The worst deal I've ever seen

Freeport McMoRan is a giant of the resources industry. One of the world's largest producers of gold and copper, it operates the biggest gold mine in the world, the monstrous Grasberg mine in West Papua.

Grasberg, which was originally discovered in the 1930's, still ranks amongst the most lucrative mines in the world and has made Freeport a fortune. Now Freeport has decided to use some of that bounty to purchase two oil exploration businesses for US$20bn. A gold and copper business will now become an energy producer. It's akin to waking up one morning to find Newcrest Mining buying Woodside Petroleum.

The market has reacted to the takeover with unguarded disgust; Freeport's share price has fallen almost 20% since the deal was announced. Officially, management has pointed to BHP to justify the move, suggesting that if diversification made sense for the world's mightiest miner, it was good enough for them.

Yet BHP has articulated a diversification strategy for years and followed publicly disclosed criteria for new asset purchases. Investors know what they get when they buy shares in the business. In contrast, shareholders of Freeport thought they had invested in a metals business and woke one morning to find they were owners of energy assets too.

Management also claim that the deal makes them a bigger business and more likely to be on the radar of institutional investors. Rubbish. It was already the largest primary copper producer in the world with a market capitalisation of US$30bn. Size for its own sake is always folly.

What makes the move even more dubious is that Freeport bought badly. Rather than buying cash rich assets or an established producer, management stumped a huge sum of cash for exploration businesses that generated little cashflow. Worse, the purchased businesses were owned by members of Freeport's own board. The takeover meant that Freeport management made millions. It's a bad look, especially as Freeport has deliberately structured the deal to deny its own shareholders a vote on the transaction.

In an industry that can boast spectacularly bad deals, this is the worst I've ever seen.