5 Copper Takeover Targets In 2012

by: Stock Croc

Even though copper prices have suffered due to concerns about the state of the global economy, the future looks better, owing to a global copper shortfall and a scarcity in large-scale copper assets. Rio Tinto (NYSE:RIO) expects copper demand to double over the next 10 to 15 years. The world's top miners are striving to expand production. The fastest way to do that is by buying an active mine, so I believe that we will see an increasing trend of M & A activity in the copper mining sector.

The recently announced $61 billion megadeal between commodities trader Glencore International (OTCPK:GLNCY) and diversified miner Xstrata (OTC:XSRAY) has provided a strong impetus for other large mining deals. It was preceded by the acquisition of Equinox Minerals, the owner of Africa's largest copper mine in Zambia, by Barrick Gold (NYSE:ABX) for an enterprise value of $7.46 billion. After losing the bidding contest for Equinox, Hong Kong-listed Minmetals Resources paid $1.3 billion for Anvil Mining, which operates copper mines in the Democratic Republic of the Congo. In December 2011, Polish copper miner KGHM Polska Miedz (OTC:KGHPF) made a friendly $2.96 billion bid for Canadian Quadra FNX (OTC:QADMF), which controls one of the world's largest undeveloped copper assets: the Sierra Gorda copper-molybdenum project in Chile.

For future deals, the best potential targets are those who are close to or already in production and are generating free cash flow. Canadian companies on the radar of buyers looking for copper assets include Capstone Mining Corp (OTCPK:CSFFF), which operates mostly in Canada and Mexico, and Lundin Mining Corporation (OTCPK:LUNMF), which has mining operations across Europe, and a 25% stake in the Tenke Fungurume copper-cobalt mine in the Democratic Republic of Congo.

In South America, Grupo Mexico (OTCPK:GMBXF), which operates 13 mines, is a potential target. In Australia, copper miner OZ Minerals (OTCPK:OZMLF) could be interested in Sandfire Resources (OTC:SFRRF), in which it already owns 19.83%; PanAust (OTC:PNAJF), which has assets in Asia and Chile; or Discovery Metals (OTC:DVYLF), which mines copper and nickel in Botswana. OZ Minerals could also be a target itself.

Potential buyers are rival mining companies operating in the same geography, as well as international heavyweights BHP Billiton (NYSE:BHP) and Rio Tinto. Brazilian Vale (NYSE:VALE), and Chile-focused Antofagasta (OTC:ANFGF) could also be looking for more copper assets. Minmetals Resources, which is backed by China's biggest metals trader, will pursue more acquisitions. The mine lives of its four existing holdings are set to end by 2020.

Among U.S.-listed companies involved in copper mining, I see the following as well positioned for a takeover:

Freeport-McMoRan Copper & Gold (NYSE:FCX): explores and mines copper, gold, molybdenum, silver and cobalt. It holds interests in various properties in North and South America; the Grasberg minerals district in Indonesia; and Tenke Fungurume in the DRC. Freeport expects to produce 3.8 billion pounds of copper in 2012. It is the world's largest listed copper miner, with a market cap of $40.80 billion. Its stock trades at 2.66 Price/Book compared to an average of 2.16 for the industrial metals and minerals and 3.96 for the copper industry. Its total cash of $4.82 billion exceeds its debt of $3.54 billion. While it is being tipped as a buyer for the Canadian companies mentioned above, it might also be on the receiving end of a bid.

Ivanhoe Mines Limited (IVN): Ivanhoe has copper, gold, and silver mining projects in Mongolia and Australia, as well as a gold mine in Khazakhstan. Its flagship asset is the Oyu Tolgoi copper and gold project in Mongolia, in which it has a 66% stake, with Mongolia's government holding the balance. Rio Tinto operates the project, expected to start commercial production in mid-2013. Rio Tinto just increased its interest in Ivanhoe from 49% to 51% and effectively controls IVN's board. It might make a full bid in the future, although it denies planning to buy more shares. Despite having a majority stake, I think that Rio might not necessarily block a bid from another company, for example Freeport. Rio Tinto has willingly relinquished its interests in assets sought by others, most recently uranium miners Kalahari Minerals and Extract Resources (OTC:EXRLF) which were acquired by China Guangdong Nuclear Power. Ivanhoe is capitalized at around $12.24 billion and trades at 2.58 Price/Book. It has total cash of $1.41 billion, compared to only $204.83 million in debt.

Hudbay Minerals (NYSE:HBM): HudBay Minerals is an integrated mining company for copper concentrates containing copper, gold, and silver, and zinc metal and zinc oxide in North, Central, and South America. The company owns three underground mines in the Canadian province of Manitoba. It also holds land positions in Manitoba and Saskatchewan, as well as Guatemala, Yukon, Chile, and New York. In addition, Hudbay operates ore concentrators and zinc production facilities in Canada; the Fenix nickel laterite project in Guatemala; and the Constancia copper project in Peru. It has exploration joint ventures with Aquila Resources (OTCPK:AQARF) and VMS Ventures (OTC:VMSTF). Hudbay just acquired a 9.9% stake in Northern Shield Resources (OTC:NSHRF), a junior mining company focused on platinum group element and copper-zinc-silver exploration in Canada. In my analysis, Hudbay makes a good target because of its attractive metrics. At $2.04 billion, it has the smallest market cap of the five targets and trades at 1.14 Price/Book. It has total cash of $870.78 million and no debt.

Southern Copper (NYSE:SCCO): Southern Copper engages in mining, exploring, smelting, and refining copper ores in Peru, Mexico, and Chile. The company operates the Toquepala and Cuajone mines, as well as a smelter and refinery in Peru. It also operates five underground mines that produce copper, zinc, lead, silver, and gold; a coal mine, and a zinc refinery. Although its figures are not as attractive as those of Hudbay, I believe Vale could be interested since it operates in the same region. Southern Copper is capitalized at around $27.34 billion and trades at 6.93 Price/Book. It has total cash of $1.37 billion and $2.75 billion in debt.

Teck Resources (TCK): Teck Resources is Canada's biggest diversified miner. It produces copper and metallurgical coal; zinc, lead, and molybdenum concentrates; cadmium, germanium, and indium; silver and gold; low alpha lead, high purity copper plating anodes, and indium powder for semiconductor and integrated circuit, thermal interface, solar panel, and next generation technology applications; and chemicals and fertilizer products. The company also holds interests in various oil sands development assets, and has stakes in 13 mines in Canada, the United States, Chile and Peru, as well as a metallurgical complex in Canada. It is also involved in exploration in the Americas, Asia-Pacific, Europe, and Africa, and is a partner in a wind power project. I find Teck a logical target, mainly for its copper and coking-coal assets. It has an equity value of $22.52 billion and trades at 1.31 Price/Book. Teck has total cash of $4.40 billion and $7.03 billion in debt.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.