China buys Glencore unit for $6b

bangalore/london — A Chinese consortium bought the Las Bambas copper mine in Peru from Glencore Xstrata for $6 billion, the high end of analysts’ forecasts in China’s biggest acquisition of a mine, showing the strength of its long-term need for copper.

MMG, the Hong Kong-listed offshore arm of China’s state-owned Minmetals, led the winning bid in partnership with Hong Kong-registered Guoxin International Investment and state-owned investment giant Citic Group.

Commodity trader Glencore had agreed to sell Las Bambas to secure approval from China’s competition authorities for its takeover of miner Xstrata. Beijing made this condition to prevent the merged group from having potentially too much power over the global copper market.

A Chinese buyer had been considered a virtual certainty since Las Bambas was put on the block, given the deep pockets of China’s state-owned enterprises and its hunger for copper as the world’s top consumer of the metal.

Glencore will receive about $5.85 billion in cash upon completion of the deal, which compared with analysts’ forecasts between $5 billion and $6 billion. The Chinese group will also pay the mine’s capital expenditure and development costs from the beginning of 2014 until the deal closes, which amounted to about $400 million as of March 31.

“In our view, the agreed consideration offers a surprise to the upside... The transaction is another testa- ment to Glencore CEO Ivan Glasenberg’s strong deal-making credibility and the fact that he is willing to play a long game,” Bernstein Research analysts said in a note.

“In addition, it underlines the global scarcity of large high-quality copper deposits and the continued Chinese demand for this metal.”

The sale, initially expected to be concluded by the end on 2013, dragged on due to a delay in reaching agreement on price.

Glencore said last month the Minmetals consortium was the preferred bidder.

Copper prices are down almost 10 per cent on the year. They have recovered some ground since China’s first domestic bond default last month raised worries over its credit situation prompting a nine per cent tumble in the price of the red metal.

The Peruvian mine is due to start production in 2015 at a rate of more than 450,000 tonnes a year for the first five years.

Keep China happy

Rating agency Moody’s had signalled that a decision by Glencore to abandon the sale could have put its credit rating at risk.

Swiss-based Glencore said it would use the proceeds from the sale to “immediately and materially” deleverage its balance sheet and could use some to make new acquisitions. It planned to return any surplus cash to shareholders.

If Glencore had failed to sell Las Bambas, Beijing had given it the option to sell one of four other copper projects — Frieda River in Papua New Guinea, Tampakan in the Philippines, or Alumbrera or El Pachon in Argentina.

Glencore has already agreed to sell its stake in Frieda River to Australian copper producer PanAust and is looking for a buyer for its stake in Tampakan, both of which were Xstrata projects.

The deal is the biggest acquisition ever for MMG, a Melbourne-headquartered producer of copper, zinc and lead with mines in Australia, Laos and the Democratic Republic of Congo.

Shares in Glencore Xstrata were up 1.1 per cent in mid-morning trading, outperforming a 0.4 per cent rise in the mining sector. —