Why Glencore Xstrata Won't Just Give Away Las Bambas to China

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Call me a cynic, but Beijing’s insistence that Glencore divest itself of a sizeable asset in return for approval of the merger with Xstrata always had the ring of a closed-door deal.

It was never a matter of the combined firm having a monopoly in a particular market, and sounded from the off like the world’s largest consumer seizing the chance to acquire a decent asset in return for its acquiescence. Glencore is not the largest copper miner – by their own admission, Codelco is considerably larger and so is Freeport McMoRan – although arguably the company’s role as the world’s largest trader of copper concentrate and metal, and third-largest refiner gives it influence no one, not even Codelco, can match.

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So how much credit do we give the case made at last month’s presentation that Las Bambas was a prize asset, but simply too capital-demanding for the cash-flow-focused merchant miner to contemplate when the copper market was in, or imminently going into, surplus?

Well, here the cynic takes a back seat; Las Bambas certainly is a world-class asset. Quoting Glencore’s figures, the resource contains 1,710Mt at 0.62% Copper, with significant gold, silver and molybdenum by-products.

According to the FT, the mine is set to produce 450,000 tons of copper annually when it starts production probably in 2015, nearly half as much as the world’s largest mine Escondida, owned by BHP Billiton. It is only 45% complete at the moment, meaning a fair chunk of the projected $5.9 billion capital cost still to be spent.

Glencore has the nearby Antapaccay project, completed this year and running ahead of capacity, with a roll-out option of the Corrocohuayco project next door, said to be able to leverage the existing Tintaya mill and concentrator processing infrastructure.

Do they need Las Bambas as well? Can they afford it?

Glencore’s copper resource base has mushroomed since the merger from 26Mt in 2011 to 106Mt in 2012; they probably want to husband the cash more than hold onto an asset that while undeniably attractive, would be coming on-stream along with a lot of other expansion projects around the world.

Several analysts are predicting copper could test the $7,000/ton floor again next year. In the long run, falling ore grades and even slowly rising demand will see the world consuming considerably more copper at higher extraction costs five years from now than today; but Glencore’s philosophy is to maximize returns from existing assets, and Las Bambas still needs a lot of investment – cash that maybe they feel could be used better elsewhere.

Don’t expect them to give it away, though. Minmetals, the Chinese state mining and trading company, is said to be the likely buyer, although Jiangxi Copper is also in the running. But neither will get the asset on the cheap, even if the deal to one of them is something of a forgone conclusion.

Read more from Stuart Burns.

FREE Download: The Monthly MMI® Report – covering the Copper market.

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