This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Freeport's Energy Deal: The Real Reason Behind It

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?

No one is more scornful of the limited intellectual prowess of the Corporate Media than myself. However, we know that this oligopoly understands hedging strategies, because when they attempt to justify the grossly disproportionate short position of JPMorgan in the silver market, these talking heads use the word "hedging" about six times per paragraph.

It is simply beyond credulity that no one in the Corporate Media oligopoly understands that when some of the world's most energy-intensive industrialists begin buying up energy assets that this is a hedging strategy. So what is really going on here with this farcical propaganda?

Disinformation. The Corporate Media pieces to which I've referred are riddled with anti-commodities messages, while scrupulously avoiding the obvious bullish implications for commodities that this deal signifies. "Copper's prospects are waning." A major commodity producer will "lose its status as a pure play."

Missing from this disinformation are two hugely important (and related) messages. Due to the nature of their operations, all mining companies must be long-term planners. The moves by these multinational mining companies to scoop up oil and gas assets for themselves -- as part of a global rush to secure energy assets -- directly implies much higher oil prices in the future.

Similarly, the clear evidence that oil prices are going much higher and many large, industrial corporations are going to become more energy-intensive in the future, rather than less so, implies much higher prices for any/every commodity for which energy is a major component of production costs.

At the top of the list here is agriculture. From fertilizer to farm machinery to transportation, agriculture soaks up energy the way their crops soak up the rain. The Corporate Media has primary responsibility for peddling the mythology of Western governments that "inflation is under control," while Asian governments panic over the "global food-price crisis."

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,084.70 -13.75 -0.08%
S&P 500 2,004.04 +0.67 0.03%
NASDAQ 4,595.0030 +14.7320 0.32%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs