All American copper giant

Freeport-McMoRan Copper & Gold (FCX) and Phelps Dodge have signed a definitive merger agreement under which FCX will acquire Phelps Dodge for approximately $25.9 billion in cash and stock, creating the world’s largest publicly traded copper company. The combined company will be a new industry leader with large, long-lived, geographically diverse assets and significant proven and probable reserves of copper, gold and molybdenum. The company’s increased scale of operations, management depth and strengthened cash flow will provide an improved platform to capitalize on growth opportunities in the global market.

The combined company will be the largest North American-based mining company. The company will enjoy an excellent cost position, long reserve life, a diversified geographic footprint, and an attractive growth profile, the owners say. FCX currently operates the world-class Grasberg mine, located in Papua, Indonesia, which is the world’s largest copper and gold mine in terms of reserves (IM, September 2005). Phelps Dodge has mines in operation or under development in North and South America, and Africa, including the world-class Tenke Fungurume development project in the Democratic Republic of the Congo (IM, December 2006). The combined company will represent one of the most geographically diversified portfolios of operating, expansion and growth projects in the copper mining industry.

James R. Moffett, Chairman of the board of FCX, said: “This transaction combines two leading mining companies to form a strong industry leader at a time when we see significant long-term opportunities in our industry. FCX has been built through our exploration and development capabilities, and we will focus on aggressively pursuing opportunities in the extensive Phelps Dodge asset portfolio.”

Richard C. Adkerson, FCX’s President and CEO, said: “Together, FCX and Phelps Dodge will have the size, management depth and financial strength to optimize existing operations and accelerate our growth by aggressively pursuing promising new development projects, exploration and acquisitions. We are enthusiastic about the addition of Phelps Dodge’s highly regarded mining team, which will complement our existing organization, and are delighted to welcome Phelps Dodge’s talented team to the FCX family.”

J. Steven Whisler, Chairman and CEO of Phelps Dodge, said: “I believe our management team, with its industry-recognized reputation for operational excellence and technological innovation, possesses the skills in open pit and underground mining and mineral processing to add value to FCX’s operations. We look forward to working with FCX to realize all of the benefits of this combination, and its exciting portfolio of growth and expansion projects, for our shareholders, customers, employees and suppliers.”

Under the terms of the transaction, FCX will acquire all of the outstanding common shares of Phelps Dodge for a combination of cash and common shares of FCX for a total consideration of $126.46 per Phelps Dodge share, based on the closing price of FCX stock on November 17, 2006. Each Phelps Dodge shareholder would receive $88.00 per share in cash plus 0.67 common shares of FCX. This represents a premium of 33% to Phelps Dodge’s closing price on November 17, 2006, and 29% to its one-month average price at that date.

The cash portion of $18 billion represents approximately 70% of the total consideration. In addition, FCX would deliver a total of 137 million shares to Phelps Dodge shareholders, resulting in Phelps Dodge shareholders owning approximately 38% of the combined company on a fully diluted basis.

The Boards of Directors of FCX and Phelps Dodge have each unanimously approved the terms of the agreement and have recommended that their shareholders approve the transaction. The transaction is subject to the approval of the shareholders of FCX and Phelps Dodge, receipt of regulatory approvals and customary closing conditions. The transaction is expected to close at the end of the first quarter of 2007. FCX has received financing commitments from JPMorgan and Merrill Lynch to fund the cash required to complete the transaction. After giving effect to the transaction, estimated pro forma total debt at December 31, 2006, would be approximately $17.6 billion, or approximately $15 billion net of cash.

For the 12-month period ending September 30, 2006, the companies had combined revenues of $16.6 billion, EBITDA (operating income before depreciation, depletion and amortization) of $7.0 billion, and operating cash flows of $5.5 billion. For the year 2006, the combined company’s estimated EBITDA would approximate $7.9 billion and operating cash flows would approximate $6.5 billion.

On a pro forma basis for 2006, the combined company’s production would approximate 1.68 Mt of copper (1.41 Mt net of minority interests), 1.8 Moz of gold (1.7 Moz net of minority interests) and 31,300 t of molybdenum. Combined proven and probable reserves at December 31, 2005, would approximate 34 Mt of copper, 41 Moz of gold and 862,000 t of molybdenum, net of minority interests.

Benefits of the transaction:

  • The combined company is well-positioned to benefit from the positive copper market at a time when there is a scarcity of large-scale copper development projects combined with strong global demand for copper. The combined company’s copper production growth is expected to be some 25% over the next three years
  • The combined company will benefit from long-lived reserves
  • The combined company is expected to generate strong cash flows, enabling significant debt reduction. For the year 2006, the two companies are expected to generate estimated combined operating cash flows totalling $6.5 billion
  • FCX expects the transaction to be immediately accretive to FCX’s earnings and cash flow
  • The combined project pipeline will support industry-leading growth by delivering over 450,000 t of additional copper production capacity over the next three years. Projects include Phelps Dodge’s recent commissioning of the $850 million expansion of the Cerro Verde mine in Peru; the development of the new $550 million Safford mine in Arizona; a potential project to extend the life of El Abra through sulphide leaching; the exciting Tenke Fungurume copper/cobalt project in the DRC, which is expected to begin production by 2009; the expansion of FCX’s DOZ underground mine in Indonesia; and other developments of FCX’s large-scale, high-grade underground ore bodies in the Grasberg district in Indonesia
  • The combined company will have significant high potential exploration rights in copper regions around the world, including FCX’s existing prospects in Papua, Indonesia, and Phelps Dodge’s opportunities at its Tenke concession, in the US and South America, as well as Phelps Dodge’s portfolio of exciting exploration targets. FCX will continue its longstanding focus on adding value through exploration
  • The combination of FCX’s and Phelps Dodge’s proven management and best practices in open pit and underground mining will facilitate the sharing of expertise to optimize perations across the asset base. Phelps Dodge’s unique mining and processing technology provides opportunities to be applied to optimize metal production at Grasberg.

James R. Moffett, Chairman of FCX, will continue as chairman. Richard C. Adkerson, CEO of FCX, will serve as CEO of the combined company. Upon completion of the transaction, J. Steven Whisler is expected to retire after more than 30 years of service to Phelps Dodge. Timothy R. Snider will be COO of the combined company, Ramiro G. Peru will be Chief Financial Officer and Kathleen L. Quirk will be Chief Investment Officer. Mark J. Johnson will continue as COO of FCX’s Indonesian operations and Michael J. Arnold will continue in his executive management role, including serving as Chief Financial and Administrative Officer of FCX’s Indonesian operations.

At closing, FCX will add to its board of directors three independent members from Phelps Dodge’s board, increasing the size of the board to sixteen directors in total.

The parent company will retain the Freeport-McMoRan Copper & Gold name and trade on the New York Stock Exchange under the symbol ‘FCX.’ The Phelps Dodge name will continue to be used in its existing operations. The corporate headquarters of the combined company will be located in Phoenix, Arizona and FCX will maintain its New Orleans, Louisiana, office for accounting and administrative functions for its Indonesian operations.