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Freeport-McMoRan’s metal-morphosis not a done deal

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Freeport-McMoRan Copper & Gold – rough week to have those metals in your company name. Prices for both have plummeted. Freeport's shares were down 3 per cent on Monday on reports that China's economy, and by implication copper demand, was slowing. So Thursday's earning report was somewhat anticlimactic. Sales, as expected, were down year over year as higher copper sales volume couldn't compensate falling prices.

The real drag on Freeport shares, however, is not metal prices but its $20-billion (U.S.) foray into oil and gas. It announced plans to buy Plains Exploration and McMoRan Exploration in December. The stock fell from $38 to $31 then, and has remained around there since.

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Management believes the company must diversify in the way that BHP Billiton and Rio Tinto already have. Admittedly, buying another miner might not have been wise, with the global economy wobbling and the industry recovering from a decades-long acquisition binge. But oil and gas?

The Plains and McMoRan assets are all in the U.S., a virtue when its foreign mines are in unstable parts of the world. And the cash flow from the new businesses could fund future expansion in copper. It all comes down to whether management can execute, despite a doubling of Freeport's net debt load from $7-billion to $16-billion, not too high compared with $12-billion in earnings before interest, taxes and depreciation. But the company projects a combined $7-billion of capital expenditures this year alone.

Freeport investors who remain unenthusiastic about the venture into energy may have a get-out, courtesy of the targets' shareholders. Plains investors are clamouring for a higher bid. Half of the price was to be paid in (now much cheaper) Freeport shares, and a newly discovered oil field has shown promise. McMoRan shareholders are also protesting that its management may not have negotiated top value. Freeport may just be destined to remain a copper company.

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