What is it worth? What someone will pay.Right now it is 4, a 2.5 billion cap. Tomorrow it will be more, much more. Friedland knows this. He will drill up every target and let the copper price run. The assiduous analyst may model a long run price for copper. This would be a rational thing for a long-term buyer to do. But the market doesn't work this way. When copper was 2, these assets were worthless, by market values that is. In fact, they were worth less than nothing, as the cash in the bank plus receivables were almost double the market cap! Explain to me why this is rational. Any takers? Well if you were trying to sketch a fair value for these assets, you would make a judgement as to long term copper, say 3, or 3.50 may be more reasonable. Who knows, maybe it's 4 dollars? I don't see global population going down, or anyone using less electricity. And look at how much money has been printed, inflating almost every asset class beyond recognition, with one notable exception: commodities and natural resource assets. Estimate your terminal resource figures, and capital and operating costs and taxes, and discount net-net free cash flows at a reasonable rate, which is not too high since they are inflation protected. We already know what that number is, it is 7.2 billion, or 3 billion for 40% at a high rate of disount, 8%, and a conservative copper price of 3. Copper is trading for 3.20 in London this morning, USD 7,000/t. So it's more like 8 billion. Excluding expansion from proven resources, drilled but as yet unpublished, and undrilled resources. Known unknowns and unknown unknowns.
Just forget all this for now. Value is what someone will pay, and we are at 4 dollars. But there is an embedded takeover value: 50% minimum, probably 100% in this case. I have no doubt the high bidding senior would pay 4 billion tomorrow morning to control 40% of this project. And the residue, Kipushi, Platreef and cash would trade for at least a billion in this depressed market. But Friedland is not stupid. He is not playing for a 100% takeover premium. He is playing the long game. Find every ounce of metal on these properties, advance it to production, and sell it to the high-bidder at the summit of the commodity boom. He has done it before twice, and it would be foolish not to follow the same play book. All the hard work and luck of a discovery has already been assured. When you have a royal flush, you do not call. You raise the stakes.
It is all very well to consider an ultra-conservative armageddon scenario. But we are in a bull market. The copper market is entering a deficit on run-rate demand. There are few major mines coming onstream. Cobre and OT, that's it. These are scarcely offsetting production declines from the old workhorses in the Andes. As for other projects, seniors are sitting on them, mulling over expansion, wary of making multi-billion dollar capital investment in block caves which are marginal at today's prices. El Teniente, Chuqui, Cadia, Golpu, New Afton, etc. Grasberg UG options are good, but there is so much political wrangling right now. Resolution? Forget about it. And 2018 could be a turbulent year for the copper markets. "According to Citi bank, there are over 30 labour contracts, covering around 5 million tonnes of mine supply, due to expire next year, most of them in Chile and Peru." ("Global Commodities Focus", December 2017).
So the key is, not what what it's worth to a rational buyer, but what the greatest fool will pay at the top of the market. Auction it now and a smart buyer would pay double without blinking, and by the way would be stealing it. Wait a little and the smart buyer can no longer be smart with so many fools at the table. Why did Kinross pay 7 billion for Redback? Why did Barrick pay 8 billion for Equinox? Tasiast and Lumwana have not made one red cent in profit ten years later after sinking billions more into the ground on infrastructure. All these MBAs doing cash flow projections must have forgotten to carry a digit, because in hindsight it just looks totally ridiculous. But did it make sense then? These were not quality assets, though they were apparently big; in fact, they weren't as big as they were supposed to be, but they just couldn't wait to drill them off, because, so the thinking went, the price would only escalate. Why did they want them? Because we had peak gold, and peak copper, and the world was going to end, and by the way, "if we don't buy it, the other guy will." And that is the real reason. The Oracle of Omaha once said, "it is not greed that drives the world, but envy." Well, those were the heady days of 2011, and how people were thinking, and not thinking, but rationalising their mining fever. The sentiment today is nowhere close. But it will get there.
And you have here not one of these low-grade ounces-in-the-ground optionality plays — which nevertheless go for billions at market peaks — but these are some of the largest, richest mines ever discovered, advancing to production, as turnkey operations for a senior to simply print money for a hundred years.
And as for corporate deal mania, it is not just this industry, but in technology, where IQs are supposedly polar opposite to miners'. Yahoo paid 5.7 billion for Broadcast.com, then shut it down shortly thereafter, and that was 20 years ago. One rudimentary website, and Mark Cuban sold them a bill of goods. How about how Ted Turner was almost buried by the AOL Time-Warner merger? You can name pretty well any acquisition Microsoft ever did. One could go on and on, as the epic tragedy of M&A flushes billions down the drain and consigns great businesses to the dustbin of history. It is neither good nor bad. This is the free market. For every transaction there is a winner and a loser.
One thing most of these acquisitions have in common, however, in mining at least, is that the manager pulling the trigger on the purchase has no skin in the game. Not only is their performance mediocre, and compensation obscene, but they have free options, no stock, so they get the upside without the downside. This incents them to take maximum risk with the shareholders' money. And besides this, executive salaries scale with market cap. So even if a CEO destroys shareholder value with unprofitable growth, he only gets paid more. Thus are the incentives.
Well, who is there who has skin in the game, with nearly 200 million shares? There was a study done on stocks of companies where a billionaire owner-operator had a 10-20% stake, and they outperformed the S&P by 7-10%. Isn't that obvious? Well, here is one, and it is dirt cheap, at the end of tax loss selling, as the share certificates lie in a pile of discarded paper in the corner of the floor of the Toronto Stock Exchange, on this darkest day of December, the year two thousand and seventeen.