Does Freeport-McMoRan's Phelps Dodge Acquisition Signal a Top in Metal Prices?

As Bill Cara predicted several months ago, Phelps Dodge’s (PD) bid for Inco (N) and Falconbridge has been thwarted, and has now become dinner rather than diner. As reported by today's New York Times:

Phelps Dodge, the world’s second-largest copper producer, will be acquired by Freeport-McMoRan Copper and Gold (FCX), a smaller rival that has been embroiled in environmental and human rights controversies, in a cash and stock deal worth $25.9 billion, the companies said yesterday.

The boards of both companies have approved the transaction. Under its terms, stockholders in Phelps Dodge will receive $88 a share in cash plus 0.67 of a Freeport-McMoRan share. Based on Friday’s closing, the deal is offering Phelps Dodge shareholders a 33 percent premium.

Freeport-McMoRan, which has a market capitalization of $11.3 billion compared with Phelps Dodge’s value of $19.4 billion, will finance the transactions by borrowing about $17.5 billion. Freeport said it expected the deal would be accretive to the combined company’s earnings per share and cash flow immediately.

There are several theories as to the meaning of the wave of mergers in basic materials, particularly metals. Some believe the deals are a signal of a market top, while we believe they signal a belief on the part of management teams that metals prices will remain high. For our part, we think the top will be signaled when the buyers are financial buyers rather than industry buyers.