In a somewhat uneventful, holiday-shortened period last week, investors were able to dig up a modicum of excitement by focusing on the minerals mining companies. Freeport-McMoRan Copper & Gold
Freeport's management clearly is betting on continued strength in both demand for copper and its price. The latter has tripled from its 1990s level, which hovered near $1 per pound for most of that decade. The price escalation stems largely from rapid industrialization in China and other developing nations.
Now, with interest in the industry elevated by Freeport's foray, some observers believe that Freeport itself could become an appetizer for a larger minerals producer, such as giant BHP Billiton
Of course, whether copper prices will remain at their current highs is very much in the eye of the beholder. Freeport CEO Richard Adkerson obviously believes they will, hence his quest for Phelps Dodge. Other observers note, however, that the copper companies generally have been derelict in seeking new reserves, a circumstance now being corrected by the price run-up. Nevertheless, in a period of commodity shortage, buying reserves through corporate acquisition is quicker and can be cheaper than searching for them in the desolate areas of the world where they tend to be concentrated.
And there are other reasons for the desirability of mergers among minerals producers: The larger companies are better able to deal effectively with the governments in those areas where operations are likely to be conducted. Further, as in the energy industry, economies of scale typically lead to lower producing costs, and therefore to increased profitability for the operator.
How then should Foolish investors view the industry amid the events of the past week? My advice would be to keep a close eye on both Freeport and Phelps Dodge, since the quest for combinations among the producers likely has not been exhausted. In the meantime, I like the supply/demand imbalance in which the companies are currently operating.
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Fool contributor David Lee Smithdoes not own any of the companies mentioned, although he does have a few copper pennies. He welcomes your comments. The Fool's disclosure policy is shiny, shiny, shiny.