Saturday, December 16, 2006

Showdown in Dodge City

Deciding whether to add to my position in Phelps Dodge (PD) right now shows how complicated real-world investing can really get.

Phelps Dodge closed on Friday at 122.50. Given Freeport-McMoRan's "definitive" agreement to buy Phelps Dodge at $88/share+0.67 shares of FCX, which closed at 60.08, PD is worth about $128.25. But as we all know, the only agreement which is really "definitive" is death. And there are rumors that BHP Billiton is interested in buying Freeport-McMoRan, but the rumors are noisily silent about Phelps Dodge, which R. M. Schneiderman at Forbes suggests might mean that if the rumors are true, the Freeport-Phelps deal might not go through. Does that mean that there's a danger that the deal won't go through, and that we'll be stuck with something closer to Phelps' old price below 100? If I had some idea as to the answer to that one, I might just tell you.

On the other hand, we know that in the long run, even if the merger doesn't go through, Phelps Dodge should go up no matter what. Just about everybody agrees that PD was and is undervalued, and that in the long run, copper, like other commodities, should go up. China, India, and all of that. And commodities should go up as the dollar goes down, as it's expected to do: Just about everybody also says that the dollar is overvalued right now.

Of course, instead of going up, Phelps Dodge might go down, since our old friend Mr. Just About Everyone also thinks that copper prices have reached a peak. And the cyclical decline may be exacerbated by an industrial slowdown, especially in the United States. All of which could easily happen before the end of the first quarter of 2007, when the Freeport-Phelps deal is supposed to close.

But before these medium-term phenomena can take effect, and if Freeport buys Phelps before BHP Billiton buys Freeport, or if BHP never does acquire FCX, maybe SAC Capital's opposition to the PD-FCX merger at the current price will prod FCX into making a higher offer. FCX or somebody else.

Have you noticed how many times the word "might" appears in this posting?

What do I really think? I do think that PD is undervalued at 122.50, whatever happens. Am I so convinced of the fact that the shareholders will thereby make money that I'm willing to buy some more? Well....


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