Time May Be Ripe for Copper M&A to Flourish

With global demand for copper expected to outstrip supply, and the price of the red metal down from its highs of nearly $4 earlier this year, now may be a good time to move aggressively in the market. There are already signs that copper producers both large and small plan to forge new alliances and press ahead with buyouts in anticipation of greater demand.

Total global merger and acquisition activity in the mining sector rose 130 percent in the first quarter of this year from the previous quarter to reach US$90 billion, according to KPMG’s Mining M&A Quarterly Newsletter. Granted, that was mostly a result of the proposed merger between Glencore International (LSE:GLEN) and Xstrata (LSE:XTA), which was announced in February; the deal will be the largest mining transaction in history if it goes ahead, and may significantly shift the industry’s landscape in the future. After all, it would create the third-largest copper group in the world and become the fourth-largest diversified mining company after BHP Billiton (ASX:BHP), Vale (NYSE:VALE), and Rio Tinto (ASX:RIO). Yet even without that mega-merger, there were over 81 mining transactions in the latest quarter, compared to under 50 in the fourth quarter of 2011, KPMG found.

Looking solely at copper mergers, there were a total of ten transactions during the latest quarter for a combined total deal value of $13 billion. The most high profile was Rio Tinto’s move to become the majority shareholder in Ivanhoe Mines (NYSE:IVN,TSX:IVN), which operates the Oyu Tolgoi copper mine in Mongolia. Oyu Tolgoi is slated to begin initial production by the end of this year, and commercial production is projected to begin by the first half of 2013.

Hopes may be high for Oyu Tolgoi, which will be one of the world’s largest copper mines, and other mega-projects, but some analysts argue that this is not the best time for companies to be making aggressive moves. Indeed, both Rio Tinto and BHP suggested this month that they may be scaling back their investment plans amid increasing worries about a further global economic downturn. BHP’s chairman, Jacques Nasser, stated that the company is rethinking its expansion plans “every day,” while Rio Tinto’s CEO, Tom Albanese, said “increasing costs are an industry-wide problem…[w]e must ensure we are proactively tackling issues now that may impact productivity in years to come.”

Still, 2011 was a strong year for copper M&A activity. According to the Metals Economics Group’s Strategic Report, released this month, copper deals dominated base metals acquisitions spending, and accounted for the bulk of the 47 percent increase in the total base metals spending of $29 billion in 2011. Looking at the geographic breakdown of 2011′s global mining acquisitions, of the 51 percent of acquired projects Canada accounted for 25 percent market share followed by the US with 15 percent and Australia.

Looking ahead, corporate deals in the copper sector may remain strong, but more action could take place outside of the obvious locations such as North America and Australia. PwC expects a record year of mining M&A driven by cash-rich senior and intermediate mining groups, with Africa becoming a “more viable M&A geography with growth market buyers in particular, driving substantial acquisition volumes.” PwC also expects M&A deals to be robust despite a 21 percent drop in copper prices in 2011 as the spot price of copper nonetheless averaged $4 a pound, 17 percent higher than the 2010 price and 24 percent higher than in 2007. Indeed, Morgan Stanley pointed out that Chinese demand for copper will support prices in the latter half of the year, stating that “we think the timing of a rebound in copper prices will be in large part determined by the speed at which China churns through its domestic inventory, which will necessitate a return to the import market…[f]urthermore, with the majority of known copper inventory concentrated in the U.S. and East Asia, demand weakness outside of these regions will be offset by supply tightness.”

Meanwhile, demand is expected to outstrip supply, with inventories remaining low, especially as labor strikes at major mines worldwide continue to disrupt output. In addition, it is taking longer to produce lower-quality copper, which is encouraging companies both large and small to forge partnerships and pursue buyouts to meet ever-growing demand from consumers in developing economies in particular, PwC said.

Conflict among major copper producers

The drama among major producers is also likely to continue. As investors await the closure of the Xstrata-Glencore deal, they will also be keeping close tabs on the ongoing conflict between Anglo American (LSE:AAL) and Codelco as the latter continues to press its right to exercise the option to acquire a 49 percent stake in Anglo American Sur. In late 2011, Anglo American agreed to sell a 24.5 percent stake in its Chilean unit to Japan’s Mitsubishi Corp. (TSE:8058) for $6.7 billion. As a result, Anglo American has argued that Codelco can now only have the remaining 24.5 percent stake in the company. When and how a settlement will be reached between the two sides remain in question.

Such legal disputes, however, are not uncommon and are unlikely to reverse the tide of copper companies looking to strengthen their position with another group, either through a merger or a buyout. This month, for instance, TNR Gold (TSXV:TNR) received an offer from an unnamed company to merge with TNR and acquire TNR’s copper and gold properties in Argentina. However, TNR is in dispute with McEwen Mining (NYSE:MUX) over the title to a significant part of the Los Azules property; a trial to settle the issue will start in November and should last for about six weeks.

TNR’s Chairman, Kirill Klip, stated that “the Los Azules project is considered to represent one of the largest undeveloped copper projects in the world but the current legal uncertainty over its legal ownership is detracting from the value of the project for shareholders of both TNR and McEwen Mining.”

Even with stumbling blocks, the quest to secure a steady copper supply in the coming years may continue to fan the flames of more M&A activity from both major and junior miners in the near future.

Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.