Freeport-McMoRan Copper & Gold Inc. (FCX) is taking over Phelps Dodge Corporation (PD) according to Wall Street Journal article Freeport-McMoRan To Buy Phelps Dodge For $25.9 Billion (subscription required) for $126.46 per share. I recommend reading the complete WSJ article.
The value of the deal in terms of Phelps Dodge's share price could fall as trading opens Monday since shares of companies making big acquisitions typically fall over earnings-dilution fears and other factors. Freeport said it is offering $88 in cash and 0.67 share for each Phelps Dodge share. Freeport will finance the deal's cash portion, some $18 billion, with debt.
The deal amounts to a large bet on the long-term sustainability of high metals prices. Before this latest mining deal, some industry players had thought the industry's consolidation cycle had possibly abated for now in light of recent weakness in the price of copper. Since peaking in May, copper prices have dropped more than 20%, trading at about $3.07 a pound Friday.
Copper-market players have pointed to such factors as increasing Chinese production and slackening demand, and a slower U.S. economy and housing market. Long-held concerns that copper supplies could fall short of demand have been offset by a growing sense that supplies appear sufficient. Industry costs, meanwhile, have climbed sharply in recent years amid high energy prices and equipment and labor shortages.
Still, the current copper price remains very high by historical standards, and provides strong earnings and cash flows to most mining companies. Most copper mines in operation today were built with much lower prices in mind.
At the close on Friday, Freeport and Phelps Dodge closed at $57.40 and $95.02. If Freeport is offering $88 cash and 0.67 shares (equivalent cash value of $38.46 based on Friday's close), then nearly 70% of the offer is cash. Freeport must be bullish on copper, because if it believed that copper prices were headed lower, then it would have waited for the price of Phelps Dodge to fall and used its cash to purchase the same shares at a cheaper price. The International Copper Study Group has an interesting graph of world refined copper stocks for the past six years.
Unlike many pundits who proclaim that that commodity bubble will burst soon and like Jim Rogers, I continue to believe that many commodities are in a long term bull market. Simply put, finding new resources is becoming more costly and more difficult and more time consuming. The low hanging fruit has largely been picked over. Other supplies are often located in less hospitable parts of the world. And everywhere, environmental concerns are more costly and are taking longer to address. As new supplies are becoming more difficult to access, many countries—notably Brazil, Russia, India, and China—are experiencing rapid growth. Moreover, I expect more consolidation to occur as commodity related companies build up their war chests and hunt for growth.
Leave a comment