Both companies recently acquired by FCX were purchased at premium of NAV
Freeport-McMoRan (NYSE: FCX, Stock Forum) is an international copper and gold mining company headquartered out of Phoenix, Arizona. Freeport-McMoRan is the world’s largest publicly-traded copper producing company with operations worldwide in countries like Indonesia, North America, South America, and the Republic Of Congo.
Freeport-McMoRan has recently announced that they will acquire two new companies, Plains Exploration & Production Company and McMoRan Exploration Company, both companies are in the oil and gas production business with significant operations in the United States, which is intended to add diversification away from the mining industry for Freeport-McMoRan.
The recent news reported by FCX detailing the acquisitions have not been bullish moves in the minds of many current FCX stock holders as they are having a difficult time coming to grip with the decision to spend around $20 billion on both companies, a move that has sent FCX stock down 21% from $38 to $30/share.
In a recent press release announcing the acquisitions, James R. Moffett Chairman of the Board of FCX reported: “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. We are pleased to add the PXP and MMR oil and gas teams to FCX’s global family. The combined mining and oil and gas teams have significant management depth in operations, technical innovation, project development and financial management, and share a strong commitment to safety, community development and environmental management.”
Richard C. Adkerson, FCX’s President and Chief Executive Officer, stated in the same announcement: “The transaction will add a high quality portfolio of assets with strong current cash flows, significant growth options and complementary exposure to markets positioned for global growth in the developed and developing world and reflects our positive view of the factors that will drive demand for copper and other commodities. The oil and gas assets being acquired possess the asset quality characteristics that we seek in our mining business – large scale assets with long lives, low cost and geologic potential to support growth through exploration and development. We anticipate that attractive debt financing markets and our strong balance sheet will allow us to finance a significant portion of the transaction using low cost debt and enable FCX shareholders to retain the significant value we see in our existing asset base, while enhancing future value generation opportunities. We will not diminish our focus in our mining operations on safe and efficient production, executing our organic growth projects, prudent capital allocation and an entrepreneurial spirit of creating values for our shareholders.”
To finance the merger consideration for both of these transactions and to pay off debt held by Plains Exploration & Production Company, FCX received $9.5 billion in financing from JP Morgan Chase, which has newly created an estimated debt of $20.0 billion dollars for FCX, or around $16.3 billion net of cash.
Both companies recently acquired by FCX were purchased at premium of NAV, which has many investors and shareholders uncertain about the decision to undergo such extreme debt for these investments.
The outlook on oil for 2013 is bearish with the world economy still uncertain about the future for the local economy and global trade cutting the demand for oil, which is predicted to decrease the price of oil in 2013.
I like the idea of Freeport-McMoRan diversifying into the oil and gas sector with the mining industry under-going problems of its own with expensive operational costs and a decrease in yearly production from many countries, which have separated the higher price of gold from the value of mining companies as we have seen in the past four years, with major gold indices such as the HUI gold bugs index lower than pre-recession 2008 prices.
With these facts in mind I am not particularly bullish on FCX, I personally wouldn’t be in a hurry to place any buy orders just yet.