Phelps Dodge's Golden Nickel

If the past few days are any fair basis for judgment, well-heeled companies in the basic materials sector are saying "enough is enough" and opening the doors to their treasuries.

Today Phelps Dodge (NYSE: PD  ) , one of the market's largest publicly-traded copper companies, announced a three-way deal to acquire both Inco (NYSE: N  ) and Falconbridge (NYSE: FAL  ) -- companies known principally for nickel and zinc (but who both produce copper and other metals as well).

The deal is worth about $40 billion and combines both stock and cash. Inco is being offered 0.672 shares of Phelps Dodge stock and $15.59 in cash, while Inco would up its offer to Falconbridge to $15.59 and 0.557 shares of stock versus its prior deal of $11.14 in cash and 0.524 shares of stock. Phelps Dodge is also proposing to share a bit of the wealth with its own shareholders, intending to launch a $5 billion share-buyback program as well.

Assuming that the deal is done, the combination will be the largest player in nickel and the largest publicly-traded player in copper, as well as a significant player in molybdenum (used primarily in hardening steel), cobalt, and zinc. Investors thinking about a smaller play in nickel and cobalt might want to see how OM Group (NYSE: OMG  ) trades in the wake of this deal.

I'm almost always very skeptical of big deals, but I don't dislike this one, at least not now. I like the idea of adding scale and creating a larger base of assets over which to leverage expenses. I also like the diversification aspect of adding the nickel, cobalt, and other metal operations.

My gripe in the past with Phelps Dodge had primarily revolved the stock's extended upward progress, without much of a pause (much like prices for copper itself). Since then, though, we've seen a cooling-off period in many commodity markets. That's healthy, and it's not at all unusual in long-term bull markets -- nothing ever goes straight up without eventually seeing a sharp fall.

I'm still willing to believe that we're in a long-term secular move in basic materials. After all, there's the oft-repeated mantra of India and China demand, but also the reality that it takes time for new mines and smelters to come online and replenish inventory stocks. All the same, investing in commodity stocks -- whether it's Phelps Dodge, CVRD (NYSE: RIO  ) , Rio Tinto (NYSE: RTP  ) , and so on -- is risky, and investors have to make their peace with both the volatility of the markets and the reality that there's little these companies can do to stimulate their own demand.

For more metal missives:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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