65
Cumulative effect of accounting change (see Note 6)				9.7			8.4			0.09			(33.0	)		(22.9	)		(0.29	)
	Total		$	15.9			14.0			0.16			(60.7	)		3.5			0.04

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     Quest for Zero Operational Improvement Program

     Phelps Dodge announced in October 2001 that it was commencing Quest for Zero (QFZ), a comprehensive, lean-production program, designed to, among other things, improve operating income by a targeted $250 million annually. Quest for Zero encompasses both the October 2001 program and the $150 million cost improvement program announced in May 2001. The Company’s goal is to achieve these combined annual operating income improvements of $400 million by the end of 2003 when compared with the results that were then expected for 2001.

     In order to achieve the full $400 million target, PDMC chartered business improvement teams to drive performance improvement projects and best practices. The elimination of variance and waste are key factors in this process, coupled with the rapid transfer of best practices to all business units. On a quarterly basis, we document improvement successes, failures and potential projects yet to be implemented. New project ideas are generated at internal conferences where statistical analysis tools are utilized on current performance data to identify improvement opportunities. Improvement projects are prioritized and implemented accordingly. Key elements of the plan going forward include six-sigma quality programs, technology innovations, global procurement strategies and improved operating practices.

     During the 2003 second quarter, we achieved $76 million (an annual run rate slightly in excess of $300 million) in improvements, bringing total improvements in the eight quarters since the program was announced to $421 million.

     We remain determined to drive toward our stretch goal of an implied production cost of 60 cents per pound. We have experienced a leveling off of the rate of improvement due to the increased challenge that comes with multi-year improvement projects as we begin to tackle more difficult initiatives; unforeseen costs including higher energy, pension and medical costs, and higher administrative costs and professional fees; and our Company’s decision to emphasize growth-oriented projects. We expect to achieve fourth quarter 2003 QFZ improvements of $90 million to $100 million, equating to an annualized run-rate of $360 million to $400 million.

     The following is a summary of improvement dollars:

(Unaudited; $ in millions)

		Second Quarter
		2003		2002
U.S. Mining Operations*		$	47		34
South American Mines**			16		10
Primary Molybdenum			4		2
	Total PDMC		67		46
Specialty Chemicals			5		4
Wire and Cable			4		3
	Total PDI		9		7
	Total Quest for Zero	$	76		53

(Unaudited; $ in millions)

		Six Months Ended
		June 30,
		2003		2002
U.S. Mining Operations*		$	103		65
South American Mines**			27		18
Primary Molybdenum			7		4
	Total PDMC		137		87
Specialty Chemicals			9		5
Wire and Cable			9		5
	Total PDI		18		10
	Total Quest for Zero	$	155		97

*	U.S. Mining Operations combines the following segments: Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and Sales, and Other Mining.
**	South American Mines combines the following segments: Candelaria, Cerro Verde and El Abra.

     Business Divisions

     Results for 2003 and 2002 can be meaningfully compared by separate reference to our reporting divisions, PDMC and PDI. PDMC is a business division that includes our worldwide copper operations from mining through rod production, marketing and sales; molybdenum operations from mining through manufacturing, marketing and sales; other mining operations and investments; and worldwide mineral exploration and development programs. PDMC comprises 11 reportable segments. PDI, our manufacturing division, produces engineered products principally for

- 31 -

the global energy, telecommunications, transportation and specialty chemical sectors. PDI includes our Specialty Chemicals segment and our Wire and Cable segment. Significant events and transactions have occurred within each segment which, as indicated in the separate discussions presented below, are material to an understanding of the particular year’s results and to a comparison with results of the other periods.

RESULTS OF 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 reportable 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, some of these 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 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 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.

(Unaudited; $ in millions except per pound amounts)

		Second Quarter
		2003		2002
				(As Restated)
Sales and other operating revenues to unaffiliated customers		$	641.6		644.5
Operating income		$	25.8		38.2
Copper production (thousand short tons):
	Total production		318.8		316.6
	Less minority participants’ shares (A)		59.5		62.0
	Net Phelps Dodge share		259.3		254.6
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines		266.5		264.7
	Purchased copper		84.7		123.1
	Total copper sales		351.2		387.8
LME average spot copper price per pound — cathodes		$	0.744		0.730
COMEX average spot copper price per pound — cathodes		$	0.747		0.741
Implied unit cost of copper production — full		$	0.695		0.698
Implied unit cost of copper production — cash		$	0.535		0.534
Molybdenum production (million pounds)			13.1		10.4
Molybdenum sales (million pounds):
	Net Phelps Dodge share from own mines		13.5		11.3
	Purchased molybdenum		2.2		2.8
	Total molybdenum sales		15.7		14.1
Metals Week:
Molybdenum oxide price per pound		$	5.21		4.35

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(Unaudited; $ in millions except per pound amounts)

		Six Months Ended
		June 30,
		2003		2002
				(As Restated)
Sales and other operating revenues to unaffiliated customers		$	1,296.6		1,256.2
Operating income		$	61.5		65.5
Copper production (thousand short tons):
	Total production		636.0		638.5
	Less minority participants’ shares (A)		116.3		126.7
	Net Phelps Dodge share		519.7		511.8
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines		530.3		533.2
	Purchased copper		178.4		220.5
	Total copper sales		708.7		753.7
LME average spot copper price per pound — cathodes		$	0.749		0.718
COMEX average spot copper price per pound — cathodes		$	0.754		0.732
Implied unit cost of copper production — full		$	0.691		0.689
Implied unit cost of copper production — cash		$	0.535		0.526
Molybdenum production (million pounds)			24.6		21.0
Molybdenum sales (million pounds):
	Net Phelps Dodge share from own mines		27.3		24.1
	Purchased molybdenum		3.6		5.4
	Total molybdenum sales		30.9		29.5
Metals Week:
Molybdenum oxide price per pound		$	4.63		3.55

(A) Minority participant interests include (i) a 15 percent undivided interest in Morenci, Arizona, copper mining complex held by Sumitomo Metal Mining Arizona, Inc., (ii) a one-third partnership interest in Chino Mines Company in New Mexico held by Heisei Minerals Corporation, (iii) a 20 percent partnership interest in Candelaria in Chile held by SMMA Candelaria, Inc., a jointly owned indirect subsidiary of Sumitomo Metal Mining Co., Ltd., and Sumitomo Corporation, and (iv) a 49 percent partnership interest in the El Abra copper mining operation in Chile held by Corporación Nacional del Cobre de Chile (CODELCO).

Note: Supplemental Data

     “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., London Metal Exchange 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 (as disclosed in the table above). 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 to the market price of copper to render an implied cost of copper production. Following is the calculation of implied unit cost of copper production for the quarters and six months ended June 30, 2003 and 2002:

(Unaudited; $ in millions except per pound amounts)

		Second Quarter
		2003			2002
					(As Restated)
PDMC implied unit cost of copper production
	Operating income	$	25.8			38.2
	Less special operating items		(0.5	)		20.9
Operating income excluding special items		$	26.3			17.3
Copper sales from own mines — million pounds			533.0			529.4
Operating margin — per pound of copper sold		$	0.049			0.032
LME average spot copper price per pound — cathodes		$	0.744			0.730
Implied unit cost of copper production per pound		$	0.695			0.698

- 33 -

(Unaudited; $ in millions except per pound amounts)

		Six Months Ended
		June 30,
		2003			2002
					(As Restated)
PDMC implied unit cost of copper production
	Operating income	$	61.5			65.5
	Less special operating items		(0.5	)		34.7
Operating income excluding special items		$	62.0			30.8
Copper sales from own mines — million pounds			1,060.6			1,066.4
Operating margin — per pound of copper sold		$	0.058			0.029
LME average spot copper price per pound — cathodes		$	0.749			0.718
Implied unit cost of copper production per pound		$	0.691			0.689

Note: Our measure of implied unit cost of copper production may not be comparable to similarly titled measures reported by other companies.

     Total PDMC Division — Sales

     PDMC’s sales and other operating revenues to unaffiliated customers decreased $2.9 million in the 2003 second quarter compared with the 2002 second quarter. The decrease reflected lower sales volumes (approximately $52 million) associated with lower market demand; partially offset by higher average copper prices (approximately $19 million), higher average molybdenum prices (approximately $24 million) and higher sales volumes of molybdenum (approximately $6 million).

     PDMC’s sales and other operating revenues to unaffiliated customers increased $40.4 million, or 3 percent, in the first six months of 2003 compared with the first six months of 2002. The increase reflected higher average copper prices (approximately $48 million), higher average molybdenum prices (approximately $39 million) and higher sales volumes of molybdenum (approximately $6 million); partially offset by lower copper sales volumes (approximately $58 million) associated with lower market demand.

     Total PDMC — Operating Income (Loss)

     PDMC reported operating income of $25.8 million in the 2003 second quarter, including a special, net pre-tax loss of $0.5 million, compared with operating income of $38.2 million in the 2002 second quarter, including a special, net pre-tax gain of $20.9 million. The decrease in operating income primarily reflected lower pre-tax special gains ($21.4 million), partially offset by higher copper prices (approximately $8 million).

     PDMC reported operating income of $61.5 million in the first six months of 2003, including a special, net pre-tax loss of $0.5 million, compared with operating income of $65.5 million in the first six months of 2002, including a special, net pre-tax gain of $34.7 million. The decrease in operating income primarily reflected lower pre-tax special gains ($35.2 million), partially offset by higher copper prices (approximately $33 million).

     The New York Commodity Exchange (COMEX) spot price per pound of copper cathode, primarily upon which we base our U.S. sales, averaged 74.7 cents and 74.1 cents in the second quarters of 2003 and 2002, respectively, and 75.4 cents and 73.2 cents for the first six months of 2003 and 2002, respectively. The London Metal Exchange (LME) spot price per pound of copper cathode, primarily upon which we base our international sales, averaged 74.4 cents and 73.0 cents in the second quarters of 2003 and 2002, respectively, and 74.9 cents and 71.8 cents for the first six months of 2003 and 2002, respectively.

     The implied full and cash unit cost of copper production for the second quarter of 2003 was comparable to the second quarter of 2002. Favorable Quest for Zero operating income improvements and molybdenum prices reduced implied unit production costs by approximately 4 and 3.5 cents per pound, respectively. These improvements were primarily offset by unfavorable stockpile and inventory changes (approximately 2.5 cents per pound), unfavorable mine haulage profiles and ore grades (approximately 2.5 cents per pound), higher energy costs (approximately 1.5 cents per pound), and higher salary and benefit costs (approximately 1 cent per pound).

     The implied full unit cost of copper production for the first six months of 2003 was comparable to the corresponding 2002 period. The cash unit cost of copper production for the first six months of 2003 increased approximately 1 cent per pound compared with the six months ended June 30, 2002. Favorable Quest for Zero operating income improvements and molybdenum prices reduced implied unit production costs by approximately 4.5 and 2.5 cents per pound, respectively. These improvements were primarily offset by higher energy costs (approximately 1.5 cents per pound), unfavorable stockpile and inventory changes (approximately 1.5 cents per pound),

- 34 -

unfavorable mine haulage profiles and ore grades (approximately 1.5 cents per pound), and higher salary and benefit costs (approximately 1 cent per pound).

Note: Supplemental Data

     The following table summarizes PDMC’s special items for the quarters and six months ended June 30, 2003 and 2002, and the resultant earnings (losses) excluding these special items.

(Unaudited; $ in millions)

		Second Quarter
		2003			2002
					(As Restated)
Special, pre-tax items:
	U.S. Mining Operations*	$	(0.5	)		20.9
	South American Mines**		—			—
	Primary Molybdenum		—			—
			(0.5	)		20.9
Segment operating income (loss) excluding special items:
	U.S. Mining Operations*	$	(1.5	)		(3.4	)
	South American Mines**		27.4			20.2
	Primary Molybdenum		0.4			0.5
			26.3			17.3

(Unaudited; $ in millions)

		Six Months Ended
		June 30,
		2003			2002
					(As Restated)
Special, pre-tax items:
	U.S. Mining Operations*	$	(0.5	)		34.7
	South American Mines**		—			—
	Primary Molybdenum		—			—
			(0.5	)		34.7
Segment operating income (loss) excluding special items:
	U.S. Mining Operations*	$	(2.1	)		(17.1	)
	South American Mines**		63.6			47.7
	Primary Molybdenum		0.5			0.2
			62.0			30.8

*	U.S. Mining Operations combines the following segments: Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and Sales, and Other Mining.
**	South American Mines combines the following segments: Candelaria, Cerro Verde and El Abra.

Note: Our non-GAAP measure of special items may not be comparable to similarly titled measures reported by other companies.

Note: Supplemental Data

     Special, pre-tax items and provisions in operating income (loss) were as follows:

(Unaudited; $ in millions)

	Second Quarter 2003
	and Six Months Ended
	June 30, 2003
	U.S.			South		Primary
	Mining			American		Molyb-
	Operations			Mines		denum
Environmental provisions, net	$	(0.5	)		—		—

(Unaudited; $ in millions)

	Second Quarter 2002
	U.S.			South		Primary
	Mining			American		Molyb-
	Operations			Mines		denum
Environmental insurance recoveries, net	$	(1.7	)		—		—
Sale of non-core real estate		22.6			—		—
	$	20.9			—		—

(Unaudited; $ in millions)

	Six Months Ended
	June 30, 2002
	U.S.		South		Primary
	Mining		American		Molyb-
	Operations		Mines		denum
Environmental insurance recoveries, net	$	12.1		—		—
Sale of non-core real estate		22.6		—		—
	$	34.7		—		—

Note: Our non-GAAP measure of special items may not be comparable to similarly titled measures reported by other companies.

PDMC Results by Reportable Segments

     The following tables summarize, on a segment basis, the production and sales statistics and the operating income (loss) and special items and provisions for the second quarter and first six months of 2003 and 2002. Our presentation of reportable segment information for PDMC for the quarter and six months ended June 30, 2002, has been revised to reflect additional segments.

- 35 -

PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited)

		U.S. Mines
				Bagdad/		Miami/			Chino/
		Morenci		Sierrita		Bisbee			Cobre			Tyrone			Subtotal
Second Quarter 2003
Copper production (thousand short tons):
	Total production		105.5		46.4		3.9			7.9			14.3			178.0
	Less minority participants’ shares		15.8		—		—			2.6			—			18.4
	Net Phelps Dodge share		89.7		46.4		3.9			5.3			14.3			159.6
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines		89.7		53.3		5.9			5.3			14.3			168.5
	Purchased copper		—		—		—			—			—			—
	Total copper sales		89.7		53.3		5.9			5.3			14.3			168.5
($ in millions)
Operating income (loss)		$	4.9		18.3		(3.1	)		(2.8	)		(4.5	)		12.8
Special items and provisions		$	—		—		(0.5	)		—			—			(0.5	)
Second Quarter 2002 (as restated)
Copper production (thousand short tons):
	Total production		105.9		38.8		1.9			13.4			16.7			176.7
	Less minority participants’ shares		15.9		—		—			4.4			—			20.3
	Net Phelps Dodge share		90.0		38.8		1.9			9.0			16.7			156.4
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines		90.0		37.2		1.5			8.9			16.8			154.4
	Purchased copper		—		—		—			—			—			—
	Total copper sales		90.0		37.2		1.5			8.9			16.8			154.4
($ in millions)
Operating income (loss)		$	12.9		4.5		(3.8	)		1.3			0.6			15.5
Special items and provisions		$	—		—		—			—			—			—

Refer to segment discussion on pages 41 through 45.

Revenues, operating costs and expenses of PDMC’s segments include allocations that may not be reflective of market conditions. Additionally, certain costs are not allocated to the reportable segments. (Refer to pages 41 and 42 for further discussion.)

- 36 -

PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited)

		South American Mines
		Candelaria		Cerro Verde		El Abra		Subtotal
Second Quarter 2003
Copper production (thousand short tons):
	Total production		52.5		24.8		61.9		139.2
	Less minority participants’ shares		10.5		—		30.3		40.8
	Net Phelps Dodge share		42.0		24.8		31.6		98.4
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines		39.3		24.9		32.5		96.7
	Purchased copper		7.7		—		1.5		9.2
	Total copper sales		47.0		24.9		34.0		105.9
($ in millions)
Operating income (loss)		$	13.6		8.6		5.2		27.4
Special items and provisions		$	—		—		—		—
Second Quarter 2002 (as restated)
Copper production (thousand short tons):
	Total production		52.5		23.6		63.8		139.9
	Less minority participants’ shares		10.5		—		31.2		41.7
	Net Phelps Dodge share		42.0		23.6		32.6		98.2
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines		48.3		23.5		38.5		110.3
	Purchased copper		12.7		—		15.1		27.8
	Total copper sales		61.0		23.5		53.6		138.1
($ in millions)
Operating income (loss)		$	13.2		6.8		0.2		20.2
Special items and provisions		$	—		—		—		—

Refer to segment discussion on pages 41 through 45.

Revenues, operating costs and expenses of PDMC’s segments include allocations that may not be reflective of market conditions. Additionally, certain costs are not allocated to the reportable segments. (Refer to pages 41 and 42 for further discussion.)

- 37 -

PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited)

			Primary		Manufacturing						Total
			Molybdenum		and Sales			Other Mining			PDMC
Second Quarter 2003
Copper production (thousand short tons):
	Total production			—		1.6			—			318.8
	Less minority participants’ shares			—		0.3			—			59.5
	Net Phelps Dodge share			—		1.3			—			259.3
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines			—		1.3			—			266.5
	Purchased copper			—		75.5			—			84.7
	Total copper sales			—		76.8			—			351.2
Molybdenum production (thousand pounds):
	Primary — Henderson			5,775		—			—			5,775
	By-product			7,350		—			—			7,350
		Total production		13,125		—			—			13,125
Molybdenum sales (thousand pounds):
	Net Phelps Dodge share from own mines			13,517		—			—			13,517
	Purchased molybdenum			2,152		—			—			2,152
		Total molybdenum sales		15,669		—			—			15,669
($ in millions)
Operating income (loss)			$	0.4		6.5			(21.3	)		25.8
Special items and provisions			$	—		—			—			(0.5	)
Second Quarter 2002 (as restated)
Copper production (thousand short tons):
	Total production			—		—			—			316.6
	Less minority participants’ shares			—		—			—			62.0
	Net Phelps Dodge share			—		—			—			254.6
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines			—		—			—			264.7
	Purchased copper			—		95.3			—			123.1
	Total copper sales			—		95.3			—			387.8
Molybdenum production (thousand pounds):
	Primary — Henderson			5,193		—			—			5,193
	By-product			5,165		—			—			5,165
		Total production		10,358		—			—			10,358
Molybdenum sales (thousand pounds):
	Net Phelps Dodge share from own mines			11,309		—			—			11,309
	Purchased molybdenum			2,745		—			—			2,745
		Total molybdenum sales		14,054		—			—			14,054
($ in millions)
Operating income (loss)			$	0.5		(1.0	)		3.0			38.2
Special items and provisions			$	—		—			20.9			20.9

Refer to segment discussion on pages 41 through 45.

Revenues, operating costs and expenses of PDMC’s segments include allocations that may not be reflective of market conditions. Additionally, certain costs are not allocated to the reportable segments. (Refer to pages 41 and 42 for further discussion.)

- 38 -

PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited)

		U.S. Mines
				Bagdad/		Miami/			Chino/
		Morenci		Sierrita		Bisbee			Cobre			Tyrone			Subtotal
Six Months Ended 2003
Copper production (thousand short tons):
	Total production		209.0		89.1		9.3			16.3			31.4			355.1
	Less minority participants’ shares		31.3		—		—			5.4			—			36.7
	Net Phelps Dodge share		177.7		89.1		9.3			10.9			31.4			318.4
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines		177.7		97.4		11.7			10.9			31.4			329.1
	Purchased copper		—		—		—			—			—			—
	Total copper sales		177.7		97.4		11.7			10.9			31.4			329.1
($ in millions)
Operating income (loss)		$	17.3		25.0		(3.8	)		(4.9	)		(8.9	)		24.7
Special items and provisions		$	—		—		(0.5	)		—			—			(0.5	)
Six Months Ended 2002 (as restated)
Copper production (thousand short tons):
	Total production		207.4		76.9		3.9			31.7			32.8			352.7
	Less minority participants’ shares		31.1		—		—			10.5			—			41.6
	Net Phelps Dodge share		176.3		76.9		3.9			21.2			32.8			311.1
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines		176.3		89.9		7.8			21.1			32.9			328.0
	Purchased copper		—		—		—			—			—			—
	Total copper sales		176.3		89.9		7.8			21.1			32.9			328.0
($ in millions)
Operating income (loss)		$	24.7		0.2		(8.3	)		7.0			(1.1	)		22.5
Special items and provisions		$	—		—		—			—			—			—

Refer to segment discussion on pages 41 through 45.

Revenues, operating costs and expenses of PDMC’s segments include allocations that may not be reflective of market conditions. Additionally, certain costs are not allocated to the reportable segments. (Refer to pages 41 and 42 for further discussion.)

- 39 -

PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited)

		South American Mines
		Candelaria		Cerro Verde		El Abra		Subtotal
Six Months Ended 2003
Copper production (thousand short tons):
	Total production		112.5		49.4		115.0		276.9
	Less minority participants’ shares		22.5		—		56.3		78.8
	Net Phelps Dodge share		90.0		49.4		58.7		198.1
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines		88.4		49.5		60.0		197.9
	Purchased copper		17.4		—		7.3		24.7
	Total copper sales		105.8		49.5		67.3		222.6
($ in millions)
Operating income (loss)		$	36.7		16.1		10.8		63.6
Special items and provisions		$	—		—		—		—
Six Months Ended 2002 (as restated)
Copper production (thousand short tons):
	Total production		110.2		46.5		128.7		285.4
	Less minority participants’ shares		22.0		—		63.0		85.0
	Net Phelps Dodge share		88.2		46.5		65.7		200.4
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines		89.7		46.6		68.6		204.9
	Purchased copper		22.8		—		23.6		46.4
	Total copper sales		112.5		46.6		92.2		251.3
($ in millions)
Operating income (loss)		$	33.4		13.6		0.7		47.7
Special items and provisions		$	—		—		—		—

Refer to segment discussion on pages 41 through 45.

Revenues, operating costs and expenses of PDMC’s segments include allocations that may not be reflective of market conditions. Additionally, certain costs are not allocated to the reportable segments. (Refer to pages 41 and 42 for further discussion.)

