Phelps Dodge

( PD) investors applauded Tuesday as the copper miner finally abandoned its months-long pursuit of Canadian nickel producer

Inco

(N)

.

Phelps shares rose 3% in midday action as Wall Street speculated about what's next for the Phoenix-based company.

The Phelps relief rally suggests that many observers continue to view the company as a likely takeover target in an industry that has been swept by consolidation fever. Attention turned first to gigantic international miners such as Britain's

Rio Tinto

( RTP) and Australia's

BHP

(BHP) - Get Report

.

"The big mega global miners are always a possibility," says Evan Smith, co-manager for the

(PSPFX) - Get Report

U.S. Global Investors Global Resources Fund. He says they have the skill and scale to make a big acquisition work, and a runup in commodity prices has given the big companies huge cash hoards. Execs want to put that money to work by grabbing what they view as assets undervalued for the long term.

But Smith, whose fund doesn't own Phelps Dodge, says Phelps management will first have some wounds to lick.

"They are going to have to do some soul-searching, since this diversification effort failed," says Smith, referring to Phelps' June agreement to a $56 billion, three-way cash-and-stock combination with Falconbridge and Inco, both of Toronto.

Phelps' global gamble immediately prompted shareholder ire. Hedge fund Atticus Capital, Phelps' largest shareholder, vowed to oppose the deal. Other shareholders voiced their displeasure by selling Phelps shares, sending them down more than 10% at one point.

The three-way plan soon unraveled, though. Falconbridge was acquired this summer by Swiss Xstrata, and Inco fielded unsolicited bids from Canada's

Teck Cominco

(TCK)

as well as Brazil's

Rio

(RIO) - Get Report

. Teck subsequently dropped its bid, citing a failure to raise sufficient funding.

Tuesday's move apparently clears the way for Inco to merge with Rio. Inco shares fell 1%, while Rio rose 2.6%.

The failure of its big merger plan isn't the only headache for Phelps. The company managed to botch its copper hedging program, paying $187 million to derivatives counterparties during the first quarter of the year as copper prices moved higher than expected.

Smith says the first order of business for management should be to get rid of all of its hedging so it can truly benefit from the benign price environment. He adds that the stock still has an attractive valuation.

Phelps shares seem to be reflecting copper at $2 a pound, whereas current prices are closer to $4 a pound. Even forward futures contracts reflect $3 a pound for the medium term, Smith says.

On Monday, surging copper prices gave Phelps another boost. Contracts for December delivery popped 18.5 cents to $3.646 a pound on the Comex division of the New York Mercantile Exchange.