Anglo pre-funds $600m of Quellaveco in Mitsubishi share deal

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ANGLO American is to sell a 21.9% stake in its Quellaveco copper project in Peru to Mitsubishi increasing the Japanese firm’s stake in the venture to 40%. The transaction sees the UK-listed group lock down $500m in capital expenditure for the project.

The transaction is designed as a share subscription such that Mitsubishi will subscribe for new shares in Anglo American Quellaveco S.A which will require it to finance $500m of the project. A further $100m will be ‘paid’ to Anglo by Mitsubishi once production milestones totalling 150,000 and 180,000 tonnes of copper-bearing ore a day are met.

So in total, Mitsubishi will subscribe for shares totalling $833m which represents the 40% stake it is buying and the pre-fund of a share of Anglo’s project capital. The transaction also fixes a valuation on Quellavecco – designed to produce up to 250,000 tonnes of copper a year – at some $2.74bn.

“The successful syndication of a 21.9% interest in Quellaveco confirms the world-class quality of our copper asset in Peru and aligns with our disciplined approach to how we allocate capital,” said Mark Cutifani, CEO of Anglo in a statement.

“We are pleased to be able to extend our longstanding partnership with Mitsubishi and look forward to its ongoing contribution and strong support for the development of Quellaveco,” he said. The transaction is expected to close during the third quarter of this year.

The deal is not a complete surprise. Cutifani has mentioned the possibility of syndication to help fund the enormous capital outlay required and more recently it was speculated that Japanese firms would purchase a stake in the business. Cutifani’s comments that Anglo was to end up with 50% and 70% of the project was a pretty good steer.

Investec Securities commented that a sell down for value was expected adding that “… it [Anglo] appears to have achieved this with the transaction valuing the projection at c.10% above our indicative valuation”. The bank added that the deal “… keeps things simple, with Anglo partnering with an existing and honourable partner”.

Mitsubishi would also be making the first contribution to the estimated $5.5bn to $6bn in capital expenditure then contributing its 40% share thereafter. “While Anglo has been criticised by some about selling down an interest at all, it is all about relativity – for Anglo to do a $6bn project on its own would be like BHP doing a $24bn project on its own!”

Said RBC Capital Markets in a note on the transaction: “The $2.7bn implied valuation for the sale of this stake in the Quellaveco copper project in Peru appears to be a reasonable indicator that the economics are shaping up to be more improved than our current high-level $1.7bn‎ estimate would imply.

“This injection of cash, as well as a lower capital burden, will improve Anglo American’s free cash flow through the Quellaveco construction phase as the company continues to delever its balance sheet (especially outside of South Africa where the net debt lies)”.

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