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Consolidation of the copper mining industry into a handful of supermajors similar to the oil and gas sector has the potential to lift output of the supply-constrained metal vital for the clean energy transition, according to the new boss of the world’s third-largest producer.
Despite concerns over deal costs, Kathleen Quirk, who took charge as chief executive of US-based Freeport-McMoRan last Tuesday, said reducing the sector from scores of groups into a small number of giants could be an effective way to buoy supplies needed to cut emissions in the decades ahead.
She believes only the biggest groups can execute the multibillion-dollar projects to increase the supply of the metal, which is widely predicted to suffer severe shortages in the next few years.
“There’s some merit in the value of being large enough [and] having enough scale to be able to embark on major investments in copper,” she said in an interview with the Financial Times.
“A lot of companies are struggling just to maintain production. You have that challenge — and then you’re trying to stack on top of that, growth and the lead times to do these major projects.”
However, she added scale can be a detriment if copper projects have to fight for company resources in diversified mining groups such as BHP and Rio Tinto, which produce iron ore, coal and other commodities.
Quirk, a company veteran who succeeds Richard Adkerson as boss, made the comments in the wake of the collapse of the £39bn takeover attempt by the world’s biggest miner, BHP, of London-listed rival Anglo American.
The BHP and Anglo merger talks sparked debate on whether the mining sector needs to consolidate to a handful of supermajors similar to oil or would benefit from a large number of companies developing projects.
However, Quirk stressed she was “not putting a lot of weight on our ability to do M&A deals that break enormous value”.
Large deals are obstructed by the unwillingness of many miners of the metal to sell at a reasonable price, given expected future shortages.
“As you’ve seen in the recent examples, most companies that have high-quality copper assets don’t want to sell and they want to keep them and grow themselves,” she said.
Australia-based BHP and Chile’s Codelco are the biggest copper miners in the world, closely followed by Freeport, which all have roughly 6 per cent of global production, according to consultancy Wood Mackenzie.
The new chief executive, who served as Freeport’s chief financial officer for almost two decades, said copper’s recent rally to an all-time high above $11,000 per tonne on fears about supply was just the start of a “new era”, adding that there will be a “very tight market for the foreseeable future”.
Instead of M&A, Freeport is banking on expanding a new leaching technology, which is already generating about 90,000 tonnes annually of extra output, to boost output by up to about 360,000 tonnes within five years — equivalent to a large copper mine.
A number of smaller miners, such as Canada’s Lundin Mining and First Quantum, could become targets for the bigger groups in merger activity.
Christopher LaFemina, analyst at Jefferies, said that Freeport combining with another Canadian miner, Teck Resources, would make “strategic sense” if the company pursues more aggressive growth under Quirk.
“We would not be surprised if Freeport eventually pivots more to a focus on growth, including via M&A, as value-accretive opportunities will probably emerge,” he said.
After cutting debt piles following disastrous takeovers of two oil producers in 2012 and securing a deal to keep operating in Indonesia, Freeport has enjoyed a surge in its share price because of the demand for copper.
Its shares have surged 800 per cent since March 2020 to a market capitalisation of almost $70bn, putting its valuation at nine times of estimated core earnings, well above industry peers, creating a position of strength for M&A.
Copper is known as the metal of electrification because it is needed for power lines, renewables and electric cars that will help replace fossil fuels as an energy source in the green transition.
The big problem for miners of copper is the lengthening time it takes — an average of more than 15 years — from discovering the metal in the ground to production.
The long development times are because of the declining quality of resources and increasing difficulty of excavating the metal from ever deeper mines.
Freeport has also suffered labour shortages in the US, while tougher environmental permitting and governments demanding more in return for resources have added to the costs and risks of projects.