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SAN FRANCISCO (UNITED STATES) - For the founders of Freeport-McMoRan Copper & Gold, this weekend's deal for Phelps Dodge Corp. marks a step away from the source of their wealth - and the belief that its product has still a long way to run. New Orleans-based Freeport in a friendly deal that would forge the world's biggest publicly traded copper miner. The acquisition would spread out Freeport's source of its copper to the Americas, where Phelps Dodge operates mines in the U.S., Chile and Peru.
Currently, Freeport gets all of its mining revenue from Indonesia. That share would drop to 35% if the deal closes, said the company in a presentation. But copper remains king.
The precious metal accounted for 68% of Freeport's mining revenue last year, with the rest coming from gold mining. Buying No. 3 copper-producer Phelps Dodge boosts the copper stake to 74%.
The deal underscores the increasing importance natural resources companies have placed on assets in stable countries to counter some of the risks they assume while prospecting for resources in often politically volatile regions. "Freeport's one asset approach has given it tremendous upside, but they've recognized that it also creates challenges," said Alex Gorbansky, a managing director at Frontier Strategy Group, a Cambridge, Mass. consultancy that advises mining and other natural resources firms.
Buying mines in more stable countries, like Chile and the U.S. "means you can afford to make bets in these high-risk countries without breaking the company," he said.
The potential for geographic diversification prompted Standard & Poor's on Monday to place its ratings for Freeport on credit watch with positive implications, saying a successful deal would mitigate the company's exposure to political and legal risks of operating in Indonesia, "which historically have been key risk factors" when determining Freeport's ratings.
Other mining companies have lost money when the policies of their host countries hardened toward foreign investors, or when natural disasters struck. Gold miner Newmont Mining Corp. in September cut its gold sales outlook, partly due to lost sales from a joint venture in Uzbekistan, where the government expropriated Newmont's assets.
Diversifying away from Indonesia, where Freeport is one of the nation's largest taxpayers, starts a new chapter for the company co-founded by Chairman James Moffett (the "Mo" in McMoRan.) In 1969, he and two associates founded McMoRan Oil & Gas Co., which in 1981 merged with Freeport Minerals Company.
Freeport had inked the original, 1960s licenses with the Indonesian government that allowed it to tap huge gold and copper reserves high in the mountains of western New Guinea. Since then, Freeport McMoRan has expanded the Grasberg mine into the world's largest source of gold and copper reserves, creating a company with $5.6 billion in annual sales.
The deal creates a company with reserves "that are long-lived and geographically diverse," said Freeport Chief Executive Officer Richard Adkerson. "It will have exceptional cash flows - at today's copper prices and lower prices."
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