Chinese demand for metal is expected to continue to increase over the coming years. Anglo American PLC believes that by 2020, China may account for at least 50% of copper demand globally. Rio Tinto (NYSE:RIO) expects copper demand to double over the next 10 to 15 years, though its copper mining production fell by around 15% through 2010. It is predictions and facts like these, as well as rising metals prices for much of this year, that has put Freeport-McMoRan on the list of possible takeover targets in the sector. The world’s largest listed copper miner has been touted as a bid target since BHP Billiton’s (NYSE:BHP) $40 billion hostile offer for Potash Corp (NYSE:POT) in August 2010.
Perhaps this is why, in April this year, Freeport Chief Executive, Richard Adkerson, said that the company would be interested in a large acquisition. After all, a classic way to put a halt on potential takeover for a target company is for the target company to make an acquisition. The last large acquisition the company made was that of Phelps Dodge Corp in a deal worth $26 billion and completed in 2007. Could it really be that FCX is considering becoming a bidding company, and buying production rather than exploring for it?
FCX has recently completed negotiations, which have settled pay disputes in the Philippines, and it looks likely that other wage disputes will be drawn to a close soon also. It will once more be at full production and its cash flow will be strong. The settlement at its Grasberg mine in the Philippines, has given it two years of known wage costs and a settled workforce. Cash flow from consistent production could be key to financing a large acquisition. But what are the possible targets?
Grupo Mexico (GMBXF.PK), is one of Mexico’s largest companies, with operations covering mining, transportation, and infrastructure. It has 13 mines in operation, and other exploration projects across Chile, Peru, and Mexico. Its runs 8,111 km of track covering 71% of Mexico. Its market capitalization is around $21 billion, and it would bring around $1.7 billion of net income per annum. However, it's unlikely that FCX would want more than the company’s mining operations, so a buyer for the railroad and infrastructure divisions would need to be found.
Ivanhoe Mines Limited (IVN) With copper, gold, and silver mining projects in Mongolia, and Australia, as well as gold mining in Khazakhstan, IVN is capitailized at around $12 billion, and could be a good geographic fit for FCX’s operations. However, Rio Tinto owns a stake of 49% in IVN and may be looking to up this stake: perhaps even making a full bid. Any move on the company by FCX would mean a full-blown battle with RIO, or the payment of a premium too far.
First Quantum Minerals Ltd. (OTCPK:FQVLF) is a Canadian-based company that has interests around the world, including Australia, Peru, Zambia, and Mauritania. The company is capitalized at around $8.5 billion. It has good mineral reserves, $750 million in cash and $62 million of debt. With a return on equity of 17.47% on its operations, this could be a good fit for FCX.
Lundin Mining Corporation (OTCPK:LUNMF) has copper, zinc, lead, and nickel mining operations across Europe, and a 25% stake in the Tenke Fungurume mine in the Democratic Republic of Congo. Capitalized at around $2 billion, its profit margin of 35% is attractive. For FCX, a purchase of LUNMF.PK would offer some excellent synergies at a bite size price.
Capstone Mining Corp (OTCPK:CSFFF) operates mostly in Canada and Mexico, mining copper, gold, and silver, as well as lead and zinc. With strong operating margins, and no debt position, FCX would be hoping to increase the return on equity of just 7.86%. The shares are trading at CAD$2.61, and have a reported book value of CAD$2.83. Capitalized at less than $1 billion, a purchase by FCX would be easily financed.
Copper Mountain Mining Corp (OTCPK:CPPMF) owns copper, gold, and silver mining interests in Canada. The company is capitalized at $500 million, and has debts of $350 million as against cash of $60 million. Its return on equity is currently negative, and shares trading at CAD$5.38 compare with its reported book value of CAD$1.50. An unlikely target.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.