S32's Copper ambitions

I create a fresh thread for S32's copper ambitions. I had posted on S32's JV with Noronex under the Sierra Gorda thread, but this won't do. Link here: https://hotcopper.com.au/posts/75879971/single

Considered opinions on copper welcomed.

Mining industry struggles with valuation gap amid shift to copper

By Clara Denina and Felix Njini. September 27, 20249

LONDON, Sept 27 (Reuters) - Leading mining companies are struggling to balance investor expectations for hefty returns with paying the necessary premiums to buy pure play copper companies as global demand for the metal sends valuations soaring.Big diversified miners including Rio Tinto, BHP and Glencore, pressured by a slowdown in global economic growth and falling commodity prices, are watching rival copper producers gradually grow beyond their reach, with shares benefiting from the metal's robust outlook.

While shares of Rio, BHP and Glencore have slumped between 10% and 15% this year, the valuations of pure play copper producers including Freeport-McMoRan, Ivanhoe Mines and Teck Resources, have risen, even as benchmark copper prices retreated after hitting a record high above $11,000 a metric ton in May this year.

"Engaging in large copper deals makes the boards (of directors) nervous when fluctuations in other commodities, like iron ore and coal, are likely to persist," a banker, who has worked on several mining transactions, told Reuters.

"And since copper companies have performed better, diversified miners find it challenging to pay massive premiums when their share prices have dropped more in comparison," the banker added.

BHP, Rio Tinto and Glencore trade at multiples of five to six times earnings, whereas Teck, Freeport, and Ivanhoe are at nearly double that, the banker said.

The long-term outlook for the metal isn't always factored in by investors in the bigger miners when they offer higher premiums to try and seal a deal, said Richard Blunt, a partner at law firm Baker McKenzie."Investors only want to know what's going to happen to the value of their company over the next three to six months, and that's a major problem," Blunt said.

In the past three years, thanks to higher commodity prices most miners have paid record dividends, which - although popular - are seen as eroding the industry's ability to generate production growth via exploration, mine development, or consolidation.

Investors have good reason to keep a wary eye on management's dealmaking ambitions as most miners have a corporate history littered with failed and sometimes costly acquisitions.

Rio Tinto's $38 billion deal for Alcan in 2007 commanded a 65% premium, and subsequent writedown, while BHP's $12 billion deal for U.S. onshore shale oil and gas assets in 2011 sold back for $10 billion in 2018.Some management teams have tried to return to M&A, but with no or only partial success.

"There's the pure financial aspect, which is the resistance of existing shareholders to significant premia," said Michel Van Hoey, senior partner at McKinsey & Company."If you look historically, 10 years ago, we have gone through a significant wave where some companies probably overpaid for their transactions. Now, executives have become a bit more conservative," he added.

Glencore eventually settled for 77% of Teck's steelmaking coal assets after its $23 billion bid for all of the Canadian miner was spurned, while BHP was forced to walk away from Anglo American, even after revising its initial bid two times to entice the smaller rival.

Both BHP and Glencore initially made all-share proposals for their target companies."In past cycles, companies such as Rio Tinto engaged in substantial cash acquisitions at peak times, only to see prices crash, leaving them looking imprudent," a mining investor said."Today, the trend has shifted towards stock-based deals to mitigate risks, but that is more expensive, especially at a time when commodity prices are coming down."

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Ash here.

And this is the dilemma for diversified miners like S32: their other mining operations command low multiples while copper assets are flavour of the month and high priced.

There is a solution, which GK & team would be entirely across in their restless M&A journey: buy cheap non-copper base metal mines relevant to the electrical revolution.

The IEA says the key ones are aluminium, nickel, manganese, zinc, chromium, REE and cobalt. Other lists vary, though not a lot.

S32 has plenty of aluminium production.

It its already a globally-significant manganese producer, with more to come from Hermosa Clark and the opportunity to buy out AAL's share of their JV likely.

Cannington is a big zinc producer, with Hermosa Taylor Zn adding from CY27.

In nickel, S32's Cerro Matoso is already a major player. As I have blathered on about above, AAL's Brazil nickel mines are for sale and likely to be cheap as AAL says its options are sell or close. Everyone has been frightened of nickel as fresh Indonesian production funded by China has suppressed prices. Indonesia is now struggling with poor environmentals and baleful China influences.

Al, Ni, Mn and Zn are already core competencies in S32, meaning GK & team are well placed to judge the merits of mines for sale and their markets.

S32 is well placed to play the electrical revolution, even without copper M&A. It has the Sierra Gorda JV, Ambler JV and an extensive Cu exploration portfolio.

Hey, if S32 can find a Cu opportunity, great. Its prospects remain excellent without it.

Ash