- 40 -

PDMC RESULTS BY REPORTABLE SEGMENTS
(Unaudited)

			Primary		Manufacturing						Total
			Molybdenum		and Sales			Other Mining			PDMC
Six Months Ended 2003
Copper production (thousand short tons):
	Total production			—		4.0			—			636.0
	Less minority participants’ shares			—		0.8			—			116.3
	Net Phelps Dodge share			—		3.2			—			519.7
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines			—		3.3			—			530.3
	Purchased copper			—		153.7			—			178.4
	Total copper sales			—		157.0			—			708.7
Molybdenum production (thousand pounds):
	Primary — Henderson			10,614		—			—			10,614
	By-product			14,014		—			—			14,014
		Total production		24,628		—			—			24,628
Molybdenum sales (thousand pounds):
	Net Phelps Dodge share from own mines			27,299		—			—			27,299
	Purchased molybdenum			3,632		—			—			3,632
		Total molybdenum sales		30,931		—			—			30,931
($ in millions)
Operating income (loss)			$	0.5		15.0			(42.3	)		61.5
Special items and provisions			$	—		—			—			(0.5	)
Six Months Ended 2002 (as restated)
Copper production (thousand short tons):
	Total production			—		0.4			—			638.5
	Less minority participants’ shares			—		0.1			—			126.7
	Net Phelps Dodge share			—		0.3			—			511.8
Copper sales (thousand short tons):
	Net Phelps Dodge share from own mines			—		0.3			—			533.2
	Purchased copper			—		174.1			—			220.5
	Total copper sales			—		174.4			—			753.7
Molybdenum production (thousand pounds):
	Primary — Henderson			9,529		—			—			9,529
	By-product			11,455		—			—			11,455
		Total production		20,984		—			—			20,984
Molybdenum sales (thousand pounds):
	Net Phelps Dodge share from own mines			24,104		—			—			24,104
	Purchased molybdenum			5,366		—			—			5,366
		Total molybdenum sales		29,470		—			—			29,470
($ in millions)
Operating income (loss)			$	0.2		(2.7	)		(2.2	)		65.5
Special items and provisions			$	—		—			34.7			34.7

Refer to segment discussion on pages 41 through 45.

Revenues, operating costs and expenses of PDMC’s segments include allocations that may not be reflective of market conditions. Additionally, certain costs are not allocated to the reportable segments. (Refer to pages 41 and 42 for further discussion.)

- 41 -

Sales of Copper (U.S. and South America) and Molybdenum

     The Manufacturing and Sales segment is responsible for selling all copper produced at the U.S. mines. Intersegment revenues of the individual U.S. mines represent an internal allocation based on PDMC’s sales to unaffiliated customers. Therefore, the following discussion and analysis combines the U.S. Mines and Other Mining segments with the Manufacturing and Sales segment. Additionally, the South American Mines sold approximately 36 percent of their copper to the Manufacturing and Sales segment in each of the second quarters of 2003 and 2002. Intersegment sales by the South American Mines are based upon arms-length prices at the time of the sale. Intersegment sales of any individual mine may not be reflective of the actual prices PDMC ultimately receives due to a variety of factors including additional processing, timing of sales to unaffiliated customers, and transportation premiums. These sales are reflected in the Manufacturing and Sales segment.

(Unaudited; $ in millions)

		Second Quarter
		2003			2002
U.S. Mining Operations*
	Unaffiliated customers	$	449.2			485.5
	Intersegment elimination		(56.3	)		(94.5	)
			392.9			391.0
South American Mines**
	Unaffiliated customers		99.0			96.0
	Intersegment		56.3			94.5
			155.3			190.5
Primary Molybdenum
	Unaffiliated customers		93.4			63.0
	Intersegment		—			—
			93.4			63.0
Total PDMC
	Unaffiliated customers	$	641.6			644.5

(Unaudited; $ in millions)

		Six Months Ended
		June 30,
		2003			2002
U.S. Mining Operations*
	Unaffiliated customers	$	927.7			941.8
	Intersegment elimination		(128.0	)		(156.4	)
			799.7			785.4
South American Mines**
	Unaffiliated customers		199.6			190.1
	Intersegment		128.0			156.4
			327.6			346.5
Primary Molybdenum
	Unaffiliated customers		169.3			124.3
	Intersegment		—			—
			169.3			124.3
Total PDMC
	Unaffiliated customers	$	1,296.6			1,256.2

*	U.S. Mining Operations combines the following segments: Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and Sales, and Other Mining.
**	South American Mines combines the following segments: Candelaria, Cerro Verde and El Abra.

     U.S. Mines, Other Mining and Manufacturing and Sales Segments — Sales

     Sales and other operating revenues to unaffiliated customers by U.S. Mines, Other Mining and Manufacturing and Sales decreased $36.3 million, or 7 percent, in the 2003 second quarter compared with the 2002 second quarter. This decrease primarily was due to lower copper sales volumes (approximately $42 million) and lower precious metals sales (approximately $3 million); partially offset by higher average copper prices (approximately $8 million).

     Sales and other operating revenues to unaffiliated customers by U.S. Mines, Other Mining and Manufacturing and Sales decreased $14.1 million, or 2 percent, in the first six months of 2003 compared with the corresponding 2002 period. This decrease primarily was due to lower copper sales volumes (approximately $52 million) and lower precious metals sales (approximately $3 million); partially offset by higher average copper prices (approximately $37 million).

- 42 -

     South American Mines Segments — Sales

     South American Mines sales and other operating revenues to unaffiliated customers increased $3.0 million, or 3 percent, in the 2003 second quarter compared with the 2002 second quarter. This increase primarily was due to higher realized copper prices (approximately $10 million) and higher precious metals sales (approximately $3 million); partially offset by lower sales volumes of copper (approximately $10 million).

     South American Mines sales and other operating revenues to unaffiliated customers increased $9.5 million, or 5 percent, in the first six months of 2003 compared with the corresponding 2002 period. This increase primarily was due to higher realized copper prices (approximately $13 million) and higher precious metals sales (approximately $3 million); partially offset by lower sales volumes of copper (approximately $7 million).

     Primary Molybdenum Segment — Sales

     Primary Molybdenum sales and other operating revenues to unaffiliated customers increased $30.4 million, or 48 percent, in the 2003 second quarter compared with the 2002 second quarter. This increase primarily was due to higher average molybdenum prices (approximately $24 million) and higher sales volumes of molybdenum (approximately $6 million).

     Primary Molybdenum sales and other operating revenues to unaffiliated customers increased $45.0 million, or 36 percent, in the first six months of 2003 compared with the corresponding 2002 period. This increase primarily was due to higher average molybdenum prices (approximately $39 million) and higher sales volumes of molybdenum (approximately $6 million).

Operating Income (Loss) for Copper (U.S. and South America) and Molybdenum

     In addition to the allocation of revenues, management allocates certain operating costs, expenses and capital of PDMC’s segments that may not be necessarily reflective of market conditions. We also do not allocate all costs and expenses applicable to a mine or operation from the division or corporate offices. Accordingly, the segment information reflects management’s determinations that may not be indicative of actual financial performance of each segment as if it was an independent entity.

(Unaudited; $ in millions)

		Second Quarter
		2003			2002
					(As Restated)
U.S. Mining Operations*		$	(2.0	)		17.5
South American Mines**			27.4			20.2
Primary Molybdenum			0.4			0.5
	Total PDMC	$	25.8			38.2

(Unaudited; $ in millions)

		Six Months Ended
		June 30,
		2003			2002
					(As Restated)
U.S. Mining Operations*		$	(2.6	)		17.6
South American Mines**			63.6			47.7
Primary Molybdenum			0.5			0.2
	Total PDMC	$	61.5			65.5

*	U.S. Mining Operations combines the following segments: Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre, Tyrone, Manufacturing and Sales, and Other Mining.
**	South American Mines combines the following segments: Candelaria, Cerro Verde and El Abra.

     U.S. Mining Operations — Operating Income (Loss)

     U.S. Mining Operations reported an operating loss of $2.0 million in the 2003 second quarter, compared with operating income of $17.5 million in the 2002 second quarter including $20.9 million of special, net pre-tax gains.

     U.S. Mining Operations reported an operating loss of $2.6 million for the first six months of

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2003, compared with operating income of $17.6 million in the corresponding 2002 period including $34.7 million of special, net pre-tax gains. (Refer to the separate discussion of PDMC’s segments below for further detail.)

Note: Supplemental Data

     The following table summarizes U.S. Mining Operations special items for 2003 and 2002 and the resultant losses excluding these special items:

(Unaudited; $ in millions)

	Second Quarter
	2003			2002
				(As Restated)
Special, pre-tax items	$	(0.5	)		20.9
Segment operating losses excluding special items	$	(1.5	)		(3.4	)

(Unaudited; $ in millions)

	Six Months Ended
	June 30,
	2003			2002
					(As Restated)
Special, pre-tax items	$	(0.5	)		34.7
Segment operating losses excluding special items	$	(2.1	)		(17.1	)

Note: Our non-GAAP measure of special items may not be comparable to similarly titled measures reported by other companies.

     Morenci Segment — Operating Income

     The Morenci open-pit mine, located in southeastern Arizona, primarily produces electrowon copper cathode. We own an 85 percent interest in Morenci and apply the proportional consolidation method of accounting. Operating income of $4.9 million in the 2003 second quarter decreased $8.0 million compared with the 2002 second quarter, primarily due to higher cost of copper production (approximately $8 million) primarily due to higher energy costs.

     Operating income of $17.3 million for the first six months of 2003 decreased $7.4 million compared with the corresponding 2002 period, primarily due to higher cost of copper production (approximately $13 million) primarily due to higher energy costs; partially offset by higher average copper prices (approximately $4 million).

     Bagdad/Sierrita Segment — Operating Income

     Our wholly owned Bagdad and Sierrita open-pit mines, located in northwest Arizona and near Green Valley, Arizona, respectively, mine copper sulfide and oxide ores. They produce copper and molybdenum concentrates. Since January 2002, the Bagdad and Sierrita mines have been producing between 50 and 70 percent of their capacity due to the economic environment. The 2003 second quarter operating income of $18.3 million increased $13.8 million compared with the 2002 second quarter, primarily due to lower cost of copper production (approximately $13 million) and higher copper sales volumes (approximately $1 million). The lower cost of copper production of $13 million was primarily due to higher molybdenum credits resulting from higher molybdenum prices and volumes (approximately $19 million); partially offset by an unfavorable change in heap leach and work-in-process inventory ($1 million), and higher electricity costs (approximately $3 million).

     Operating income of $25.0 million for the first six months of 2003 increased $24.8 million compared with the corresponding 2002 period, primarily due to lower cost of copper production (approximately $25 million) and higher average copper prices (approximately $2 million). The lower cost of copper production of $25 million was primarily due to higher molybdenum credits resulting from higher molybdenum prices and volumes (approximately $28 million), partially offset by higher electricity costs (approximately $4 million).

     On April 28, 2003, the Company announced its copper concentrate-leaching demonstration plant at Bagdad, Arizona, had been commissioned ahead of schedule. It is now operating at design capacity. The Bagdad plant is the first commercial facility in the world to use pressure leaching to treat chalcopyrite concentrates. The new technology should make it more economical to recover copper from chalcopyrite ores, which accounts for approximately 70 percent of the world’s known copper reserves. Our immediate plans are to continue in the present mode of operation until the economic viability of the process is proven. Once we have completed this demonstration, we will be ready for larger scale commercial application where appropriate.

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     Miami/Bisbee Segment — Operating Loss

     Our wholly owned Miami open-pit mine, located in Miami, Arizona, produces electrowon copper cathode. Since January 2002, the Miami mine and refinery were closed temporarily due to the economic environment. The Bisbee precipitation operation is located in southern Arizona. The 2003 second quarter operating loss of $3.1 million decreased $0.7 million compared with the 2002 second quarter, primarily due to lower cost of copper production (approximately $1 million) resulting from higher production and lower depreciation expense (approximately $1 million).

     The operating loss of $3.8 million for the first six months of 2003 decreased $4.5 million compared with the corresponding 2002 period, primarily due to lower cost of copper production (approximately $6 million) resulting from higher production (approximately $4 million) and lower depreciation expense (approximately $2 million).

     Chino/Cobre Segment — Operating Income (Loss)

     The Chino open-pit mine, located near Silver City, New Mexico, primarily mines copper sulfide and oxide ores. We own a two-thirds partnership interest in Chino and apply the proportional consolidation method of accounting. Since January 1, 2002, the Chino mine and smelter were closed temporarily; however, residual leaching has continued. Our wholly owned Cobre mine, which is adjacent to the Chino mine, has been on care-and-maintenance status since late 1998. The 2003 second quarter operating loss of $2.8 million increased $4.1 million compared with the 2002 second quarter, primarily due to lower copper sales volumes (approximately $1 million), higher cost of copper production (approximately $3 million) due to lower production from lower leach solution grades and flow rates (approximately $2 million) and higher electricity costs (approximately $1 million).

     The operating loss of $4.9 million for the first six months of 2003 increased $11.9 million compared with the corresponding 2002 period, primarily due to lower copper sales volumes (approximately $4 million), higher cost of copper production (approximately $7 million) due to lower production from lower leach solution grades and flow rates (approximately $6 million) and higher electricity costs (approximately $3 million); partially offset by lower closure expense (approximately $1 million) and lower operating costs (approximately $1 million).

     Tyrone Segment — Operating Income (Loss)

     Our wholly owned Tyrone open-pit mine, located near Tyrone, New Mexico, primarily mines copper oxide ore. It produces electrowon copper cathode. The 2003 second quarter operating loss of $4.5 million increased $5.1 million compared with the 2002 second quarter, due to higher cost of copper production (approximately $5 million). The higher cost of copper production included an unfavorable change in heap leach and work-in-process inventory (approximately $8 million) and higher depreciation (approximately $1 million); partially offset by lower closure expense from the adoption of SFAS No. 143 (approximately $3 million).

     The operating loss of $8.9 million for the first six months of 2003 increased $7.8 million compared with the corresponding 2002 period, due to higher cost of copper production (approximately $9 million); partially offset by higher average copper prices (approximately $1 million). The higher cost of copper production included an unfavorable change in heap leach and work-in-process inventory (approximately $19 million); partially offset by lower costs associated with mine plan changes (approximately $4 million) and lower closure expense from the adoption of SFAS No. 143 (approximately $6 million).

     South American Mines — Operating Income

     South American Mines reported operating income in the 2003 second quarter of $27.4 million, compared with operating income of $20.2 million in the 2002 second quarter.

     South American Mines reported operating income of $63.6 million for the first six months of 2003, compared with operating income of $47.7 million for the first six months of 2002.

     (Refer to the separate discussion of PDMC’s segments below for further detail.)

     Candelaria Segment — Operating Income

     The Candelaria open-pit mine is located near Copiapó in northern Chile and produces copper concentrates. We own an 80 percent partnership interest in Candelaria, a Chilean contractual mining company, and we apply the proportional consolidation method of accounting. Operating income of $13.6 million in the 2003 second quarter increased $0.4 million compared with the 2002 second quarter, primarily due to higher average

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realized prices ($2 million) and lower unit cost of copper production (approximately $2 million); partially offset by lower copper sales volumes (approximately $3 million).

     Operating income of $36.7 million for the first six months of 2003 increased $3.3 million compared with the corresponding 2002 period, primarily due to lower cost of copper production ($4 million) resulting from a higher copper ore grade (approximately $1 million) and lower downstream rates (approximately $3 million).

     Cerro Verde Segment — Operating Income

     The Cerro Verde open-pit mine, located near Arequipa, Peru, produces electrowon copper cathode. We own approximately 82 percent of the common stock of Cerro Verde, which we fully consolidate and show the minority interest. The 2003 second quarter operating income of $8.6 million increased $1.8 million from the 2002 second quarter, primarily due to higher average copper prices (approximately $1 million) and lower cost of copper production (approximately $1 million) primarily due to higher production.

     Operating income of $16.1 million for the first six months of 2003 increased $2.5 million from the corresponding 2002 period, primarily due to higher average copper prices (approximately $3 million) and higher copper sales volumes (approximately $1 million); partially offset by higher cost of copper production (approximately $1 million) primarily due to the change in heap leach and work-in-process inventory.

     El Abra Segment — Operating Income

     The El Abra open-pit mine is located in northern Chile and produces electrowon copper cathode. We own a 51 percent partnership interest in El Abra, a Chilean contractual mining company, and we apply the proportional consolidation method of accounting. The remaining 49 percent interest is owned by Corporación Nacional del Cobre de Chile (CODELCO), a Chilean state-owned company. The 2003 second quarter operating income of $5.2 million increased $5.0 million from the 2002 second quarter, primarily due to higher average copper prices (approximately $3 million) and lower cost of copper production (approximately $2 million) primarily comprising lower electricity costs (approximately $1 million).

     Operating income of $10.8 million for the first six months of 2003 increased $10.1 million from the corresponding 2002 period, primarily due to higher average copper prices (approximately $6 million) and lower cost of copper production (approximately $4 million) primarily comprising a favorable change in heap leach and work-in-process inventory (approximately $8 million) and lower energy costs (approximately $2 million); partially offset by higher depreciation expense (approximately $2 million) and lower production levels (approximately $2 million).

     Primary Molybdenum — Operating Income (Loss)

     Primary Molybdenum includes our wholly owned Henderson and Climax molybdenum mines in Colorado and conversion facilities in the United States and Europe. Henderson produces high-purity, chemical-grade molybdenum concentrates, which are further processed into value-added molybdenum chemical products. Climax is currently on care-and-maintenance status. We expect 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.

     Primary Molybdenum operations reported operating income in the 2003 second quarter of $0.4 million, compared with operating income of $0.5 million in the second quarter of 2002. The 2003 second quarter decrease of $0.1 million primarily was due to higher average molybdenum prices (approximately $24 million), essentially offset by higher mining costs (approximately $3 million), higher costs of third-party purchases and by-product molybdenum (approximately $18 million), higher shutdown expenses (approximately $2 million) and higher marketing costs (approximately $1 million).

     Primary Molybdenum operations reported operating income of $0.5 million for the first six months of 2003, compared with operating income of $0.2 million for the first six months of 2002. The increase of $0.3 million primarily was due to higher average molybdenum prices (approximately $39 million); offset by higher production costs (approximately $10 million), higher costs of third-party purchases and by-product molybdenum (approximately $26 million), higher shutdown expenses (approximately $2 million) and lower tolling profits (approximately $1 million). The higher production costs primarily resulted from higher mining (approximately $5 million), conversion cost (approximately $3 million), and energy costs (approximately $1 million).

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     PDMC — Other Matters

     We have approximately 700 million to 760 million pounds of curtailed annual copper production capacity (100 percent basis), depending on near-term mine plans, that could be brought to market. At the end of the 2003 second quarter, such capacity approximated 705 million pounds (660 million pounds, in the United States and 45 million pounds internationally). This curtailed capacity is located at eight of our mine sites, all with existing infrastructures. Approximately 605 million to 665 million pounds of this curtailed annual capacity is located at our active mine sites and approximately 95 million pounds is located at inactive sites (50 million at Cobre and 45 million at Ojos del Salado).

     Any decision to recommence full operations at these sites will depend on several factors including then-prevailing copper prices, management’s assessment of copper market fundamentals and its estimates of future copper price trends and the extent to which any such new production is necessary for the efficient integration of the Company’s other copper-producing operations at that time. Management’s assessment of copper market fundamentals will reflect its judgment about future global economic activity and demand, and its estimates of the likelihood and timing of curtailed or new projects of competitors being placed into production. While there is no single copper price threshold that would necessarily trigger the recommencement of full operations at any of these sites, management does not expect to recommence operations until there has been a significant improvement in copper market fundamentals or a production integration inefficiency that could be alleviated by such recommencement.

     Any material change in the price we receive for copper, or in PDMC’s implied unit cost of copper production, has a significant effect on our results. Based on expected 2003 annual production of approximately 2.1 billion pounds of copper, each 1 cent per pound change in the average annual copper price, or in average annual implied unit cost of copper production, causes a variation in annual operating income before taxes of approximately $21 million.

     Our current annual molybdenum production is approximately 51 million pounds (approximately 23 million pounds from primary mines and 28 million pounds from by-product mines). Approximately 70 percent of our molybdenum contracts are priced based on the average of the previous 30 days of published prices (i.e., Platts Metals Week, Ryan’s Notes, or Metal Bulletin), plus premiums. Accordingly, each $1.00 per pound change in our average annual realized molybdenum price causes a variation in annual operating income before taxes of approximately $36 million (subject to any negotiated limitations in outstanding customer agreements).

     From time to time, we may purchase or sell copper price protection contracts for a portion of our expected future mine production. We do this to limit the effects of potential decreases in copper selling prices. We did not have any outstanding copper price protection contracts on June 30, 2003.

PDMC — New Mexico Reclamation

     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 the 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

- 47 -

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 WQCC. NMED issued a permit in accordance with the hearing officer’s decision on April 8, 2003, which Tyrone also has appealed. 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. 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. 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 is 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 $394 million, based

- 48 -

upon third-party unescalated and undiscounted capital and operating costs over a 100-year operating period, including the cost of technical studies required under the permit. The Company’s two-thirds share of NMED’s $394 million estimate is approximately $263 million and our joint venture partner’s cost share is approximately $131 million. We estimate total costs for Chino Mines Company to achieve the closure standards required by NMED to be approximately $264 million (100 percent basis); that estimate 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 $176 million and our joint venture partner’s cost share is approximately $88 million. At June 30, 2003, and December 31, 2002, we had accrued approximately $18 million and $8 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 permits 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 June 30, 2003, and December 31, 2002, we had accrued closure costs of approximately $60 million and $27 million, respectively, at Tyrone and approximately $6 million and $2 million, respectively, 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 (NPV) 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 NMED, the financial assurance amount for Chino could be approximately $191 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 MMD can approve the closeout plan. Chino and Tyrone have provided approximately $56 million and $58 million of financial assurance in the form of surety bonds, respectively, to NMED under the terms of several discharge permits. The closure and financial assurance requirements of these permits have been superseded by the recently issued NMED closure permits. Consequently, the Company has advised NMED that this financial assurance should be terminated and replaced by new financial assurance under the terms of the new closure permits. Chino and Tyrone have submitted financial assurance proposals in accordance with the schedules under their NMED closure permit proposing financial assurance primarily in the form of corporate performance guarantees from the Company. 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. Hidalgo currently has provided financial assurance in the amount of approximately $11 million under its discharge permit.

- 49 -

     In late May 2003, the Company and the state announced an agreement on a framework for the Company to provide financial assurance for Chino, Tyrone and Cobre under both NMMAR and WQCC Regulations. Under this agreement, the Company will provide financial assurance based upon the NPV of the cost estimates in a total amount of approximately $484 million. Initially, approximately 70 percent of this amount will be covered by a corporate performance guarantee. At least $50 million will be provided in the form of trust funds, increasing to at least $75 million after five years. The balance will be provided as collateral, including liens on certain owned parcels of non-mining real estate located in New Mexico. In addition, the Company will expend at least $30 million on accelerated closure and reclamation work over the next 10 years. The amount of the guarantee will be reduced to approximately 64 percent by the amount of accelerated reclamation performed. Finalization of the financial assurance is subject to completion of the permitting process, including additional public comment and hearings. MMD also has proposed some changes to NMMAR for consideration by the Mining Commission, which could affect the final financial assurance package.

RESULTS OF PHELPS DODGE INDUSTRIES

     PDI, our manufacturing division, produces 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 manufacturing division includes our Specialty Chemicals segment and our Wire and Cable segment. Our Specialty Chemicals segment includes Columbian Chemicals Company and its subsidiaries (Columbian Chemicals or Columbian). Our Wire and Cable segment consists of three worldwide product line businesses including magnet wire, energy and telecommunications cables, and specialty conductors.

