Rio Tinto, BHP & Glencore 'Feeling the Pinch on Copper'
Some of the world’s biggest mining companies are struggling to balance investor expectations for hefty returns against the necessity of paying a premium to acquire pure-play copper companies.
The challenge comes as global demand for the metal drives valuations to new heights, reports Reuters.
Major diversified miners, including Rio Tinto, BHP Group, and Glencore, are feeling the pressure of a slowdown in global economic growth and declining commodity prices. These factors have led to a significant decrease in their share prices, ranging from 10% to 15% this year.
Meanwhile, pure-play copper producers such as Freeport-McMoRan, Ivanhoe Mines, and Teck Resources have seen their valuations rise. This increase has occurred despite benchmark copper prices retreating after hitting a record high above $11,000 a metric ton in May 2024.
A banker with experience in mining transactions tells Reuters: "Engaging in large copper deals makes the boards nervous when fluctuations in other commodities, like iron ore and coal, are likely to persist.
"Since copper companies have performed better, diversified miners find it challenging to pay massive premiums when their share prices have dropped more in comparison."
BHP Group, Rio Tinto, and Glencore currently trade at multiples of five to six times earnings. In contrast, Teck Resources, Freeport-McMoRan, and Ivanhoe Mines are trading at nearly double that multiple.
Copper's future in electric vehicles and AI
Copper, a vital metal used in power and construction, is poised to benefit from increasing demand in the electric vehicle sector and new applications such as data centres for artificial intelligence. This long-term outlook for copper is not always factored into investor considerations when larger miners offer higher premiums to secure deals.
Richard Blunt, a partner at law firm Baker McKenzie, says, "Investors only want to know what's going to happen to the value of their company over the next three to six months, and that's a major problem."
In the past three years, higher commodity prices have enabled most miners to pay record dividends. While popular among investors, this practice is seen as eroding the industry's ability to generate production growth through exploration, mine development, or consolidation.
Investors wary of mining firms' dealmaking ambitions
Investors have valid reasons to remain cautious about management's dealmaking ambitions. Many mining companies have a corporate history marred by failed and costly acquisitions.
Rio Tinto's $38 billion deal for Alcan in 2007 commanded a 65% premium and resulted in a subsequent writedown. Similarly, BHP's $12 billion deal for U.S. onshore shale oil and gas assets in 2011 was sold back for $10 billion in 2018.
Michel Van Hoey, Senior Partner at McKinsey & Company, tells Reuters: "There's the pure financial aspect, which is the resistance of existing shareholders to significant premia.
"If you look historically, 10 years ago, we have gone through a significant wave where some companies probably overpaid for their transactions. Now, executives have become a bit more conservative."
Mining M&As seeing mixed success
Recent attempts at mergers and acquisitions in the mining sector have met with mixed success. Glencore eventually settled for 77% of Teck Resources' steelmaking coal assets after its $23 billion bid for the entire Canadian miner was rejected.
BHP Group was forced to withdraw its proposal for Anglo American, even after revising its initial bid twice in an attempt to entice the smaller rival. Both BHP and Glencore initially made all-share proposals for their target companies.
A mining investor told Reuters: "In past cycles, companies such as Rio Tinto engaged in substantial cash acquisitions at peak times, only to see prices crash, leaving them looking imprudent.
"Today, the trend has shifted towards stock-based deals to mitigate risks, but that is more expensive, especially at a time when commodity prices are coming down."
In related news, Schneider Electric is helping Glenore transform its copper supply chain and enhance decarbonisation efforts through digital technologies and innovative manufacturing approaches.
