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Merger A-Go-Go

07/14/2006 12:00 am EST


John Buckingham

Editor, The Prudent Speculator

John Buckingham, known as one of America's top stock pickers, is editor of The Prudent Speculator and actively follows more than 1,000 stocks. He tells subscribers how to profit from the recent merger announcement between two nickel producers…


“Several of our formerly recommended but not yet closed out names are involved in some bit of deal making, starting with another twist in the Inco (N NYSE) Falconbridge, Teck Cominco, Xstrata—and now Phelps Dodge (PD NYSE) saga.


“Hoping to fend off further advances from Switzerland's Xstrata for Canada's Falconbridge, Inco apparently sought a partner to make the deal between it and Falconbridge bigger than just the combination of two nickel producers. Enter Phelps Dodge, the world's second largest copper miner, which will consume both in a transaction originally valued at $56 billion. Added to $550 million in annual synergies related to the nickel merger, adding Phelps Dodge to the deal could subtract another $350 million in annual expenses by 2008.


“Scale can be captivating in the commodities biz. Only nationally held Corporacion Nacional del Cobre de Chile (Codelco) is larger in copper mining. And there'll be no one bigger in nickel. Phelps Dodge Inco, as the company will be known, will also be the world's second largest producer of molybdenum and the world's third-largest producer of cobalt. Plus, there should be some cross-metal scale advantages the trio can gain from the combination. Immediately adding to Phelps' cash flow, the deal should begin to augment EPS in 2008.


“Many are calling the deal price rich, believing that such major consolidations often come at the peak of the market and that the only place to go from here is down. On the contrary, we think that even with the country's 'best' efforts to cool the economy, China will continue to be a rapacious consumer of metals and that a still healthy and growing global economy will further stoke demand.


“The Inco offer is still below our last published FG price of $75, but then again, our latest PD target price of $104 was still well above the current share price, and we are optimistic about the potential gains from the just-announced combination. We did, however, cut our PD goal price to reflect the usual uncertainties and costs related to a deal of this size, to an LG of $126 and an FG of $101. Our target FG price for N remains $75.”


(Ed.’s note: Swiss mining company Xstrata, which already owns 20% of Falconbridge, made a higher bid for the company on July 11. And although Canadian mining company Teck Cominco received European regulatory clearance to acquire Inco, European regulators also cleared Inco to buy Falconbridge. Consequently, if shareholders approve the Inco-Falconbridge deal, Phelps Dodge plans to buy the combined companies.)

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