     (Unaudited; $ in millions)

		Second Quarter
		2003		2002
Sales and other operating revenues to unaffiliated customers:
	Specialty Chemicals	$	166.1		140.5
	Wire and Cable		154.5		181.8
		$	320.6		322.3
Operating income:
	Specialty Chemicals	$	15.0		17.0
	Wire and Cable		3.5		3.3
		$	18.5		20.3

(Unaudited; $ in millions)

		Six Months Ended
		June 30,
		2003		2002
Sales and other operating revenues to unaffiliated customers:
	Specialty Chemicals	$	328.2		269.8
	Wire and Cable		315.4		359.3
		$	643.6		629.1
Operating income:
	Specialty Chemicals	$	29.1		30.2
	Wire and Cable		6.9		6.1
		$	36.0		36.3

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     PDI — Sales

     PDI reported sales to unaffiliated customers of $320.6 million in the 2003 second quarter, compared with $322.3 million in the 2002 second quarter. The decrease of $1.7 million was due to lower sales volumes of wire and cable as a result of reduced demand stemming from continuing global economic uncertainty (approximately $27 million). This decrease was mostly offset by higher specialty chemicals sales resulting primarily from higher average unit selling prices worldwide (approximately $23 million) due to higher feedstock-related increases.

     PDI reported sales to unaffiliated customers of $643.6 million for the first six months of 2003, compared with $629.1 million in the corresponding 2002 period. The increase of $14.5 million was due to higher specialty chemicals sales resulting from higher sales volumes (approximately $8 million) and higher average unit selling prices worldwide (approximately $51 million) due to general market increases and higher feedstock-related increases. This increase was partially offset by lower sales volumes of wire and cable as a result of reduced demand stemming from continuing global economic uncertainty (approximately $44 million).

     PDI — Operating Income

     PDI reported operating income of $18.5 million in the 2003 second quarter, compared with $20.3 million in the 2002 second quarter.

     PDI reported operating income of $36.0 million for the first six months of 2003, including a special, net pre-tax gain of $3.2 million, compared with operating income of $36.3 million in the corresponding 2002 period.

     (Refer to the separate discussion of PDI’s Specialty Chemicals and Wire and Cable segments below for further detail.)

Note: Supplemental Data

     The following table summarizes PDI’s special items for the second quarter and first six months of 2003 and 2002 and the resultant earnings excluding these special items:

(Unaudited; $ in millions)

	Second Quarter
	2003		2002
Operating income	$	18.5		20.3
Special, pre-tax items		—		—
Segment operating earnings excluding special items	$	18.5		20.3

(Unaudited; $ in millions)

	Six Months Ended
	June 30,
	2003		2002
Operating income	$	36.0		36.3
Special, pre-tax items		3.2		—
Segment operating earnings excluding special items	$	32.8		36.3

Note: Our non-GAAP measure of special items may not be comparable to similarly titled measures reported by other companies.

     Special items and provisions in operating income were as follows:

(Unaudited; $ in millions)

	Six Months Ended
	June 30,
	2003		2002
Termination of a foreign postretirement benefit plan	$	3.2		—

Note: Our non-GAAP measure of special items may not be comparable to similarly titled measures reported by other companies.

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     Specialty Chemicals — Operating Income

     Specialty Chemicals reported operating income in the 2003 second quarter of $15.0 million, compared with $17.0 million in the 2002 second quarter. The 2003 second quarter decrease of $2.0 million primarily was due to feedstock and natural gas cost increases, lower sales volumes and the timing of plant turnarounds (approximately $32 million), partially offset by favorable sales revenues primarily from higher average unit selling prices worldwide (approximately $28 million) due to higher feedstock-related increases and Quest for Zero improvements of approximately $1 million.

     Specialty Chemicals reported operating income of $29.1 million for the first six months of 2003 including a special, net pre-tax gain of $3.2 million, compared with operating income of $30.2 million for the first six months of 2002. The decrease of $1.1 million was minimized due to a special, pre-tax gain of $3.2 million that resulted from the termination of a foreign postretirement benefit plan and Quest for Zero improvements of approximately $4 million. In addition, feedstock and natural gas cost increases and the timing of plant turnarounds for specialty chemical operations (approximately $61 million) were mostly offset by favorable sales revenues primarily from higher average unit selling prices worldwide (approximately $51 million) due to higher feedstock-related increases.

Note: Supplemental Data

     The following table summarizes Specialty Chemicals’ special items for the first six months of 2003 and 2002 and the resultant earnings excluding these special items:

(Unaudited; $ in millions)

	Six Months Ended
	June 30,
	2003		2002
Special, pre-tax items	$	3.2		—
Segment operating earnings excluding special items	$	25.9		30.2

Note: Our non-GAAP measure of special items may not be comparable to similarly titled measures reported by other companies.

     Wire and Cable — Operating Income

     Wire and Cable reported operating income in the 2003 second quarter of $3.5 million, compared with $3.3 million in the 2002 second quarter. Wire and Cable’s sales decreased $27.3 million as a result of reduced demand stemming from continuing global economic uncertainty, and operating costs decreased $27.5 million including Quest for Zero improvements of approximately $1 million. There were no special items in either quarter.

     Wire and Cable reported operating income of $6.9 million for the first six months of 2003, compared with $6.1 million for the first six months of 2002. Wire and Cable’s sales decreased $43.9 million as a result of reduced demand stemming from continuing global economic uncertainty, and operating costs decreased $44.8 million including Quest for Zero improvements of approximately $4 million. There were no special items in either six months ended June 30, 2003 and 2002.

OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS

     Selling and General Administrative Expense

     Our selling and general administrative expense increased $6.0 million and $6.5 million, respectively, for the three- and six-month periods ended June 30, 2003, compared with the corresponding 2002 periods. The increases primarily resulted from higher legal fees associated with the RAG settlement, SEC reviews and other legal matters.

     Exploration and Research Expense

     Our net exploration and research expense was $12.9 million in the 2003 second quarter, compared with $9.2 million in the 2002 second quarter. The increase primarily resulted from slightly higher PDMC research expense (approximately $2 million) and exploration expense ($2 million).

     Net exploration and research expense was $22.5 million for the first six months of 2003, compared with $17.9 million in the corresponding 2002 period. The increase primarily resulted from slightly higher PDMC research expense (approximately $3 million) and exploration expense (approximately $1 million).

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     Interest Expense

     Interest expense decreased $12.2 million in the 2003 second quarter, compared with the 2002 second quarter. The decrease in the 2003 second quarter primarily was attributable to reductions related to the payoff of long-term debt (approximately $10.0 million) and project financing in 2002 (approximately $2.8 million).

     Interest expense decreased $29.0 million for the first six months of 2003, compared with the corresponding 2002 period. The decrease was primarily attributable to reductions related to the payoff of long-term debt (approximately $23.8 million) and project financing in 2002 (approximately $5.9 million).

     Miscellaneous Income (Expense), Net

     Miscellaneous income (expense), net, increased $12.6 million in the 2003 second quarter compared with the 2002 second quarter. The increase for the 2003 second quarter resulted primarily from the gain on sale of a cost-basis wire and cable investment ($6.4 million), mark-to-market benefits on non-qualified pension plan assets ($4.0 million), and foreign currency exchange gains ($2.1 million); partially offset by higher shutdown expenses ($1.9 million).

     Miscellaneous income (expense), net, increased $11.5 million for the first six months of 2003 compared with the corresponding 2002 period. The increase resulted primarily from the gain on sale of a cost-basis wire and cable investment ($6.4 million), mark-to-market benefits on non-qualified pension plan assets ($3.5 million), and foreign currency exchange gains ($2.9 million); partially offset by higher shutdown expenses ($3.8 million).

     Benefit (Provisions) for Taxes on Income

     The Company’s income tax provision for the 2003 second quarter principally resulted from (i) taxes on earnings at international operations ($12.2 million) that cannot be offset by losses at domestic operations and (ii) a benefit from finalizing year-end 2002 estimates in the Company’s 2002 U.S. tax return filed in June 2003 ($4.2 million). The Company’s income tax provision for the six months ended June 30, 2003, primarily comprised the following: (i) taxes on earnings at international operations ($26.3 million) that cannot be offset by losses at domestic operations and (ii) a benefit from finalizing year-end 2002 estimates in the Company’s 2002 U.S. tax return filed in June 2003 ($4.2 million).

     The Company’s income tax provision for the 2002 second quarter, primarily comprised the following: (i) a $21.9 million benefit recognized for the second quarter 2002 net operating losses that, based on the March enactment of the Job Creation and Worker Assistance Act of 2002, may be carried back to recover prior years’ taxes paid; (ii) a $13.0 million benefit for release of deferred taxes previously provided with regard to Plateau Mining Corporation; and (iii) a $4.1 million expense for taxes on earnings at international operations. The Company’s income tax benefit for the six months ended June 30, 2002, principally comprised the following items: (i) a $38.5 million tax benefit associated with the carryback of 2001 net operating losses that, based on the new tax legislation, may also be carried back to recover prior years’ taxes paid; (ii) a $34.8 million benefit recognized for the first half of 2002 net operating losses, based on the new tax legislation; (iii) a $15.8 million expense for taxes on earnings at international operations; and (iv) a $13.0 million benefit for release of deferred taxes previously provided.

     The Company completed its 2002 federal income tax return in June 2003 and filed for a $67.5 million tax refund, which was received in July 2003.

     Cumulative Effect of Accounting Change

     On January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” With the adoption of this Statement, we recognize asset retirement obligations (AROs) as liabilities when incurred, with the initial measurement at fair value. These liabilities will be accreted to full value over time through charges to income. In addition, an asset retirement cost was capitalized as part of the related asset’s carrying value and will subsequently be depreciated over the asset’s useful life. Our AROs consist primarily of costs associated with mine reclamation and closure activities. These activities, which tend to be site specific, generally include costs for earthwork, revegetation, water treatment and demolition. Upon adoption, we recorded an increase to our closure and reclamation reserve of approximately $2.5 million, net, an increase to our mining properties assets of approximately $12.2 million and a cumulative gain of $8.4 million, net of deferred taxes. For the three and six months ended June 30, 2003, the effect of adopting SFAS No. 143 decreased loss before cumulative effect of accounting change by approximately $8 million, or 9 cents per common share, and $11 million, or 12 cents per common share, respectively.

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     The following table summarizes the balance sheet impact associated with the adoption of SFAS No. 143:

(Unaudited; $ in millions)

					SFAS			January 1,
		December 31,			No. 143			2003
		2002			Adoption			After
		As Reported*			Impact			Adoption
Mining properties		$	907.4			63.8	**		971.2
Mining properties accumulated depreciation			(197.1	)		(53.2	)		(250.3	)
	Net mining properties assets	$	710.3			10.6			720.9
Intangibles		$	439.5			3.6	**		443.1
Intangibles — accumulated amortization			(93.6	)		(2.0	)		(95.6	)
		$	345.9			1.6			347.5
Asset retirement obligation liability		$	138.6			10.4	***		149.0

*	Reflects the reclassification of mining concessions from property, plant and equipment, net to intangible assets (refer to Note 3, Reclassification of Intangible Assets, for further discussion).
**	Amounts include $84.0 million and $7.5 million of additions related to recording an asset retirement cost, offset by $20.2 million and $3.9 million to reclassify amounts recognized as ore reserves in purchase accounting.
***	Amount consists of $2.5 million of liabilities recognized at adoption and $7.9 million of reclassifications related to closure obligations from other liabilities at adoption.

     The pro forma effects of the application of SFAS No. 143 as if this Statement had been adopted on January 1, 2002, are presented below:

(Unaudited; $ in millions except per share data)

			Three Months
			Ended
			June 30, 2002
Loss before cumulative effect of accounting change as reported			$	(34.3	)
Reduced cost of products sold, net of tax				4.5
Additional depreciation expense, net of tax benefit				(0.5	)
Pro forma loss before cumulative effect of accounting change			$	(30.3	)
Loss per common share before cumulative effect of accounting change:
		Basic and diluted — as reported	$	(0.46	)
		Basic and diluted — pro forma	$	(0.41	)
Net loss as reported			$	(34.3	)
Pro forma net loss			$	(30.3	)
Loss per common share:
	Basic and diluted — as reported		$	(0.46	)
	Basic and diluted — pro forma		$	(0.41	)

(Unaudited; $ in millions except per share data)

			Six Months Ended
			June 30,
			2003			2002
Loss before cumulative effect of accounting change as reported			$	(38.6	)		(36.2	)
Reduced cost of products sold, net of tax				—			9.3
Additional depreciation expense, net of tax benefit				—			(1.0	)
Pro forma loss before cumulative effect of accounting change			$	(38.6	)		(27.9	)
Loss per common share before cumulative effect of accounting change:
		Basic and diluted — as reported	$	(0.51	)		(0.48	)
		Basic and diluted — pro forma	$	(0.51	)		(0.38	)
Net loss as reported			$	(30.2	)		(59.1	)
Pro forma net loss			$	(38.6	)		(50.8	)
Loss per common share:
	Basic and diluted — as reported		$	(0.42	)		(0.77	)
	Basic and diluted — pro forma		$	(0.51	)		(0.67	)

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     The pro forma asset retirement obligation liability balances as if SFAS No. 143 had been adopted on January 1, 2002, are as follows:

(Unaudited; $ in millions)

Pro forma asset retirement obligation liability – January 1, 2002	$	138.1
Pro forma asset retirement obligation liability – December 31, 2002	$	149.0

     Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives are not amortized, but rather tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Upon completion of the transitional impairment tests, the fair value of three of the Company’s international wire and cable reporting units was determined to be less than the related carrying amount. The resulting impairment loss recognized upon adoption of SFAS No. 142 in the first quarter of 2002 was $33.0 million, pre-tax ($22.9 million after-tax), and was recognized as a cumulative effect of a change in accounting principle.

     Subsequently, the Company completed its annual goodwill impairment test as of December 31, 2002, with no additional impairments. The Company will continue to test its goodwill annually as of December 31 unless events occur or circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

     The changes in the carrying amount of goodwill for the year ended December 31, 2002, and six months ended June 30, 2003, are as follows:

(Unaudited; $ in millions)

	Specialty			Wire and
	Chemicals			Cable
	Segment			Segment			Total
Balance as of December 31, 2001	$	88.5			54.6			143.1
Impairment losses upon adoption of SFAS No. 142		—			(33.0	)		(33.0	)
Foreign currency translation adjustments		(19.4	)		—			(19.4	)
Balance as of December 31, 2002		69.1			21.6			90.7
Foreign currency translation adjustments		8.9			—			8.9
Balance as of June 30, 2003	$	78.0			21.6			99.6

CHANGES IN FINANCIAL CONDITION

     Working Capital

     During the first six months of 2003, net working capital balances (excluding cash and cash equivalents and debt) increased $102.6 million. This increase resulted primarily from:

• a $101.0 million increase in accounts receivable primarily due to higher molybdenum sales volumes and realizations (approximately $18 million), higher rod sales due to seasonal demand patterns (approximately $22 million), the timing of copper receivable collections (approximately $14 million), higher Specialty Chemicals sales volumes and prices (approximately $26 million), higher Wire and Cable sales volumes (approximately $2 million) and the timing of their receivable collections (approximately $7 million), and higher net accounts receivable in the securitization program (approximately $5 million); and

• a $46.2 million decrease in accounts payable and accrued expenses primarily due to the payment for an historic Cyprus Amax lawsuit and arbitration award ($48.6 million); partially offset by

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• a $29.4 million decrease in mill and leach stockpiles and inventories due to higher copper sales (approximately $22 million), higher molybdenum sales (approximately $8 million), and lower current mill and leach stockpiles (approximately $16 million); partially offset by an increase in Wire and Cable’s inventory primarily due to inventories being low at year-end (approximately $15 million); and

• a $12.6 million increase in accrued income taxes due to higher foreign taxes.

     Debt

     At June 30, 2003, our total debt was $2,061.1 million, compared with $2,110.6 million at year-end 2002. Our ratio of debt to total capitalization was 41.6 percent and 42.3 percent at June 30, 2003, and December 31, 2002, respectively.

     In May 2003, the Company terminated $375 million of fixed-to-floating interest rate swaps associated with corporate debt maturing in 2005 and 2007. In the second quarter 2003, we received cash proceeds of $35.9 million; $34.6 million was reflected as a deferred gain on the balance sheet and will be amortized over the remaining life of the underlying debt using the effective interest method.

     As of June 30, 2003, the Company had no borrowings under its $1 billion revolving credit facility that is available, provided compliance with covenant requirements, until its scheduled maturity on May 10, 2005.

     In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Under SFAS No. 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. This Statement eliminates SFAS No. 4 and, thus, the exception to applying Accounting Principles Board (APB) Opinion No. 30 to all gains and losses related to extinguishments of debt. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. Applying the provisions of APB No. 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. As a result of this Statement being adopted by the Company on January 1, 2003, we will reclassify the third quarter 2002 extraordinary item for debt extinguishment to recurring operations in our Form 10-Q filing for the quarter ended September 30, 2003.

     Capital Expenditures and Investments

     Capital expenditures and investments for the first six months of 2003 were $37.0 million for PDMC, $16.4 million for PDI and $23.9 million for other Corporate-related activities. Capital expenditures and investments for the first six months of 2002 were $38.1 million for PDMC, $9.5 million for PDI and $3.2 million for other Corporate-related activities. We expect capital expenditures and investments for the year 2003 to approximate $200 million, comprising approximately $110 million for PDMC, approximately $60 million for PDI, and approximately $30 million for Corporate and other. These capital expenditures and investments are expected to be funded primarily from operating cash flow and cash reserves.

     Dividends

     For the first six months of 2003, Phelps Dodge has declared quarterly dividends of $3.375 per mandatory convertible preferred share amounting to $6.8 million.

     Other Matters

     Based on recent discussions with the Staff of the Securities and Exchange Commission regarding the balance sheet classification of certain mining concessions, primarily mining concessions containing proven and probable ore reserves and mineralized material at the Company’s South American mines, the Company has reclassified such mining concessions from “Property, plant and equipment, net” to “Intangible assets.” Additionally, previously reported historical amounts have been reclassified for comparative purposes. Refer to Note 3 for further discussion.

     On July 11, 2003, Phelps Dodge amended its Form S-3 to combine the outstanding $150 million outstanding shelf registration into a new $750 million shelf registration. On July 15, 2003, this shelf registration statement was declared effective by the SEC.

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     Contractual Obligations

     The following tables summarize Phelps Dodge’s contractual obligations at June 30, 2003, and the effect such obligations are expected to have on its liquidity and cash flow in future periods for short-term debt, long-term debt (including capital lease obligations) and take-or-pay contracts. The following table, as of June 30, 2003, reflects an update of only the major changes to the similar table presented in the Company’s Form 10-K at December 31, 2002:

     Debt and Take-or-Pay Contracts as of June 30, 2003:

(Unaudited; $ in millions)

	Less Than
	Total		1 Year		1-3 Years
Short-term debt	$	61.5		61.5		—
Long-term debt		1,999.6		134.7		536.6
Take-or-pay contracts		604.4		167.1		205.6

			After
	4-5 Years		5 Years
Short-term debt	$	—		—
Long-term debt		275.4		1,052.9
Take-or-pay contracts		129.2		102.5

     Our take-or-pay contracts primarily include contracts for electricity ($284.7 million), contracts for petroleum-based feedstock for conversion into carbon black ($162.7 million), contracts for natural gas ($35.8 million), and transportation and port fee commitments ($45.6 million). Approximately 81 percent of our take-or-pay electricity obligations are through PD Energy Services, the legal entity used to manage power for PDMC at generally fixed-priced arrangements. PD Energy Services has the right and the ability to resell the electricity as circumstances warrant. Obligations for petroleum-based feedstock for conversion into carbon black are for specific quantities, and ultimately will be purchased based upon prevailing market prices at the time. These petroleum-based products may be re-sold to others if circumstances warrant. Obligations for natural gas provide for deliveries of specified volumes, at market-based prices, primarily to our carbon black operation in Brazil. Transportation obligations total $32.8 million for exporting cathode produced at El Abra and Cerro Verde and copper in concentrate at Candelaria and for importing sulfuric acid to El Abra. Our carbon black facility in the United Kingdom has port fee commitments of $12.8 million.

     Guarantees

     In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that upon issuance of certain guarantees, a guarantor must recognize a liability for the fair value of an obligation assumed under the guarantee. FIN 45 also requires significant new disclosures by guarantors, in both interim and annual financial statements, about obligations associated with guarantees issued. FIN 45 disclosure requirements were adopted for our year ended December 31, 2002; the initial recognition and measurement provisions were adopted on a prospective basis to guarantees issued or modified after December 31, 2002. There were no such guarantees issued in the first six months of 2003.

     Other Items that May Affect Liquidity

     New Mexico and Colorado’s mined-land reclamation laws require financial assurance covering the future cost of reclamation. In contrast, Arizona’s Mine Land Reclamation Act permits a company to satisfy financial assurance requirements by demonstrating it has financial strength to fund future reclamation costs identified in an approved reclamation plan. An investment-grade bond rating is one of the financial strength tests under the Arizona Act. Phelps Dodge’s senior unsecured debt currently carries an investment-grade albeit at the lowest level in that category. Additionally, the Company currently meets another financial strength test in Arizona that is not ratings dependent.

     The cost of surety bonds (the traditional source of financial assurance) has increased significantly during the past year. Also, many surety companies are now requiring an increased level of collateral supporting the bonds. If surety bonds are unavailable, the Company could be required to post other collateral or possibly cash or cash equivalents directly in support of financial assurance obligations.

     Diesel Fuel and Natural Gas Price Protection Programs

     We purchase significant quantities of diesel fuel and natural gas to operate our facilities as an input to the manufacturing process and as input for electricity generation and copper refining.

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To reduce the Company’s exposure to price increases in these energy products, the Company enters into energy price protection programs. Our diesel fuel and natural gas price protection programs consist of purchasing a combination of out-of-the-money (OTM) call option contracts and fixed-price swaps. The OTM call option contracts give the holder the right, but not the obligation, to purchase a specific commodity (diesel fuel or natural gas) at a pre-determined price, or “strike price.” OTM call options are options that have a “strike price” above the current market price for that commodity. Call options allow the Company to cap the commodity purchase cost at the strike price of the option while allowing the Company to participate in commodity price reductions below the strike price. Swaps allow us to establish a fixed commodity purchase price for delivery during a specific future period.

     As of June 30, 2003, our domestic mining diesel fuel price protection program, which started in 2000, had outstanding diesel fuel option contracts in place to hedge approximately 32 million gallons of diesel fuel, or 56 percent of our consumption forecast through September 2004. As of June 30, 2002, our domestic diesel fuel price protection program had 20.2 million gallons of diesel fuel hedged. Gains and losses on these hedge transactions were substantially offset by a similar amount of gain or loss on the underlying forecast diesel fuel purchases.

     As of June 30, 2003, our domestic natural gas price protection program, which started in 2001, had outstanding natural gas option contracts in place to hedge approximately 2.2 million decatherms of natural gas, or 63 percent of our consumption forecast through October 2003. As of June 30, 2002, our domestic natural gas price protection program had outstanding natural gas option contracts in place to hedge approximately 2.5 million decatherms of natural gas. Gains and losses on these hedge transactions were substantially offset by a similar amount of gain or –loss on the underlying forecast natural gas purchases.

