Is Newmont Planning To Bid For Glencore Xstrata’s Peruvian Copper Mine?

by Trefis Team
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Speculation is rife that Newmont Mining (NYSE:NEM) is either mulling a bid or has already bid for Glencore Xstrata’s Las Bambas copper mine, one of the world’s largest copper assets. Glencore is required to divest the Las Bambas mine in Peru to comply with conditions set forth by Chinese regulators during its acquisition of Xstrata, and the first round bids were accepted last month. Both Glencore and Newmont have declined to confirm the rumor.

The intense speculation comes after Newmont CEO Gary Goldberg announced at the Denver Gold Forum conference last month that Newmont was keen to acquire more copper assets to leverage its expertise in copper and diversify away from gold. In addition, in an interview with Financial Times, Mr. Goldberg mentioned that the Las Bambas is an interesting prospect since it is further down the development path and closer to production.

Glencore is looking to sell Las Bambas at approximately $5 billion, and the mine requires substantial further investments before production can commence. When asked if Newmont would be keen on an asset located in Peru, the country where its Conga project has been suspended by the government, Mr.Goldberg said that he didn’t consider Peru to be a bad place for investment.

See our complete analysis for Newmont here

The Las Bambas Mine

As a condition for allowing the merger of Glencore and Xstrata to go through, China has asked for the Las Bambas mine to be divested because it is concerned about a single company gaining too much influence in the copper market. China consumes more than 30% of the world’s annual copper production and most of it is imported. It imports about 3.4 million tonnes of refined copper every year.

The Las Bambas mine was already under construction by Xstrata when Glencore acquired it this year, and is much closer to production than any newly acquired mine would be. If Newmont were to prospect for new copper deposits and seek to develop them, the time needed would be much longer. The company would also have to deal with all the associated regulatory issues before obtaining clearances. With the Las Bambas mine, such issues are not there. However, even if Newmont spends the $5 billion which Glencore is expecting for Las Bambas, additional funds to the tune of $6 billion would be needed before production can commence. [1]

The upside is that Las Bambas is expected to produce about 400,000 tonnes of copper per year for the first five years, and the life of the mine is estimated to be about 20 years. To put things in perspective, Newmont’s annual copper production currently stands at about 65,000 tonnes. [2]

However, the road for Newmont, if it serious about making a bid, will not be easy. At least two Chinese state-owned companies have already submitted non-binding bids for Las Bambas and one more has expressed interest. If Beijing decides to view the mine as a strategic acquisition, the state-owned firms may have more financial firepower than what Newmont can hope to match. [3]

Why More Copper?

Mr. Goldberg emphasized in his Denver talk that his vision for the future was to generate returns in the top quartile for shareholders, through all business cycles. He said that Newmont would achieve this by continuing to focus on returns over volume growth. The long term thinking about moving into the copper business in a bigger way seems to be driven by this core objective. This is because Newmont’s bread-and-butter gold business is no longer fetching the returns it used to. According to Goldberg, operating costs have been relentlessly rising while gold prices are very volatile and nowhere near their peak values some years back. The premium that gold producers used to command as pure play gold miners is now a thing of the past. [4]

Even while signaling a greater push into the copper business, Mr. Goldberg emphasized that Newmont doesn’t have a specific volume target in mind. The company is simply aiming to leverage its existing capabilities in the copper business to pursue growth opportunities. It will only opt for projects that promise to generate value, take the company to a lower point on its overall cost curve, and don’t involve taking unmanageable social and political risks. The emphasis on avoiding undue risk is undoubtedly due to Newmont’s ongoing woes at the Conga project. [5]

While a diversification strategy is fine, we think that copper prices may remain subdued for the next 2-3 years as China re-balances its economy and reduces its copper consumption. New growth frontiers would have to be found for copper prices to keep climbing upwards and generate significant returns for producers.

We have a Trefis price estimate for Newmont Mining of $22.

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Notes:
  1. Newmont bids for Las Bambas to beef up copper assets – CEO Goldberg, MineWeb []
  2. Newmont looks at Glencore Peru project for copper diversification, Financial Times []
  3. Chinese Miners Compete for Glencore’s Copper Project in Peru, Wall Street Journal []
  4. Gold Price Charts, Kitco []
  5. Newmont Mining’s CEO Presents at Denver Gold Forum, Seeking Alpha []
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