Newmont Mining Part Of Consortium In Race For Peruvian Mega Copper Mine?
According to unidentified sources, Newmont Mining (NYSE:NEM) is planning a joint bid for the Las Bambas copper mine in Peru with Teck Resources, private equity player Blackstone group and Magris Resources, a firm started by former Barrick Gold CEO, Aaron Regent. The sources refused to identify themselves to Reuters because the process is private and ongoing, with the second round of bids due next month. While Teck, Magris and Blackstone declined to comment, nobody from Newmont could be reached for comment. However, Newmont had not admitted to be bidding for Las Bambas last month also, so we doubt it would be any more forthcoming this time. [1]
The Las Bambas mine is owned by Glencore Xstrata. 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.
We have a Trefis price estimate for Newmont Mining of $23, which represents a 4% downside to the current market price.
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 had asked for the Las Bambas mine, one of the world’s largest copper assets, to be divested. 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, the winning bidder would have to invest additional funds to the tune of billions before production can commence. Glencore estimates that it would have spent $3.3 billion by the time the sale goes through and expects the total cost of construction to be $5.9 billion. The initial bids received for the mine last month stood at $6 billion, including the amount spent on construction so far. [2]
The upside is that Las Bambas, expected to commence operations in 2015, may produce about 450,000 tonnes of copper per year for the first five years and 300,000 tonnes a year thereafter. 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.
However, the road will not be easy for the consortium that Newmont is supposedly a part of. A strong bid from a Chinese state-owned company has been expected all along, given the strong financial backing provided by the Chinese government and the country’s humongous appetite for copper. While initially China Minmetals Corporation and Chinalco were in the race, it was speculated that the Chinese government will ask one of the companies to step back in order to avoid driving up valuations. That has happened, with Chinalco dropping out of the race and leaving the field clear for China Minmetals to mount a strong bid. [3]
Why More Copper For Newmont?
Newmont’s CEO, Gary Goldberg, emphasized in his Denver Gold Forum conference 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.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- Exclusive: Teck, Newmont, Blackstone in joint Las Bambas bid – sources, Reuters [↩]
- Teck, Newmont, Blackstone in joint Las Bambas copper mine bid – sources, The Globe And Mail [↩]
- UPDATE 1-Chinalco out of race for Glencore’s Las Bambas mine, Reuters [↩]
- Gold Price Charts, Kitco [↩]
- Newmont Mining’s CEO Presents at Denver Gold Forum, Seeking Alpha [↩]