Appetite for ‘green energy metals’ drives deals

Demand for ‘green energy’ metals like copper, nickel, lithium, and cobalt has risen sharply, driven by the global move to lower carbon emissions and electric vehicle makers chasing battery ingredients. On October 13, Tesla inked a multi-year nickel supply deal with New Caledonia’s Prony Resources, which will give the EV maker roughly 42,000 tonnes of the metal, making it the miner’s largest customer; and late last month, China’s EV battery giant Contemporary Amperex Technology (CATL), said it had signed a deal to acquire Canada’s Millennial Lithium for about US$305 million. Millennial has two lithium brine projects in Argentina. Earlier this month, Zijin Mining announced it is buying NeoLithium and its 3Q lithium brine project in Argentina for $960 million in cash.

The appetite for copper assets in particular is behind much of the recent M&A. Australian miner Sandfire Resources unveiled plans late last month to acquire the Minas de Aguas Tenidas mining complex in Spain from Trafigura and Abu Dhabi’s state-owned Mubadala for US$1.9 billion. The complex has three underground copper mines.

The latest deal on October 14 is South32’s acquisition of a 45% stake in Sierra Gorda, a low-grade open-pit copper mine in Chile’s Antofagasta region for an upfront cash payment of US$1.6 billion, and a further amount of up to US$500,000, structured as a contingent price-linked consideration and payable annually over four years as a percentage of incremental revenue above agreed copper price and production thresholds.

“We are actively reshaping our portfolio for a low carbon world and the acquisition of an interest in Sierra Gorda will increase our exposure to the commodities important to that transition,” South32’s CEO Graham Kerr said. “Copper is a critical metal in the decarbonisation of the world’s energy networks and has strong long-term market fundamentals.”

The mine is expected to produce 180,000 tonnes of copper, 5,000 tonnes of molybdenum, 54,000 oz. gold and 1.6 million oz. silver (214,000 tonnes copper-equivalent) in calendar 2021. South32 is acquiring its stake from Japan’s Sumitomo Metal Mining (31.5%) and Sumitomo Corp. (13.5%). Polish miner KGHM owns the other 55%. South32 is funding the transaction with cash on hand and an underwritten debt acquisition facility.

“Finding a producing copper asset of size up for sale isn’t easy, but South32 has done that,” BMO analysts Alexander Pearce and David Gagliano commented in a research note. “Headlines look solid: an asset in Chile with greater than 150,000 tonnes per year of copper, a long mine life with upside potential, an attractive EV/EBITDA of about 3.3 times.” But the analysts also pointed out that over the last five years, Sierra Gorda’s average annual copper production has been just 109,000 tonnes at all-in costs of more than US$2.00 per pound. Historically, they cautioned, “the asset’s performance hasn’t quite matched its potential and as a minority partner it may be harder for South32 to deliver improvements in the near-term.”

On a conference call, South32’s Kerr admitted that initially he had been “skeptical” about the asset, but extensive due diligence and multiple site visits over nine months had assured him that Sierra Gorda had overcome many of its commissioning and ramp-up challenges of 2014 and 2015, and that while more work needed to be done, it was well into a successful debottlenecking program.

“I was the most skeptical about this. We didn’t think this was going to go anywhere. The reputation of the asset wasn’t great. But every time we took off a layer of the onion we were surprised by a) the work that had been done over the last couple of years and b) the potential that still exists.”

“You can see a significant improvement in the operation’s performance,” Kerr continued. “It has been de-risked through its build and following a tough commissioning, it is now fully ramped up. … If you look at the performance over the last three years, whether it’s throughput, or whether it’s mining efficiencies, whether it’s recoveries. … it really shows how they are on a pathway to improvement.”

“Sierra Gorda is a very well-run operation,” he added. “The general manager is super impressive and they’ve done a really good job. It’s something I don’t think the markets appreciate.”

Kerr rattled off a list of attributes including the US$5 billion of historical investment in “high quality, modern infrastructure;” the asset’s 20-year reserve life; regional exploration upside; future potential of an oxide project; and continued optimization and debottlenecking opportunities. Sumitomo also has agreed to a tax indemnity up to an agreed cap in relation to potential changes in the country’s tax regime, and there is a tax stability agreement in place on Sierra Gorda until 2028.

“The acquisition meaningfully lifts group margins,” Kerr told analysts and investors on the call. “Looking forward we expect the investment to immediately contribute to group earnings, improve our portfolio and further strengthen our balance sheet through the cycle.”

When an analyst asked whether South32 felt it had paid full and fair value, Kerr responded: “We think we got it at a very good price.” 

“There’s more upside, we have looked at a number of opportunities over the last six and a half years extensively, and this is by far the best one we’ve seen, despite the initial skepticism.”

“It’s a good entry into an asset at a good price when you think about what historical prices look like,” he added. “But also if you look at some of our major diversified peers that are about to commission projects in calendar 2022, they’re paying well in excess…”

He also pointed out that the capital intensity of new copper builds has been rising over time.

“We think we’re getting in very cheaply compared to what these builds look like, and that’s before you consider permitting, construction and ramp up. And the other piece is if you look at it on a consensus basis, it’s value accretive in fiscal year 2022.”

Kerr also emphasized that working together with KGHM in a joint-venture structure was not a downside. “I don’t think we’re driven by the ego — that we believe we have to be the operator and we’re the best operator in the world. We’re comfortable around the joint control and that we can exercise our rights and our influence to realize the value.”

In addition, Kerr said South32 has “a lot more extensive copper experience than probably some people recognize,” and that the challenges of using seawater for processing wasn’t a big deal. “We would probably argue that the actual processing there is not dissimilar from what other people are doing in the region in terms of approach and technology, and we’re not the only ones using seawater.”

The CEO emphasized that the deal was “opportunistic” and will create value for shareholders. “I’ve always said from day one that M&A needs to be opportunistic,” he said. “The challenge is buying an opportunity that is not only undervalued but also has a clear path to realize the full value.”