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London - Glencore [JSE:GLN] is close to finalising a $700m deal with the Ontario Teachers’ Pension Plan to create a new base-metals royalty company, according to people familiar with the matter.
The Swiss commodity giant will bring royalty agreements from about 10 mines, while Ontario Teachers’ will contribute about $350m in capital to allow the company to buy further royalty streams from other projects.
Glencore and Ontario Teachers’ will each have a 50% stake in the new vehicle and the deal is expected to close in the next few weeks, the people said, asking not be to identified as the talks are confidential.
The deal would create the world’s first major base metals-focused royalty company and is the latest move by Glencore CEO Ivan Glasenberg to expand his control of key commodities without extending his company’s balance sheet.
Glencore and Ontario Teachers’ declined to comment.
The largest royalty stream included in the package is Glencore’s 33.75% stake in Antamina in Peru, which produces copper, zinc and silver. Glencore will also contribute several smaller streams it owns from other mines in South America and Canada, the people said.
Future sales
Royalty companies normally receive a regular percentage of future metal sales in return for upfront capital to help bring a mine into production. For Ontario Teachers’, the vehicle offers a new way to invest in the metals markets as the outlook for materials including copper, zinc and nickel strengthens.
While royalty and streaming companies such as Franco-Nevada and Wheaton Precious Metals have been successful in precious metals, there’s no large royalty company specializing in base metals.
For Glencore, the royalty company will also provide a way to secure further metal supplies for its powerful marketing business without using its own balance sheet. Through the new vehicle, Glencore will be able to use Ontario Teachers’ cash contribution to finance junior mining companies in return for royalty streams and exclusive marketing deals.
Glencore is the world’s biggest commodity trader and depends on its close relationships with producers to access volumes to trade.
It deals in almost 100 raw materials, including oil and agricultural products, delivered from a combination of its own mines, industrial facilities and third-party supply contracts.
The transaction follows a series of steps it has taken to streamline its balance sheet since a collapse in its shares in 2015 driven by concerns about its indebtedness. It sold 49% of its agriculture unit to two Canadian pension funds last year, creating a new company with its own balance sheet, which isn’t guaranteed by Glencore itself.
Glencore cut its net debt to $13.9bn by June, down more than 60% from mid-2014, and has recently announced acquisitions including a stake in Latin America’s top zinc miner and another in some of Chevron’s African oil assets.
The royalty deal comes as bankers and brokers say large investors are looking to return to industrial metals after several years on the sidelines. Some investors have even placed bets on copper returning to record highs above $10 000 a metric ton.
Glencore and Ontario Teachers’ could eventually seek to list the vehicle, one of the people said, but added that there were currently no concrete plans for an initial public offering.
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