Freeport-McMoRan Plays Let’s Make a Deal

Freeport-McMoRan Copper & Gold (NYSE:FCX), an international mining industry leader based in North America, is making major moves to diversify its business. Unfortunately, current shareholders are taking a beating in the market as shares trade sharply lower.

Let’s Make a Deal

After months of negotiations behind closed-doors, Freeport announced on Wednesday that it agreed to purchase Plains Exploration & Production (NYSE:PXP) for approximately $6.9 billion in cash and stock, while also buying McMoRan Exploration (NYSE:MMR) for about $3.4 billion in cash, or $2.1 billion net of 36 percent of McMoRan assets currently owned by Freeport and Plains. The acquisitions include about $11 billion in assumed debt, and McMoRan Exploration shareholders will receive a distribution of units in a royalty trust that will hold a 5 percent overriding royalty interest on future production in the company’s existing shallow water ultra-deep properties.

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The deal gives Freeport stronger exposure to the oil and gas business, which it got into during the 1970s, but sold many of its assets in the 1990s to develop copper and gold projects.

James R. Moffett, chairman of the board for Freeport, explains in a press release, “FCX has been built through our exploration and development capabilities, and this transaction will enable us to add assets with exceptional exploration and development potential to a world-class mining company to create a premier minerals and oil and gas business focused on value creation for shareholders. The transaction offers significant values to the MMR and PXP shareholders and will enable FCX to build on these values through a much larger, well capitalized platform.”

Contestants did not like their surprise…

Unhappy Contestants

Mr. Market did not react well to the announcement. Shares of Freeport plunged more than 14 percent on heavy volume to hit as low as $31.73, its lowest level since July. The deal complicates Freeport’s business outlook, as it is no longer seen as only a copper and gold play. Furthermore, the company is paying out hefty premiums to acquire the two firms. Freeport is paying about $50 a share for Plains, representing a 39 percent premium to the firm’s prior day closing price. Meanwhile, Freeport is paying $14.75 a share for McMoRan, a 74 percent premium.

CHEAT SHEET Analysis: Trends Support the Industry in which Freeport Operates

One of the core components of our CHEAT SHEET Investing Framework explains that companies riding macro trends tend to outperform those which don’t. Think of the investing proverb, “A rising tide raises all boats.” The growing world needs energy and metals like copper (NYSE:JJC). Furthermore, massive central bank easing taking place around the globe provides support to gold (NYSEARCA:GLD) and other commodities across the board. However, when shares decline as sharply as Freeport has done, it may be best to take a step back and avoid trying to catch a falling knife.

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