     Additionally, as of late July 2003, we had increased our outstanding natural gas option contracts to hedge approximately 11 million decatherms of natural gas, representing 72 percent of consumption forecast through December 2004.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

     There have been no material changes in the Company’s market risk during the first six months of 2003. For additional information on market risk, refer to pages 51 and 93 through 97 of our report on Form 10-K for the year ended December 31, 2002.

Item 4. Controls and Procedures

     The Company maintains a system of disclosure controls and procedures that is designed to ensure information required to be disclosed by the Company is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a timely manner. Management has reviewed this system of disclosure controls and procedures within 90 days of the date hereof, and has concluded that the current system of controls and procedures is effective.

     The Company maintains a system of internal controls and procedures for financial reporting. Since the date of management’s most recent evaluation, there were no significant changes in internal controls or in other factors that could significantly affect internal controls.

Part II. Other Information

Item 1. Legal Proceedings

     I.     Reference is made to paragraph XIX of Part II, Item 3, Legal Proceedings, of the Company’s Form 10-K for the year ended December 31, 2002.

     The Company and Columbian Chemicals Company, together with several other companies, have been named as defendants in an action entitled Technical Industries, Inc. v. Cabot Corporation, et al., filed on January 30, 2003, in the U.S. District Court for the District of Massachusetts, and approximately 12 other actions filed in four U.S. district courts, 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. The complaints in these actions, which allege that the defendants fixed the price of carbon black and engaged in other unlawful activities in violation of the U.S. antitrust laws, seek treble damages in an unspecified amount and attorneys’ fees. A hearing was held on July 25, 2003, before the Judicial Panel on Multidistrict Litigation on motions to consolidate all these actions in one court; the Court has not yet ruled on the motion. The Company and Columbian Chemicals Company, together with several other companies, have also been named in an action entitled Level Construction, Inc. v. Cabot Corporation, et al., filed in Superior Court of the state of California for the County of San Francisco

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(and three other actions also filed in other California Superior Courts) on behalf of a purported class or indirect purchasers of carbon black in the state of California from as early as November 1998 to the present. The complaint alleges similar claims by indirect purchasers under California state law and seeks treble damages in an unspecified amount and attorneys’ fees. The Company believes that all these claims are without merit and intends to defend the lawsuits vigorously.

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

     Our annual meeting was held on May 23, 2003. A total of 78,264,691 common shares, or about 87.95 percent of our issued and outstanding common shares, were represented at the meeting. Set forth below is a description of the matters voted upon at the meeting and a summary of the voting regarding each matter:

	For		Withheld
Election of Directors:
Robert N. Burt		76,514,243		1,750,447
Robert D. Krebs		74,441,117		3,823,573
William J. Post		74,112,333		4,152,357
Jack E. Thompson		76,711,151		1,553,539
Jon C. Madonna		74,596,021		3,668,669

	For		Against		Abstain
Approval of the 2003 Stock Option and Restricted Stock Plan		56,649,593		6,897,646		834,303

     There were no broker non-votes included in the results of the election of directors or the approval of the 2003 Stock Option and Restricted Stock Plan.

     The date of the 2004 annual meeting of shareholders was published in the 2003 Proxy Statement as May 5, 2004. The date has subsequently been changed from May 5, 2004, to May 28, 2004.

Item 6. Exhibits and Reports on Form 8-K

(a)

Any exhibits required to be filed by the Company are listed in the Index to Exhibits.

(b)

During the quarter ended June 30, 2003, the Company filed the following Current Reports on Form 8-K: (i) Current Report on Form 8-K bearing cover date of April 14, 2003, in which the Company reported under Item 9 and 12 that it had issued a press release announcing the rescheduling of the Company’s annual meeting to May 23, 2003; (ii) Current Report on Form 8-K bearing cover date of April 15, 2003, in which the Company reported under Item 7 and 9 that it had furnished Certifications pursuant to 18 United States Code section 1350, as enacted by section 906 of the Sarbanes-Oxley Act of 2002; (iii) Current Report on Form 8-K bearing cover date of April 24, 2003, in which the Company reported under Item 7 and 9 that it had furnished Certification pursuant to 18 United States Code section 1350, as enacted by section 906 of the Sarbanes-Oxley Act of 2002; and (iv) Current Report on Form 8-K bearing cover date of April 29, 2003, in which the Company reported under Item 9 and 12 that it had issued a press release announcing financial results for the quarter ended March 31, 2003.

Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PHELPS DODGE CORPORATION         (Corporation or Registrant)
Date: July 28, 2003	By:	/s/	Stanton K. Rideout
			Stanton K. Rideout
		Vice President and Controller (Principal Accounting Officer)

Certifications

I, J. Steven Whisler, Chairman, President and Chief Executive Officer, certify that:

l. I have reviewed this quarterly report on Form 10-Q of Phelps Dodge Corporation;

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2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

July 28, 2003

/s/ J. Steven Whisler

J. Steven Whisler
Chairman, President and Chief Executive Officer

I, Ramiro G. Peru, Senior Vice President and Chief Financial Officer, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Phelps Dodge Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those enti-

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	ties, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

July 28, 2003

/s/ Ramiro G. Peru

Ramiro G. Peru
Senior Vice President and Chief Financial Officer

Index to Exhibits

10.14	The Corporation’s 2003 Stock Option and Restricted Stock Plan (the 2003 Plan), and forms of: (i) Stock Option Agreement; (ii) Supplement A to Stock Option Agreement; (iii) Supplement B to Stock Option Agreement, (iv) Restricted Stock Letter Agreement; and (v) Restricted Stock Letter Agreement (cliff vesting), each effective May 23, 2003 (SEC File No. 1-82).
	Note: Omitted from the filing pursuant to the Instruction to Item 601 (b) (10) are any actual agreement between the Corporation and certain officers under the 2003 Plan, which contain subsequently similar provisions to Exhibit 10.14 above.
11	Computation of per share earnings.
12	Computation of ratios of total debt to total capitalization.
15	Letter from PricewaterhouseCoopers LLP with respect to unaudited interim financial information.
99.1	Certification of J. Steven Whisler, Chairman, President and Chief Executive Officer of the Company, pursuant to 18 United States Code section 1350, as enacted by section 906 of the Sarbanes-Oxley Act of 2002.
99.2	Certification of Ramiro G. Peru, Senior Vice President and Chief Financial Officer of the Company, pursuant to 18 United States Code section 1350, as enacted by section 906 of the Sarbanes-Oxley Act of 2002.

