Analysis of the new strategy

The new strategy and organization of risk management should help Phelps Dodge to operate
profitably and meet its financial obligations. The new strategy and organization of risk
management contains restructuring copper operations to produce Gross profits of $50 million
per year from operations. Besides, unprofitable divisions like Morenci smelter and the Ajo
mine and smelter should be closured according to the new strategy. An immediate
consequence of that action for the financing of Phelps would be that the company would have
less capital expenditure, nearly $11 million. The strategy also consists of shrinking the
headquarters staff, moving to a less costly location, cut back the exploration and research and
development to reduce the overhead costs with $21.2 million. A consequence of that would
be that the company would have less general costs per year.
Another measure within the strategy is to sell several assets and move on with the cash
received from these sales and a smaller set of assets. By doing that, the firm would raise
enough cash to put itself in a net positive cash flow position. In sum, these strategic actions
would lead to enormous cost-cuttings, which in turn could lead to a net positive cash flow.
These surplus in cash flow would be used to reduce the debt. So in this case, financial
liquidity is managed by cost-cuttings through selling assets, closing unprofitable divisions and
reducing the overhead costs. As a consequence, the capital structure changes significantly.
The appropriate capital structure would be that the company only contains assets that are
profitable with a low risk and the risky non-profitable assets are sold. The next step would be
paying the debt with the cash flow surplus. The new strategy would improve the leverage
ratio, since the company would make no more losses but profits per year.
Since diversification was not really succesful for Phelps Dodge in the past, its not
sure if this would be a good initiative to manage the risks. An alternative to diversification
would be the use of future contracts which is a good instrument to use when you participate in
a volatile market and you want to make sure what to expect in the future. Exhibit 5 shows the
decline of copper spot prices through the years, which is an indication to fix the price of
copper in the future by a future contract to get some certainty for the future cash flows. In that
way, risks about the future will be reduced.
The risk management strategy of Phelps will create value in the future, because no
more losses will occur according plan. Instead, annual profits will be generated following the
cost-cuttings, the sale of several assets not essential to the companys core business and debt
cuttings.

Conclusion
The new strategy and organization of the risk management for the financing of Phelps was
mainly focused on cost-cutting and debt-cuttings. They did that by restructuring copper
operations to produce more Gross profits, reducing overhead costs and selling several nonprofitable assets. With this strategy, Phelps would generate a surplus of cash flows to pay of
its debt. With paying of their debt, they can improve their leverage ratio to get more
confidence from equityholders and investors. Diversification was also considered to
implement in the new strategy. However, diversification wasnt a succes in the past, it is still a
question whether to implement it or not. On the other hand, future contracts are good option
to implement, because it gives more certainty about the future. Since Phelps is active in a
volatile market, it should be a wise choice to take part in future contracts.