By now, it is no secret that the mining company, Freeport-McMoRan Copper & Gold (FCX) lost $6 billion in value after it announced its planned purchase of Plains Exploration & Production and McMoRan Exploration. But the real beneficiaries to this are Jim Bob Moffett, Freeport's chairman, and James Flores, chief executive of Plains. Here is a summary of who wins at what:
- The transaction offered up a headline 74 percent premium for McMoRan. It is a struggling oil company part owned by Mr. Moffett.
- His gains on his McMoRan holding trumped his losses on Freeport stock to the tune of some $15 million while others licked their wounds caused by the gap down.
- Mr. Flores of Plains, meanwhile, will get a $130 million windfall including accelerated vesting of stock.
- He will also keeping a senior job at the enlarged Freeport, collecting a pay rise to match the $2.5 million annual salaries of Mr. Moffett and Freeport's chief executive, Richard Adkerson, and joining them on the board.
Investors just don't like this deal even though a special committee of independent directors evaluated it. Mr. Flores' golden parachute - due even without losing his job - was written into his Plains contract, but that doesn't make it any more palatable for Freeport shareholders.
Goldman Sachs still has unanswered questions and believes the stock will remain trade bound for some time to come. Here's what they stated:
"We attended an analyst meeting hosted by FCX management to discuss the PXP/MMR acquisitions…the meeting did not answer all the concerns that we have heard from investors regarding the strategic rationale behind the acquisitions and the process that the Freeport's Board ran to assess the assets and company trajectory. We continue to expect the stock to remain pressured and trade range bound for some time."
But not everyone thinks the move was so bad. Oracle Investment believes the short term drop will bring a welcomed investment point. It's thinking centers around the cycle of natural resources and bringing oil to the mix is a wise investment on capital. But in order to be a wise move, everything has to play out correctly. World economy must rebound and copper could be a huge revenue generator. Can the companies be integrated smoothly and profits extracted from the operations?
So what is an investor to think? Will multiples remain suppressed for an unforeseeable period of time to come? It comes down to the global performance of the economy in 2013 and the forecasts I have seen do not paint a rosy picture.
Direction is not even a question with FCX. The recent gap down at the beginning of December defined the direction if the stock but the RSI indicator signaled an over sold position so now I would expect the stock to move sideways to slightly bullish as it corrects itself from the huge gap down. Will the gap fill? It is highly probable that the stock will move to fill the gap at least partially. This gap down is just as extreme move in the direction the stock was moving anyway. The MACD reveals the long term direction of the movement and the gap just pushed it down faster. It is too early to observe what the Bollinger Bands may be telling us. But do not be surprised if the stock started to move sideways toward the middle band.
What can a Long Term Investor Expect?
I am of the opinion that the company will look good if the economy really starts to pick up. But it is going to take major increases in copper and oil prices to make this move look credible in the short run. Will this happen? According to my observations I do not believe 2013 is going to be declared the year of prosperity. So I would not stand behind a statement that the acquisition is going to make the company look good in the near term. As an investment, I am not inclined to jump in yet. Prices are low but I am just not sure the company will increase in value in the coming quarters. I would take a wait and see approach.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.