BHP (NYSE: BHP; LSE: BHP) has signed an option agreement with Encounter Resources (ASX: ENR) over the Australian explorer’s 4,500-sq.-km Elliott copper project, in the Northern Territory.
The pact would give BHP the choice to enter an earn-in and joint venture deal to earn up to a 75% stake in the project, following a validation program to be completed by year-end.
The Melbourne-based mining giant would have to spend up to A$22 million (US$15.5 million) over 10 years to become Elliot’s majority owner.
The companies would then form a joint venture and would be expected to fund development based on their percentage interest. That would allow the parties to maintain their respective stakes or dilute according to a standard dilution formula, Encounter Resources said.
Should a party’s interest dilute to less than 10%, the junior added, it would automatically convert to a net smelter royalty.
BHP has the right to be the manager of the project, during the earn-in phase.
Encounter also wholly owns other copper projects in the Northern Territory, including the Jessica, Carrara, Playford and Sandover projects. Together, they cover 10,300 sq. km of land and are surrounded by other projects, including the Tennant Creek copper-gold mine and the Century zinc mine in Queensland.
BHP has spent the last four years actively looking for new copper projects, as analysts anticipate a supply crunch of the metal, which is used in construction, renewable energy and electric vehicles (EVs).
In 2019, the mining giant became the top shareholder in Australian miner SolGold (TSX: SOLG; LSE: SOLG), which is developing the Cascabel copper-gold project in Ecuador. The asset has the potential to become one of the largest copper-gold assets ever discovered, with an estimated producing mine-life of 55 years.
It also initiated a US$2.5-billion expansion of its Spence copper mine in Chile, BHP’s second-largest copper mine after Escondida, which is the world’s biggest.
That doesn’t seem to be enough for BHP, however. Its new chief executive, Mike Henry, said in February that the company needed more “future-facing” metals, such as copper. A month later, Chairman Ken Mackenzie said the miner was in a strong position to make acquisitions should there be attractive valuations resulting from the coronavirus.
“I’m not sure if there will be any opportunities that will come from this, but if there are, we are actually in a position to act,” Mackenzie said.
According to the latest report by International Copper Study Group (ICSG), global mine production fell 1% during the first half of the year. The market deficit hit 235,000 tonnes in the period.
Prices for the industrial metal, also used in the making of electric vehicles (EVs), have spiked thanks to recovering Chinese demand.
Bank of America (BofA) analysts said earlier this month that baseline mine supply growth had fallen steadily in recent years, with copper concentrates production in 2020 hovering at roughly the same levels as in 2016.
“While output should rebound next year, we remain concerned that unexpected losses may increase as miners especially in Chile have had only essential staff on-site in recent months,” they wrote.
“Linked to that, we have factored in the usual disruption allowance of 6% for 2021, which implies a deficit of 188,000 tonnes; yet, there is a risk that the shortages may end up being much bigger,” BofA noted.