A Chinese consortium led by MMG, an arm of state-owned China Minmetals Group, is buying Glencore Xstrata’s (LSE: GLEN) enormous Las Bambas copper project in Peru for US$5.85 billion in cash.
The consortium includes Hong Kong-based Guoxin International Investment Corp. and Citic Metal Co. MMG owns 62.5% of the consortium; Guoxin International, 22.5%; and Citic Metal, 15%.
In addition to the nearly US$6-billion sticker price, the consortium is on the hook for all capital and development costs that Glencore Xstrata has spent on the project between this year and the date the deal closes. Glencore says it has invested US$400 million on the project between Jan. 1 and March 31.
Amanda Smith, a spokesperson for New York-based Dealogic, confirmed in an email to The Northern Miner that the deal is the largest cross-border acquisition of a mining target by a Chinese company since state-owned Aluminum Corp. of China, or Chinalco, took a 12% stake in Rio Tinto for $14 billion in early 2008.
Glencore will use the proceeds to trim debt and reinvest in the company, which is the world’s largest commodities trader and fourth-largest miner. Any surplus capital will be returned to shareholders.
The deal is expected to close before the end of the third quarter. China Minmetals Group — which owns 74% of Australia-based MMG — has committed to vote in favour of the transaction, Glencore said in a brief statement released on April 13.
Ivan Glasenberg, Glencore’s CEO, said the company’s “willingness to sell reflects the level of the offer and our conviction that we can use the sale proceeds to create additional shareholder value.”
Glencore agreed to sell Las Bambas to obtain regulatory approval from China’s Ministry of Commerce for its merger with Xstrata in May 2013.
Andrew Michelmore, MMG’s president and CEO, described the acquisition as “transformational” for the company, which is one of the world’s largest zinc producers, but also mines copper, lead, gold and silver. MMG produces copper from the Sepon mine in Laos and the Kinsevere mine in the Democratic Republic of the Congo.
By adding Las Bambas, MMG’s 3.9-million-tonne contained copper resource could grow to 10.5 million tonnes, Michelmore said, and the Hong Kong-listed company’s revenue will skew towards copper, while offering exposure to zinc.
Of the 400,000 to 450,000 tonnes of copper Las Bambas will produce each year, he added, MMG’s 62.5% share would work out to 250,000-plus tonnes of copper a year — which he says is a “significant component for us.”
He told analysts and investors on the conference call that “assets of this quality and scale are rarely available, and with the project already 56% complete, it is set to become a significant producing asset in the near-term . . . this is a unique opportunity for MMG.”
Las Bambas is expected to produce 2 million tonnes of copper in concentrate in the first five years of operation, he continued. That would put Las Bambas amongst the top-three copper producing mines in the world in 2017. He also noted that Las Bambas offers exploration upside, given that much of the licensed area is unexplored.
“Once in operation, Las Bambas is expected to be in the first quartile of the C1 cash-cost curve, using forward projections of production and costs,” he added. “Glencore have given estimates of a C1 cost of US79¢ per lb. copper for the mine’s life.” He says it appears to be a clean, high-quality concentrate, with a copper grade of between 30% and 35%.
The project involves a large open pit using a conventional concentrator that can process 140,000 tonnes of ore per day.
Las Bambas has a reserve of 950 million tonnes grading 0.73% copper plus gold, silver and molybdenum credits, and a measured and indicated resource of 1.2 billion tonnes at 0.66% copper plus by-product credits, enough for at least a 23-year mine life.
The transaction will be funded by a banking syndicate arranged through the China Development Bank, Michelmore confirmed, noting that the debt “has been supported” by MMG’s main shareholder, China Minmetals. Details on how the financing will be structured will be made public in late May.
Michelmore conceded that MMG has “identified some risks in the existing project schedule and capex” during the eight months it has had access to data on the project in the due diligence period. More details will be provided after the transaction is complete and the joint venture assumes control of the assets.
For now, however, he acknowledged that, as of the end of December 2013, Glencore had spent US$3.5 billion, and its projections at that time were that another US$2.4 billion would be needed to complete the project.
Glencore said the project should be complete by mid-2015, he added, “but we haven’t given our comments on that. We’ll wait until we’ve completed the transaction — we’ll have a better view of the timing by that stage.”
Michelmore said the investment “is the first step of what we see as a long-term relationship with Peru.”
He added that “a lot of people don’t realize Peru is the second-largest zinc producer in the world, after China . . . it’s the third-largest copper producer and it’s large in silver, as well. So it has huge natural resources right across the country, and again, through our due diligence work down in the south where the Las Bambas project is and our interaction with groups down there, it makes us comfortable about being in Peru.”
In addition to Las Bambas, Kinsevere and Sepon, MMG owns and operates the Century (zinc), Golden Grove (copper, zinc and precious metals) and Rosebery (zinc, lead, gold and silver) mines in Australia.
Its development projects included the Dugald River high-grade zinc–lead–silver deposit in northwestern Queensland in Australia and the Izok Corridor base metals project in Nunavut, Canada.
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