I can't help but feel that the move by Phelps Dodge to buy (or merge with) Inco and Falconbridge will turn out badly.
I admit, I'm not a bull on commodities. I think record high prices will stimulate significant growth in supply and will precipitate a change in demand (read: reduce) through substitution and design change. When that happens, prices, volumes and profits will come down.
In any case, this deal looks like top-of-the-market stuff. In my view, cyclical companies should be de-leveraging themselves at the top of the cycle. They should be paying down debt and building a war chest for tougher times ahead. A strong, liquid balance sheet at the bottom cycle allows a company to invest in new capacity and/or increased productivity when no one else can. It also puts the company in a perfect position to buy cheap assets well below replacement cost. And it can pay cash if its stock price is depressed due to cyclical concerns.
Call me a scrooge, but I think Phelps Dodge should be acting more like Exxon. Exxon's management refuses to get caught up in the hype around the energy cycle. They recognize that they're operating in a highly cyclical industry and are keeping to their long established investment disciplines. Phelps Dodge's management is totally caught up in the euphoria of the cycle. As a result, this deal could go do down in business annals along side the likes of Noranda's purchase of MacMillan Bloedel and Time Warner's purchase of AOL.