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."

This means perverting any and every news item that carries the clear message that commodities prices are going higher. So a story about an energy-intensive copper producer spending $9 billion to hedge against soaring energy costs is transformed into "a bold bid to diversify into the U.S. energy sector."

This leaves still one question unanswered for inquiring minds. If this was actually a prudent, logical move by Freeport; why did its share price immediately get hammered after the announcement of this deal? One could offer at least two alternatives to the drivel presented by the Corporate Media.

At the top of the list is simple manipulation. Between Wall Street's abominable trading algorithms and Washington's Plunge Protection Team, if the Powers That Be decide that a certain stock listing should be driven down (or up) over any short-term period, it's simply a matter of picking a number, and then point-and-click.

With Wall Street and Washington both having huge incentives to get investor dollars out of commodity markets (and into various forms of banker scams, like U.S. Treasuries), this tag-team could have easily kneecapped Freeport as retribution for drawing attention to economic dynamics, which this cabal wants to conceal at all costs.

Of course, they aren't the only ones who might be looking to "punish" the company after this announcement. The other prime suspects responsible for the plunge in Freeport's share price could be enraged (former) shareholders. Senior management stands to collect hundreds of millions of dollars for themselves for spinning back in the same corporate asset that the company spun out: McMoRan Exploration -- the "McMoRan" in what used to be Freeport-McMoRan.

It's certainly understandable that many shareholders would be overwhelmed with nausea as they contemplated senior management reaping millions for correcting a past mistake. Presumably, management also rewarded themselves with fat bonuses when McMoRan Exploration was originally spun out.

This highlights a much broader issue of corporate governance: the need to pass a law against any sort of bonus, commission or other incremental salary gain being paid to any member of senior management of a corporation for doing nothing more than pulling out their checkbook and writing a check. That subject, however, will have to be left for another day.

-- The writes owns no shares of any companies mentioned.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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