Leading mining companies are having a hard time balancing investors’ expectations of large returns with financing the premium required to buy pure-play copper mining companies, as global demand for the metal sends valuations soaring.
Diversified mining companies including Rio Tinto, BHP Group, and Glencore, pressured by slow global economic growth and falling commodity prices, see rival copper producers growing slowly out of reach, with shares benefiting from the metal’s strong prospects.
While shares of Rio, BHP, and Glencore have slumped between 10% and 15% this year, those of refined copper producers including Freeport-McMoRan, Ivanhoe Mines, and Teck resources have risen, despite a drop in benchmark copper prices after hitting a record high above $11,000 per metric ton in May this year.
A banker who has worked on several mining deals told Reuters that doing big copper deals makes boards nervous as fluctuations in other commodities, such as iron ore and coal are likely to continue.
He added that also because copper companies have outperformed, diversified mining companies find it difficult to pay large premiums when their share prices fall more in comparison.
BHP, Rio Tinto, and Glencore are trading at multiples of five to six times earnings, while Teck, Freeport, and Ivanhoe are almost double that.
Copper, as a material used in electricity and construction is expected to benefit from increased demand from the electric vehicle sector and new applications such as data centers for artificial intelligence.
Richard Blunt, partner at law firm Baker McKenzie said that the long-term outlook for the metal is not always taken into account by investors in large mining companies when they offer higher premiums to try to close deals.
Blunt said that investors just want to know what will happen to the value of their company over the next three to six months, which makes it a big deal.
In the past three years, thanks to higher commodity prices, most mining companies have paid record dividends, which is seen as eroding the industry’s ability to generate production growth through exploration, mine development or consolidation.
COSTLY HISTORY
Investors have good reason to keep a close eye on management’s deal ambitions, as most mining companies 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 write-downs, while BHP’s $12 billion deal for shale oil and gas assets in the US in 2011 was resold for $10 billion in 2018.
Some management teams have tried to return to M&A, but with little or no success.
Michel Van Hoey, senior partner at McKinsey & Company, said there is a purely financial principle, which is the resistance of existing shareholders to significant premiums.
He added that, looking historically, the Party has gone through significant waves where some Companies may have paid too much for deals. Now, executives are being a little more conservative.
Glencore finally settled for 77% of Teck’s matallurgical coal assets after its $23 billion bid for the entire Canadian company was rejected, while BHP was forced to back away from Anglo American despite twice revising its initial offer to attract the smaller rival.
Both BHP and Glencore initially made all-stock proposals for their target companies.
A mining investor said that in previous cycles, companies like Rio Tinto engaged in large cash acquisitions at peak times, only to see prices fall, making them imprudent.
He also said that the trend today has shifted towards share-based deals to reduce risk, but are more expensive especially when commodity prices fall.
