Shareholders in Plains Exploration and Production (PXP) in a preliminary vote have approved their acquisition by Freeport McMoRan (FCX), the world's largest producer of copper and molybdenum. FCX also is one of the world's foremost producers of gold and output from its Grasberg mine in Papua New Guinea is expected to grow substantially in 2015 and again in 2017 when its underground operations there accelerate. PXP holds potentially valuable oil and gas rights in the Gulf of Mexico and in California.
When the deal was announced December 05, 2012 shares of FCX sold down sharply to $32-33/share. There was another briefer dip in early spring on expectations that a PXP drill test would be very positive and induce shareholders to demand higher compensation. But despite hearty words from its partner Anadarko Petroleum (APC) the drill was less impressive than expected, a "half full, half empty" test one resource newsletter termed it and when potential resource nationalism problems in the Congo were allayed, FCX shares rose back from $27.20 to today's $32.40.
As of the election deadline at 5pm EDT on May 15, holders of 60.231 million shares of PXP (45.5% of total shares outstanding) elected to receive shares in FCX for approval of the acquisition - merger. Holders of 38.50 million shares of PXP (29.1% outstanding shares) chose to receive cash. Those holding 25.4% of shares did not submit a valid ballot: they will be compensated in cash like those who elected that option specifically. So while lawsuits may go forward a decisive majority, 74.6% of PXP shares are committed to the acquisition and the compensation package.
So is the CEO of PXP, James Flores who is on the board of FCX, an irritating factor to shareholders at each company. In an open letter to shareholders released last Monday, May 13, Flores countered reports by ISS advisory group and Glass Lewis & Co that had criticized the merger and urged PXP shareholders to reject it. Flores who will gain over $140 million from the merger (troubling to many) urged PXP shareholders to support the plan which provide access to the credit and material resources of FCX that would best enable exploration, development and marketing of PXP's oil and gas properties. Apparently the deal's merits, despite the enormous compensation he will receive made sense to most PXP stakeholders. The formal vote is Monday May 20.
The acquisition of PXP will cost FCX over $6 billion: the mining giant has secured credit lines to finance the deal to lessen the drawdown of its previously enormous cash base. Also part of the deal is FCX's acquisition of its 1994 spin-off, McMoRan Exploration (MMR) for about $3.5 billion. That deal is so likely to go forward that the formal vote of MMR shareholders is set for June 03, a few hours before the deal is set to be finalized.
On May 17 the Democratic Republic of the Congo's Minister of Mines Martin Kabwelulu chose a forum in Tokyo to reiterate his demand that copper miners in the DRC process their concentrate in his nation. However, the governor of the semi-independent southern state of Katanga, Moise Katumbi already has asserted he will not enforce the ban as I reported in an earlier piece on FCX. The latest declaration by Mr. Kabwelulu sounds big to those new to the situation but actually is old hat. As Mr. Katumbi pointed out a month ago, he views the major copper miners in his state, FCX and Glencore (OTCPK:GLCNF) as "partners." Moreover these two commodity majors already process most of the concentrate in-country and there is not yet sufficient electricity to produce more. So what appears to be a cloud of resource nationalism on FCX's copper production is just a puff of pollen. There is precedent for DRC central government posturing: in 2007 and 2010 the DRC sought to ban export of unprocessed ore but in each case the decree was rescinded.
The takeaway is that it looks increasingly likely that the acquisition by FCX of PXP and MMR will proceed and that there will not be significant problems with production and export of copper from its giant Tenke Fungurume mine in Katanga, DRC. The outlook is very good for FCX as a mixed commodity mega-company with diversified resource and geographic base, new assets coming online and expanding production. A positive outlook is confirmed by the most recent target upgrades of FCX from Neutral to Buy by firms like Nomura (May 01) and Morgan Stanley (May 08, Overweight) with share price targets of $38 and $45 respectively. UBS has a $40 price target on FCX which is set to flourish in expanding world markets and to compete capably with its diverse resource base.