Freeport-McMoRan Copper & Gold (FCX -1.10%) is taking its diversification away from copper to a whole new level. Last month, the company announced deals to purchase two oil and gas exploration companies, now it is acquiring a joint venture stake in a cobalt chemical refinery. However, as much as a stretch as that might sound, it's not as far-fetched an idea as it might seem at first glance.
The deal, of course, isn't as dramatic or expensive as the company's announcement last month that it was buying McMoRan Exploration (NYSE: MMR) and Plains Exploration & Production (NYSE: PXP). The roughly $9 billion combined acquisitions marked a major shift for the mining company into oil and gas exploration. Freeport-McMoRan had shared close ties with both companies which made deals a bit easier to swallow than it might have first seemed.
Likewise, this deal makes sense when you dig deeper. Freeport-McMoRan will join a newly formed joint venture to purchase the downstream, advanced materials chemical business from OM Group (NYSE: OMG). This includes the cobalt chemical refinery and the related sales and marketing business. While the refinery is located in Finland, it will provide direct end-market access for the cobalt hydroxide production at Freeport's 56% owned Tenke mining subsidiary in the Congo.
The Tenke mine, which also produces copper, is a joint venture with Lundin Mining Corp and La Generale des Carrieres et des Mines, the Congolese state mining company. Together the partners will invest up to a total of $435 million in the new venture, with Freeport-McMoRan to acquire the refinery with $110 million of that, contingent on hitting revenue-based targets.
The deal enhances the company's position in the cobalt market. Not only does it provide the company direct end-market access for cobalt, but it has the capacity to refine 100% of Tenke's planned cobalt production. According to CEO Richard Adkerson Freeport-McMoRan is "going to be producing a lot of cobalt, we were dealing with the issue of how to access that market in an efficient way, we needed to make an investment, we found this opportunity to purchase an existing facility and have acted on it and this gives us an experienced management team and a direct access to end markets."
In the end, Freeport-McMoRan saw an opportunity to acquire another high quality asset to provide its shareholders with the opportunity for stronger long-term returns. Despite the long-term positive global economic outlook, it sees limited opportunities to invest in copper beyond its brownfield expansion projects. Until that dynamic changes, look for Freeport-McMoRan to continue to keep making headlines as it looks for other ways to create value for its investors.