EX-10.14 3 p68063exv10w14.txt EXHIBIT 10.14 Exhibit 10.14 PHELPS DODGE 2003 STOCK OPTION AND RESTRICTED STOCK PLAN SECTION 1 PURPOSE The purpose of the Plan is to foster and promote the long-term financial success of the Corporation and materially increase shareholder value by (a) motivating superior performance by means of performance-related incentives, (b) encouraging and providing for the acquisition of an ownership interest in the Corporation by Employees, and (c) enabling the Corporation to attract and retain the services of an outstanding team upon whose judgment, interest and special effort the successful conduct of its operations is largely dependent. SECTION 2 DEFINITIONS 2.1 Definitions. Whenever used herein, the following terms shall have the respective meanings set forth below: (a) "Act" shall mean the Securities Exchange Act of 1934, as amended. (b) "Adjustment Event" shall mean any stock dividend, stock split or share combination of, or extraordinary cash dividend on, the Common Shares or recapitalization of the Corporation. (c) "Board" shall mean the Board of Directors of the Corporation. (d) "Common Shares" shall mean the Common Shares of the Corporation. (e) "Cause" shall mean (i) the willful failure by the Participant to perform substantially his duties as an Employee (other than due to physical or mental illness) after reasonable notice to the Participant of such failure, (ii) serious misconduct on the part of the Participant that is injurious to the Corporation or any Subsidiary in any way, including, without limitation, by way of damage to any of their respective reputations or standings in their respective industries, (iii) the conviction of, or entrance of a plea of nolo contendere by, the Participant with respect to a crime that constitutes a felony or (iv) the breach by the Participant of any written covenant or agreement with the Corporation or any 1 Subsidiary not to disclose any information pertaining to the Corporation or any Subsidiary or not to compete or interfere with the Corporation or any Subsidiary. (f) A "Change of Control" shall be deemed to have taken place at the time (i) when any "person" or "group" of persons (as such terms are used in Section 13 and 14 of the Act), other than the Corporation or any employee benefit plan sponsored by the Corporation, becomes the "beneficial owner" (as such term is used in Section 13 of the Act) of 25% or more of the total number of the Corporation's common shares at the time outstanding, or (ii) of the approval by the vote of the Corporation's stockholders holding at least 50% (or such greater percentage as may be required by the Certificate of Incorporation or By-Laws of the Corporation or by law) of the voting stock of the Corporation of any merger or consolidation with any other corporation (other than a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the entity surviving such merger or consolidation (the "Surviving Entity") or its direct or indirect parent (the "Survivor Parent")) at least 80% of the combined voting power of the securities of the Corporation or the Surviving Entity or Survivor Parent outstanding immediately after such merger or consolidation); sale of assets; liquidation; or reorganization in which the Corporation will not survive as a publicly owned corporation (the transactions described above being collectively referred to as the "Transaction"); provided that a Change of Control will occur in the circumstances described above only if the Transaction is ultimately consummated, or (iii) when the individuals who, at the beginning of any period of two years or less, constituted the Board cease, for any reason, to constitute at least a majority thereof, unless the election or nomination for election of each new director was approved by the vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. (h) "Committee" shall mean a Committee of the Board, which shall consist of two or more members. Each member of the Committee shall be a "Non-Employee Director" within the meaning of Rule 16b-3 as promulgated under the Act, or meet any other applicable standard for administrators under that or any similar rule which may be in effect from time to time. Each member of the Committee shall serve at the pleasure of the Board. (i) "Corporation" shall mean Phelps Dodge Corporation, a New York corporation, and any successor thereto. 2 (j) "Disability" shall mean the Participant is eligible to receive benefits under the Phelps Dodge Corporation Long-Term Disability Plan ("LTD Plan"), or any successor to the LTD Plan. If no long-term disability plan is currently sponsored by the Corporation, "Disability" shall be determined by referring to the terms and conditions of the long-term disability plan most recently sponsored by the Corporation. (k) "Employee" shall mean any executive or other key employee of the Corporation or any Subsidiary (as determined by the Committee in its sole discretion). (l) "Fair Market Value" shall mean the mean of the high and low prices of the Common Shares on the Consolidated Trading Tape on the date of determination or, if no sale of Common Shares is recorded on the Tape on such date, then on the next preceding day on which there was such a sale. (m) "Immediate Family Member" shall mean with respect to a Participant, the Participant's spouse, ancestors (including parents and grandparents), siblings (including half-brothers and sisters), and descendants (including children, grand children and great grandchildren), as well as any entity, such as a limited liability company, partnership or trust, in which all of the beneficial ownership interests are held directly or indirectly by the Participant or a natural person who is an Immediate Family Member. For purposes of this definition, individuals who have the legal relationship described herein through legal adoption and the children of the Participant's spouse or the spouse of one of the Participant's children or grandchildren shall be treated as Immediate Family Members. (n) "Option" shall mean the right to purchase Common Shares at a stated price for a specified period of time. For purposes of the Plan, an Option may be either (i) an "Incentive Stock Option" within the meaning of Section 422 of the Code or (ii) an Option which is not an Incentive Stock Option (a "Nonqualified Stock Option"). (o) "Participant" shall mean any Employee designated by the Committee to receive an option or share of Restricted Stock under the Plan. (p) "Plan" shall mean the 2003 Stock Option and Restricted Stock Plan, as set forth herein and as the same may be amended from time to time. (q) "Predecessor Plans" shall mean the Phelps Dodge 1993 Stock Option and Restricted Stock Plan and the Phelps Dodge 1998 Stock Option and Restricted Stock Plan. 3 (r) "Restricted Period" shall mean the period during which shares of Restricted Stock are subject to forfeiture and restrictions on transferability pursuant to Section 6.2 of the Plan. (s) "Restricted Stock" shall mean stock granted to a Participant pursuant to the Plan which is subject to forfeiture and restrictions on transferability in accordance with Section 6 of the Plan. (t) "Retirement" shall mean termination of a Participant's employment on or after the Participant's normal retirement date or early retirement under any pension or retirement plan of the Corporation or a Subsidiary. (u) "Subsidiary" shall mean any company in which the Corporation and/or another Subsidiary owns 50% or more of the total combined voting power of all classes of stock. 2.2 Gender and Number. Except when otherwise indicated by the context, words in the masculine gender used in the Plan shall include the feminine gender, the singular shall include the plural and the plural shall include the singular. SECTION 3 ADMINISTRATION 3.1 Power to Grant and Establish Terms of Awards. The Committee shall have authority, subject to the terms of the Plan, to determine the Employees eligible for Options and awards of Restricted Stock and those to whom Options or Restricted Stock shall be granted, the number of Common Shares to be covered by each Option or award of Restricted Stock, any conditions that may be imposed upon the grant of an Option, the time or times at which Options or Restricted Stock shall be granted, and the terms and provisions of the instruments by which Options or Restricted Stock shall be evidenced; to designate Options as Incentive Stock Options or Nonqualified Stock Options; to permit Participants to elect to defer the issuance of Common Shares otherwise deliverable upon the exercise of an Option on such terms and subject to such conditions as the Committee shall determine; and to determine the period of time during which restrictions on Restricted Stock shall remain in effect. The grant of any Option to any Employee or an award of Restricted Stock shall neither entitle such Employee to, nor disqualify him from, participation in any other grant of Options or award of Restricted Stock. Notwithstanding anything else contained in the preceding sentence to the contrary, in no event may the number of Common Shares subject to Options granted to any single Participant within any 12-month period exceed 350,000 Common Shares, as such number may be adjusted pursuant to Section 4.3. 4 3.2 Administration. Any Option grant or award of Restricted Stock made by the Committee may be subject to such conditions, not inconsistent with the terms of the Plan, as the Committee shall determine. The Committee, by majority action thereof, is authorized to prescribe, amend and rescind rules and regulations relating to the Plan, to provide for conditions deemed necessary or advisable to protect the interests of the Corporation, to interpret the Plan and to make all other determinations necessary or advisable for the administration and interpretation of the Plan to carry out its provisions and purposes. Determinations, interpretations or other actions made or taken by the Committee pursuant to the provisions of the Plan shall be final, binding and conclusive for all purposes and upon all persons. The Committee may consult with legal counsel, who may be counsel to the Corporation, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel. Without limiting the generality of the foregoing, the Committee may delegate to any officer of the Corporation or any committee comprised of officers of the Corporation the authority to take any and all actions permitted or required to be taken by the Committee hereunder; provided that such delegation shall not be permitted with respect to Options or other awards granted or to be granted to any officer of the Corporation and that, to the extent the Committee delegates authority to grant Options and other awards hereunder, such delegation shall specify the aggregate number of Common Shares that may be awarded pursuant to such delegation and may establish the maximum number of Common Shares that may be subject to any award made pursuant to such delegation and any other limitations thereon that the Committee may choose to impose. SECTION 4 STOCK SUBJECT TO PLAN 4.1 Number. The stock as to which Options and awards of Restricted Stock may be granted shall be Common Shares. When Options are exercised or Restricted Stock is awarded, the Corporation may either issue unissued Common Shares or transfer issued shares held in its treasury. Subject to adjustment as provided in Section 4.3 below, the total number of Common Shares (i) which may be sold to Employees under the Plan pursuant to Options and (ii) that may be transferred or issued as Restricted Stock pursuant to Section 6 shall not exceed the sum of (A) 3,500,000 Common Shares, and (B) the number of Common Shares remaining available for issuance under the Phelps Dodge 1998 Stock Option and Restricted Stock Plan on the Effective Date. Notwithstanding the foregoing, the total number of Common Shares that may be transferred or issued hereunder as awards of Restricted Stock pursuant to Section 6 shall not exceed 1,500,000 Common Shares, plus that number of the Common Shares referred to in subclause (B) of the immediately preceding sentence that, on the Effective Date, were available for awards of restricted stock under the Phelps Dodge 1998 Stock Option and Restricted Stock Plan. Any Option settled in cash shall reduce the number of 5 Common Shares under the Plan by the number of shares that would have been issued had the Option been exercised for Common Shares. 4.2 Canceled, Terminated or Forfeited Awards. If, after the Effective Date, an Option granted hereunder or an Option granted under a Predecessor Plan which is outstanding on the date hereof expires, or is terminated, canceled or otherwise surrendered by a Participant prior to its exercise, or if shares of Restricted Stock are returned to the Corporation pursuant to the terms of the Plan or if shares of Restricted Stock awarded under a Predecessor Plan which are still restricted on the date hereof are returned to the Corporation prior to the time at which a Participant's rights become nonforfeitable, the Common Shares covered by such Option immediately prior to such expiration or other termination or the Common Shares affected by such return of Restricted Stock shall be available for future grants under the Plan. 4.3 Adjustment in Capitalization. The number and price of Common Shares covered by each Option, the maximum number of Common Shares that be awarded as Options under Section 3.1 and the total number of Common Shares that may be sold, issued or transferred under the Plan shall be proportionately adjusted to reflect, as deemed equitable and appropriate by the Committee, an Adjustment Event. To the extent deemed equitable and appropriate by the Committee, subject to any required action by stockholders, in any merger, consolidation, reorganization, liquidation, dissolution, or other similar transaction, any Option granted under the Plan shall pertain to the securities and other property to which a holder of the number of Common Shares covered by the Option would have been entitled to receive in connection with such event. Any shares of stock (whether Common Shares, shares of stock into which Common Shares are converted or for which Common Shares are exchanged or shares of stock distributed with respect to Common Shares) or cash or other property received with respect to any award of Restricted Stock granted under the Plan as a result of any Adjustment Event, any distribution of property or any merger, consolidation, reorganization, liquidation, dissolution or other similar transaction shall, except as provided in Section 6.4 or as otherwise provided by the Committee at or after the date an award of Restricted Stock is made by the Committee, be subject to the same terms and conditions, including restrictions on transfer, as are applicable to such shares of Restricted Stock and any stock certificate(s) representing or evidencing any shares of stock so received shall be legended in substantially the same manner as provided in Section 6.5 hereof. 6 SECTION 5 STOCK OPTIONS 5.1 Grant of Options. The date of grant of an Option under the Plan will be the date on which the Option is awarded by the Committee or, if so determined by the Committee, the date on which occurs any event the occurrence of which is an express condition precedent to the grant of the Option. The aggregate Fair Market Value of the Common Shares with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year under the Plan and any other stock option plan of the Corporation or any Subsidiary shall not exceed $100,000 or such other amount as may be subsequently specified by the Internal Revenue Code of 1986, as amended. Options shall be evidenced by instruments in such form or forms as the Committee may from time to time approve. 5.2 Option Price. The Option price per share shall be at or above the Fair Market Value of the optioned shares on the day the Option is granted (as determined under Section 5.1). 5.3 Payment. Upon exercise, the Option price shall be paid (i) in cash, including an assignment of the right to receive cash proceeds of the sale of Common Shares subject to the Option; (ii) in the discretion of the Committee, in already owned Common Shares of the Corporation having a Fair Market Value on the date of exercise equal to such Option price or in a combination of cash and Common Shares or (iii) in accordance with such procedures or in such other form as the Committee shall from time to time determine. 5.4 Term and Exercise of Options. Each Incentive Stock Option shall expire not later than the tenth anniversary of the date of its grant, and each Nonqualified Stock Option shall expire not later than the day after the tenth anniversary of the date of its grant. Options shall become exercisable in three or four substantially equal annual installments commencing on the first anniversary of the date of grant, as the Committee in its discretion shall determine, or at such other times and upon the occurrence of such other events or conditions as the Committee may determine at or after the grant of such Option. Notwithstanding the foregoing, the Committee may include in any Option instrument, initially or by amendment at any time, a provision making any installment or installments exercisable at such earlier or later date, or upon the occurrence of such earlier or later event, as may be specified by such provision. Without limiting the generality of the foregoing, the Committee may approve, pursuant to the foregoing sentence, provisions making installments exercisable (i) upon a Participant's Retirement (provided that, in the event that the Participant is retiring prior to his normal retirement date and such retirement is not determined by the Committee to be adverse to the Corporation, such acceleration shall be conditioned upon the execution by the Participant 7 of a release in favor of the Corporation and its affiliates in a form acceptable to the Corporation), (ii) not later than the date the Participant ceases to be employed by the Corporation if he ceases to be so employed within two years following a Change of Control of the Corporation, and (iii) at such time and for such period as the Committee deems appropriate, in the event of a Change of Control. Except as may be provided in any provision approved by the Committee pursuant to this Section 5.4, after becoming exercisable each installment shall remain exercisable until expiration, termination or cancellation of the Option. An Option may be exercised from time to time, in whole or in part, up to the total number of Common Shares with respect to which it is then exercisable. 5.5 Termination of Employment. If the Participant ceases to be employed by the Corporation or a Subsidiary other than by reason of death, Disability, Retirement or the Participant's termination for Cause, all Options granted to him and exercisable on the date of his termination of employment shall terminate on the earlier of such Options' expiration or one month (or such greater period of time, not to exceed one year, determined by the Committee in its sole discretion) after the day his employment ends. If the Participant ceases to be employed on account of Disability or Retirement, all Options granted to him and exercisable on the date of his termination of employment due to Disability or his Retirement shall terminate on the earlier of such Options' expiration or the fifth anniversary of the day of such termination or Retirement. If the Participant's employment is terminated for Cause, all Options granted to such Participant which are then outstanding shall be forfeited. Except as otherwise determined by the Committee at or after grant of any Option, any installment which has not become exercisable prior to the time the Participant ceases to be employed by the Corporation or a Subsidiary other than by reason of death shall lapse and be thenceforth unexercisable. Whether authorized leave of absence or absence in military or governmental service may constitute employment for the purposes of the Plan shall be conclusively determined by the Committee. 5.6 Exercise upon Death of Participant. Each Participant having Nonqualified Stock Options may designate, on such forms as may be approved by the Corporation from time to time, a beneficiary or beneficiaries with respect to the Participant's Nonqualified Stock Options should the Participant die prior to the exercise of the Participant's Nonqualified Stock Options. To be effective, any beneficiary designation forms completed by a Participant must have been delivered to the Corporation. A Participant may change a beneficiary designation by executing and delivering to the Corporation a new beneficiary designation form. Upon receipt of such designation by the Corporation, such designation or change of designation shall be effective as of the date of the notice, regardless of whether the Participant is living at the time the notice is received by the Corporation . If the Participant dies while he is employed by the Corporation or a Subsidiary, his Options may be exercised, for the full number of Common Shares covered thereby for which such Options were not previously 8 exercised, by his estate, personal representative or beneficiary who acquires the Options by beneficiary designation, will or by the applicable laws of descent and distribution, at any time prior to the earlier of the Options' expiration or the fifth anniversary of the Participant's death. Such Options shall terminate upon the earlier of such Options' expiration or the fifth anniversary of such Participant's death. If the Participant dies while he is no longer employed by the Corporation, his Options may be exercised, for the number of Common Shares as to which he could have exercised them on the date of his death, by his estate, personal representative or beneficiary who acquires the Options by beneficiary designation, will or by the applicable laws of descent and distribution, at any time prior to the termination date provided by Section 5.5. SECTION 6 RESTRICTED STOCK 6.1 Grant of Restricted Stock. Any award made hereunder of Restricted Stock shall be subject to the terms and conditions of the Plan and to any other terms and conditions not inconsistent with the Plan (including, but not limited to, requiring the Employee to pay the Corporation an amount equal to the par value per share for each share of Restricted Stock awarded) as shall be prescribed by the Committee in its sole discretion. The Committee may require that, as a condition to any award of Restricted Stock under the Plan, the Employee shall have entered into an agreement with the Corporation setting forth the terms and conditions of such award and such other matters as the Committee, in its sole discretion, shall have determined. As determined by the Committee, the Corporation shall either (i) transfer or issue to each Participant to whom an award of Restricted Stock has been made the number of shares of Restricted Stock specified by the Committee or (ii) hold such shares of Restricted Stock for the benefit of the Participant for the Restricted Period. 6.2 Restrictions on Transferability. Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered by the Participant during the Restricted Period, except as hereinafter provided. 6.3 Rights as a Shareholder. Except for the restrictions set forth herein and unless otherwise determined by the Committee, the Participant shall have all the rights of a shareholder with respect to such shares of Restricted Stock, including, but not limited to, the right to vote and the right to receive dividends. 6.4 Lapse of Restricted Period. Unless the Committee shall otherwise determine at or after the date an award of Restricted Stock is made to the Participant by the Committee, the Restricted Period shall commence upon the date of grant and shall lapse with respect to the shares of Restricted Stock on the earlier of: (a) the third anniversary of the date of grant, in the case of an award of restricted stock that vests 9 based on the passage of time and the performance of continuous service as an employee, (b) the first anniversary of the date of grant, in the case of a restricted stock award that vests based on the achievement of specified performance criteria or (c) the date of a Change of Control, unless sooner terminated as otherwise provided herein. The determination of whether the Participant has achieved such performance goals shall be made by the Committee in its sole discretion. Notwithstanding the foregoing, if a Participant incurs a tax liability in respect of an award of Restricted Stock prior to the time the Restricted Period would otherwise lapse hereunder (other than by reason of the election by the Participant under the Code to be taxed as the time of grant), the Restricted Period shall lapse on the date such tax liability arises with respect to the number of whole Common Shares having a Fair Market Value at such time no greater than the amount required to satisfy all tax withholding requirements applicable thereto (as determined in accordance with Section 9.3 hereof). Unless the Committee determines otherwise, the Corporation shall withhold such released Common Shares to satisfy such withholding obligations. 6.5 Legend. Each certificate issued to a Participant in respect of shares of Restricted Stock awarded under the Plan shall be registered in the name of the Participant and shall bear the following (or similar) legend: "The shares of stock represented by this certificate are subject to the terms and conditions contained in the Phelps Dodge 2003 Stock Option and Restricted Stock Plan and may not be sold, pledged, transferred, assigned, hypothecated, or otherwise encumbered in any manner until". 6.6 Death, Disability or Retirement. Unless the Committee shall otherwise determine at the date of grant, if a Participant ceases to be employed by the Corporation or any Subsidiary by reason of death, Disability or Retirement, the Restricted Period covering all shares of Restricted Stock transferred or issued to such Participant under the Plan shall immediately lapse. 6.7 Termination of Employment. Unless the Committee shall otherwise determine at or after the date of grant, if a Participant ceases to be employed by the Corporation or any Subsidiary for any reason other than those specified in Section 6.6 at any time prior to the date when the Restricted Period lapses, all shares of Restricted Stock owned by such Participant shall revert back to the Corporation upon the Participant's termination of employment. Whether authorized leave of absence or absence in military or government service may constitute employment for the purposes of the Plan shall be conclusively determined by the Committee. 6.8 Issuance of New Certificates. Upon the lapse of the Restricted Period with respect to any shares of Restricted Stock, such shares shall no longer be 10 subject to the restrictions imposed under Section 6.2 and the Corporation shall issue or have issued new share certificates without the legend described in Section 6.5 in exchange for those previously issued. SECTION 7 TERMINATION AND AMENDMENT OF PLAN The Board may terminate or amend the Plan in any respect at any time, except that without the approval of the holders of a majority of Common Shares present and voting on the proposal at a meeting of shareholders, the total number of shares that may be sold, issued or transferred under the Plan may not be increased (except by adjustment pursuant to Section 4.3), the category of persons eligible to receive Options and shares of Restricted Stock may not be changed, the purchase price at which shares may be offered pursuant to Options may not be reduced (except by adjustment pursuant to Section 4.3) and the expiration date of the Plan may not be extended. No action of the Board or shareholders, however, may, without the consent of a Participant alter or impair his rights under any Option or award of Restricted Stock previously granted. SECTION 8 APPLICABILITY OF PLAN TO GRANTS UNDER PREDECESSOR PLANS The provisions of the Plan relating to Options and Restricted Stock grants shall apply to, and govern, existing Option and restricted stock grants made under the Predecessor Plans as if such awards were granted hereunder (except that no such awards shall count against the share limit set forth in Section 4.1) and such Options and restricted stock grants shall, where appropriate, be deemed to have been amended to provide any additional rights, subject in the case of Options and restricted stock grants outstanding as of the date of adoption of this Plan by the Board, to the right of an affected Participant to consent to the application of such amendments to such grants as provided in Section 7. SECTION 9 MISCELLANEOUS PROVISIONS 9.1 Nontransferability of Awards. Unless the Committee otherwise determines at or after grant to permit any award made hereunder to be transferable to the Immediate Family Members of a Participant, an award granted under the Plan may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than in accordance with a beneficiary designation effective on the death of the Participant, by will or by the applicable laws of descent and distribution. All rights with respect to 11 awards granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. 9.2 Securities Law Compliance. Instruments evidencing Options or awards of Restricted Stock may contain such provisions as the Committee deems appropriate in respect of any securities laws and such other provisions, not inconsistent with the Plan, as the Committee deems advisable. Common Shares received pursuant to the Plan shall be transferable only if the proposed transfer will be in compliance with applicable securities laws. 9.3 Tax Withholding. The Corporation shall have the power to withhold, or require a Participant to remit to the Corporation promptly upon notification of the amount due, an amount sufficient to satisfy federal, state and local withholding tax requirements on any award under the Plan, and the Corporation may defer payment of cash or issuance or delivery of Common Shares until such requirements are satisfied. Subject to any required withholding of Common Shares pursuant to Section 6.4, the Committee may, in its discretion, permit a Participant to elect, subject to such conditions as the Committee shall impose, (i) to have Common Shares otherwise issuable or deliverable under the Plan withheld by the Corporation or (ii) to deliver to the Corporation previously acquired shares of Stock, in each case, having a Fair Market Value sufficient to satisfy all or part of the minimum amount of the Participant's total federal, state and local tax withholding obligation associated with the transaction. 9.4 Term of Plan. This Plan shall be effective as of the date of approval by the holders of the Common Shares at the 2003 Annual Meeting of Shareholders. This Plan shall expire on March 31, 2013 (except as to Options and Restricted Stock outstanding on that date), unless sooner terminated pursuant to Section 7 of the Plan. 9.5 Governing Law. The Plan, and all Agreements hereunder, shall be construed in accordance with and governed by the laws of the State of New York. 12 STOCK OPTION AGREEMENT Phelps Dodge 2003 Stock Option and Restricted Stock Plan STOCK OPTION AGREEMENT, dated _____________ __, __, between PHELPS DODGE CORPORATION, a New York corporation (the "Corporation"), and _____________ (the "Employee"). The Compensation and Management Development Committee of the Board of Directors of the Corporation (such Committee, and any successor committee appointed by the Board of Directors of the Corporation to administer the Corporation's 2003 Stock Option and Restricted Stock Plan (the "Plan"), is hereinafter referred to as the "Committee") has granted to the Employee an option under the Plan to purchase Common Shares of the Corporation on the terms set forth below. To evidence the option so granted, and to set forth their terms and conditions as provided in the Plan, the Corporation and the Employee hereby agree as follows: 1. Confirmation Of Grant Of Option; Option Price. The Corporation hereby evidences and confirms its grant to the Employee of (i) an option (the "Option") to purchase ___ of the Corporation's Common Shares at an option price of $ ____ per share. The Option granted hereby shall be subject to the provisions of the Plan. Capitalized terms used herein that are not defined in this Agreement shall have the meanings assigned to such terms in the Plan. 2. Term For Exercise. (a) The Option shall become exercisable, subject to the provisions of this Section 2 and Sections 3 and 4 hereof, in installments of ______ Common Shares on the first anniversary of the date of grant of the Option, ______ Common Shares on the second anniversary and _____ Common Shares on the third anniversary. Unless an earlier expiration date is specified by this Agreement (or, if applicable, in Supplement A), the Option shall expire at 5:00 P.M., Arizona Mountain Standard Time (such time shall hereinafter be referred to as the "End of Business"), on the day after the tenth anniversary of the date on which the Option was granted (the "Termination Date"). (b) Without limiting the generality of the foregoing, in the event: (i) of the consummation, following the approval by the vote of the Corporation's stockholders holding at least 50% (or such greater percentage as may be required by the Certificate of Incorporation or By-Laws of the Corporation or by law) of the voting stock of the Corporation, of any merger or consolidation with any other corporation (other than a merger or consolidation which would result in the voting securities of the 1 Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the entity surviving such merger or consolidation (the "Surviving Entity") or its direct or indirect parent (the "Survivor Parent")), at least 80% of the combined voting power of the securities of the Corporation or the Surviving Entity or Survivor Parent outstanding immediately after such merger or consolidation); sale of assets; liquidation; or reorganization in which the Corporation will not survive as a publicly owned corporation (the transactions described above being collectively referred to as the "Transaction") (the consummation of any such Transaction hereinafter referred to as a "Merger Consummation"); or (ii) any of the Corporation's Common Shares are purchased pursuant to a tender or exchange offer other than an offer by the Corporation, any Subsidiary of the Corporation (as defined in the Plan and hereinafter referred to as a "Subsidiary"), or any employee benefit plan maintained by the Corporation or a Subsidiary (such purchase hereinafter referred to as a "Tender Purchase"); then the Option shall become exercisable during the period beginning on the date of the Merger Consummation or Tender Purchase, as the case may be, and ending on the thirtieth day following such date (but in no event shall the Option become exercisable under this paragraph earlier than six months from the date on which the Option was granted (the "Grant Date")). If any portion of the Option shall be exercised, the Option shall thereafter remain exercisable, according to its terms, only with respect to the number of Common Shares as to which the Option would otherwise be exercisable less the number of Common Shares with respect to which the Option has previously been exercised. 3. Who May Exercise. During the Employee's lifetime the Option may be exercised only by him. Each Participant having Nonqualified Stock Options may designate, on such forms as may be approved by the Corporation from time to time, a beneficiary or beneficiaries with respect to the Participant's Nonqualified Stock Options should the Participant die prior to the exercise of the Participant's Nonqualified Stock Options. To be effective, any beneficiary designation forms completed by a Participant must have been delivered to the Corporation. A Participant may change a beneficiary designation by executing and delivering to the Corporation a new beneficiary designation form. Upon receipt of such designation by the Corporation, such designation or change of designation shall be effective as of the date of the notice, regardless of whether the Participant is living at the time the notice is received by the Corporation. If the Employee dies while in the employ of the Corporation or one of its Subsidiaries, the Option may be exercised for the full number of Common Shares specified in Section 1 hereof less the number of Common Shares with respect to which the Option has previously been exercised, by the Employee's estate, personal representative or 2 beneficiary who acquired the right to exercise the Option by will or by the laws of descent and distribution, at any time prior to the End of Business on the earlier of the Termination Date or the fifth anniversary of the Employee's death. If the Employee dies while he is no longer employed by the Corporation or a Subsidiary, his Options may be exercised for the full number of Common Shares as to which he could have exercised them on the date of his death, by his estate, personal representative or beneficiary who acquired the right to exercise the Option by will or by the laws of descent and distribution, at any time prior to the termination date provided by Section 4 hereof. Following the End of Business on the earlier of the Termination Date, the fifth anniversary of the Employee's death or the termination date provided by Section 4, as the case may be, the Option shall expire. 4. Exercise After Termination of Employment. If the Employee shall cease to be employed by the Corporation or a Subsidiary other than by reason of death, Disability (as defined in the Plan), Retirement (as defined in the Plan) or the Employee's termination for Cause (as defined in the Plan), the Option shall remain exercisable, to the extent exercisable on the date of such termination, until the End of Business on the earlier of the Termination Date or the date which is one month after the day his employment ends. If the Employee's employment shall terminate due to Disability or Retirement, the Option shall remain exercisable, to the extent exercisable on the date of the Employee's termination of employment, until the End of Business on the earlier of the Termination Date or the fifth anniversary of the date of such termination of employment; provided, however, that, in the event the Employee's employment with the Corporation terminates not earlier than six months from the Grant Date as a result of the Employee's Disability or Retirement, unless the Employee retires prior to his Normal Retirement Date, as defined under the Phelps Dodge Retirement Plan (or any successor plan thereof) under conditions determined by the Committee to be adverse to the Corporation or the Employee does not sign a release of claims satisfactory to the Corporation, the Option shall become exercisable immediately prior to the End of Business on the date the Employee's employment terminates for the purchase of the full number of Common Shares specified in Section 1 of the Agreement less the number of Common Shares with respect to which the Option has previously been exercised. If the Employee's employment is terminated for Cause, all Options granted to the Employee which are then outstanding shall be forfeited as of the effective time of such termination but in no event later than the End of Business on such termination date. Any portion of the Option which is not exercisable on the date the Employee's employment terminates for any reason other than death, Disability, or Retirement shall expire at the End of Business on such termination date. Any portion of the Option which did not expire on the date the Employee's employment terminates and which is not exercised within the period established under this Section 4 shall expire following the End of Business on the last day on which the Option could have been exercised. 3 5. Restrictions on Exercise. The Option may be exercised only with respect to full Common Shares. No fractional shares shall be issued. The Option may not be exercised in whole or part: (a) if any requisite approval or consent of any governmental authority of any kind having jurisdiction over the exercise of options shall not have been secured or if, as determined by the Committee, a violation of any applicable securities laws may result; or (b) unless the Common Shares subject to the Option shall be effectively listed on the New York Stock Exchange and registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which listing and registration may be upon official notice of issuance of such Common Shares. The Corporation may require that, as a condition to any exercise of the Option, the Employee represent to the Corporation in writing that he is acquiring the Common Shares subject to such exercise for his own account for investment only and not with a view to the distribution thereof. 6. Manner of Exercise. To the extent the Option shall be exercisable in accordance with the terms hereof, and subject to the applicable law and regulations and such administrative regulations as the Committee may have adopted, the Option may be exercised in whole or from time to time in part by written notice to the Committee, (i) identifying the Option by Grant Date, the option price and whether or not the Agreement includes Supplement A, (ii) specifying the number of Common Shares with respect to which the Option is being exercised, and (iii) accompanied by full payment of the option price for such Common Shares (1) in United States dollars by personal check or cash, including an assignment of the right to receive cash proceeds of the sale of Common Shares subject to the Option, (2) in Common Shares of the Corporation owned by the Employee for at least three months prior to the day of exercise, represented by certificates duly endorsed to the Corporation or its nominee with any requisite transfer tax stamps attached, the market value of which shall be equal to the option price for the Common Shares with respect to which the Option is being exercised, or (3) in a combination of (1) and (2) above. The market value of any Common Shares delivered pursuant to the immediately preceding sentence shall be the mean of the high and low prices of such Common Shares on the Consolidated Trading Tape on the day of exercise or, if there was no such sale on such day, on the day next preceding the day of exercise on which there was a sale. For valuation purposes, the day of exercise of the Option shall be deemed to be the day on which notice, addressed to the Committee, either to exercise the Option in whole or in part by the payment of Common Shares (together with duly endorsed certificates as provided above and any other required payment) is received at the Corporation's principal office, except that if such notice (together with certificates and 4 other payment if required) is received on a Saturday or Sunday or on a holiday observed by the Corporation's principal office, or after the End of Business on any other day, the day of exercise shall be deemed to be the next business day. "Written notice" shall include, without limitation, notice by telegram, telex, cable or telecopy facsimile. In the event that the Option shall be exercised by a person other than the Employee in accordance with the provisions of Section 3 hereof, such person shall furnish the Corporation with evidence satisfactory to it of his or her right to exercise the same and of payment or provision for payment of any estate, transfer, inheritance or death taxes payable with respect to the Option or with respect to any related Common Shares or payment. The Corporation may require the Employee or other person exercising the Option to furnish or execute such documents as the Corporation shall deem necessary to evidence such exercise, to determine whether registration is then required under the Securities Act of 1933, as amended, or to comply with or satisfy the requirements of the Exchange Act, or any other law. 7. Nonassignability. Unless the Committee shall otherwise so specify by a supplement to this Agreement approved in connection with the award hereof or at any subsequent time, the Option shall not be assignable or transferable except by beneficiary designation, will or by the applicable laws of descent and distribution to the extent contemplated by Section 3 hereof. At the request of the Employee, Common Shares purchased on exercise of the Option may be issued or transferred in the name of the Employee and another person jointly with the right of survivorship, or in the name of a trust or other legal entity established to hold property for the benefit of the Employee or members of his immediate family. 8. Rights As Stockholder. The Employee shall have no rights as a stockholder with respect to any Common Shares covered by the Option until the issuance of a certificate or certificates to him for such Common Shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of such certificate or certificates. 9. Capital Adjustments. The number and price of the Common Shares covered by the Option shall be proportionately adjusted to reflect, as deemed equitable and appropriate by the Committee, any stock dividend, stock split or share combination of, or extraordinary cash dividend on, the Corporation's Common Shares or any recapitalization of the Corporation. To the extent deemed equitable and appropriate by the Committee, subject to any required action by the stockholders of the Corporation, in any merger, consolidation, reorganization, liquidation, dissolution, or other similar transaction, the Option shall pertain to the securities and other property, if any, which a holder of the number of Common Shares covered by the Option would have been entitled to receive in connection with such event. 5 10. Withholding. (a) The Corporation's obligation to deliver Common Shares upon the exercise of the Option shall be subject to payment by the Employee of any amount required to be withheld with respect to such exercise pursuant to any applicable federal, state or local tax withholding requirements. (b) Unless this Agreement includes Supplement A (making it an incentive stock option), the Employee may elect to satisfy all or any part of his federal, state and local tax obligations (including, without limitation, FICA) with respect to such exercise by having the Corporation withhold from any Common Shares otherwise deliverable to him in connection with the exercise of the Option a number of Common Shares, or by delivering Common Shares already owned by the Employee, having a market value equal in amount to the obligations to be so satisfied. The market value of Common Shares withheld or delivered shall be the mean of the high and low prices of such Common Shares on the Consolidated Trading Tape on the day of exercise or, if there was no such sale on such day, on the next preceding day on which there was a sale. 11. Governing Law. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of New York. 12. Supplements. Attached hereto are the following supplements: Supplement A - Incentive Stock Options Supplement B - Change of Control Any such supplements so attached are incorporated herein and constitute a part of this Agreement as though set forth in full herein. Additional supplements may be added to this Agreement at a later date by the Committee; provided, however, that if any such additional supplement adversely affects the rights of the Employee under this Agreement, such supplement shall not be or become effective unless and until the Employee consents to its addition in writing. All capitalized terms used in such supplements without definition shall have the meaning determined under this Agreement. 13. Predecessor Plans. The Employee hereby acknowledges and agrees that all of the Employee's outstanding options that were granted pursuant to the Predecessor Plans (as defined in the Plan) shall hereafter become subject to the terms of this Agreement. 6 IN WITNESS WHEREOF, the Corporation and the Employee have duly executed this Agreement as of the date set forth above. PHELPS DODGE CORPORATION By ------------------------- Senior Vice President ------------------------- Employee 7 Supplement A [Incentive Stock Option - 2003 Stock Option Plan] Supplement A to the Stock Option Agreement (the "Agreement") dated between Phelps Dodge Corporation (the "Corporation") and (the "Employee"). 1. Term of the Option. Each incentive stock option shall expire on the tenth anniversary of the date of its grant. 2. Disposition of Shares. If the Employee disposes of any Common Shares received upon exercise of the Option within two years after the Option was granted to him or within one year after the Common Shares were transferred to him upon exercise of the Option, whether by sale, gift, or otherwise, the Employee shall notify the Secretary of the Corporation of the number of such Common Shares disposed of, the date on which disposed of, the manner of disposition and the amount, if any, realized upon such disposition, and shall promptly pay to the Corporation the amount, if any, that the Corporation specifies in a written notice to the Employee as required to be withheld with respect to such exercise and disposition pursuant to any applicable federal, state or local tax withholding requirements. 3. Interpretation of Agreement. The Option is intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. Supplement B [Change of Control - 2003 Stock Option Plan] Supplement B to the Stock Option Agreement (the "Agreement") dated _______, between Phelps Dodge Corporation (the "Corporation") and ______________________, (the "Employee"). 1. Additional Trigger Event for Exercisability. In addition to the provisions of Section 2 of the Agreement, in the event the Employee's employment with the Corporation or any Subsidiary terminates by reason of a Qualifying Termination (as defined below) not earlier than six months from the date on which the Option was granted and within two years after a Change of Control (as defined below) of the Corporation, the Option shall become exercisable, no later than the date of such termination, for the purchase of the full number of Common Shares specified in Section 1 of the Agreement. For the purpose of this Supplement B: A "Change of Control" shall have the meaning set forth in the Plan. A "Qualifying Termination" means a termination of the Employee's employment with the Corporation or any Subsidiary of the Corporation (under circumstances where the Employee is no longer employed by the Corporation or any such Subsidiary) (i) by the Employee for Good Reason, or (ii) by the Corporation or a Subsidiary without Cause as specifically defined below in this Supplement B, and (iii) prior to the Employee's death or Disability as specifically defined below in this Supplement B. a. Cause. For purposes of the definition of Qualifying Termination, "Cause" shall mean willful misconduct in the performance of the Employee's duties which results in a material detriment to the Corporation, and its subsidiaries, taken as a whole. b. Disability. For purposes of the definition of Qualifying Termination, "Disability" shall have the meaning given to that term in the Phelps Dodge Corporation Long-Term Disability Insurance Plan. c. Good Reason. For purposes of the definition of Qualifying Termination, "Good Reason" means a termination of employment with the Corporation and its Subsidiaries by the Employee under any of the following circumstances: (i) such termination occurs more than 180 days following the time when a Change of Control takes place and such Change of Control has not been approved by a resolution adopted by the Board of Directors of the Corporation as constituted immediately prior to such Change of Control; or 1 (ii) the Employee terminates his or her employment on account of one or more of the following events (and the Employee has not agreed to such event in writing): (A) the assignment to the Employee of any duties inconsistent, in a way materially adverse to the Employee, with his or her positions, duties, responsibilities and status with the Corporation and its Subsidiaries immediately prior to a Change of Control, or a material reduction in the duties and responsibilities held by the Employee immediately prior to such Change of Control; a change in the Employee's reporting responsibilities, titles or offices as in effect immediately prior to such Change of Control; or any removal of the Employee from or any failure to re-elect the Employee to any position with the Corporation or any Subsidiary that the Employee held immediately prior to such Change of Control except in connection with the Employee's promotion or the termination of his or her employment; or (B) a reduction by the Corporation or any Subsidiary in the Employee's base salary as in effect immediately prior to such Change of Control; the failure by the Corporation or any such Subsidiary to continue in effect any employee benefit plan or compensation plan (including any incentive compensation or bonus programs) in which the Employee is participating immediately prior to such Change of Control unless the Employee is permitted to participate in other plans providing him or her with substantially comparable benefits; or the taking of any action by the Corporation or any such Subsidiary, which would adversely affect the Employee's participation in or materially reduce his benefits under any such employee benefit or compensation plan; or (C) the Corporation's or any Subsidiary's requiring the Employee to be based anywhere other than a location within 50 miles of his or her location immediately prior to such Change of Control; or the Corporation's or any Subsidiary's requiring the Employee to travel on the Corporation's or any Subsidiary's business to an extent substantially more burdensome than his or her travel obligations immediately prior to such Change of Control. 2 [PHELPS DODGE CORPORATION LETTERHEAD] _____ __, 2003 Phelps Dodge Corporation Award of Restricted Stock Dear : Phelps Dodge Corporation (the "Company") is pleased to confirm to you that at a meeting held on _____ __, 2003 ("Grant Date"), the Compensation and Management Development Committee of the Board of Directors of Phelps Dodge Corporation (the "Committee") awarded you __________ shares of Restricted Stock of the Company pursuant to the 2003 Stock Option and Restricted Stock Plan (the "Plan"). This letter will confirm the following agreement between you and the Company pursuant to the Plan. Capitalized terms used herein that are not defined in the Award of Restricted Stock letter shall have the meanings assigned to such terms in the Plan. This award of Restricted Stock is subject to the terms and conditions of the Plan, as supplemented by this letter. 1. Restriction on Transfer. Except as provided in paragraphs 3 and 4 below, the shares of Restricted Stock awarded to you hereunder may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered until __________ (the "Restricted Period"). Notwithstanding the foregoing, if the Restricted Period for any shares of Restricted Stock would lapse during any "blackout period" as defined in Section 306(a)(4) of the Sarbanes-Oxley Act of 2002, then, unless otherwise determined by the Committee, the Restricted Period for such shares shall not lapse until the first day following the expiration of such blackout period. 2. Forfeiture of Restricted Stock. Except as provided in paragraph 3 below, if your employment with the Company and its Subsidiaries terminates prior to the end of any applicable Restricted Period for any reason including, without limitation, any termination by you or by the Company in its absolute discretion, your shares of Restricted Stock, for which the applicable Restricted Period has not lapsed, shall revert back to the Company without any payment to you and you shall cease to have any rights with respect to such shares of Restricted Stock. In the case of such reversion, such shares shall be retransferred to the Company by means of the stock power referred to in paragraph 5 below. 3. Death, Disability or Retirement. If your employment with the Company and its Subsidiaries terminates by reason of your death, your Disability or your Retirement (except for a termination occurring within six months of the Grant Date on account of your Disability or Retirement), any Restricted Period still in effect shall lapse upon your termination of employment. 4. Change of Control. Any Restricted Period still in effect shall lapse in the event that, on or after the date six months after the Grant Date, a Change of Control occurs. 5. Rights as a Shareholder. Subject to the provisions of paragraph 7 below, you shall have all the rights of a holder of Common Shares with respect to your Restricted Stock, including the right to vote the shares and to receive dividends. Notwithstanding the foregoing, your Restricted Stock shall be held by the Company prior to the lapse of the applicable Restricted Period and you shall deliver to the Company a stock power executed in blank in such form as the Company shall determine. 6. Administration. The Plan is administered by the Committee and any interpretation or construction of the Plan or this letter by the Committee, and any determination made by the Committee pursuant to the Plan or this letter, shall be conclusive and binding on the Company, you and any other interested party. 7. Conversion and Property Distributions. In the event your Restricted Stock is exchanged for or converted into securities other than Common Shares or in the event that any distribution is made with respect to such Restricted Stock either in Common Shares or in other property or by way of an extraordinary cash dividend, the securities or other property or cash that you receive shall be subject to the same restrictions as apply to your Restricted Stock, including those provided by the last sentence of paragraph 5 above. 8. Withholding. You shall be required to pay, as a condition of receiving a share certificate without legend, any applicable federal, state or local tax withholding requirements, which, if the Committee shall permit, may be satisfied by the withholding of shares of Restricted Stock with respect to which the Restricted Period has lapsed, subject to such terms and conditions as the Committee shall impose. 9. Governing Law. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of New York. Please sign one of the two copies of this letter where indicated below and the attached Stock Power and return them to Linda Lewis, Manager, Executive Compensation (Phelps Dodge Corporation, One North Central Avenue, Phoenix, AZ 2 85004) at your earliest convenience. Please retain the other copy of this letter for your records. PHELPS DODGE CORPORATION By: ------------------------ Senior Vice President ACCEPTED AND AGREED TO: - ---------------------------- Date: - ---------------------------- 3 [PHELPS DODGE CORPORATION LETTERHEAD] _____ __, 2003 Phelps Dodge Corporation Award of Restricted Stock Dear : Phelps Dodge Corporation (the "Company") is pleased to confirm to you that at a meeting held on _____ __, 2003 ("Grant Date"), the Compensation and Management Development Committee of the Board of Directors of Phelps Dodge Corporation (the "Committee") awarded you __________ shares of Restricted Stock of the Company pursuant to the 2003 Stock Option and Restricted Stock Plan (the "Plan"). This letter will confirm the following agreement between you and the Company pursuant to the Plan. Capitalized terms used herein that are not defined in the Award of Restricted Stock letter shall have the meanings assigned to such terms in the Plan. This award of Restricted Stock is subject to the terms and conditions of the Plan, as supplemented by this letter. 1. Restriction on Transfer. Except as provided in paragraphs 3 and 4 below, the shares of Restricted Stock awarded to you hereunder may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered until the lapse of the applicable Restricted Period for these shares as set forth in subparagraphs 1. a., 1. b., and 1. c. below. a. The Restricted Period for 25% of the shares of Restricted Stock issued pursuant to this award shall lapse on the third anniversary date of the Grant Date. b. The Restricted Period for an additional 25% of the shares of Restricted Stock issued pursuant to this award shall lapse on the fourth anniversary date of the Grant Date. c. The Restricted Period for the remaining 50% of the shares of Restricted Stock issued pursuant to this award shall lapse on the fifth anniversary date of the Grant Date. Notwithstanding the foregoing, if the Restricted Period for any shares of Restricted Stock would lapse during any "blackout period" as defined in Section 306(a)(4) of the Sarbanes-Oxley Act of 2002, then, unless otherwise determined by the Committee, the Restricted Period for such shares shall not lapse until the first day following the expiration of such blackout period. 2. Forfeiture of Restricted Stock. Except as provided in paragraph 3 below, if your employment with the Company and its Subsidiaries terminates prior to the end of any applicable Restricted Period for any reason including, without limitation, any termination by you or by the Company in its absolute discretion, your shares of Restricted Stock, for which the applicable Restricted Period has not lapsed, shall revert back to the Company without any payment to you and you shall cease to have any rights with respect to such shares of Restricted Stock. In the case of such reversion, such shares shall be retransferred to the Company by means of the stock power referred to in paragraph 5 below. 3. Death, Disability or Retirement. If your employment with the Company and its Subsidiaries terminates by reason of your death, your Disability or your Retirement (except for a termination occurring within six months of the Grant Date on account of your Disability or Retirement), any Restricted Period still in effect shall lapse upon your termination of employment. 4. Change of Control. Any Restricted Period still in effect shall lapse in the event that, on or after the date six months after the Grant Date, a Change of Control occurs. 5. Rights as a Shareholder. Subject to the provisions of paragraph 7 below, you shall have all the rights of a holder of Common Shares with respect to your Restricted Stock, including the right to vote the shares and to receive dividends. Notwithstanding the foregoing, your Restricted Stock shall be held by the Company prior to the lapse of the applicable Restricted Period and you shall deliver to the Company a stock power executed in blank in such form as the Company shall determine. 6. Administration. The Plan is administered by the Committee and any interpretation or construction of the Plan or this letter by the Committee, and any determination made by the Committee pursuant to the Plan or this letter, shall be conclusive and binding on the Company, you and any other interested party. 7. Conversion and Property Distributions. In the event your Restricted Stock is exchanged for or converted into securities other than Common Shares or in the event that any distribution is made with respect to such Restricted Stock either in Common Shares or in other property or by way of an extraordinary cash dividend, the securities or other property or cash that you receive shall be subject to the same restrictions as apply to your Restricted Stock, including those provided by the last sentence of paragraph 5 above. 2 8. Withholding. You shall be required to pay, as a condition of receiving a share certificate without legend, any applicable federal, state or local tax withholding requirements, which, if the Committee shall permit, may be satisfied by the withholding of shares of Restricted Stock with respect to which the Restricted Period has lapsed, subject to such terms and conditions as the Committee shall impose. 9. Governing Law. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of New York. Please sign one of the two copies of this letter where indicated below and the attached Stock Power and return them to Linda Lewis, Manager, Executive Compensation (Phelps Dodge Corporation, One North Central Avenue, Phoenix, AZ 85004) at your earliest convenience. Please retain the other copy of this letter for your records. PHELPS DODGE CORPORATION By: ------------------------ Senior Vice President ACCEPTED AND AGREED TO: - -------------------------------- Date: - -------------------------------- 3 EX-11 4 p68063exv11.htm EXHIBIT 11

