M&A landscape changing for copper producers

VANCOUVER — With the US$5.1-billion hostile takeover of Toronto-based Inmet Mining (IMN-T) by larger-cap peer First Quantum Minerals (FM-T) looking all but wrapped up, it’s an opportune time to take a look at the shifting mergers-and-acquisitions landscape for mid-tier copper producers, and try to earmark just which companies might be making moves over the next few years.

The current climate is particularly interesting for a number of reasons. Firstly, the recent rash of writedowns plaguing major producers has generated an appetite for capital savings and financial prudence, which means big-time players like Anglo American (AAUKY-Q) and BHP Billiton (BHP-N) could be looking to shed fringe assets in a bid to pump up balance sheets. Though these assets are on the margins for mega companies, many would represent a solid growth option for a mid-tier producer.

A second consideration stems from the recent global recession that has seen many miners dropping to historic lows vis-à-vis share and capital valuations. First Quantum discovered that market machinations can leave a company like Inmet open to a hostile acquisition at a lower-than-anticipated price. The effect has been even more acute at the junior level, where many small-cap companies are teetering on the brink of extinction due to weak equity markets and lack of available capital.

Finally, the long-term outlook on copper has remains predominantly bullish, despite a mid-term volatility in prices stemming from underperformances in major industrial economies like those in China, the U.S. and the European Union.

Over the past 12 months, copper prices have moved in a variance bracket of plus or minus 10.6% from a high of US$3.96 per lb. to a low of US$3.23 per lb., which seems a likely price range for the red metal to occupy over the mid-term. At these prices, copper is a profitable commodity for miners with strong operational pedigrees and an ability to meet guidance estimates.

One such proven operator is Vancouver-based Capstone Mining (CS-T), which is producing strong results at its Cozamin polymetallic mine in Zacatecas, Mexico, and the Minto copper-gold mine in the Yukon. The company also has a promising growth pipeline with its US$1.6-billion Santo Domingo copper-iron-gold joint venture in Chile.

Capstone has been in the acquisition conversation for the past year. It boasts a strong balance sheet with US$500 million in its treasury plus cash flows from operations, and no capital outlays at Santo Domingo until 2015. During a conference call on March 14 president and CEO Darren Pylot explained that Capstone had suspended a recent share buyback program to preserve capital as acquisition talks heat up.

“I’m sure you have heard in the market — and you have heard every major mining company CEO stand up and say it over the last six months — that they’re going to be preserving capital and selling non-core assets. So we believe there’s going to be a number of additional non-core assets from the majors that could become available,” Pylot said. He added that Capstone was looking to buy specific assets, as opposed to an entire company.

“There’s been quite a few over the past four or five months. We are engaged in some of those, and we actually expect to see a fair amount coming up over the balance of 2013. We’re being disciplined with our capital. We’re not going to overstretch our balance sheet to make an acquisition, because we do believe there’ll be more coming — this is just sort of the beginning of it,” he said.

A larger base metal producer that has not been shy about voicing its pursuit of copper assets is Toronto-based Lundin Mining (LUN-T). The company is expecting to produce between 100,000 and 108,000 contained tonnes copper in 2013 at cash costs of roughly US$1.03 per lb., and it had a cash position of around US$275 million to end 2012.

During a conference call in late February, president and CEO Paul Conibear outlined Lundin’s growth strategy, noting that the company was looking at projects in various stages and would not discount smaller-scale acquisitions.

“I would like to add more copper into our portfolio . . . we really like copper. We’ve got a great portfolio already of zinc and polymetallic to be expanded in the future. We’ll be opportunistic if we see a good deal,” Conibear said, adding that Lundin would look at assets put up for sale by majors.

“I wouldn’t want to put any particular size on it. We’re looking at lots of junior opportunities as well — three or four of those would be great to add to our stable this year,” he said, noting smaller investments in the US$2-million to US$10-million range that could lead to incremental growth.

Conibear said that Lundin would focus on mines that were producing between 30,000 and 80,000 contained tonnes copper per year, and host reserves that would support a mine life in excess of 10 years.

B.C.-focused producer Taseko Mines (TKO-T, TGB-X) has also been viewed as a potential player in the mergers-and-acquisitions space. The company runs Canada’s second-largest open-pit copper-molybdenum mine at its 75%-owned Gibraltar operation in the Cariboo region, which produced 89.7 million lb. copper and 1.3 million lb. moly in 2012.

Taseko is focused on growing internally via its US$1.1-billion New Prosperity copper-gold project, 125 km southwest of Williams Lake, B.C., but the company could prove to be an acquisition target or potential acquirer moving forward.

Taseko has been wrestling with ongoing federal permitting issues and strong local opposition at New Prosperity, although the project has a potential 32-year mine life based on reserves of 831 million tonnes grading 0.23% copper and 0.41 gram gold per tonne.

In November Taseko bumped its equity position to 16.8% in junior Yellowhead Mining (YMI-T), whose main asset is its Harper Creek copper-gold-silver project, 150 km north of Kamloops, B.C. Harper Creek is a low-grade volcanogenic sulphide system that contains 704.4 million tonnes of reserves grading 0.26% copper, 0.03 gram gold per tonne and 1.14 grams silver per tonne.

On the other side of the ledger, two Vancouver-based producers stand out as potential acquisition targets. Both Copper Mountain Mining (CUM-T) and Mercator Minerals (ML-T) own assets that could draw interest from mid-tier outfits looking to boost copper production.

Copper Mountain would be the more expensive option of the two, with its $282-million market capitalization.

The junior operates its 75%-owned Copper Mountain mine, 20 km south of Princeton, B.C. The mine produced 57 million lb. copper and 19,000 oz. gold in 2012 at total cash costs of US$2.32 per lb. However, processing difficulties meant Copper Mountain ended the year with 82% mill availability, and the company saw its working capital drop 38% year-on-year to C$24.3 million.

Mercator has struggled to get a handle on operations at its historic Mineral Park copper-moly mine, 120 km southeast of Las Vegas, Nev., though the company reported record production in 2012, with 87.5 million lb. copper equivalent.

Mercator aims to keep improving operations, with its 2013 guidance at Mineral Park clocking in at between 93 million and 102 million lb. copper equivalent, at cash costs of ranging from US$2.25 to US$2.50 per lb. At the end of the third quarter Mercator reported US$11.3 million in cash and equivalents, along with a working capital deficiency of US$63.8 million.

Mercator could be viewed as a relatively cheap acquisition with a C$118-million market capitalization, and it offers an intriguing growth profile, courtesy of its wholly owned El Pilar copper project in Sonora, Mexico. The US$280-million project would pr
oduce 79.3 million lb. copper cathode over a 13-year mine life, and boasts a US$416-million, after-tax net present value and 36.6% internal rate of return at an 8% discount rate.

Looking further down the road, it is hard not to notice B.C.-centric producer Imperial Metals (III-T) and its large Red Chris copper-gold development, 80 km south of Dease Lake. Imperial exceeded its guidance at its Mount Polley and Huckleberry mines in 2012, producing 51.3 million lb. copper, 53,500 oz. gold and 212,000 oz. silver.

The company is hostile acquisition-proof due to its tightly held equity structure, with Canadian oilsands billionaire Murray Edwards controlling roughly 39% of outstanding shares. But assuming Red Chris stays near its US$444-million development budget, Imperial could be a player down the road.

Red Chris remains on schedule for plant start-up in 2014, though the company will need more financing by mid-2013. Reserves stand at 302 million tonnes grading 0.359% copper and 0.274 gram gold. At current reserve levels, Red Chris features a 28-year mine life at a 30,000-tonne-per-day throughput rate.