Global Supply Deficit Heating Up Copper Sector M&A Activity
by Matthew Carr, Investment U Research Analyst
Tuesday, May 24, 2011
We're all well aware by now that the world is facing a copper supply deficit. The price of the metal rose 30 percent in 2010. Meanwhile, London Metal Exchange (LME) copper inventories fell 25 percent - below what the world consumes in a single month.
Of course, the usual suspects are to blame: booming growth in the emerging and developing worlds. But the tight supply situation means there are plenty of opportunities for investors.
Demand, Demand, Demand...
Global demand for copper increased 8 percent in 2010, outpacing supply.
No surprise, China was the main driver behind the increases. Even U.S. copper exports to China surged 20 percent.
But the supply deficit is going to get worse.
This year, Rio Tinto (NYSE: RIO) believes worldwide copper demand is going to increase at least 4.5 percent. That again outstrips new mine production output forecasts of 3 percent. This is why Barclays Capital believes the supply shortfall for 2011 will double from 2010 to 822,000 metric tons.
It also means 2011 will be another record year for merger and acquisition (M&A) activity for the copper mining sector. In 2010, PricewaterhouseCoopers (PwC) recorded 2,693 global mining M&A deals worth $113 billion, with copper accounting for 19 percent of the activity. For the decade, total global mining M&A is a staggering 11,000 deals worth $785 billion.
No other sector even comes close to matching that...
Recent M&A Activity in the Copper Sector
And the recent industry mania is just fun to watch:
- In April, Barrick Gold (NYSE: ABX) swooped in and bought Africa's largest copper mine owner Equinox Minerals (TSE: EQN) for $7.1 billion. This was a slap in the face to China's Minmetals Resources, who had a bid in place for Equinox that would've made the deal the largest proposed takeover in China's history.
- The Barrick/Equinox deal followed Equinox's purchase of Citadel Resources Ltd. for $1.18 billion late last year (the second largest copper deal in 2010). And forced Equinox to drop its own hostile takeover bid for copper miner Lundin Mining (PINK: LUNMF), who was in merger talks with Inmet Mining (TSE: IMN).
- Korea's LG International is ponying up $176 million for a 20 percent stake in Augusta Resource's (AMEX: AZC) Rosemont copper and molybdenum project. The group is also going to buy 30 percent of the copper concentrate and 20 percent of the copper cathode and molybdenum produced for the mine.
- This month, Japan's Sumitomo Corp. and Sumitomo Metal Mining Co. jointly bought a 45 percent stake in Quadra FNX Mining's (TSE: QUX) Sierra Gorda copper in Chile for $1.2 billion. (Quadra FNX is itself the result of the largest copper merger in 2010 between Quadra Mining and FNX Mining.)
- And Singapore's Tamsek signed a $510 million deal with Inmet, which will go to developing Inmet's gold and copper project in Panama (which was the center of attacks from Equinox during the Lundin-Inmet merger talks that eventually fell apart).
As day time soap operas get canceled one by one, the M&A activity in the copper sector is providing viewers with a new source of melodrama.
China' Copper Acquisition Game Plan
Like every other raw material, China needs a lot more copper to keep up with the pace of development. That means more M&A deals and attacking it's own fragmented mining sector.
But China is fairly new to the whole takeover game, particularly in the mining arena. Five years ago, China didn't even deserve the label "bit player" in sector M&A. Though, the country is stepping up its game, making 161 deals worth about $12 billion last year.
Still, according to PwC, Australia's Rio Tinto and Xstrata completed more acquisitions in terms of value during the last decade than all Chinese buyers combined. And despite the calls that it was trying to take over the world through buying sprees, China was involved in just 6 percent of all global acquisitions last year.
But China isn't without a game plan. It continues to eye Africa. Particularly Zambia, the largest copper producer on the continent, and the Democratic Republic of Congo.
China Nonferrous Metals Co. and Yunnan Copper Group are gobbling up what they can in Zambia. And Zhonghui Mining Group rushed in with a $690 million copper and cobalt mine of its own. The company also has large-scale exploration projects in the Zambia's northwest where Equinox and First Quantum Minerals (TSE: FM) have opened sizable mines in the last few years.
Plus, there's China's $6 billion agreement with the Congo to build infrastructure in exchange for minerals. Something China's done repeatedly throughout Africa.
Because the need for copper is so great, the move is underway to large resource plays in "more risky" neighborhoods of the world. Zambia, as well as the DRC, Saudi Arabia, Mongolia and the Philippines are all piquing interest.
But the majority of the M&A deals in 2010 were still done in less politically volatile countries - Canada, Australia, etc. And there are plenty of options here, like Australia's OZ Minerals (ASX: OZL), PanAust (ASX: PNA), Sandfire Resources (ASX: SFR) and Anvil Mining (ASX: AVM).
In Canada, Lundin is also still in play. It's reportedly fielding bids from China and other "interested" groups. The company plans to announce an update on a possible sale - either partial or total - by the end of the month. Lundin owns a 24 percent stake in the Democratic Republic of Congo's Tenke Fungurume copper and cobalt mine, in which Freeport McMoran Copper & Gold (NYSE: FCX) holds a 56 percent stake.
M&A season is shaping up to be a long one in the copper sector. And with demand rising and supply shortfalls expanding, it's just a matter of time before we start to see a mega deal or two down the pipeline.