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When selecting investments, portfolio managers may look a few years into the future. Corporate boards should think about the next decade. BHP has “copper” in its crystal ball.
The mining company’s £30bn share offer to rival Anglo American is aimed at extracting copper, a metal for which everyone sees increasing demand and limited new supply. Expect BHP to increase its offer, which was quickly rejected by Anglo, even though this deal will already be slightly dilutive to earnings per share. The copper building or buying numbers suggest the Australian miner should be ready to move higher.
As mines become increasingly difficult to build, the time required to generate cash flows is enormous. According to S&P Global Market Intelligence, the transition from exploration to production has taken an average of 16 years over the past two decades. Then expect a $3.5 billion investment in a mine with a capacity of 100,000 tons per year, says Tony Robson of Global Mining Research.
A top 20 mine produces, on average, four times as much. Anglo’s Collahuasi in Chile and Quellaveco in Peru both qualify. BHP already controls Escondida, the world’s largest and very mature copper mine.
A simplified view is that the miner spent the equivalent of $30,000 to $35,000 per ton per year on his new mine in the early years of production, when sunk capital costs play a large role. Estimates vary, of course. But the BHP board would have had such numbers to compare with the takeover of an active copper mining company.
Buying a pure-play copper mining company such as London-listed Antofagasta, controlled by the Chilean Luksic family, or Southern Copper, 89 percent owned by conglomerate Grupo México, would require paying at least twice the start-up costs per ton.
Otherwise, there are few copper-rich options. First Quantum is having legal problems in Panama. Freeport-McMoRan is too big to swallow.
Based on Anglo’s copper equivalent production over the past three years, BHP’s offer is $21,700 per tonne per year, according to Liberum’s Ben Davis. The miner’s proposed deal, which requires the separation of shares in Johannesburg-listed Anglo American Platinum and Kumba Iron Ore, is overly complicated and politically sensitive. But there are few obvious alternatives without starting over. Its largest copper growth project, Resolution in Arizona, has been stalled for years. Mining investors remain cautious about greenfield projects.
BHP needed several price increases to buy Australia’s Oz Minerals. The same may be required here. Ultimately, the complexity of the business and the problems in South Africa may outweigh the costs, risks and expenses of attempting to build a new mine.