PHELPS DODGE CORPORATION AND SUBSIDIARIES

Exhibit 11

COMPUTATION OF PER SHARE EARNINGS
(Unaudited; dollars in millions except per share data)

									Six Months Ended
			Second Quarter						June 30,
			2003			2002			2003			2002
						(As Restated)*						(As Restated)*
Loss before cumulative effect of accounting change			$	(15.2	)		(34.3	)		(38.6	)		(36.2	)
Cumulative effect of accounting change (1)				—			—			8.4			(22.9	)
Net loss			$	(15.2	)		(34.3	)		(30.2	)		(59.1	)
Preferred stock dividends				(3.4	)		(2.4	)		(6.8	)		(2.4	)
Loss applicable to common shares			$	(18.6	)		(36.7	)		(37.0	)		(61.5	)
Basic:
	Average number of common shares outstanding			88.6			80.6			88.6			79.6
Diluted:
	Average number of common shares outstanding			88.6			80.6			88.6			79.6
	Common stock equivalents — stock options			—			0.1			—			0.1
	Common stock equivalents — restricted stock			0.5			0.2			0.5			0.2
	Conversion of mandatory convertible preferred stock			5.0			1.1			5.0			0.5
	Diluted average number of common shares outstanding			94.1			82.0			94.1			80.4
Basic loss per share:
	Loss before cumulative effect of accounting change		$	(0.21	)		(0.46	)		(0.51	)		(0.48	)
		Cumulative effect of accounting change(1)		—			—			0.09			(0.29	)
	Basic loss per share		$	(0.21	)		(0.46	)		(0.42	)		(0.77	)
Diluted loss per share:
	Loss before cumulative effect of accounting change		$	(0.21	)		(0.46	)		(0.51	)		(0.48	)
		Cumulative effect of accounting change(1)		—			—			0.09			(0.29	)
	Diluted loss per share (2)		$	(0.21	)		(0.46	)		(0.42	)		(0.77	)

*	Refer to Note 2, Restatements, to the Consolidated Financial Information of this Form 10-Q.
(1)	The six months ended June 30, 2003, included adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations,” and the six months ended June 30, 2002, included adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.”
(2)	Diluted loss per share was anti-dilutive for the 2003 and 2002 second quarters and for the six months ended June 30, 2002. Therefore, diluted loss per share for these periods is based on average number of shares outstanding.

EX-12 5 p68063exv12.htm EXHIBIT 12

PHELPS DODGE CORPORATION AND SUBSIDIARIES

Exhibit 12

COMPUTATION OF TOTAL DEBT TO TOTAL CAPITALIZATION
($ in millions)

	June 30,			December 31,
	2003			2002
Short-term debt	$	61.5			35.2
Current portion of long-term debt		134.7			127.0
Long-term debt		1,864.9			1,948.4
Total debt		2,061.1			2,110.6
Minority interests in consolidated subsidiaries		71.8			65.3
Shareholders’ equity		2,819.0			2,813.6
Total capitalization	$	4,951.9			4,989.5
Ratio of total debt to total capitalization		41.6	%		42.3	%

EX-15 6 p68063exv15.txt EXHIBIT 15 EXHIBIT 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated July 25, 2003 on our review of interim financial information of Phelps Dodge Corporation (the "Company") as of and for the period ended June 30, 2003 and included in the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in its Registration Statements on Form S-3 (Nos. 333-104627, 333-67606, 333-61624 and 333-43890), its Registration Statement and Post-Effective Amendment No. 1 on Form S-3 (Nos. 33-44380 and 333-36415), its Registration Statements on Form S-8 (Nos. 33-26442, 33-6141, 33-26443, 33-29144, 33-19012, 2-67317, 33-34363, 33-34362, 33-62648, 333-42231, and 333-52175) and its Post-Effective Amendment No. 4 on Form S-8 to the Registration Statement on Form S-4 (No. 333-86061). /s/ PricewaterhouseCoopers LLP Phoenix, Arizona July 28, 2003 EX-99.1 7 p68063exv99w1.htm EXHIBIT 99.1

Exhibit 99.1

CERTIFICATION
Pursuant to 18 United States Code § 1350

     The undersigned hereby certifies that, to his knowledge, the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003 of Phelps Dodge Corporation (the “Company”) filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ J. Steven Whisler
Name:	J. Steven Whisler
Title:	Chairman, President and Chief Executive Officer
Date:	July 28, 2003

EX-99.2 8 p68063exv99w2.htm EXHIBIT 99.2

Exhibit 99.2

CERTIFICATION
Pursuant to 18 United States Code § 1350

     The undersigned hereby certifies that, to his knowledge, the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003 of Phelps Dodge Corporation (the “Company”) filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ Ramiro G. Peru
Name:	Ramiro G. Peru
Title:	Senior Vice President and Chief Financial Officer
Date:	July 28, 2003

-----END PRIVACY-ENHANCED MESSAGE-----

EX-10.14

                                                                   Exhibit 10.14

                         PHELPS DODGE 2003 STOCK OPTION
                            AND RESTRICTED STOCK PLAN

                                   SECTION 1

                                     PURPOSE

         The purpose of the Plan is to foster and promote the long-term
financial success of the Corporation and materially increase shareholder value
by (a) motivating superior performance by means of performance-related
incentives, (b) encouraging and providing for the acquisition of an ownership
interest in the Corporation by Employees, and (c) enabling the Corporation to
attract and retain the services of an outstanding team upon whose judgment,
interest and special effort the successful conduct of its operations is largely
dependent.

                                   SECTION 2

                                   DEFINITIONS

                  2.1 Definitions. Whenever used herein, the following terms
shall have the respective meanings set forth below:

                  (a) "Act" shall mean the Securities Exchange Act of 1934, as
         amended.

                  (b) "Adjustment Event" shall mean any stock dividend, stock
         split or share combination of, or extraordinary cash dividend on, the
         Common Shares or recapitalization of the Corporation.

                  (c) "Board" shall mean the Board of Directors of the
         Corporation.

                  (d) "Common Shares" shall mean the Common Shares of the
         Corporation.

                  (e) "Cause" shall mean (i) the willful failure by the
         Participant to perform substantially his duties as an Employee (other
         than due to physical or mental illness) after reasonable notice to the
         Participant of such failure, (ii) serious misconduct on the part of the
         Participant that is injurious to the Corporation or any Subsidiary in
         any way, including, without limitation, by way of damage to any of
         their respective reputations or standings in their respective
         industries, (iii) the conviction of, or entrance of a plea of nolo
         contendere by, the Participant with respect to a crime that constitutes
         a felony or (iv) the breach by the Participant of any written covenant
         or agreement with the Corporation or any

                                       1

         Subsidiary not to disclose any information pertaining to the
         Corporation or any Subsidiary or not to compete or interfere with the
         Corporation or any Subsidiary.

                  (f) A "Change of Control" shall be deemed to have taken place
         at the time (i) when any "person" or "group" of persons (as such terms
         are used in Section 13 and 14 of the Act), other than the Corporation
         or any employee benefit plan sponsored by the Corporation, becomes the
         "beneficial owner" (as such term is used in Section 13 of the Act) of
         25% or more of the total number of the Corporation's common shares at
         the time outstanding, or (ii) of the approval by the vote of the
         Corporation's stockholders holding at least 50% (or such greater
         percentage as may be required by the Certificate of Incorporation or
         By-Laws of the Corporation or by law) of the voting stock of the
         Corporation of any merger or consolidation with any other corporation
         (other than a merger or consolidation which would result in the voting
         securities of the Corporation outstanding immediately prior thereto
         continuing to represent (either by remaining outstanding or by being
         converted into voting securities of the entity surviving such merger or
         consolidation (the "Surviving Entity") or its direct or indirect parent
         (the "Survivor Parent")) at least 80% of the combined voting power of
         the securities of the Corporation or the Surviving Entity or Survivor
         Parent outstanding immediately after such merger or consolidation);
         sale of assets; liquidation; or reorganization in which the Corporation
         will not survive as a publicly owned corporation (the transactions
         described above being collectively referred to as the "Transaction");
         provided that a Change of Control will occur in the circumstances
         described above only if the Transaction is ultimately consummated, or
         (iii) when the individuals who, at the beginning of any period of two
         years or less, constituted the Board cease, for any reason, to
         constitute at least a majority thereof, unless the election or
         nomination for election of each new director was approved by the vote
         of at least two-thirds of the directors then still in office who were
         directors at the beginning of such period.

                  (g) "Code" shall mean the Internal Revenue Code of 1986, as
         amended.

                  (h) "Committee" shall mean a Committee of the Board, which
         shall consist of two or more members. Each member of the Committee
         shall be a "Non-Employee Director" within the meaning of Rule 16b-3 as
         promulgated under the Act, or meet any other applicable standard for
         administrators under that or any similar rule which may be in effect
         from time to time. Each member of the Committee shall serve at the
         pleasure of the Board.

                  (i) "Corporation" shall mean Phelps Dodge Corporation, a New
         York corporation, and any successor thereto.

                                       2

                  (j) "Disability" shall mean the Participant is eligible to
         receive benefits under the Phelps Dodge Corporation Long-Term
         Disability Plan ("LTD Plan"), or any successor to the LTD Plan. If no
         long-term disability plan is currently sponsored by the Corporation,
         "Disability" shall be determined by referring to the terms and
         conditions of the long-term disability plan most recently sponsored by
         the Corporation.

                  (k) "Employee" shall mean any executive or other key employee
         of the Corporation or any Subsidiary (as determined by the Committee in
         its sole discretion).

                  (l) "Fair Market Value" shall mean the mean of the high and
         low prices of the Common Shares on the Consolidated Trading Tape on the
         date of determination or, if no sale of Common Shares is recorded on
         the Tape on such date, then on the next preceding day on which there
         was such a sale.

                  (m) "Immediate Family Member" shall mean with respect to a
         Participant, the Participant's spouse, ancestors (including parents and
         grandparents), siblings (including half-brothers and sisters), and
         descendants (including children, grand children and great
         grandchildren), as well as any entity, such as a limited liability
         company, partnership or trust, in which all of the beneficial ownership
         interests are held directly or indirectly by the Participant or a
         natural person who is an Immediate Family Member. For purposes of this
         definition, individuals who have the legal relationship described
         herein through legal adoption and the children of the Participant's
         spouse or the spouse of one of the Participant's children or
         grandchildren shall be treated as Immediate Family Members.

                  (n) "Option" shall mean the right to purchase Common Shares at
         a stated price for a specified period of time. For purposes of the
         Plan, an Option may be either (i) an "Incentive Stock Option" within
         the meaning of Section 422 of the Code or (ii) an Option which is not
         an Incentive Stock Option (a "Nonqualified Stock Option").

                  (o) "Participant" shall mean any Employee designated by the
         Committee to receive an option or share of Restricted Stock under the
         Plan.

                  (p) "Plan" shall mean the 2003 Stock Option and Restricted
         Stock Plan, as set forth herein and as the same may be amended from
         time to time.

                  (q) "Predecessor Plans" shall mean the Phelps Dodge 1993 Stock
         Option and Restricted Stock Plan and the Phelps Dodge 1998 Stock Option
         and Restricted Stock Plan.

                                       3

                  (r) "Restricted Period" shall mean the period during which
         shares of Restricted Stock are subject to forfeiture and restrictions
         on transferability pursuant to Section 6.2 of the Plan.

                  (s) "Restricted Stock" shall mean stock granted to a
         Participant pursuant to the Plan which is subject to forfeiture and
         restrictions on transferability in accordance with Section 6 of the
         Plan.

                  (t) "Retirement" shall mean termination of a Participant's
         employment on or after the Participant's normal retirement date or
         early retirement under any pension or retirement plan of the
         Corporation or a Subsidiary.

                  (u) "Subsidiary" shall mean any company in which the
         Corporation and/or another Subsidiary owns 50% or more of the total
         combined voting power of all classes of stock.

                  2.2 Gender and Number. Except when otherwise indicated by the
context, words in the masculine gender used in the Plan shall include the
feminine gender, the singular shall include the plural and the plural shall
include the singular.

                                   SECTION 3

                                 ADMINISTRATION

                  3.1 Power to Grant and Establish Terms of Awards. The
Committee shall have authority, subject to the terms of the Plan, to determine
the Employees eligible for Options and awards of Restricted Stock and those to
whom Options or Restricted Stock shall be granted, the number of Common Shares
to be covered by each Option or award of Restricted Stock, any conditions that
may be imposed upon the grant of an Option, the time or times at which Options
or Restricted Stock shall be granted, and the terms and provisions of the
instruments by which Options or Restricted Stock shall be evidenced; to
designate Options as Incentive Stock Options or Nonqualified Stock Options; to
permit Participants to elect to defer the issuance of Common Shares otherwise
deliverable upon the exercise of an Option on such terms and subject to such
conditions as the Committee shall determine; and to determine the period of time
during which restrictions on Restricted Stock shall remain in effect. The grant
of any Option to any Employee or an award of Restricted Stock shall neither
entitle such Employee to, nor disqualify him from, participation in any other
grant of Options or award of Restricted Stock. Notwithstanding anything else
contained in the preceding sentence to the contrary, in no event may the number
of Common Shares subject to Options granted to any single Participant within any
12-month period exceed 350,000 Common Shares, as such number may be adjusted
pursuant to Section 4.3.

