Freeport McMoRan embraces Big Commodities

Commentary: Getting the jump on regulators

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Dec. 5, 2012, 2:46 p.m. EST  

http://www.marketwatch.com/story/freeport-mcmoran-embraces-big-commodities-2012-12-05?siteid=bigcharts&dist=bigcharts

 

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By MarketWatch

SAN FRANCISCO (MarketWatch) — Glencore International PLC’s blockbuster $62 billion merger this year with mining giant Xstrata PLC put the world’s biggest commodities-trading operations under one roof.

It also stirred a bug to get big that clearly bit Freeport McMoRan Copper & Gold Inc. FCX -16.22% .

Freeport announced Wednesday it’s buying McMoRan Exploration Co. MMR +86.05% , reuniting it with the oil and gas company it spun off in 1994, back when “unlocking shareholder value” was in vogue. The two had always remained close, even sharing a chairman.

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Freeport is also buying Plains Exploration & Production Co. PXP +23.88%  . Plains, a petroleum producer with a 31% stake in McMoRan Exploration, was practically family anyway. Read about Freeport's move into energy.

All told, it’s a $9 billion deal aimed at creating what Freeport calls a U.S.-based natural-resource company with a diverse portfolio of mineral and energy assets spread around the globe. The focus here is very keenly on building a “natural-resource company.”

Adding oil and natural gas to their production portfolio reflects a gnawing concern at Freeport that the gold and copper markets are looking a bit played out. Freeport is one of many miners that rode the China wave. As Chinese manufacturing cools, so does demand for the red metal. Copper prices are down about 18% from their 2011 highs.

Gold is not that perky either, falling below $1,700 an ounce this week despite all the hand-wringing over the U.S. fiscal cliff. Goldman Sachs even put out a note this morning lowering its 2013 gold price forecast. See; Goldman Sachs cuts gold outlook, sees growing risk.

None of this guarantees oil and gas prices will go up next year, but at least Freeport can tell shareholders it’s spread the risk around.

There’s probably another motivator lurking behind Freeport’s expansion, and it goes back to Glencore UK:GLEN -0.23% .

Through its Xstrata UK:XTA -0.34%  deal, Glencore has amassed enormous pricing power in key commodity markets. It was a bold move that secured the Anglo-Swiss company’s dominance of the zinc market and a huge presence in the global copper and grain trade.

At the same time, the ongoing concentration of global mining operations in the hands of a few big, multinationals and fierce competition for resources from state-controlled companies are raising widespread concerns among economists, politicians and regulators of the historically under-regulated global commodity markets. Are these companies amassing too much clout?

Freeport McMoRan, already the world’s biggest publicly-traded copper producer, isn’t waiting to find out.

The trend is clear: Expand while you still can.