The Xstrata/Glencore Merger Could Put These Copper Miners In Play

Includes: RIO, SCCO, TRQ, VALE
by: Bret Jensen

The proposed merger of Xstrata and Glencore International will establish another major player among commodity producers. Fast rising demand from Asia is keeping commodity prices strong despite concerns about Europe. Given the current low debt costs and relatively low valuations, this should kick off a feeding frenzy for the midsize players in this space. Given the huge increase in copper prices over the last decade, I think that is a good place to start to look for companies that could be put in play by this merger. Here are two copper miners that could make good acquisitions.

Ivanhoe Mines (IVN) - "Ivanhoe Mines Ltd. operates as an exploration and development company. The company's principal mineral resource property is Oyu Tolgoi copper-gold-silver project located in southern Mongolia." (Business Description from Yahoo Finance)

Why Ivanhoe would make sense as an acquisition

  • One word, Mongolia. Ivanhoe has several large projects in this fast developing Asian mining Mecca. Mongolia is becoming like Asia's Bakken Reserve for mineral producers. Mongolia's low costs, huge mineral deposits and proximity to China will drive exponential growth there for decades. Ivanhoe's copper mine there will become the world's largest when it comes on line next year.
  • The company just engaged UBS to find strategic partners for some of its Australian projects. It will be interesting to see if this effort kicks off larger conversations.
  • Rio Tinto (NYSE:RIO) increased its stake in Ivanhoe just last month
  • The stock is significantly under analysts' price targets. The median analysts' price target on IVN is $24, which is 40% above Ivanhoe's current price of $17 a share.

Prognosis: I think Rio Tinto makes the most logical acquirer given its current stake in the company. Given the company's market capitalization dwarfs Ivanhoe's, its robust cash flow and the attractiveness of Ivanhoe's Mongolian assets; the chances seem high that RIO will acquire the rest of IVN at some point in the future.

Southern Copper (NYSE:SCCO) - "Southern Copper Corporation engages in mining, exploring, smelting, and refining copper ores in Peru, Mexico, and Chile. It involves in the production of copper and molybdenum concentrates; smelting of copper concentrates to produce anode copper; and refining of anode copper to produce copper cathodes, as well as refined silver and copper." (Business Description from Yahoo Finance)

Why Southern Copper would make sense as an acquisition:

  • The stock has a digestible market capitalization of around $30B.
  • The company has desirable long-lived mining assets in relatively stable parts of the world
  • It is already in the midst of strategic plan to double its copper production in the next five years.
  • The company assets are throwing off increasing cash flow, which has allowed Southern Copper to significantly increase its dividend over the last few years. The stock currently provides a yield of 7%

Prognosis: Vale (NYSE:VALE) makes the most sense to me as a potential acquirer. This would allow Vale to diversify away from just iron production (72% of revenue), it is already headquartered in South America where most of SCCO's assets are, and it has roughly five times Southern Copper's market capitalization.

Disclosure: I am long VALE, RIO.