Glencore to divest interest in Ernest Henry mine with sale to Australia’s Evolution Mining

Swiss commodity giant Glencore (LSE: GLEN) is selling its stake in the Ernest Henry copper-gold mine in Queensland, Australia to Evolution Mining (ASX: EVN) for A$1 billion ($916.5 million) in cash.

Evolution will pay Glencore A$800 million ($733 million) upfront and the remaining A$200 million after 12 months. The companies believe the transaction will close in early January 2022.

Under the terms of the transaction, Evolution will assume full ownership of the mine, located about 38 km northeast of Cloncurry. It has also entered into a copper concentrate offtake agreement and separate ore tolling agreement with Glencore.

The two companies have worked in partnership for the past five years at Ernest Henry, which commenced operation as an open pit mine in 1998, before transitioning to an underground operation in 2011.

Evolution first acquired an economic interest in the mine via a joint venture with Glencore in November 2016. Under that joint-venture, the mine was managed and operated by Glencore. The joint-venture delivered 100% of future gold and 30% of future copper and silver produced within an agreed life of mine area. Evolution paid 30% of the operating costs and capital of the operation. Outside the agreed life of mine area, Evolution had a 49% interest in future additional copper, gold and silver production, and would pay 49% of the operating and capital costs. The concentrate was treated at Glencore’s Mt Isa smelter, about 150 km from the mine, and the metal was refined at Glencore’s Townsville refinery.

Under the sale agreement, the joint ventures expire and Evolution will receive 100% ownership of the asset. In addition, a new offtake arrangement has been agreed for 100% of Ernest Henry’s concentrate to be sold to Glencore on standard market terms effective from January 1.

Glencore recently started a prefeasibility study on the potential extension below the current mine footprint, which was expected to be completed in the September 2022 quarter.

“Evolution has been a strong partner in the Ernest Henry mine for five years,” Gary Nagle, Glencore’s CEO, stated in a press release. “They share our way of working and commitment to operating responsibly across all aspects of the business.”

Commenting on the acquisition, Evolution’s executive chairman Jake Klein said his company has long coveted owning 100% of the mine, which he calls a world class asset.

“We are proud that it will once again be 100% Australian owned,” Klein said. “The acquisition is consistent with our strategy, materially improves the quality of our portfolio and delivers both strong cashflow and mine life extension.”

Since its founding in 2011, Evolution has grown quickly to establish itself as a force in the mining industry. The company has assets in Australia and Canada. In Australia it owns the Cowal, Mungari and Mt. Rawdon mines. In Canada it owns the Red Lake complex in Ontario, acquired from Newmont (TSX: NGT; NYSE: NEM) in April, 2020, and the Bateman gold project also in Red Lake, which it picked up earlier this year when it acquired Battle North Gold for $343 million.

In October of this year, the company announced plans to sell its Mt. Carlton gold mine in Queensland to Navarre Minerals (ASX: NML) in a deal worth up to US$65 million. That followed the company’s acquisition of assets from North Star Resources (ASX: NST) in Western Australia in late July, which are situated near Evolution’s Mungari mine.

In a research note, Alexander Pearce of BMO Capital Markets described the transaction as a “minor positive” for Glencore. “As a first pass, Glencore’s divestment of its 70% interest in Ernest Henry is a minor positive for the company, albeit the asset is worth <1% of our overall net present value estimate. More significantly, the transaction is in line with Glencore’s ongoing portfolio optimisation, as it looks to focus on higher value assets.”

“Ernest Henry currently produces ~60ktpa of copper and with 38.5 million tonne [in] reserves at 0.95% copper (366kt contained copper) has a relatively short reserve life of five-to-six years. However, existing studies are ongoing for a potential extension, with total current resources of 75.4 million tonnes at 1.15% copper (864kt contained).”