By Stuart Burns
As we said back last year when the terms of Glencore's takeover of Xstrata were announced, the condition that the merged business should divest itself of one or more major copper resources effectively meant it would have to sell them to a Chinese firm.
So it comes as little surprise that Minmetal's HK subsidiary MMG, along with Guoxin International Investment Corp and CITIC Metal Co, should become the new owners in a 62.5/22.5/15.0% equity share funded largely with debt.
Glencore is to be paid a price of $5.85 billion in cash when the deal is finalized in the third quarter, at the top end of analysts' expectations, according to the FT, and sweetened further by an agreement that MMG will pay for all development costs incurred this year; already some $400 million and with a planned capital expenditure (capex) this year of about $1.8bn likely to at least double that to $800m by the time the deal concludes.
Why is it a good deal for Glencore?
MMG will incur something like $2.4bn of capex bringing the mine to its 460,000-ton-per-year capacity and as such are paying just shy of $18,000/ton of installed annual copper production capacity, according to Investec. A hefty price, given low copper prices at present, but still less than the $21,000/ton they paid for DRC-focused Anvil Mining in 2012. The price reflects the limited good quality copper deposits available and MMG's willingness to take the long view on demand and prices.
Nevertheless, this is a good deal for Glencore. The firm has said it will use the proceeds to pay down debt, standing at some $55bn at the end of Dec 2013, fund investment in options Glencore has elsewhere (such as the DRC and Zambia possibly), and no doubt return some funds to shareholders.
Regardless of which shareholders should be cheering the deal, the reduction in debt will support the firm's current BBB rating and free up cash flow that was being absorbed (and critically would continue to be absorbed without a sale) by Las Bambas, while facilitating the continued development of assets Glencore sees as more sensible projects for a firm with their philosophy of preferring development of existing assets rather than cash consuming greenfield projects.
Anticipating the sale, analysts had changed their recommendation on Glencore from sell to hold - the terms of the deal will only support that view. Glencore continues to be valued at the higher end of miners' range, but for good reason: the firm is so much more than holes in the ground.