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Subject:  This is not so good -- FCX Date:  12/5/2012  10:37 AM
Author:  TMFGebinr Number:  845 of 1287

What: Freeport McMoRan Copper & Gold shares dropped 15% at the open and are now down about 13%.

So what: The company announced a deal that is not welcome by the market. It's expanding into oil and natural gas drilling. Yippee. <sigh>

It is buying two companies, both oil exploration companies. The first is Plains Exploration & Production (PXP) at $50 per share or $6.9 billion. This is near a 50% premium over last night's close of $4.65 billion ($36.05 per share). This is a cash and stock deal.

The second is McMoRan Exploration (MMR) at $14.75 per share (cash), a 75% premium to last night's close of $8.46. MMR shareholders would also get 1.15 units of a royalty trust per share of MMR they own. The trust gets 5% royalties on all future production from ultra-deepwater properties that MMR already owns.

The deal is incestuous: The Plains CEO sits on MMR's board. Another Plains board member also sits on MMR's board. And there are six MMR board members that sit on FCX's board (that's nearly half of FCX's 13 directors), including FCX's CEO.

The deal also appears to be a bailout of MMR in all but name. Last week, it announced that it is continuing to have difficulty with getting a flow test from its Davy Jones well, a requirement before production can begin. This raised the concern that the well is a dud and shares plummeted by about 33% over the course of the week. And now FCX is buying the company? Really?

Now what: I'm going to have to think about whether I want to continue owning FCX or not. I like it as a copper miner, but adding in oil and gas drilling seems outside their wheelhouse (despite the fact that MMR and FCX parted ways almost 20 years ago). And the behavior of senior management and the boards is a distinct turn off.

More later as I think this through.

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