Copper Mining Investment

Briton Ryle

Updated April 17, 2013

Global commodities giant Glencore International (LSE:GLEN) stands tall above the crowd as the world’s largest publicly traded commodities supplier. From such heights, Glencore must be seeing something big coming over the horizon, or it wouldn’t have given up so much to acquire metals miner Xstrata (LSE:XTA).

For the past 14 months, Switzerland-based Glencore has been jumping through one hoop after another to get its hands on fellow Switzerland-based Xstrata. After European antitrust regulators gave their approval for the takeover in November, and South African regulators gave their approval earlier this year, the final go-ahead nod from China’s Ministry of Commerce has at last been received.

The Give and Take

All these hoops Glencore has had to jump through have forced it to give up a few things before it could cannibalize Xstrata.

Among the “gives” is a higher price for Xstrata shares. Xstrata’s largest shareholder, Qatar Holding, dragged Glencore through what have been described as “intense negotiations”, ultimately forcing it to raise its offer from 2.8 shares to 3.05 shares of Glencore for each share of Xstrata.

copper barsAntitrust regulators also required Glencore to make a number of concessions. First, European regulators required Glencore to sell some of its assets on that continent to reduce the scope of its operations there.

Then, China’s Ministry of Commerce demanded the company sell one of its copper mines — namely the Las Bambas operation in Peru, currently one of Xstrata’s operations about half-way into development. The requirement to sell the mine comes with the stipulation that the buyer must be approved by China’s MOFCOM.

Paul Gait, an analyst at Sanford C. Bernstein & Company, surmised to Bloomberg, “MOFCOM have to approve the buyer, so it’s got to be a Chinese state-owned player.” Indeed, we all know how important the copper market is to China, and it doesn’t like the idea of any one player controlling too much of it.

To give up so much to acquire a relatively specialized company like Xstrata, Glencore must see something big rapidly approaching, and it eagerly wants to position itself to capture it.

Stocking Up For The Future

Glencore has spent decades building up an empire in the “production, sourcing, processing, refining, transporting, storage, financing and supply of metals and minerals, energy products and agricultural products”, as its website profiles.

Given its broad spectrum of interests, Glencore could just as easily expand, acquire, and synergize in any number of industries. But its pursuit of Xstrata shows where Glencore believes the future lies: construction and energy.

And to fully exploit the opportunities in those growing sectors, it needs commodities — especially the base metals.

Xstrata is “a major producer of seven commodities used in everything from constructing buildings and delivering electricity to developing jet engines and mobile phones,” the company introduces itself.

Within the commodity space, Xstrata specializes in ferrochrome and vanadium production used by the steel industry, coal used in electricity generation, copper (the fourth largest global producer), base metals including nickel, cobalt, zinc, and lead, plus a technical department providing expertise to the global mining industry to improve efficiency and environmental performance.

The takeover will make Glencore’s metals inventory overflow with stock. It will now become the largest zinc miner in the world and the largest power-station coal exporter. Yet the biggest benefit from the synergy will most assuredly prove to be its copper production.

Despite the sale of Xstrada’s Peruvian copper operation, Glencore’s acquisition of Xstrata will grow it into the third largest copper miner in the world. The company has already secured a contract to sell a minimum of 900,000 metric tons of copper to Chinese clients each year for 8 years.

Though at the present time, China’s economic expansion may be experiencing stalls and set-backs along with most of the rest of the world, Glencore’s hunger for Xstrata’s resources leaves little doubt where it believes the global economy is heading in the future.

Construction is always the first sector to come out of a recession. And with over a billion people globally expected to rise out of the lower class into the middle class over the next 20 years, the demand for commodities used in construction, power generation, and fuel will turn well stocked companies like Glencore into cash machines.

Investors hoping to follow Glencore’s lead in positioning their portfolios for the next expansionary phase of the global economy might do well to include a metals fund. That is, if the recent rout in metals prices — both base and precious — hasn’t made them swear off metals for good.

Perhaps Glencore’s move is showing us how a level-headed and calculating investor might respond — buying when prices are cheap in preparation for higher prices to come.

copper price chart 4-17Source: TradingCharts.com

With copper back down to major support levels in the $3.30 area, one might need some courage to jump onto it now. Yet when the global economy fires up again and re-enters the expansionary phase, copper demand will drive its price back up over $4.00 and further for many years to come.

But if the commodity itself is too scary, one always has the option of buying a major producer. The soon-to-be bigger and richer Glencore might well be a candidate.

Joseph Cafariello

 

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