Chinese copper asset buyers are out again

Driven by China’s seemingly insatiable demand for concentrates as more smelter capacity comes on-line and refined copper imports diminish, the need for foreign sourcing of copper raw materials is increasing. This is one reason for renewed Chinese interest in acquiring foreign mine assets.

A recent rule change should certainly help the process. Effective May 8, most overseas deals (including in mining) under US$1 billion in value will no longer require government approval, thus giving buyers more flexibility. Previously, any deal valued at more than US$100 million had to be submitted to China’s National Development and Reform Commission.

Even more important in driving the current trend is the fall in copper and some other metals pricings: Long-term assets now can be gained at prices that may seem relatively cheap.

The most recent example of a more heated acquisition activity is the US$1.46 billion offer by state-owned Guangdong Rising Assets Management Co. Ltd. for all the shares it does not own in Australia’s PanAust Ltd.copper-gold producer. Rising Assets currently holds a 22.8% stake. PanAust rejected the initial offer as opportunistic, despite the 46% premium to the current stock price, but it said it welcomed Rising Assets to perform due diligence in the hope of an improved offer.

Looking at PanAust’s portfolio, the offer does look on a low side. The company expects to produce up to 70,000 tonnes of copper this year from its two Laos-based active mines and, more importantly, it has a strong project pipeline. PanAust had agreed in October 2013 to buy an 80% stake in GlencorePlc Frieda River project in Papua New Guinea for US$125 million. Now intended as a 100,000-tonnes-per-annum project, former owner Xstrata had seen this as the home of a 300,000 tpa mine.

PanAust also holds 60.45% of Inca de Oro in Chile, a 50,000 tpa copper asset that it plans to develop with Codelco. Taking into account these assets, PanAust CEO Gary Stafford described the bid multiples implied by the Rising Asset offer as “lowball.”

Nevertheless, there is logic to the relatively low offer in today’s business environment. To develop greenfields assets is a risky exercise, and this has to be factored in. Rising Assets will need to find US$1.5 billion to US$1.8 billion to develop the Papua New Guinea asset. Decisions regarding the way forward for Inca de Oro are expected later this year, but this is unlikely to be cheap either. Rather than focus on such early stage projects, the recent thrust of China’s acquisitions has been on assets soon to enter production, without the up-front risk. In the past, China’s mining deals were often about securing a footprint in large undeveloped assets. In copper, the ill-fated but ambitious US$4.4 billion purchase of the 200,000 tpa Aynak project in Afghanistan by Metallurgical Corp. China Ltd. and Jiangxi Copper Co. Ltd. in 2007 is one such project. Others are the 200,000 tpa Galeno project in Peru by Jiangxi Copper and China Minmetals Corp. and the US$3 billion Mirador project in Ecuador by Tongling Nonferrous Metals Group Co. Ltd. All require years of development work, with significant capital input and associated risk.

In keeping with a more conservative approach, we see China’s recent determination and ultimate success in gaining the late-stage development Las Bambas project in Peru. Although the US$6 billion price tag for Minmetals and others on this 450,000 tpa mine looks high, with relatively little further spending this does seem to ensure a low-risk stream of copper in less than two years. The same high price but low-risk stance can be seen in China Molybdenum Co. Ltd.’s US$820 million purchase of Rio Tinto’s 82% stake in the 42,000 tpa Northparkes active mine in Australia in late 2013.

Chinese investors will likely become more active in trying to secure such low-risk assets at affordable prices before the next metals price boom puts them out of reach.