PHOENIX — By bidding $25.9 billion for Phelps Dodge, Freeport-McMoRan is trying to boost its copper reserves the only way possible as precious metal prices soar.
With mining companies unable to keep up with demand from a worldwide building boom, market analysts say the best place to find copper these days is to mine Wall Street, not the ground.
"The global amount of copper that's available ... is very low," Richard C. Adkerson, president and CEO of Freeport-McMoRan Copper & Gold Inc., said Monday in a conference call with investors.
"Our view is, there's a high likelihood that the world is going to need copper," he said.
Freeport-McMoRan plans to reinvest in its current mining operation in the future. But acquiring Phelps Dodge would give shareholders "a company that's producing a lot of copper right now," Adkerson said.
That's a major asset as an explosion of construction projects in China and other developing countries sucked up supplies of copper wiring and other building materials.
As supplies thinned, copper prices have more than tripled in value. Copper has been valued at about $3 per pound during the past few years, compared with $1 per pound throughout the 1990s.
The acquisition of Phelps Dodge, which Adkerson expects to be complete by the end of the first quarter of 2007, still must be approved by the Department of Justice and the Securities and Exchange Commission. The agencies have a month to review Freeport-McMoRan's proposal.
The combined company would become the world's largest publicly traded copper miner, outpacing Chile's Codelco, or Nacional del Cobre de Chile, currently the largest company in terms of production.
Its mines would be spread across the globe, from Indonesia and Peru to the Democratic Republic of the Congo and Arizona.
"Having all that cash on the table is really nice for Phelps Dodge shareholders," said Peter Kettle, a metals industry researcher with London-based CRU.
Freeport-McMoRan estimates its offer is worth $125.27 per share. Each Phelps Dodge share would be exchanged for $88 in cash plus 0.67 of a common share of Freeport-McMoRan.
Shares of Freeport-McMoRan dropped $1.77, or 3 percent, to close at $55.63 in trading on Monday, the first day of trading after the acquisition announcement. Phelps Dodge shares shot up $25.45, or 27 percent, to end at $120.47 on the New York Stock Exchange.
But Kettle added that Freeport-McMoRan might stumble on its bet that copper prices will continue to stay strong for years to come.
"This is generally perceived to be the top of the cycle for copper prices," Kettle said. "Therefore, it's sort of a risky time for investing huge amounts of cash."
Credit ratings agency Standard & Poor's said it also was concerned about the amount of debt the combined company would have to deal with.
"We acknowledge the strong metals price environment but do not expect current prices to remain near these levels during the next several years," S&P's credit analyst Thomas Watters, said Monday in a published statement.
Peter Schiff, president of Euro Pacific Capital, Inc. in Connecticut, who advises investors of precious metals, said this was a smart way for Freeport-McMoRan to get a hold of more copper.
"The cheapest way to get reserves is to buy them on Wall Street," Schiff said.
Mining companies didn't invest in more exploration for years, Schiff said, because of a false perception that there wasn't much profit in it. The recent surge in copper prices has created a demand for more ore than mining companies can produce.
"Over time these things will correct themselves," Schiff said. "This is more of a problem for this generation than future generations."
The merged companies will operate under the Freeport-McMoRan Copper & Gold banner, with Adkerson serving as CEO. However, any business operating under Phelps Dodge will continue to use that name.
Freeport-McMoRan also plans to keep an office and its 300 employees in its green-stone high-rise in downtown New Orleans, across from the Louisiana Superdome. Some mining professionals will move west, Freeport-McMoRan spokesman Bill Collier said.
Officials for both companies say they don't expect any job cuts or facility closures because of the deal. "Our operations don't overlap," Adkerson said.
