Cu Majors Need New Production
MINING FINANCE / INVESTMENT
High copper prices make Canadian copper juniors attractive targets
Analysts saythat a number of Canadian junior copper miners have the potential tobecome prime acquisition targets as record prices have major producersshopping for assets that will help boost production immediately
Author: Bhaswati Mukhopadhyay and Julie Gordon (Reuters)
Posted:Wednesday,23 Feb 2011
BANGALORE/TORONTO (Reuters) -
A record run for copper prices, fuelled by Chinese industrialdemand, has the world's most prolific copper producers shopping forsmaller miners capable of boosting their output almost immediately.
Dozens of Canadian-based juniors have the potential to become primetargets. The strongest candidates already have operating mines withhealthy growth profiles, and their share prices are undervalued,analysts say.
The drive to acquire is especially urgent because the output at some of the world's top producers is falling. Rio Tinto (RIO.L: Quote)sees copper demand doubling in the next 15 to 20 years but theAnglo-Australian mining giant experienced a 16 percent drop in minedproduction last year.
"We really haven't developed the next generation of new mines interms of finding large-scale projects," said analyst John Hughes atDesjardins Securities. "Without the next wave of proper supply, juniorcompanies with large resources will continue to be targets for thelarger mining companies."
As a consequence, senior producers such as First Quantum (FM.TO: Quote) and Freeport-McMoRan (FCX.N: Quote), as well as Vale (VALE5.SA: Quote), BHP Billiton (BLT.L: Quote)and other diversified miners, will line up to buy establishedproduction rather than invest in development projects from scratch,analysts say.
"It takes such a long time to find something, then permit it, thenbuild it, then ramp it up," said David Radclyffe, an analyst at BMOCapital Markets. "You're going to miss that leverage to the currentprice that you can get today."
Rapid urbanization in China, India and other developing nations isone of the main factors pushing demand for copper and other materialsused in construction and manufacturing.
According to a Reuters poll of analysts, this trend will result in acopper shortfall of 444,000 tonnes this year. This has prompted theworld's top miners to invest billions of dollars in expanding productionover the next five years. The fastest way to do that is throughacquisitions.
Radclyffe points to Capstone Mining (CS.TO: Quote)as an ideal target. The company forecasts 85 million pounds of copperconcentrate in 2011 from its mines in Canada and Mexico, and has growthpotential at three sites. The company's shares have risen just 7 percentin the past 90 days.
Another takeout possibility is Mercator Minerals (ML.TO: Quote),which is producing copper and molybdenum at its Mineral Park propertyand has two development projects in Mexico. Mercator's shares have risenover 42 percent in the same time period.
Meanwhile, a longer-term possibility is Baja Mining (BAJ.TO: Quote),which is just one month into a two-year construction phase at its Boleoproject in Mexico, and Copper Mountain Mining (CUM.TO: Quote), which is bringing the past-producing Copper Mountain project in British Columbia back online.
M&A FEVER
With most producers feeling flush having built up cash surpluses, andwith copper hitting yet another record high earlier this month at$10,190 a tonne, M&A frenzy is gripping the sector. Mid-caps, notthe big players, have taken the lead.
In January, Lundin Mining (LUN.TO: Quote) and Inmet Mining (IMN.TO: Quote) announced plans to join forces to form Symterra, a C$9 billion ($9.1 billion) copper producer. [ID:nN12239651]
HudBay Minerals (HBM.TO: Quote) is buying Norsemont Mining (NOM.TO: Quote) to gain access to the Constancia project, which has the potential to produce 172 million pounds of copper a year.
Last year, First Quantum bought Antares Minerals for its Haquiraproject -- a Peruvian mine that will cost $2.1 billion to develop andwill produce 425 million pounds of copper annually.
"I guess most of the activity we've seen at the moment has been inthe mid-caps, who've been looking to add new projects to strengthentheir growth profile," said Radclyffe.
But predators be warned, Radclyffe said the hunters could become thehunted as the consolidation phase ramps up and the majors look tomid-tiers to boost their own bottom lines. On that note, Rio Tinto hassaid it plans to spend $80 billion in expansion over the next fiveyears.
"It's still much cheaper to buy existing production rather than tryto build it," said Radclyffe, suggesting Quadra FNX (QUX.TO: Quote), Equinox Minerals (EQN.AX: Quote) and First Quantum could all emerge as targets for still larger producers.
($1=
.99 Canadian) (Additional Reporting by Euan Rocha, Editing by Frank McGurty)
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