Metals rally allows autonomy, but M&A still possible

Reuters | Fri, 09 Oct 2009 15:36
[miningmx.com] -- Sustained price recovery in metals from copper to zinc has boosted prospects for small, fledgling miners, dampening previous predictions that a wave of consolidation is imminent for the hardscrabble industry.

The game of large, financially strong miners picking off small, distressed competitors is slowing, analysts and investment bankers say.

In the near term, buyouts and mergers will most likely involve copper-gold miners and iron ore players aiming to cash in on surging Chinese demand, and in need of scale, infrastructure and diversification.

Three-month copper on the London Metal Exchange has more than doubled to $6,150 a tonne on the back of Chinese stockpiling and government-backed infrastructure investment.

Gold has gained about 20 percent this year and topped $1,050 per ounce on Thursday as a hedge against dollar weakness.

Given that near-term outlooks for metals prices are positive, deals would be strategic and not come as a result of distress.

"It's difficult to find a catalyst, particularly if markets are improving," CLSA's Australia resources analyst Matthew Whittall said of consolidation among small miners.

"I think with the gold price run and the interest in iron ore from China, small companies have probably got a fair degree of independence. Looking back, I think maybe some base metals -- your nickel and zinc producers. But that would have been a story six months ago."

In the current price environment, small Australian, Asian and African miners of copper and gold may consolidate to alleviate the risk of depending on a single mine, analysts say.

Philippines-focused, gold-copper player Medusa Mining and West Africa-focused zinc and gold miner Ampella, may be among those looking to partner with peers, some analysts have said.

Asian and Australian markets have also pulsed with rumours of a tie-up between OZ Minerals, Kingsgate Consolidated, PanAus Limited, and G Resources as each player strives to build scale and diversify their businesses beyond a few mines.

OZ Minerals operates the Prominent Hill copper-gold mine in Australia; Kingsgate runs Chatree gold mine in Thailand; PanAus has the Phu Kham copper-gold mine in Laos; and G Resources runs the Martabe gold-silver project in Indonesia.

On Tuesday, Bret Clayton, chief executive of Rio Tinto's copper division, told Reuters the mining giant is actively on the hunt for copper acquisitions, as it seeks to further capitalise on long-term Chinese demand for the industrial metal.

"We're constantly looking for opportunities - from early stage to operating assets," Clayton said. "It will have be able to produce a reasonable amount, probably a minimum of 200,000 to 250,000 tonnes a year."

On the smaller end of the spectrum is Cape Lambert's much-touted Lady Annie copper project in Queensland, which was once expected to produce 25,000 tonnes a year, but was sold to Cape Lambert by the collapsed CopperCo in May before prices showed signs of consistent recovery.

In late August Cape Lambert announced plans of a Lady Annie IPO and also said seven buyers have shown interest.

"They are actively trying to flog to someone, or they'll IPO or generate value from it somehow," DJ Carmichael analyst James Wilson said of Lady Annie.

"If it wasn't for the fact that the global financial crisis came along and copper prices and various hedges in place went awry, the place would be making a bucket of money."

MORE ORE

Where copper-gold players are aiming to cash in on long-term demand from China, iron ore miners are scrambling to supply China's steel mills, as production in other regions recovers slowly from cutbacks made at the peak of the financial crisis.

To more effectively compete with giants such as Vale , Rio Tinto, and BHP Billiton, small iron ore players may choose to tie-up to increase tonnage and share infrastructure.

"With iron ore, it's about the infrastructure access," said CLSA's Whittall. "The difficulty you have there is blocking stakes by the different Chinese steel mills where they have taken big equity positions."

Still, small Australian iron ore miners such as FerrAus, Iron Ore Holdings, Giralia, and United Minerals Corporation could form alliances, some analysts have said.

FreeAus and United Minerals both struck funding deals with China in September.

Fortescue, Australia's third-largest iron ore miner, struck a supply deal with China in exchange for $6 billion in funding in an effort to treble its annual production over the long term from 30-40 million tonnes now.

"To go and build infrastructure, to be able to build these big tonnage projects, you kind of need a lot of money to be able to go and do it," said DJ Carmichael's Wilson. "One space that is ripe for consolidation is the junior iron ore space in the Pilbara."