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Melbourne - As a beleaguered Glencore [JSE:GLN] fights to staunch losses in equity and debt markets, China may be sizing up the assets of the world’s largest publicly listed commodity trader with a particular eye on its copper mines.
China is seizing on the turmoil in commodity markets to fund or buy suppliers or assets.
Iron-ore giant Vale SA signed four deals with Chinese counterparts in May including a credit agreement worth as much as $4bn, while MMG, the overseas unit of China’s biggest state-owned metals trader, led a group that bought the Las Bambas copper project in Peru from Glencore last year for about $6bn.
“You go back to the biggest piece of Glencore’s mining business from an earnings standpoint, and that’s copper,” according to Jeremy Sussman, an analyst at Clarksons Platou Securities in New York. “Given China’s history with Las Bambas, that would be the first place that we’d look,” he said in a phone interview.
Management of the Swiss company plans to meet debt investors on Wednesday following the market rout that drove yields on some of its bonds to junk levels and knocked 30% off its share price in a single day, according to three people with knowledge of the matter.
Glencore announced a raft of measures on September 7 to shore up its balance sheet, as China’s economic slowdown hammers commodity prices.
The plan included issuing new shares, scrapping dividends and selling assets. The company is "getting on and delivering a suite of measures to reduce our debt levels," Glencore said in an e-mailed statement Tuesday.
Glencore has copper operations in countries including Chile, Zambia and Peru and is the third-largest producer of mined copper, according to its website. The company has about 150 mines, energy assets and agricultural facilities globally.
Its coal assets and trading unit aren’t likely to interest the Chinese, though nickel and zinc could be possible targets, Sussman said.
Value for money
Metal companies from China are stepping up acquisitions of mining assets overseas, including copper, according to Bloomberg Intelligence. Ministry of Commerce data shows deals have continued even as prices slump, analysts Yi Zhu and Kenneth Hoffman wrote in a September 17 note.
While the world’s most populous nation is no longer scrambling to secure supplies of metals and energy, Chinese companies may be interested in some of Glencore’s assets , according to Wang Jiahua, executive vice chairman at the China Mining Association.
“They will look at Glencore’s asset quality, whether it’s value for money, is it close to potential infrastructure demand, and whether the mineral profile fits the medium-to-long-term need,” Wang said in an interview.
Supply deficit
Since the Las Bambas acquisition, buyers in China and Hong Kong have proposed or completed about $700m of deals for copper assets, according to data compiled by Bloomberg.
The Democratic Republic of Congo this month approved Zijin Mining Group’s purchase of a 49.5% stake in country’s Kamoa copper project, while the Chinese company was said in June to have been among those to show interest in Barrick Gold’s sale of a stake in its Zaldivar mine in Chile.
Miners are hunting for new operations amid forecasts that supply constraints will push the metal into a deficit over the longer term.
Global supply won’t keep pace with rising demand for copper, used in pipes and wires, appliances and to conduct electricity, leading to a deficit from 2017 to 2018, Hudbay Minerals. CEO David Garofalo said this month.
Glencore didn’t immediately respond to a phone call and email seeking comment on how it would respond to any approach over its copper assets.
Glencore has lost almost three-quarters of its market value in London since March, as commodity prices have tumbled and on investors’ doubts over the plan outlined this month to trim its $30bn net debt by about a third by the end of next year.
Goldman Sachs Group said last week that Glencore’s recent steps to reduce debt and bolster its balance sheet were inadequate.
Asset sales
“There is no quick fix,” according to Tim Schroeders, a portfolio manager who helps oversee about $1bn in equities at Pengana Capital in Melbourne. “You can go through a fire sale of assets, but the market may not look very favorably on that either.”
Alsons Prime Investments, a closely held unit of Alcantara Group, in June acquired Glencore’s stake in the Tampakan copper project in the Philippines. Glencore said last month it raised $290m from the sales of Tampakan and stakes in the Falcondo nickel operations and Sipilou nickel project.
The company has hired Citigroup and Credit Suisse to sell a minority stake in its agricultural business, a person familiar with the situation said on Friday. That business may be worth $10.5bn, according to a September 28 report by Heath Jansen, an analyst at Citigroup.
The company has the potential to go beyond its target of $2bn in asset sales, Jansen said.
Returns from raw materials plunged to the least since 1999 last month amid forecasts for the slowest economic growth since 1990 in China, the biggest user of energy, metals and grains. Copper has slid almost 21% this year and was at $5 003 a metric ton on the London Metal Exchange at 06:35.
"Glencore would be the first to admit that they don’t have tier one assets,” in copper, Clarksons Platou’s Sussman said.
But “they have got a couple of very recognizable copper mines in terms of being fairly low on the cost curve and a bunch of smaller plays that add up to being among one of the world’s largest copper producers.”
