Congo mine lured suitor

Five months after it launched a failed bid to buy two of Canada’s largest metals producers, Arizona’s Phelps Dodge Corp. was itself swallowed by smaller rival Freeport-McMoRan Copper & Gold Inc., a $26-billion (U.S.) takeover that was driven in part by a promising African venture between Phelps Dodge and a small Vancouver company.

The cash and stock deal, the richest so far in a furious spate of activity among the international mining giants, will create the world’s No. 1 publicly traded copper player.

It will also create the largest miner of any kind based in North America, though this distinction could be misleading: The prospects of this friendly merger are tethered to Indonesia and Africa, where Phelps Dodge and Vancouver-based Tenke Mining Corp. operate what is regarded as the world’s biggest undeveloped copper resource.

Freeport, headquartered in New Orleans, has generated considerable cash, and plenty of attendant controversy, from its Grasberg gold and copper mine in a remote region of Papua, Indonesia. It has been looking to diversify geographically, and Monday, the company named Phelps Dodge’s Tenke Fungurume property in Congo as a focal point of that expansion.

On a conference call, Freeport chairman James Moffett, a mining legend popularly known as ”Jim Bob,” told analysts that the Phelps Dodge purchase provided an ”opportunity to create a Grasberg-type asset with the Tenke project.”

Tenke is expected to begin producing copper in 2008, and could reach 400,000 tonnes of output by 2011.

Paul Conibear, president of Tenke Mining, which owns almost 25 per cent of this property, said Freeport’s experience in Indonesia could help Tenke in the politically unstable environment of Congo.

Tenke, which was founded by the Lundin family of Vancouver, sold a 58-per-cent stake to Phelps Dodge several years ago. Development of the project has been halted at times because of conflict in Congo.

”I think when you look in aggregate at the issues they faced when they explored it, built it, and then operating it ”” geologically, technically, and politically ”” I think [Indonesia] has been a more complex environment, and Freeport mastered that,” said Mr. Conibear, whose company’s stock climbed 12 per cent to $13.93 (Canadian) on the Toronto Stock Exchange.

”I see Tenke as being a great fit,” he said.

Not everyone has been so enamoured of Freeport’s Indonesian track record.

Grasberg ranks as the largest gold and copper mine in terms of reserves, but it has been a lightning rod for critics, who have assailed the company for everything from its environmental practices, to its impact on the indigenous population, to its financial dealings with military personnel.

Executives at the company could not be reached for comment Monday, though they have repeatedly defended their practices as appropriate.

Basu Mullick, a portfolio manager with New York’s Neuberger Berman LLC, one of Phelps Dodge’s largest shareholders, said Tenke could be one of the most significant assets for the two companies.

He was also complimentary of the deal, saying it makes more sense than Phelps Dodge’s fruitless foray into Canada.

The Arizona miner was dealt two defeats here: Once, in its unsuccessful attempt to buy a combined Inco Ltd. and Falconbridge Ltd. (Falconbridge was ultimately acquired by Anglo-Swiss miner Xstrata PLC), and then again, when Brazil’s Companhia Vale do Rio Doce spoiled its attempts to do a friendly merger with Inco alone.

”I think that this is a much better deal for shareholders versus Phelps Dodge buying Inco,” Mr. Mullick said of the Freeport agreement. ”We always like to see a better price, and who knows? Maybe we’re not done yet.”

The Freeport offer valued Phelps Dodge at $126.46 (U.S.), which reflects a 33-per-cent premium to the company’s closing price on Friday. About 70 per cent of the price tag will be paid in cash.

Opinion remains divided over whether another deep-pocketed miner could enter the fray and spark a bidding war for Phelps Dodge. The pessimists point out that the company’s high cash reserves, low debt levels and weak valuation have made it vulnerable for some time, and that other interested suitors would likely have emerged by now.

While that may be true, the current merger frenzy has defied historical precedents in many respects.

Metals prices, despite some recent softening, have remained strong, as has demand from rapidly growing industrial powerhouses such as China.

And despite the billions of dollars being funnelled into exploration, new discoveries have been sparser than expected, adding pressure on management teams to renew their depleting assets with acquisitions.

”For now, there isn’t that much out there, and there are people with lots of cash, so my guess is consolidation will continue,” said Teck Cominco Ltd. chief executive officer Don Lindsay, himself an unsuccessful bidder for Inco.

Teck was part of a three-way bidding war for the nickel giant, and appeared to have the upper hand before being brushed aside by a last-minute bid from Companhia Vale do Rio Doce.

Stephen Whisler, the Phelps Dodge chairman who at one point was poised to swallow two Canadian miners and forge a $40-billion mining titan, is expected to step down after the deal is consummated. Freeport CEO Richard Adkerson would run the merged company.

Lukas Lundin, chairman of both Tenke Mining and Lundin Mining Corp., said he welcomes the Freeport deal, and noted the managers there have ”a more aggressive style” than their counterparts at Phelps Dodge.

Like Mr. Lindsay, he doesn’t see the wave of mergers ending any time soon, either among the larger players or in the fragmented ranks of the mid-market.

”I don’t think it’s going to slow down,” he said. ”It’s very hard to find new ore bodies. To start from scratch is going to take you 10 years.”