                                       4

                  3.2 Administration. Any Option grant or award of Restricted
Stock made by the Committee may be subject to such conditions, not inconsistent
with the terms of the Plan, as the Committee shall determine. The Committee, by
majority action thereof, is authorized to prescribe, amend and rescind rules and
regulations relating to the Plan, to provide for conditions deemed necessary or
advisable to protect the interests of the Corporation, to interpret the Plan and
to make all other determinations necessary or advisable for the administration
and interpretation of the Plan to carry out its provisions and purposes.
Determinations, interpretations or other actions made or taken by the Committee
pursuant to the provisions of the Plan shall be final, binding and conclusive
for all purposes and upon all persons. The Committee may consult with legal
counsel, who may be counsel to the Corporation, and shall not incur any
liability for any action taken in good faith in reliance upon the advice of
counsel. Without limiting the generality of the foregoing, the Committee may
delegate to any officer of the Corporation or any committee comprised of
officers of the Corporation the authority to take any and all actions permitted
or required to be taken by the Committee hereunder; provided that such
delegation shall not be permitted with respect to Options or other awards
granted or to be granted to any officer of the Corporation and that, to the
extent the Committee delegates authority to grant Options and other awards
hereunder, such delegation shall specify the aggregate number of Common Shares
that may be awarded pursuant to such delegation and may establish the maximum
number of Common Shares that may be subject to any award made pursuant to such
delegation and any other limitations thereon that the Committee may choose to
impose.

                                   SECTION 4

                              STOCK SUBJECT TO PLAN

                  4.1 Number. The stock as to which Options and awards of
Restricted Stock may be granted shall be Common Shares. When Options are
exercised or Restricted Stock is awarded, the Corporation may either issue
unissued Common Shares or transfer issued shares held in its treasury. Subject
to adjustment as provided in Section 4.3 below, the total number of Common
Shares (i) which may be sold to Employees under the Plan pursuant to Options and
(ii) that may be transferred or issued as Restricted Stock pursuant to Section 6
shall not exceed the sum of (A) 3,500,000 Common Shares, and (B) the number of
Common Shares remaining available for issuance under the Phelps Dodge 1998 Stock
Option and Restricted Stock Plan on the Effective Date. Notwithstanding the
foregoing, the total number of Common Shares that may be transferred or issued
hereunder as awards of Restricted Stock pursuant to Section 6 shall not exceed
1,500,000 Common Shares, plus that number of the Common Shares referred to in
subclause (B) of the immediately preceding sentence that, on the Effective Date,
were available for awards of restricted stock under the Phelps Dodge 1998 Stock
Option and Restricted Stock Plan. Any Option settled in cash shall reduce the
number of

                                       5

Common Shares under the Plan by the number of shares that would have been issued
had the Option been exercised for Common Shares.

                  4.2 Canceled, Terminated or Forfeited Awards. If, after the
Effective Date, an Option granted hereunder or an Option granted under a
Predecessor Plan which is outstanding on the date hereof expires, or is
terminated, canceled or otherwise surrendered by a Participant prior to its
exercise, or if shares of Restricted Stock are returned to the Corporation
pursuant to the terms of the Plan or if shares of Restricted Stock awarded under
a Predecessor Plan which are still restricted on the date hereof are returned to
the Corporation prior to the time at which a Participant's rights become
nonforfeitable, the Common Shares covered by such Option immediately prior to
such expiration or other termination or the Common Shares affected by such
return of Restricted Stock shall be available for future grants under the Plan.

                  4.3 Adjustment in Capitalization. The number and price of
Common Shares covered by each Option, the maximum number of Common Shares that
be awarded as Options under Section 3.1 and the total number of Common Shares
that may be sold, issued or transferred under the Plan shall be proportionately
adjusted to reflect, as deemed equitable and appropriate by the Committee, an
Adjustment Event. To the extent deemed equitable and appropriate by the
Committee, subject to any required action by stockholders, in any merger,
consolidation, reorganization, liquidation, dissolution, or other similar
transaction, any Option granted under the Plan shall pertain to the securities
and other property to which a holder of the number of Common Shares covered by
the Option would have been entitled to receive in connection with such event.

         Any shares of stock (whether Common Shares, shares of stock into which
Common Shares are converted or for which Common Shares are exchanged or shares
of stock distributed with respect to Common Shares) or cash or other property
received with respect to any award of Restricted Stock granted under the Plan as
a result of any Adjustment Event, any distribution of property or any merger,
consolidation, reorganization, liquidation, dissolution or other similar
transaction shall, except as provided in Section 6.4 or as otherwise provided by
the Committee at or after the date an award of Restricted Stock is made by the
Committee, be subject to the same terms and conditions, including restrictions
on transfer, as are applicable to such shares of Restricted Stock and any stock
certificate(s) representing or evidencing any shares of stock so received shall
be legended in substantially the same manner as provided in Section 6.5 hereof.

                                       6

                                   SECTION 5

                                  STOCK OPTIONS

                  5.1 Grant of Options. The date of grant of an Option under the
Plan will be the date on which the Option is awarded by the Committee or, if so
determined by the Committee, the date on which occurs any event the occurrence
of which is an express condition precedent to the grant of the Option. The
aggregate Fair Market Value of the Common Shares with respect to which Incentive
Stock Options are exercisable for the first time by a Participant during any
calendar year under the Plan and any other stock option plan of the Corporation
or any Subsidiary shall not exceed $100,000 or such other amount as may be
subsequently specified by the Internal Revenue Code of 1986, as amended. Options
shall be evidenced by instruments in such form or forms as the Committee may
from time to time approve.

                  5.2 Option Price. The Option price per share shall be at or
above the Fair Market Value of the optioned shares on the day the Option is
granted (as determined under Section 5.1).

                  5.3 Payment. Upon exercise, the Option price shall be paid (i)
in cash, including an assignment of the right to receive cash proceeds of the
sale of Common Shares subject to the Option; (ii) in the discretion of the
Committee, in already owned Common Shares of the Corporation having a Fair
Market Value on the date of exercise equal to such Option price or in a
combination of cash and Common Shares or (iii) in accordance with such
procedures or in such other form as the Committee shall from time to time
determine.

                  5.4 Term and Exercise of Options. Each Incentive Stock Option
shall expire not later than the tenth anniversary of the date of its grant, and
each Nonqualified Stock Option shall expire not later than the day after the
tenth anniversary of the date of its grant. Options shall become exercisable in
three or four substantially equal annual installments commencing on the first
anniversary of the date of grant, as the Committee in its discretion shall
determine, or at such other times and upon the occurrence of such other events
or conditions as the Committee may determine at or after the grant of such
Option. Notwithstanding the foregoing, the Committee may include in any Option
instrument, initially or by amendment at any time, a provision making any
installment or installments exercisable at such earlier or later date, or upon
the occurrence of such earlier or later event, as may be specified by such
provision. Without limiting the generality of the foregoing, the Committee may
approve, pursuant to the foregoing sentence, provisions making installments
exercisable (i) upon a Participant's Retirement (provided that, in the event
that the Participant is retiring prior to his normal retirement date and such
retirement is not determined by the Committee to be adverse to the Corporation,
such acceleration shall be conditioned upon the execution by the Participant

                                       7

of a release in favor of the Corporation and its affiliates in a form acceptable
to the Corporation), (ii) not later than the date the Participant ceases to be
employed by the Corporation if he ceases to be so employed within two years
following a Change of Control of the Corporation, and (iii) at such time and for
such period as the Committee deems appropriate, in the event of a Change of
Control. Except as may be provided in any provision approved by the Committee
pursuant to this Section 5.4, after becoming exercisable each installment shall
remain exercisable until expiration, termination or cancellation of the Option.
An Option may be exercised from time to time, in whole or in part, up to the
total number of Common Shares with respect to which it is then exercisable.

                  5.5 Termination of Employment. If the Participant ceases to be
employed by the Corporation or a Subsidiary other than by reason of death,
Disability, Retirement or the Participant's termination for Cause, all Options
granted to him and exercisable on the date of his termination of employment
shall terminate on the earlier of such Options' expiration or one month (or such
greater period of time, not to exceed one year, determined by the Committee in
its sole discretion) after the day his employment ends. If the Participant
ceases to be employed on account of Disability or Retirement, all Options
granted to him and exercisable on the date of his termination of employment due
to Disability or his Retirement shall terminate on the earlier of such Options'
expiration or the fifth anniversary of the day of such termination or
Retirement. If the Participant's employment is terminated for Cause, all Options
granted to such Participant which are then outstanding shall be forfeited.
Except as otherwise determined by the Committee at or after grant of any Option,
any installment which has not become exercisable prior to the time the
Participant ceases to be employed by the Corporation or a Subsidiary other than
by reason of death shall lapse and be thenceforth unexercisable. Whether
authorized leave of absence or absence in military or governmental service may
constitute employment for the purposes of the Plan shall be conclusively
determined by the Committee.

                  5.6 Exercise upon Death of Participant. Each Participant
having Nonqualified Stock Options may designate, on such forms as may be
approved by the Corporation from time to time, a beneficiary or beneficiaries
with respect to the Participant's Nonqualified Stock Options should the
Participant die prior to the exercise of the Participant's Nonqualified Stock
Options. To be effective, any beneficiary designation forms completed by a
Participant must have been delivered to the Corporation. A Participant may
change a beneficiary designation by executing and delivering to the Corporation
a new beneficiary designation form. Upon receipt of such designation by the
Corporation, such designation or change of designation shall be effective as of
the date of the notice, regardless of whether the Participant is living at the
time the notice is received by the Corporation . If the Participant dies while
he is employed by the Corporation or a Subsidiary, his Options may be exercised,
for the full number of Common Shares covered thereby for which such Options were
not previously

                                       8

exercised, by his estate, personal representative or beneficiary who acquires
the Options by beneficiary designation, will or by the applicable laws of
descent and distribution, at any time prior to the earlier of the Options'
expiration or the fifth anniversary of the Participant's death. Such Options
shall terminate upon the earlier of such Options' expiration or the fifth
anniversary of such Participant's death. If the Participant dies while he is no
longer employed by the Corporation, his Options may be exercised, for the number
of Common Shares as to which he could have exercised them on the date of his
death, by his estate, personal representative or beneficiary who acquires the
Options by beneficiary designation, will or by the applicable laws of descent
and distribution, at any time prior to the termination date provided by Section
5.5.

                                   SECTION 6

                                RESTRICTED STOCK

                  6.1 Grant of Restricted Stock. Any award made hereunder of
Restricted Stock shall be subject to the terms and conditions of the Plan and to
any other terms and conditions not inconsistent with the Plan (including, but
not limited to, requiring the Employee to pay the Corporation an amount equal to
the par value per share for each share of Restricted Stock awarded) as shall be
prescribed by the Committee in its sole discretion. The Committee may require
that, as a condition to any award of Restricted Stock under the Plan, the
Employee shall have entered into an agreement with the Corporation setting forth
the terms and conditions of such award and such other matters as the Committee,
in its sole discretion, shall have determined. As determined by the Committee,
the Corporation shall either (i) transfer or issue to each Participant to whom
an award of Restricted Stock has been made the number of shares of Restricted
Stock specified by the Committee or (ii) hold such shares of Restricted Stock
for the benefit of the Participant for the Restricted Period.

                  6.2 Restrictions on Transferability. Shares of Restricted
Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise
encumbered by the Participant during the Restricted Period, except as
hereinafter provided.

                  6.3 Rights as a Shareholder. Except for the restrictions set
forth herein and unless otherwise determined by the Committee, the Participant
shall have all the rights of a shareholder with respect to such shares of
Restricted Stock, including, but not limited to, the right to vote and the right
to receive dividends.

                  6.4 Lapse of Restricted Period. Unless the Committee shall
otherwise determine at or after the date an award of Restricted Stock is made to
the Participant by the Committee, the Restricted Period shall commence upon the
date of grant and shall lapse with respect to the shares of Restricted Stock on
the earlier of: (a) the third anniversary of the date of grant, in the case of
an award of restricted stock that vests

                                       9

based on the passage of time and the performance of continuous service as an
employee, (b) the first anniversary of the date of grant, in the case of a
restricted stock award that vests based on the achievement of specified
performance criteria or (c) the date of a Change of Control, unless sooner
terminated as otherwise provided herein. The determination of whether the
Participant has achieved such performance goals shall be made by the Committee
in its sole discretion. Notwithstanding the foregoing, if a Participant incurs a
tax liability in respect of an award of Restricted Stock prior to the time the
Restricted Period would otherwise lapse hereunder (other than by reason of the
election by the Participant under the Code to be taxed as the time of grant),
the Restricted Period shall lapse on the date such tax liability arises with
respect to the number of whole Common Shares having a Fair Market Value at such
time no greater than the amount required to satisfy all tax withholding
requirements applicable thereto (as determined in accordance with Section 9.3
hereof). Unless the Committee determines otherwise, the Corporation shall
withhold such released Common Shares to satisfy such withholding obligations.

                  6.5 Legend. Each certificate issued to a Participant in
respect of shares of Restricted Stock awarded under the Plan shall be registered
in the name of the Participant and shall bear the following (or similar) legend:

                  "The shares of stock represented by this certificate are
         subject to the terms and conditions contained in the Phelps Dodge 2003
         Stock Option and Restricted Stock Plan and may not be sold, pledged,
         transferred, assigned, hypothecated, or otherwise encumbered in any
         manner until".

                  6.6 Death, Disability or Retirement. Unless the Committee
shall otherwise determine at the date of grant, if a Participant ceases to be
employed by the Corporation or any Subsidiary by reason of death, Disability or
Retirement, the Restricted Period covering all shares of Restricted Stock
transferred or issued to such Participant under the Plan shall immediately
lapse.

                  6.7 Termination of Employment. Unless the Committee shall
otherwise determine at or after the date of grant, if a Participant ceases to be
employed by the Corporation or any Subsidiary for any reason other than those
specified in Section 6.6 at any time prior to the date when the Restricted
Period lapses, all shares of Restricted Stock owned by such Participant shall
revert back to the Corporation upon the Participant's termination of employment.
Whether authorized leave of absence or absence in military or government service
may constitute employment for the purposes of the Plan shall be conclusively
determined by the Committee.

                  6.8 Issuance of New Certificates. Upon the lapse of the
Restricted Period with respect to any shares of Restricted Stock, such shares
shall no longer be

                                       10

subject to the restrictions imposed under Section 6.2 and the Corporation shall
issue or have issued new share certificates without the legend described in
Section 6.5 in exchange for those previously issued.

                                   SECTION 7

                        TERMINATION AND AMENDMENT OF PLAN

         The Board may terminate or amend the Plan in any respect at any time,
except that without the approval of the holders of a majority of Common Shares
present and voting on the proposal at a meeting of shareholders, the total
number of shares that may be sold, issued or transferred under the Plan may not
be increased (except by adjustment pursuant to Section 4.3), the category of
persons eligible to receive Options and shares of Restricted Stock may not be
changed, the purchase price at which shares may be offered pursuant to Options
may not be reduced (except by adjustment pursuant to Section 4.3) and the
expiration date of the Plan may not be extended. No action of the Board or
shareholders, however, may, without the consent of a Participant alter or impair
his rights under any Option or award of Restricted Stock previously granted.

                                   SECTION 8

             APPLICABILITY OF PLAN TO GRANTS UNDER PREDECESSOR PLANS

         The provisions of the Plan relating to Options and Restricted Stock
grants shall apply to, and govern, existing Option and restricted stock grants
made under the Predecessor Plans as if such awards were granted hereunder
(except that no such awards shall count against the share limit set forth in
Section 4.1) and such Options and restricted stock grants shall, where
appropriate, be deemed to have been amended to provide any additional rights,
subject in the case of Options and restricted stock grants outstanding as of the
date of adoption of this Plan by the Board, to the right of an affected
Participant to consent to the application of such amendments to such grants as
provided in Section 7.

                                   SECTION 9

                            MISCELLANEOUS PROVISIONS

                  9.1 Nontransferability of Awards. Unless the Committee
otherwise determines at or after grant to permit any award made hereunder to be
transferable to the Immediate Family Members of a Participant, an award granted
under the Plan may not be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated, other than in accordance with a beneficiary
designation effective on the death of the Participant, by will or by the
applicable laws of descent and distribution. All rights with respect to

                                       11

awards granted to a Participant under the Plan shall be exercisable during his
lifetime only by such Participant.

                  9.2 Securities Law Compliance. Instruments evidencing Options
or awards of Restricted Stock may contain such provisions as the Committee deems
appropriate in respect of any securities laws and such other provisions, not
inconsistent with the Plan, as the Committee deems advisable. Common Shares
received pursuant to the Plan shall be transferable only if the proposed
transfer will be in compliance with applicable securities laws.

                  9.3 Tax Withholding. The Corporation shall have the power to
withhold, or require a Participant to remit to the Corporation promptly upon
notification of the amount due, an amount sufficient to satisfy federal, state
and local withholding tax requirements on any award under the Plan, and the
Corporation may defer payment of cash or issuance or delivery of Common Shares
until such requirements are satisfied. Subject to any required withholding of
Common Shares pursuant to Section 6.4, the Committee may, in its discretion,
permit a Participant to elect, subject to such conditions as the Committee shall
impose, (i) to have Common Shares otherwise issuable or deliverable under the
Plan withheld by the Corporation or (ii) to deliver to the Corporation
previously acquired shares of Stock, in each case, having a Fair Market Value
sufficient to satisfy all or part of the minimum amount of the Participant's
total federal, state and local tax withholding obligation associated with the
transaction.

                  9.4 Term of Plan. This Plan shall be effective as of the date
of approval by the holders of the Common Shares at the 2003 Annual Meeting of
Shareholders. This Plan shall expire on March 31, 2013 (except as to Options and
Restricted Stock outstanding on that date), unless sooner terminated pursuant to
Section 7 of the Plan.

                  9.5 Governing Law. The Plan, and all Agreements hereunder,
shall be construed in accordance with and governed by the laws of the State of
New York.

                                       12

                             STOCK OPTION AGREEMENT

            Phelps Dodge 2003 Stock Option and Restricted Stock Plan

         STOCK OPTION AGREEMENT, dated _____________ __, __, between PHELPS
DODGE CORPORATION, a New York corporation (the "Corporation"), and _____________
(the "Employee").

         The Compensation and Management Development Committee of the Board of
Directors of the Corporation (such Committee, and any successor committee
appointed by the Board of Directors of the Corporation to administer the
Corporation's 2003 Stock Option and Restricted Stock Plan (the "Plan"), is
hereinafter referred to as the "Committee") has granted to the Employee an
option under the Plan to purchase Common Shares of the Corporation on the terms
set forth below.

         To evidence the option so granted, and to set forth their terms and
conditions as provided in the Plan, the Corporation and the Employee hereby
agree as follows:

         1. Confirmation Of Grant Of Option; Option Price. The Corporation
hereby evidences and confirms its grant to the Employee of (i) an option (the
"Option") to purchase ___ of the Corporation's Common Shares at an option price
of $ ____ per share. The Option granted hereby shall be subject to the
provisions of the Plan. Capitalized terms used herein that are not defined in
this Agreement shall have the meanings assigned to such terms in the Plan.

         2. Term For Exercise.

         (a) The Option shall become exercisable, subject to the provisions of
this Section 2 and Sections 3 and 4 hereof, in installments of ______ Common
Shares on the first anniversary of the date of grant of the Option, ______
Common Shares on the second anniversary and _____ Common Shares on the third
anniversary. Unless an earlier expiration date is specified by this Agreement
(or, if applicable, in Supplement A), the Option shall expire at 5:00 P.M.,
Arizona Mountain Standard Time (such time shall hereinafter be referred to as
the "End of Business"), on the day after the tenth anniversary of the date on
which the Option was granted (the "Termination Date").

         (b) Without limiting the generality of the foregoing, in the event:

                  (i) of the consummation, following the approval by the vote of
         the Corporation's stockholders holding at least 50% (or such greater
         percentage as may be required by the Certificate of Incorporation or
         By-Laws of the Corporation or by law) of the voting stock of the
         Corporation, of any merger or consolidation with any other corporation
         (other than a merger or consolidation which would result in the voting
         securities of the

                                       1

         Corporation outstanding immediately prior thereto continuing to
         represent (either by remaining outstanding or by being converted into
         voting securities of the entity surviving such merger or consolidation
         (the "Surviving Entity") or its direct or indirect parent (the
         "Survivor Parent")), at least 80% of the combined voting power of the
         securities of the Corporation or the Surviving Entity or Survivor
         Parent outstanding immediately after such merger or consolidation);
         sale of assets; liquidation; or reorganization in which the Corporation
         will not survive as a publicly owned corporation (the transactions
         described above being collectively referred to as the "Transaction")
         (the consummation of any such Transaction hereinafter referred to as a
         "Merger Consummation"); or (ii) any of the Corporation's Common Shares
         are purchased pursuant to a tender or exchange offer other than an
         offer by the Corporation, any Subsidiary of the Corporation (as defined
         in the Plan and hereinafter referred to as a "Subsidiary"), or any
         employee benefit plan maintained by the Corporation or a Subsidiary
         (such purchase hereinafter referred to as a "Tender Purchase");

then the Option shall become exercisable during the period beginning on the date
of the Merger Consummation or Tender Purchase, as the case may be, and ending on
the thirtieth day following such date (but in no event shall the Option become
exercisable under this paragraph earlier than six months from the date on which
the Option was granted (the "Grant Date")). If any portion of the Option shall
be exercised, the Option shall thereafter remain exercisable, according to its
terms, only with respect to the number of Common Shares as to which the Option
would otherwise be exercisable less the number of Common Shares with respect to
which the Option has previously been exercised.

         3. Who May Exercise. During the Employee's lifetime the Option may be
exercised only by him. Each Participant having Nonqualified Stock Options may
designate, on such forms as may be approved by the Corporation from time to
time, a beneficiary or beneficiaries with respect to the Participant's
Nonqualified Stock Options should the Participant die prior to the exercise of
the Participant's Nonqualified Stock Options. To be effective, any beneficiary
designation forms completed by a Participant must have been delivered to the
Corporation. A Participant may change a beneficiary designation by executing and
delivering to the Corporation a new beneficiary designation form. Upon receipt
of such designation by the Corporation, such designation or change of
designation shall be effective as of the date of the notice, regardless of
whether the Participant is living at the time the notice is received by the
Corporation. If the Employee dies while in the employ of the Corporation or one
of its Subsidiaries, the Option may be exercised for the full number of Common
Shares specified in Section 1 hereof less the number of Common Shares with
respect to which the Option has previously been exercised, by the Employee's
estate, personal representative or

                                       2

beneficiary who acquired the right to exercise the Option by will or by the laws
of descent and distribution, at any time prior to the End of Business on the
earlier of the Termination Date or the fifth anniversary of the Employee's
death. If the Employee dies while he is no longer employed by the Corporation or
a Subsidiary, his Options may be exercised for the full number of Common Shares
as to which he could have exercised them on the date of his death, by his
estate, personal representative or beneficiary who acquired the right to
exercise the Option by will or by the laws of descent and distribution, at any
time prior to the termination date provided by Section 4 hereof. Following the
End of Business on the earlier of the Termination Date, the fifth anniversary of
the Employee's death or the termination date provided by Section 4, as the case
may be, the Option shall expire.

