The big news this week is the merger of two American copper miners–FREEPORT-MCMORAN COPPER & GOLD of New Orleans and PHELPS DODGE of Phoenix. Both boards of directors have approved and are recommending the deal, worth US$25.9 billion. Each Phelps Dodge share is valued at US$88 in cash plus 0.67 of a Freeport share.
The merged company will continue business under the Freeport McMoRan name but will move its executive offices to Phoenix. Plans are to continue using the Phelps Dodge name on assets belonging to that company. Freeport’s chairman James Moffett and CEO Richard Adkerson will retain their roles, and Phelps Dodge chairman Steven Whisler will retire. Timothy Snider and Ramiro Peru, both of Phelps, will retain their responsibilities as COO and CFO, respectively.
The press announcement was full of the usual buzz words: geographically diverse assets; growth and expansion; financially compelling; industry leader. That may be true. What we know is that the combination of Freeport and Phelps Dodge will create the largest North American copper company. Together the two companies plan to produce 3.1 billion lb of copper, 1.7 million oz of gold, and 69.0 million lb of molybdenum this year. For the 12 months ending Sept. 30, 2006, the companies had combined revenues of US$16.6 billion.
Freeport brings its Grasberg copper-gold mine in Papua, Indonesia, to the merger. For its part, Phelps Dodge is offering the Tenke Fungurume project in the Democratic Republic of the Congo, three copper mines plus an advanced exploration project in Arizona, and two copper mines in South America. Production from Tenke could begin in late 2008 or early 2009, with a planned capacity of 220 million lb of copper yearly.
The mining industry has put great faith in copper prices, watching them double through 2003, grow 50% the next year, rise again in 2005 and race through the stratosphere in 2006, reaching a high of US$3.90/lb in May. The increase has been nearly 10-fold in five years. That kind of growth is difficult to maintain indefinitely, and over the last month the copper price trend is downward. At breakfast time this morning (Nov. 22) copper was trading at approximately US$3.10/lb.
The merger raises a couple of questions in my mind. First, can Freeport remain profitable if the downward pressure on the copper price continues? That depends on how much it costs the company to produce a pound of copper. Second, will byproduct revenues be sufficient to maintain a positive balance sheet?
Among mega-mergers in the mineral industry this year, only the Freeport-Phelps Dodge deal is creating a business so heavily dependent on a single base metal. Even the proposed marriage of Inco and Falconbridge would not have been as reliant solely on nickel, since copper has always been a large part of both companies’ output. Now with Falconbridge becoming part of Xstrata and Inco being swallowed by Companhia Vale do Rio Doce, the assets of the former Canadian companies are now part of enterprises with highly diverse production profiles.