Corporate Finance : Copper Producer’s Bonds Rise With Price Of Metal

CORPORATE DEBT

 

 

Investors who bought into a $6 billion bond issued by Freeport-McMoRan Copper & Gold in March saw the value of their holdings rise quickly in the following weeks, as the price of copper surged to a four-month high on expectations of strong Chinese demand for the red metal.

The bond sale was launched to partially fund US-based mining company Freeport-McMoRan’s $26 billion cash-and-stock purchase of Phelps Dodge, which created the world’s largest publicly traded copper producer.

The three-part bond issue was the second-biggest high-yield offering ever, second only to RJR Nabisco’s record $8.5 billion issue in 1989 to finance its leveraged buyout led by Kohlberg Kravis Roberts. That mammoth debt sale depressed the value of RJR Holding’s outstanding bonds and triggered lawsuits by disgruntled institutional investors.

The success of the Freeport-McMoRan issue, which was jointly managed by JPMorgan and Merrill Lynch, demonstrated that there is still plenty of appetite among investors for high-yield debt to finance corporate takeovers. The volume of new issues in the US high-yield bond market rose to nearly $20 billion in March from $10.6 billion in February, according to Montpelier, Vermont-based KDP Investment Advisors.

Freeport-McMoRan’s bond issue was coupled with a $5.76 billion equity offering that was used to help pay down the debt incurred in connection with the acquisition of Phoenix, Arizona-based Phelps Dodge. Obviously pleased with the debt reduction, Moody’s Investors Service upgraded Freeport-McMoRan’s new notes by two notches to Ba3, its third-highest speculative-grade rating. Freeport-McMoRan will keep its name but will move its headquarters from New Orleans to Phoenix following the acquisition of its larger rival at a premium of about 33% to its existing stock price when the deal was announced last November.

Freeport-McMoRan recently commissioned an $850 million expansion of its Cerro Verde mine in Peru and is developing a new $550 million Safford mine in Arizona, expected to begin production in 2008. The company has 12 producing mines worldwide and significant proven and probable reserves of molybdenum, as well as copper and gold. Its Grasberg mine, located in Papua, Indonesia, is the world’s largest copper and gold mine in terms of reserves.

Phelps Dodge has mines in North and South America and Africa, including the Tenke Fungurume copper and cobalt development project in the Democratic Republic of the Congo, which is expected to begin production by 2009.


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Gordon Platt


 

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