A Prescient Purchase for Freeport-McMoRan

It's beginning to look like Freeport-McMoRan Copper & Gold's (NYSE: FCX  ) acquisition of oil and gas produce Plains Exploration was prescient. The prospects of an extended closure of its huge Grasberg mine means its drilling operations may be what allows it to survive.

Two weeks ago, Freeport suffered a mine collapse in a training area that killed 28 workers. After temporarily suspending operations even though the area was away from its main mining operations, Freeport reopened the mine last week. But another accident on Friday, where a truck driver was killed when his vehicle was covered in wet sludge, had the mine workers union calling for a work stoppage and the government forcing the mine's closure until it completes its investigation, an inquiry that could take as long as three months to finish.

A deep hole to climb out of
Miners, of course, don't exist on immediate output alone; there is typically three to four weeks of stockpile to get by temporary setbacks. But Freeport has been cagey about how much of a reserve it has on hand, raising the possibility it could default on shipments to its customers. In 2011 it ran into that problem after a strike ran on, causing the miner to declare a force majeure that got it out of some of its contractual obligations. 

While there was a lot of grousing, the miner was returning to its roots as a multiline resources company -- it will also be purchasing McMoRan Exploration (NYSE: MMR  ) , a driller it had spun out in the 1990s -- after a series of mishaps and deadly accidents at its huge Grasberg mine, it could be the drilling operations that Freeport relies upon to see it through.

Mining is no longer the sure thing it once seemed. In April, Rio Tinto (NYSE: RIO  ) suffered a massive wall collapse at its Bingham Canyon mine in Utah that shut its operations there and will probably prevent mining operations from resuming for a year. Its shares have fallen 13% as a result.

In Chile, Barrick Gold (NYSE: ABX  )  is facing severe delays in the development of its huge Pascua Lama gold project as it wrangles with the government, while Newmont Mining (NYSE: NEM  ) has suffered setbacks at its Conga project in Peru.

Although each of those miners has other mines to which it can turn to help ease the pain of waiting, they're not nearly as lucrative as the main projects but remain potentially politically controversial. Miners everywhere are running into issues with local indigenous populations that are causing delays and raising the costs associated with their mines.

Setting sail for the open seas
It's why Freeport-McMoRan has a unique opportunity to not only survive but also thrive, and while Plains Exploration will give it access to some immediate oil and gas plays, McMoran Exploration may just be the real jewel.

McMoRan is an ultra-deep-sea driller that's looking to tap the huge reserves trapped beneath the Gulf of Mexico's salt geology at depths as far down as 35,000 feet. If it can successfully navigate those depths -- no small feat as even larger drillers such as ExxonMobil have gotten faint with trying -- it could have access to trillions of cubic feet of reserves. 

McMoRan investors just voted this morning to approve the buyout, and it could not have come soon enough. While I'm of the mind there is a coming copper boom, there's also a lot more risk in mining these days. Not that oil and gas drilling is risk-free, as the Gulf of Mexico oil spill and resulting drilling moratorium proved, but the potential rewards are so large here that Freeport-McMoRan may have diversified itself at just the right time that we may come to think of it more as a drilling operation than as a miner.

With shares down 18% over the last six months, investors could be looking back wistfully on these prices and wishing they had gotten in before they turned into a gusher.

After putting together a blockbuster deal to expand into the oil and natural gas industry, Freeport-McMoRan will have plenty on its plate as it tries to adapt to the new industry, as expanding into oil and gas carries plenty of inherent volatility. FCX had a profitable copper business, and on top of this foray into a new industry it still has to contend with mining industry bellwether BHP Billiton. To help investors determine if Freeport-McMoRan is a buy or a sell, The Motley Fool has compiled a premium research report on the company. Simply click here now to access your copy today.


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