South32 to target ‘niche’ copper assets

IOL pic jan14 south32 INDEPENDENT MEDIA The South32 office in Johannesburg, South Africa. File picture: Nicholas Rama

Perth - Diversified miner South32 is looking to pick up niche copper projects over the coming year as more distressed assets are forced onto the market by the collapse in prices.

Commodity producers including Glencore and Anglo American are cutting dividend payouts or selling operations as weaker growth in China and supply gluts continue to weigh on prices and savage profits. Sumitomo Metal Mining Company this month paid $1 billion to increase its stake in a Freeport-McMoRan copper project in Arizona.

“We would be more looking for a niche opportunity,” Chief Executive Officer Graham Kerr said in an interview. “But I’m not sure there are that many good-quality assets out there yet and that’s where we can afford to be patient.”

With about $50 billion worth of mining assets now up for sale, the sector likely has the best market for buyers since the turn of the century, when Rio Tinto Group acquired North and Xstrata bought MIM Holdings, according to Barclays analysts. South32 cut net debt to $116 million at December 31 and has an undrawn $1.5 billion revolving credit facility.

South32 has one of the “best placed balance sheets among major miners,” Shaw and Partners analysts including Peter O’Connor wrote in a note Thursday. The company said last week it would be willing to acquire Anglo’s stake in their manganese joint venture if the price was right.

M&A opportunities

“If we look at M&A opportunity and it’s opportunistic for us, we will be looking at opportunities where we can leverage our regional model,” Kerr said. South32 has asset bases in Australia, Southern Africa and South America.

The company, which is slashing costs and staff at its global coal, manganese and alumina operations after a review, forecasts that raw materials may not rebound for 12 to 18 months. That’ll increase pressure on rivals and probably create more compelling opportunities for acquisitions, according to Kerr.

“The pain is not over for most of our competitors,” Kerr said by phone on Thursday. “I do think there is a lot of activity of people trying to divest businesses, but to be honest they are probably divesting businesses that people don’t want. The next six to 12 months will be telling.”

The Bloomberg Commodity Index of returns on 22 raw materials tumbled last month to its lowest since January 1991. BHP Billiton, the biggest miner, said this week it sees a period of low prices and higher volatility to be more prolonged than anticipated.

Major copper assets on the scale of BHP’s Escondida, the world’s biggest copper mine, and Peru’s Las Bambas, acquired in a $5.85 billion deal led by MMG, won’t be targets for South32, according to Kerr. “You are talking about serious dollars that are probably out of our league.” he said. “We would have a view that these gigantic tier one resources can either make or break a company, and in most cases more break the company.”

The metal has dropped about 20 percent in the past year as China’s economic slowdown cut demand, prompting some mining companies to shutter unprofitable production.

BLOOMBERG

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