Freeport's Energy Deal: the Real Reason Behind It

Tickers in this article: FCX

NEW YORK ( TheStreet) -- There were a number of points to examine regarding Freeport-McMoRan Copper & Gold's (FCX) $9 billion purchase of two energy companies. Sadly, it doesn't appear that the Corporate Media has latched on to any of them.

One report characterized the deal as:

... a bold bid to diversify into the U.S. energy sector as copper's prospects wane.

While this quote does absolutely nothing to explain the Freeport deal, it does perhaps come close to a record for cramming the most idiocy into a 14-word sentence fragment.

Let's begin with the suggestion that "copper's prospects" have waned. Has anyone heard the government of China (or any of the other Asian Tigers) proclaim that they planned to "stop growing" their economies? Has anyone ever heard of a modern economy that could develop itself without large amounts of copper (particularly copper wiring)?

The three-quarters of the world's population in "emerging economies" are at most a quarter of the way toward catching up with the more technologically advanced West. This means we are still in the early stages of the longest/strongest global economic boom in history. Thus, the inference that Freeport is somehow bailing out of copper production and moving into oil and gas is just silly.

Similarly, the suggestion further into the same article that it has become "too hard to find" new copper projects to develop (and that's why Freeport is moving into energy) is an absurd interpretation of the actual dynamics here. Unlike oil, no one is talking about "peak copper." There is plenty of copper in the world. All that has changed is that as the richest deposits get mined, these mega-producers have been forced to move toward lower-grade projects -- in order to find the mega-tonnages that these mining giants lust over.

Here we get to the true purpose of the Freeport deal: hedging. What we are supposed to believe here is that none of the business news reporters from Forbes, Reuters or other Corporate Media enclaves understand that mining companies use lots of energy . Apart from wages, energy costs are far and away the largest cost of production.

As lower-grade copper deposits (in the future) make copper miners like Freeport even more energy-intensive , and Peak Oil ensures that energy prices will increase at least as fast as copper prices, this is not a "bold" move at all. Rather, it would be reckless for these mining giants to forge ahead with their operations without some strategic plan in place to mitigate against rising energy prices.

Indeed, the Reuters article explicitly notes that "a handful of major miners" have already added oil and gas assets. Yet, despite several examples of what is an obvious hedging strategy, we're supposed to believe that no one in the Corporate Media can figure out what is really going on here?

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