How to do M&A in a commodities bull market

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  • BHP reportedly exploring major push into DRC
  • Competition for tier one assets remains tough

It’s a good time to be digging stuff up. Metals prices are high, even after the recent dive in iron ore, while balance sheets are in good shape and debt is cheap. This means it is also a perfect moment to go shopping in an industry built on mergers and acquisitions and powered by bigger players ever keen for new producing assets or exploration properties. 

But try getting a good deal when pockets are bursting with cash. 

What’s on the shelf

BHP (BHP) is looking at buying a pre-production copper project in the Democratic Republic of Congo (DRC), according to Bloomberg. This is a famously difficult place to do business and at first glance serves to highlight BHP’s bare cupboard, after the miner completed a major expansion project in Chile, which added decades of life to its Spence copper mine. 

The Big Australian is also setting up its own exploration offices in Ecuador, in addition to its stake in SolGold (SOLG). But in recent weeks, management has specifically talked about becoming more nimble and open to buying “future-facing” commodities such as copper and nickel, after spinning off oil and gas assets next year. 

The DRC interest is a surprise, though. Even Glencore’s (GLEN) success in the country has come from dealing with characters such as Dan Gertler, who is sanctioned by the US government for alleged corrupt dealings with the DRC’s former leader, Joseph Kabila. 

But BHP’s hunt for copper deposits is indicative of the position the industry now finds itself in: M&A is needed to keep reserves increasing, as formerly ‘tier one’ assets are on their way to being emptied of profitable metals or becoming trickier to get into production. 

On the other hand, BHP is specifically looking at a copper project owned by Ivanhoe Mines (Can:IVN), the company run by the man behind Rio Tinto’s (RIO) Oyu Tolgoi mine, Robert Friedland. 

Western Foreland, as the massive parcel of land potentially up for grabs is called, is next door to the hugely rich Kamoa-Kakula project, which was one of the best copper discoveries in decades. 

A price is not yet on the table, at least publicly, but a very early estimate from Bernstein in 2019 put its value at over $2bn, and Ivanhoe has done plenty of drilling since then. Late last year Friedland – a famous salesman – described Western Foreland as an “unparalleled treasure box of additional Kamoa and Kakulas”. 

Helpfully, another Australian miner has just shown what the market will accept for a copper project. This deal was announced in the last week of September, after Sandfire Resources (Aus:SFR) offered $1.9bn (£1.4bn) for three underground mines in Spain, known as the Minas de Aguas Teñidas (MATSA) and currently owned by trading house Trafigura and Abu Dhabi sovereign wealth fund Mubadala. 

This operation produces around 100,000 tonnes of the red metal a year, and has just six years of current reserves left, so is not a world-beater. It is very low-cost, however, with a cash cost of around 60¢ per pound (lb) of copper for the most recent financial year, compared with the nearby Proyecto Riotinto owned by Atalaya Mining (ATYM), which has forecast its 2021 cash cost at around $2.30 per lb. The deal price looks like great value against MATSA’s financial year to June 2021, on a multiple of five times cash profits, but somewhat pricier on 11 times the 2020 figure. 

Aim-listed Metal Tiger (MTR) is a Sandfire shareholder and its chief executive, Michael McNeilly, said the MATSA deal gives Sandfire the “scale and size to be relevant again”. Sandfire was facing a gap between a current operation closing and another reaching production. 

McNeilly, whose company also holds stakes in various junior miners at the equity and project level, said BHP’s interest in the DRC was likely a case of getting in ahead of the competition. “They’re thinking if they don’t go, somebody else will,” he said.

This dynamic is not new. BHP bought into SolGold in 2018 when it already had a major miner on the register in Newcrest Mining (Aus:NCM). It does look to have been beaten to the punch with Noront Resources (Can:NOT) by the founder of fellow Australian iron ore miner Fortescue Metals Group (Aus:FMG), Andrew Forrest, who has built up a stake of 37 per cent in the Canadian nickel explorer through his private company Wyloo Metals. 

Therein lies the difficulty – is it worth potentially paying over the odds for a very early-stage project to rip it from the hands of competitors, or pay even more for something that is more certain? In BHP’s case, the likely answer is yes to both, judging by its latest financial disclosures. Its copper exploration spend of $54m for the 12 months to 30 June – compared with over $500m for petroleum – shows dipping into those bursting pockets might be the only option.