Summary
- Freeport McMoRan (FM) and Phelps Dodge in a merger deal puts both companies 'in play' as targets for other groups
-Whilst FM with its world beating asset seems like an obvious target initially, there are compelling reasons why Phelps should make just as good, if not better a takeover possibility
Analysis
A major merger/ takeover inevitably attracts other players as the stock is in play and attached valuations become public. The deal between Freeport McMoran, operator of the giant Grasberg mine in Indonesia, and Phelps Dodge, the US based copper giant, is just such a merger.
Depending on who you talk to, there are different attitudes about both stocks.
FM clearly has outstanding assets (one of the largest copper deposits in the world and the largest single gold reserve in the world), and has operated very profitably. It is however working in Indonesia, an area of perceived Sovereign risk where groups such as Aon note medium-high risks of sovereign nonpayment, supply chain vulnerability, legal and regulatory risk, civil commotion, and so on. Technical engineering difficulties, in addition to fairly active anti-FM add to perceived difficulties. In addition it is essentially a single mine operation, and this in itself provides a risk bottleneck that would benefit from diversification.
Phelps Dodge, with its major assets outside the US in Peru and Chile provide a perceived lower risk, but with less 'exciting' copper assets. This article is one of the first to have pointed out that the allegedly safer Phelps Dodge may provide a real target alternative to the more widely reported Freeport McMoran, and that Phelps shareholders may not want the political and other baggage that comes with this first class asset.
The types of buyers that could spoil the deal may not want that kind of perception either. It is conceivable that we could see Phelps as the target for another group, and FM looking for further opportunities elsewhere.
