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TWST: How do the metals prices look today?

Mr. Lazarovici: They continue to look oversold to us. While they were up in the last few weeks of 2000, they have yet to recover to what we would consider to be long-term sustainable levels — prices sufficient to generate the level of cash flow and earnings required to justify reinvestment to sustain and grow capacity. The one exception to that is nickel, which had a very strong recovery out of the 1998 lows, and while the metal did come off its highs, it still traded at a very robust level until just recently.

TWST: And the stocks?

Mr. Lazarovici: The stocks generally underperformed the market through the year. Share prices declined through the first half of the year, before staging a short-lived rally from about late summer to early fall. After the subsequent correction, share prices began to rebound in late October, but most shares were down 20%-30% for the year.

TWST: When we spoke earlier in the year — at the Roundtable in 2000 — you had an accumulate rating on Phelps Dodge (NYSE:PD). How did Phelps Dodge perform through the year?

Mr. Lazarovici: Phelps Dodge peaked in January, in line with most other metal stocks, and weakened through July. The company continues to be adversely impacted by integration problems related to the Cyprus Amax Minerals acquisition, and issued a profit warning for the second quarter. Since then, the company has been hit by a number of issues in its southwestern operations where high energy prices, power interruptions and flooding in the fourth quarter have lowered production and raised costs. Despite that, and despite the fact that the copper price had been trending down, the stock started to recover in July from what was an overly depressed level. Also, despite the merger and operating problems, the market seems to have looked past the unfavorable near-term trends and started to respond to the positive implications of the the large LME inventory draw-down. As the share price continued to strengthen, we downgraded Phelps Dodge to a neutral rating, and in early December, we downgraded it to an underperform because it exceeded our price target. At the same time, as the shares rose past our price target, we cut our earnings estimates because the copper price was declining more than we had expected and the operating difficulties in Arizona were not improving as we had anticipated.