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Predator now may be prey: Barrick stalking Freeport?

Section: Daily Dispatches

Predators Abound as Mining Sector
Enjoys Record High Metal Prices;
All Is in Play In Consolidation Frenzy

By Andy Hoffman
Globe and Mail, Toronto
Thursday, November 23, 2006

http://www.theglobeandmail.com/servlet/story/LAC.20061123.RTAKEOVER23/TP...

Anything and everything is in play in the mining sector these days -- even the predators offering up billions of dollars for acquisitions have become prey. Hedge funds and other speculators are increasingly treating a bid by one miner for another as merely an invitation to further offers for one or both parties in the rush to consolidate amid record metals prices.

Witness shares of Freeport-McMoRan Copper & Gold Inc., which this week launched a $26 billion (U.S.) cash-and-stock bid for Arizona's Phelps Dodge Corp.

While Freeport shares slipped 3 percent in their first trading session Monday after announcing the friendly deal, they have surged 11.5 percent in the two days since. The stock is getting a boost from speculation that the New Orleans-based copper and gold miner could be itself a takeover target for London's BHP Billiton or possibly Toronto's Barrick Gold Corp.

David Whetham at Scotia Cassels, who manages the Scotia Resource Fund and owns both Freeport and Phelps shares, said the buyer, not the seller, is the most likely candidate for a competing offer.

"If you ever wanted to buy Freeport, it's now or never," he said. "I think that means a lot of people are doing some work to figure out what they can do."

Phelps Dodge, Mr. Whetham pointed out, was already put in play this summer when it attempted a gutsy $40-billion three-way merger with Canada's Inco Ltd. and Falconbridge Inc.

The effort to form a so-called supermajor ultimately failed, and Mr. Whetham said that if someone wanted to get their hands on Phelps, they would have already stepped up to the plate.

BHP is the name most often bandied about as a likely bidder for Freeport. A successful offer from the world's largest mining company would also vault the London giant to No. 1 in copper production. Mr. Whetham however, thinks the company is more likely to elicit interest from gold miners.

Freeport's Grasberg mine in the Indonesian province of West Papua pushed out around 750,000 tonnes of copper last year. But it also produced 3.5 million ounces of gold.

"It is a huge gold mine. That's why I think the big gold guys, meaning Newmont and Barrick, are going to have to think about it because it's one of the biggest gold mines in the world," he said.

With prices above $3 a pound, copper has become an increasingly profitable metal for gold miners as well. A recent report from Pollitt & Co. Inc. analyst John Paul Koning said Barrick's 12.7 billion pounds of copper reserves have made it a stronger company and exposure to the base metal's buoyant price "is starting to be reflected in the share price."

Bill Belovay, a fund manager at Jones Heward Investment Counsel, who oversees the BMO Resource Fund, has a different take on the Freeport/Phelps deal. The industry veteran thinks Phelps is more likely to lure another suitor and scuttle the merger with Freeport. The difference, he said, is the location of Phelps' assets.

"I reckon there is a strong possibility somebody else will come in. What characterizes Phelps Dodge is its lower-risk areas of operations. Plus they're sitting with a pot full of cash," he said.

Mr. Belovay noted that Freeport's Grasberg mine in Indonesia is fraught with political risk, calling the region "one of the worst places in the world to operate." Questions about environmental issues have long dogged Freeport and the fund manager believes other miners are wary of the country and its political regime.

"What about Freeport-McMoRan financing the military and the human rights abuses? I'd be surprised if somebody wanted to buy Indonesian troubles," he said.

Mr. Belovay cited BHP, Rio Tinto PLC, Grupo Mexico, and Anglo American PLC as possible bidders for Phelps.

John Tumazos, an analyst at Prudential Equity Group in New York, put the odds of Freeport's bid for Phelps succeeding at just 33 percent and "a two-thirds likelihood that Freeport collects the $750 million breakup fee."

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