* Freeport in $9 billion bid for two energy companies
* Move highlights lack of good copper assets available
* Copper market struggles with old mines, low grades
* Investors push back with share sell-off
By Clara Ferreira-Marques and Julie Gordon
Dec 5 Freeport-McMoRan Copper & Gold Inc's
decision to diversify into energy highlights the dearth
of attractive options available in copper, its main business,
but few competitors are likely to follow its lead into
Unlike many miners, Freeport - the world's largest listed
copper producer - has roots in oil and gas. That made it easier
for the U.S.-based miner to take its leap of faith in search of
Even so, Freeport's $9 billion play for Plains Exploration &
Production and McMoRan Exploration Co shows that
even industry giants are finding copper a challenge as mines
age, grades decline and costs rise.
Freeport-McMoRan Copper & Gold was spun-off as a stand-alone
entity in the mid-1990s from Freeport-McMoRan Inc, which back in
the day also controlled the company now known as McMoRan
Investors, it appears, blanched at the latest move and
apparently would have preferred Freeport to stick to what it
knows best. The stock tumbled nearly 16 percent after the plan
was announced on Wednesday.
But experts say Freeport may have had few alternatives:
there simply are not many known "Tier 1" copper assets left to
gobble up, particularly in accessible locations.
"We are seeing the quality of available copper asset out
there in the market declining and what assets that are out
there, a lot of them are saddled with one problem or another,"
said Alex Terentiew, a mining analyst with Raymond James.
"I do think (the deal) could partly reflect that the miners
are starting to look elsewhere."
Instead, Freeport opted to turn its sights on higher-margin
energy production even though its diversification dilutes its
exposure to China's infrastructure boom.
"People have to make these big money decisions based on
where they get the best return," said Ed Meir, a metals market
analyst at INTL FCStone.
"They're obviously not seeing it in copper as much as they
think they'll see it in energy, and that tells you something."
Copper demand has soared in the last 40 years, but
production has barely managed to keep up. Miners have faced
extreme weather, labor disruptions and operational hiccups.
Grade decline has also hit the industry hard, particularly
in traditional copper areas such as Chile, the world's top
producer. The grade at Chile's Escondida mine, for example,
dropped to 0.97 percent at the end of last year from 1.72
percent in 2007.
Meanwhile, new deposits with attractive grades have turned
up in ever-more remote locations, from Mongolia to the
Democratic Republic of Congo.
Add in sky-high development costs, challenges with securing
staff and equipment, and it is becoming very difficult for
companies to justify the development of many copper projects.
"Potentially Freeport was looking at a declining price curve
as well as limited growth options apart from its current slate
of projects, and views oil and gas as having better exploration
and overall growth potential via volume and price," Nomura
analysts said. "From this perspective, the deal strategically
makes sense to us."
Still, the angry opposition from shareholders echoes the
backlash that top gold miner Barrick Gold Corp faced in
2011 when it bid C$7.3 billion to take out copper producer
Barrick's stock tumbled as investors, hungry for exposure to
gold, exited en masse. Aaron Regent was ousted as chief
executive a year later, taking the fall for the poor performance
by shares in the wake of the deal.
OUTSIDE THE BOX
To be sure, Freeport is not the first miner to take the
plunge into energy.
It follows a path blazed by BHP Billiton Ltd
, the world's largest diversified miner. Oil and gas has
been one of the company's most profitable divisions, b u t its
diversification has not been problem-free: it took a $2.8
billion writedown on some of its shale assets earlier this year.
A second company is Canada's Teck Resources Ltd,
which mainly mines copper, coal and zinc. It has stakes in two
development-stage projects in the Alberta oil sands.
While there is little chance of either project going into
production before 2017, the company considers its energy assets
a key part of its long-term growth strategy.
Another is Glencore, the commodities trader in the
final stages of combining with miner Xstrata. Glencore
has already moved into oil production and could be hungry for
While Freeport's move into oil and gas may be unpopular now,
over time it may prove to be the best option, especially as
China's economy matures.
"Copper is clearly one asset that a developing country uses
relatively early," said Michael Widmer, a metals market analyst
with Bank of America-Merrill Lynch. "Copper demand growth is
coming under pressure. You're seeing competitors adjust their
portfolio towards later stage commodities."
"Energy is one you can see countries using more of as they
($1 = 0.9930 Canadian dollar)
(Reporting by Julie Gordon in Toronto, Clara Ferreira-Marques
in London and Josephine Mason in New York. Editing by Frank
McGurty and Bob Burgdorfer)