         4. Exercise After Termination of Employment. If the Employee shall
cease to be employed by the Corporation or a Subsidiary other than by reason of
death, Disability (as defined in the Plan), Retirement (as defined in the Plan)
or the Employee's termination for Cause (as defined in the Plan), the Option
shall remain exercisable, to the extent exercisable on the date of such
termination, until the End of Business on the earlier of the Termination Date or
the date which is one month after the day his employment ends. If the Employee's
employment shall terminate due to Disability or Retirement, the Option shall
remain exercisable, to the extent exercisable on the date of the Employee's
termination of employment, until the End of Business on the earlier of the
Termination Date or the fifth anniversary of the date of such termination of
employment; provided, however, that, in the event the Employee's employment with
the Corporation terminates not earlier than six months from the Grant Date as a
result of the Employee's Disability or Retirement, unless the Employee retires
prior to his Normal Retirement Date, as defined under the Phelps Dodge
Retirement Plan (or any successor plan thereof) under conditions determined by
the Committee to be adverse to the Corporation or the Employee does not sign a
release of claims satisfactory to the Corporation, the Option shall become
exercisable immediately prior to the End of Business on the date the Employee's
employment terminates for the purchase of the full number of Common Shares
specified in Section 1 of the Agreement less the number of Common Shares with
respect to which the Option has previously been exercised. If the Employee's
employment is terminated for Cause, all Options granted to the Employee which
are then outstanding shall be forfeited as of the effective time of such
termination but in no event later than the End of Business on such termination
date. Any portion of the Option which is not exercisable on the date the
Employee's employment terminates for any reason other than death, Disability, or
Retirement shall expire at the End of Business on such termination date. Any
portion of the Option which did not expire on the date the Employee's employment
terminates and which is not exercised within the period established under this
Section 4 shall expire following the End of Business on the last day on which
the Option could have been exercised.

                                       3

         5. Restrictions on Exercise. The Option may be exercised only with
respect to full Common Shares. No fractional shares shall be issued. The Option
may not be exercised in whole or part:

         (a) if any requisite approval or consent of any governmental authority
of any kind having jurisdiction over the exercise of options shall not have been
secured or if, as determined by the Committee, a violation of any applicable
securities laws may result; or

         (b) unless the Common Shares subject to the Option shall be effectively
listed on the New York Stock Exchange and registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which listing and
registration may be upon official notice of issuance of such Common Shares.

         The Corporation may require that, as a condition to any exercise of the
Option, the Employee represent to the Corporation in writing that he is
acquiring the Common Shares subject to such exercise for his own account for
investment only and not with a view to the distribution thereof.

         6. Manner of Exercise. To the extent the Option shall be exercisable in
accordance with the terms hereof, and subject to the applicable law and
regulations and such administrative regulations as the Committee may have
adopted, the Option may be exercised in whole or from time to time in part by
written notice to the Committee, (i) identifying the Option by Grant Date, the
option price and whether or not the Agreement includes Supplement A, (ii)
specifying the number of Common Shares with respect to which the Option is being
exercised, and (iii) accompanied by full payment of the option price for such
Common Shares (1) in United States dollars by personal check or cash, including
an assignment of the right to receive cash proceeds of the sale of Common Shares
subject to the Option, (2) in Common Shares of the Corporation owned by the
Employee for at least three months prior to the day of exercise, represented by
certificates duly endorsed to the Corporation or its nominee with any requisite
transfer tax stamps attached, the market value of which shall be equal to the
option price for the Common Shares with respect to which the Option is being
exercised, or (3) in a combination of (1) and (2) above. The market value of any
Common Shares delivered pursuant to the immediately preceding sentence shall be
the mean of the high and low prices of such Common Shares on the Consolidated
Trading Tape on the day of exercise or, if there was no such sale on such day,
on the day next preceding the day of exercise on which there was a sale.

         For valuation purposes, the day of exercise of the Option shall be
deemed to be the day on which notice, addressed to the Committee, either to
exercise the Option in whole or in part by the payment of Common Shares
(together with duly endorsed certificates as provided above and any other
required payment) is received at the Corporation's principal office, except that
if such notice (together with certificates and

                                       4

other payment if required) is received on a Saturday or Sunday or on a holiday
observed by the Corporation's principal office, or after the End of Business on
any other day, the day of exercise shall be deemed to be the next business day.
"Written notice" shall include, without limitation, notice by telegram, telex,
cable or telecopy facsimile.

         In the event that the Option shall be exercised by a person other than
the Employee in accordance with the provisions of Section 3 hereof, such person
shall furnish the Corporation with evidence satisfactory to it of his or her
right to exercise the same and of payment or provision for payment of any
estate, transfer, inheritance or death taxes payable with respect to the Option
or with respect to any related Common Shares or payment. The Corporation may
require the Employee or other person exercising the Option to furnish or execute
such documents as the Corporation shall deem necessary to evidence such
exercise, to determine whether registration is then required under the
Securities Act of 1933, as amended, or to comply with or satisfy the
requirements of the Exchange Act, or any other law.

         7. Nonassignability. Unless the Committee shall otherwise so specify by
a supplement to this Agreement approved in connection with the award hereof or
at any subsequent time, the Option shall not be assignable or transferable
except by beneficiary designation, will or by the applicable laws of descent and
distribution to the extent contemplated by Section 3 hereof. At the request of
the Employee, Common Shares purchased on exercise of the Option may be issued or
transferred in the name of the Employee and another person jointly with the
right of survivorship, or in the name of a trust or other legal entity
established to hold property for the benefit of the Employee or members of his
immediate family.

         8. Rights As Stockholder. The Employee shall have no rights as a
stockholder with respect to any Common Shares covered by the Option until the
issuance of a certificate or certificates to him for such Common Shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the issuance of such certificate or certificates.

         9. Capital Adjustments. The number and price of the Common Shares
covered by the Option shall be proportionately adjusted to reflect, as deemed
equitable and appropriate by the Committee, any stock dividend, stock split or
share combination of, or extraordinary cash dividend on, the Corporation's
Common Shares or any recapitalization of the Corporation. To the extent deemed
equitable and appropriate by the Committee, subject to any required action by
the stockholders of the Corporation, in any merger, consolidation,
reorganization, liquidation, dissolution, or other similar transaction, the
Option shall pertain to the securities and other property, if any, which a
holder of the number of Common Shares covered by the Option would have been
entitled to receive in connection with such event.

                                       5

         10. Withholding.

         (a) The Corporation's obligation to deliver Common Shares upon the
exercise of the Option shall be subject to payment by the Employee of any amount
required to be withheld with respect to such exercise pursuant to any applicable
federal, state or local tax withholding requirements.

         (b) Unless this Agreement includes Supplement A (making it an incentive
stock option), the Employee may elect to satisfy all or any part of his federal,
state and local tax obligations (including, without limitation, FICA) with
respect to such exercise by having the Corporation withhold from any Common
Shares otherwise deliverable to him in connection with the exercise of the
Option a number of Common Shares, or by delivering Common Shares already owned
by the Employee, having a market value equal in amount to the obligations to be
so satisfied. The market value of Common Shares withheld or delivered shall be
the mean of the high and low prices of such Common Shares on the Consolidated
Trading Tape on the day of exercise or, if there was no such sale on such day,
on the next preceding day on which there was a sale.

         11. Governing Law. This Agreement shall be construed and enforced in
accordance with, and governed by, the laws of the State of New York.

         12. Supplements. Attached hereto are the following supplements:

         Supplement A - Incentive Stock Options

         Supplement B - Change of Control

Any such supplements so attached are incorporated herein and constitute a part
of this Agreement as though set forth in full herein. Additional supplements may
be added to this Agreement at a later date by the Committee; provided, however,
that if any such additional supplement adversely affects the rights of the
Employee under this Agreement, such supplement shall not be or become effective
unless and until the Employee consents to its addition in writing. All
capitalized terms used in such supplements without definition shall have the
meaning determined under this Agreement.

         13. Predecessor Plans. The Employee hereby acknowledges and agrees that
all of the Employee's outstanding options that were granted pursuant to the
Predecessor Plans (as defined in the Plan) shall hereafter become subject to the
terms of this Agreement.

                                       6

         IN WITNESS WHEREOF, the Corporation and the Employee have duly executed
this Agreement as of the date set forth above.

                                                     PHELPS DODGE CORPORATION


                                                     By
                                                       -------------------------
                                                       Senior Vice President



                                                       -------------------------
                                                       Employee


                                       7

                                                                    Supplement A
                                                       [Incentive Stock Option -
                                                         2003 Stock Option Plan]

         Supplement A to the Stock Option Agreement (the "Agreement") dated
between Phelps Dodge Corporation (the "Corporation") and (the "Employee").

         1. Term of the Option. Each incentive stock option shall expire on the
tenth anniversary of the date of its grant.

         2. Disposition of Shares. If the Employee disposes of any Common Shares
received upon exercise of the Option within two years after the Option was
granted to him or within one year after the Common Shares were transferred to
him upon exercise of the Option, whether by sale, gift, or otherwise, the
Employee shall notify the Secretary of the Corporation of the number of such
Common Shares disposed of, the date on which disposed of, the manner of
disposition and the amount, if any, realized upon such disposition, and shall
promptly pay to the Corporation the amount, if any, that the Corporation
specifies in a written notice to the Employee as required to be withheld with
respect to such exercise and disposition pursuant to any applicable federal,
state or local tax withholding requirements.

         3. Interpretation of Agreement. The Option is intended to be an
incentive stock option within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended.

                                                                    Supplement B
                                                            [Change of Control -
                                                         2003 Stock Option Plan]

         Supplement B to the Stock Option Agreement (the "Agreement") dated
_______, between Phelps Dodge Corporation (the "Corporation") and
______________________, (the "Employee").

         1. Additional Trigger Event for Exercisability. In addition to the
provisions of Section 2 of the Agreement, in the event the Employee's employment
with the Corporation or any Subsidiary terminates by reason of a Qualifying
Termination (as defined below) not earlier than six months from the date on
which the Option was granted and within two years after a Change of Control (as
defined below) of the Corporation, the Option shall become exercisable, no later
than the date of such termination, for the purchase of the full number of Common
Shares specified in Section 1 of the Agreement.

         For the purpose of this Supplement B:

         A "Change of Control" shall have the meaning set forth in the Plan.

         A "Qualifying Termination" means a termination of the Employee's
employment with the Corporation or any Subsidiary of the Corporation (under
circumstances where the Employee is no longer employed by the Corporation or any
such Subsidiary) (i) by the Employee for Good Reason, or (ii) by the Corporation
or a Subsidiary without Cause as specifically defined below in this Supplement
B, and (iii) prior to the Employee's death or Disability as specifically defined
below in this Supplement B.

         a. Cause. For purposes of the definition of Qualifying Termination,
"Cause" shall mean willful misconduct in the performance of the Employee's
duties which results in a material detriment to the Corporation, and its
subsidiaries, taken as a whole.

         b. Disability. For purposes of the definition of Qualifying
Termination, "Disability" shall have the meaning given to that term in the
Phelps Dodge Corporation Long-Term Disability Insurance Plan.

         c. Good Reason. For purposes of the definition of Qualifying
Termination, "Good Reason" means a termination of employment with the
Corporation and its Subsidiaries by the Employee under any of the following
circumstances:

                  (i) such termination occurs more than 180 days following the
         time when a Change of Control takes place and such Change of Control
         has not been approved by a resolution adopted by the Board of Directors
         of the Corporation as constituted immediately prior to such Change of
         Control; or

                                       1

                  (ii) the Employee terminates his or her employment on account
         of one or more of the following events (and the Employee has not agreed
         to such event in writing):

                           (A) the assignment to the Employee of any duties
                  inconsistent, in a way materially adverse to the Employee,
                  with his or her positions, duties, responsibilities and status
                  with the Corporation and its Subsidiaries immediately prior to
                  a Change of Control, or a material reduction in the duties and
                  responsibilities held by the Employee immediately prior to
                  such Change of Control; a change in the Employee's reporting
                  responsibilities, titles or offices as in effect immediately
                  prior to such Change of Control; or any removal of the
                  Employee from or any failure to re-elect the Employee to any
                  position with the Corporation or any Subsidiary that the
                  Employee held immediately prior to such Change of Control
                  except in connection with the Employee's promotion or the
                  termination of his or her employment; or

                           (B) a reduction by the Corporation or any Subsidiary
                  in the Employee's base salary as in effect immediately prior
                  to such Change of Control; the failure by the Corporation or
                  any such Subsidiary to continue in effect any employee benefit
                  plan or compensation plan (including any incentive
                  compensation or bonus programs) in which the Employee is
                  participating immediately prior to such Change of Control
                  unless the Employee is permitted to participate in other plans
                  providing him or her with substantially comparable benefits;
                  or the taking of any action by the Corporation or any such
                  Subsidiary, which would adversely affect the Employee's
                  participation in or materially reduce his benefits under any
                  such employee benefit or compensation plan; or

                           (C) the Corporation's or any Subsidiary's requiring
                  the Employee to be based anywhere other than a location within
                  50 miles of his or her location immediately prior to such
                  Change of Control; or the Corporation's or any Subsidiary's
                  requiring the Employee to travel on the Corporation's or any
                  Subsidiary's business to an extent substantially more
                  burdensome than his or her travel obligations immediately
                  prior to such Change of Control.

                                       2

[PHELPS DODGE CORPORATION LETTERHEAD]

_____ __, 2003

Phelps Dodge Corporation

                            Award of Restricted Stock

Dear :

         Phelps Dodge Corporation (the "Company") is pleased to confirm to you
that at a meeting held on _____ __, 2003 ("Grant Date"), the Compensation and
Management Development Committee of the Board of Directors of Phelps Dodge
Corporation (the "Committee") awarded you __________ shares of Restricted Stock
of the Company pursuant to the 2003 Stock Option and Restricted Stock Plan (the
"Plan").

         This letter will confirm the following agreement between you and the
Company pursuant to the Plan. Capitalized terms used herein that are not defined
in the Award of Restricted Stock letter shall have the meanings assigned to such
terms in the Plan. This award of Restricted Stock is subject to the terms and
conditions of the Plan, as supplemented by this letter.

         1. Restriction on Transfer. Except as provided in paragraphs 3 and 4
below, the shares of Restricted Stock awarded to you hereunder may not be sold,
assigned, transferred, pledged, hypothecated or otherwise encumbered until
__________ (the "Restricted Period").

         Notwithstanding the foregoing, if the Restricted Period for any shares
of Restricted Stock would lapse during any "blackout period" as defined in
Section 306(a)(4) of the Sarbanes-Oxley Act of 2002, then, unless otherwise
determined by the Committee, the Restricted Period for such shares shall not
lapse until the first day following the expiration of such blackout period.

         2. Forfeiture of Restricted Stock. Except as provided in paragraph 3
below, if your employment with the Company and its Subsidiaries terminates prior
to the end of any applicable Restricted Period for any reason including, without
limitation, any termination by you or by the Company in its absolute discretion,
your shares of Restricted Stock, for which the applicable Restricted Period has
not lapsed, shall revert back to the Company without any payment to you and you
shall cease to have any rights with respect to such shares of Restricted Stock.
In the case of such reversion, such shares shall be retransferred to the Company
by means of the stock power referred to in paragraph 5 below.

         3. Death, Disability or Retirement. If your employment with the Company
and its Subsidiaries terminates by reason of your death, your Disability or your
Retirement (except for a termination occurring within six months of the Grant
Date on account of your Disability or Retirement), any Restricted Period still
in effect shall lapse upon your termination of employment.

         4. Change of Control. Any Restricted Period still in effect shall lapse
in the event that, on or after the date six months after the Grant Date, a
Change of Control occurs.

         5. Rights as a Shareholder. Subject to the provisions of paragraph 7
below, you shall have all the rights of a holder of Common Shares with respect
to your Restricted Stock, including the right to vote the shares and to receive
dividends. Notwithstanding the foregoing, your Restricted Stock shall be held by
the Company prior to the lapse of the applicable Restricted Period and you shall
deliver to the Company a stock power executed in blank in such form as the
Company shall determine.

         6. Administration. The Plan is administered by the Committee and any
interpretation or construction of the Plan or this letter by the Committee, and
any determination made by the Committee pursuant to the Plan or this letter,
shall be conclusive and binding on the Company, you and any other interested
party.

         7. Conversion and Property Distributions. In the event your Restricted
Stock is exchanged for or converted into securities other than Common Shares or
in the event that any distribution is made with respect to such Restricted Stock
either in Common Shares or in other property or by way of an extraordinary cash
dividend, the securities or other property or cash that you receive shall be
subject to the same restrictions as apply to your Restricted Stock, including
those provided by the last sentence of paragraph 5 above.

         8. Withholding. You shall be required to pay, as a condition of
receiving a share certificate without legend, any applicable federal, state or
local tax withholding requirements, which, if the Committee shall permit, may be
satisfied by the withholding of shares of Restricted Stock with respect to which
the Restricted Period has lapsed, subject to such terms and conditions as the
Committee shall impose.

         9. Governing Law. This Agreement shall be construed and enforced in
accordance with, and governed by, the laws of the State of New York.

         Please sign one of the two copies of this letter where indicated below
and the attached Stock Power and return them to Linda Lewis, Manager, Executive
Compensation (Phelps Dodge Corporation, One North Central Avenue, Phoenix, AZ

                                       2

85004) at your earliest convenience. Please retain the other copy of this letter
for your records.

                                                     PHELPS DODGE CORPORATION

                                                     By:
                                                        ------------------------
                                                        Senior Vice President

ACCEPTED AND AGREED TO:

- ----------------------------

Date:

- ----------------------------

                                       3

[PHELPS DODGE CORPORATION LETTERHEAD]

_____ __, 2003

Phelps Dodge Corporation

                            Award of Restricted Stock

Dear :

         Phelps Dodge Corporation (the "Company") is pleased to confirm to you
that at a meeting held on _____ __, 2003 ("Grant Date"), the Compensation and
Management Development Committee of the Board of Directors of Phelps Dodge
Corporation (the "Committee") awarded you __________ shares of Restricted Stock
of the Company pursuant to the 2003 Stock Option and Restricted Stock Plan (the
"Plan").

         This letter will confirm the following agreement between you and the
Company pursuant to the Plan. Capitalized terms used herein that are not defined
in the Award of Restricted Stock letter shall have the meanings assigned to such
terms in the Plan. This award of Restricted Stock is subject to the terms and
conditions of the Plan, as supplemented by this letter.

         1. Restriction on Transfer. Except as provided in paragraphs 3 and 4
below, the shares of Restricted Stock awarded to you hereunder may not be sold,
assigned, transferred, pledged, hypothecated or otherwise encumbered until the
lapse of the applicable Restricted Period for these shares as set forth in
subparagraphs 1. a., 1. b., and 1. c. below.

                  a.       The Restricted Period for 25% of the shares of
                           Restricted Stock issued pursuant to this award shall
                           lapse on the third anniversary date of the Grant
                           Date.

                  b.       The Restricted Period for an additional 25% of the
                           shares of Restricted Stock issued pursuant to this
                           award shall lapse on the fourth anniversary date of
                           the Grant Date.

                  c.       The Restricted Period for the remaining 50% of the
                           shares of Restricted Stock issued pursuant to this
                           award shall lapse on the fifth anniversary date of
                           the Grant Date.

         Notwithstanding the foregoing, if the Restricted Period for any shares
of Restricted Stock would lapse during any "blackout period" as defined in
Section 306(a)(4) of the Sarbanes-Oxley Act of 2002, then, unless otherwise
determined by the Committee, the

Restricted Period for such shares shall not lapse until the first day following
the expiration of such blackout period.

         2. Forfeiture of Restricted Stock. Except as provided in paragraph 3
below, if your employment with the Company and its Subsidiaries terminates prior
to the end of any applicable Restricted Period for any reason including, without
limitation, any termination by you or by the Company in its absolute discretion,
your shares of Restricted Stock, for which the applicable Restricted Period has
not lapsed, shall revert back to the Company without any payment to you and you
shall cease to have any rights with respect to such shares of Restricted Stock.
In the case of such reversion, such shares shall be retransferred to the Company
by means of the stock power referred to in paragraph 5 below.

         3. Death, Disability or Retirement. If your employment with the Company
and its Subsidiaries terminates by reason of your death, your Disability or your
Retirement (except for a termination occurring within six months of the Grant
Date on account of your Disability or Retirement), any Restricted Period still
in effect shall lapse upon your termination of employment.

         4. Change of Control. Any Restricted Period still in effect shall lapse
in the event that, on or after the date six months after the Grant Date, a
Change of Control occurs.

         5. Rights as a Shareholder. Subject to the provisions of paragraph 7
below, you shall have all the rights of a holder of Common Shares with respect
to your Restricted Stock, including the right to vote the shares and to receive
dividends. Notwithstanding the foregoing, your Restricted Stock shall be held by
the Company prior to the lapse of the applicable Restricted Period and you shall
deliver to the Company a stock power executed in blank in such form as the
Company shall determine.

         6. Administration. The Plan is administered by the Committee and any
interpretation or construction of the Plan or this letter by the Committee, and
any determination made by the Committee pursuant to the Plan or this letter,
shall be conclusive and binding on the Company, you and any other interested
party.

         7. Conversion and Property Distributions. In the event your Restricted
Stock is exchanged for or converted into securities other than Common Shares or
in the event that any distribution is made with respect to such Restricted Stock
either in Common Shares or in other property or by way of an extraordinary cash
dividend, the securities or other property or cash that you receive shall be
subject to the same restrictions as apply to your Restricted Stock, including
those provided by the last sentence of paragraph 5 above.

                                       2

         8. Withholding. You shall be required to pay, as a condition of
receiving a share certificate without legend, any applicable federal, state or
local tax withholding requirements, which, if the Committee shall permit, may be
satisfied by the withholding of shares of Restricted Stock with respect to which
the Restricted Period has lapsed, subject to such terms and conditions as the
Committee shall impose.

         9. Governing Law. This Agreement shall be construed and enforced in
accordance with, and governed by, the laws of the State of New York.

         Please sign one of the two copies of this letter where indicated below
and the attached Stock Power and return them to Linda Lewis, Manager, Executive
Compensation (Phelps Dodge Corporation, One North Central Avenue, Phoenix, AZ
85004) at your earliest convenience. Please retain the other copy of this letter
for your records.

                                                     PHELPS DODGE CORPORATION

                                                     By:
                                                        ------------------------
                                                        Senior Vice President

ACCEPTED AND AGREED TO:

- --------------------------------

Date:

- --------------------------------

                                       3

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EX-15

                                                                      EXHIBIT 15

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Commissioners:

We are aware that our report dated July 25, 2003 on our review of interim
financial information of Phelps Dodge Corporation (the "Company") as of and for
the period ended June 30, 2003 and included in the Company's quarterly report on
Form 10-Q for the quarter then ended is incorporated by reference in its
Registration Statements on Form S-3 (Nos. 333-104627, 333-67606, 333-61624 and
333-43890), its Registration Statement and Post-Effective Amendment No. 1 on
Form S-3 (Nos. 33-44380 and 333-36415), its Registration Statements on Form S-8
(Nos. 33-26442, 33-6141, 33-26443, 33-29144, 33-19012, 2-67317, 33-34363,
33-34362, 33-62648, 333-42231, and 333-52175) and its Post-Effective Amendment
No. 4 on Form S-8 to the Registration Statement on Form S-4 (No. 333-86061).

/s/ PricewaterhouseCoopers LLP

Phoenix, Arizona
July 28, 2003

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