Copper deals to get elusive after Teck’s US$1.2bil sale

SANTIAGO: The global hunt for high-quality, low-risk copper assets that are ready for construction is about to get tougher after Teck Resources Ltd sells a stake in one of the few deals available.

Sumitomo Corp and Sumitomo Metal Mining Co agreed to pay US$1.2bil for 30% of the Compania Minera Teck Quebrada Blanca SA project in northern Chile. The mine, which will require an investment of US$4.7bil, is set to start producing in 2021 and could double Teck’s copper business.

“This was one of the biggest and most sought-after deals in the market – there are few projects like that out there,” Cesar Perez-Novoa, an analyst at BTG Pactual in Santiago, said. “The transaction has closed at quite generous multiples, which shows that good-quality projects ready for development are scarce.”

The deal comes at a time when miners are struggling to keep up with demand after years of underinvestment. Inventories tracked by exchanges in New York, London and Shanghai are already at the lowest in almost four years and production is expected to trail consumption from 2021 to 2023, according to CRU Group.

Miners are likely to remain focused on keeping their balance sheets clean and will probably tap into investors’ hunger for copper to bring in project partners who are willing to finance large expansions and new mines, according to PerezNovoa.

The Quebrada Blanca phase 2 project, known as QB2, is expected to produce 300,000 tonnes of copper a year in its first five years, with production starting to ramp up in late 2021, just as the copper deficit starts, Teck chief executive officer Don Lindsay said Tuesday on a conference call.

The company said in the statement it assumes US$2.5bil in project finance loans, and Lindsay said on the call that Teck is in advanced talks for the US$2.5bil.

Of the 30% stake in the project, Sumitomo Metal Mining will take a 25% interest and its trading partner Sumitomo Corp will hold the remainder, the two Japanese companies said yesterday in a joint statement. The deal will help the companies secure supply in a country that relies almost entirely on imports for all its metals and fossil fuels. Sumitomo Metal expects the mine to generate earnings equivalent to its other projects, such as Morenci in Arizona and Cerro Verde in Peru.

“Good assets are very scarce now but we were able to encounter such a good copper project in terms of the size and quality,” Sumitomo Metal managing executive officer Hiroyuki Asai said at a briefing in Tokyo yesterday. “The project is very valuable for us.”

A third expansion, labelled QB3, could be approved as soon as 2024, Lindsay said, and added that the company’s priority is QB2, with no other acquisitions on the table at the moment.

Teck’s shares rose 2.1% in Toronto on Tuesday.

The company will use the proceeds of the stake sale to reduce outstanding bonds and return cash to shareholders, which could be done by dividend or buyback, he said. A decision will be made after the deal closes in April, according to the company’s statement.