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When selecting investments, portfolio managers might look a couple of years ahead. Company boards should consider the next decade. BHP has “copper” in its crystal ball.
The miner’s all-share £30bn offer for rival Anglo American aims to extract copper, a metal for which everyone sees rising demand and limited new supply. Expect BHP to up its bid, quickly rejected by Anglo, even though this deal will already dilute earnings per share slightly. The build or buy copper maths suggests the Australian miner should be willing to go higher.
As building mines gets harder, the time needed to produce cash flows is daunting. Moving from exploration to production has required an average of 16 years in the past two decades, according to S&P Global Market Intelligence. Then, expect to invest $3.5bn on a 100,000-tonne-per-year mine, thinks Tony Robson at Global Mining Research.
A top 20 mine produces, on average, four times that figure. Anglo’s Collahuasi in Chile and Quellaveco in Peru both qualify. BHP already controls Escondida, the world’s largest, very mature, copper mine.
One, simplistic way to look at this is that in the early years of production, when sunk capital costs weigh heavily, the miner will have spent the equivalent of $30,000-35,000 per annualised tonne on its new mine. Estimates vary, of course. But BHP’s board would have had such figures to compare with acquiring an operating copper miner.
Buying a pure-play copper miner such as London-listed Antofagasta, controlled by Chile’s Luksic family, or Southern Copper, owned 89 per cent by conglomerate Grupo México would require paying no less than two times those per tonne start-up costs.
There are few copper-rich options otherwise. First Quantum has 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 bid equates to $21,700 per annualised tonne, according to Liberum’s Ben Davis. The miner’s proposed deal, which requires the separation of stakes in Johannesburg-listed Anglo American Platinum and Kumba Iron Ore, is overly complicated and politically fraught. But there are few obvious alternatives without starting afresh. Its biggest copper growth project, Resolution in Arizona, has been stalled for years. Mining investors remain wary of greenfield projects.
BHP needed multiple price increases to buy fellow Australian Oz Minerals. It may require the same here. Ultimately, deal complexity and South African hassles may win out against the cost, risk and expense of attempting to build a new mine.