With many of the world's copper producers reeling from a recent
plunge in the metal's price and continued uncertainty due to the
international financial crisis, those who saved their coppers
during the boom years may be poised to snap up their less prudent
associates, according to the executive director of the copper and
mining studies center, or Cesco.
There's a lot of potential for mergers and acquisitions as the
winners and losers of the crisis emerge, Juan Carlos Guajardo said
in an interview Wednesday. "Those that made big buys and took on a
lot of debt have a problem, while those that have cash can take
advantage," Guajardo said.
Many copper producers had a rough fourth quarter due to the
brutal price drop, high costs and sales contracts they had signed
earlier in the year. "There were lots of big losses," he said.
But now prices have partially rebounded and costs have fallen,
providing a sufficient margin for most companies.
Still, opportunities for takeovers abound, and the potential
purchases could mark a significant shift in control of
international mining from the wealthier countries to the developing
world.
Brazil's Companhia Vale do Rio Doce (RIO), or Vale, is flush and
has been on a buying spree for a while.
In addition, China has emerged as a cash-loaded investor looking
to secure strategic supplies, Guajardo said.
State-run China Minmetals Corp. is attempting to purchase the
assets of Australia's OZ Minerals Ltd. (OZL.AU) for $1.7 billion,
but has met resistance from Australian authorities.
The bid for OZ Minerals' mines is one of several acquisitions
China is seeking to make in Australia's vast natural resources
sector.
Chinalco, or Aluminum Corp. of China Ltd. (ACH), as it is
officially known, in February proposed investing $19.5 billion in
Anglo-Australian miner Rio Tinto PLC (RTP). The deal, which is
being evaluated by the Australian Foreign Investment Review Board,
would be the biggest overseas investment to date by a Chinese
company. It would raise Chinalco's stake in Rio to 18% and increase
its leverage in pricing negotiations for iron ore from Rio's
mines.
The transactions reveal China's interest in taking advantage of
low valuations to secure its hold over natural resources. They also
reflect the financial firepower of a nation that is still growing,
albeit more slowly than before, and that boasts huge foreign
exchange reserves. Analysts expect Chinese companies to make more
acquisitions in coming months across a range of sectors, but
especially in natural resources.
In addition, China has emerged as the pillar holding up
international copper prices, Guajardo said.
Continued Volatility Expected
The global slowdown has seen copper prices plunge from near $4 a
pound in October to around $1.80 this week. But prices dipped to
about $1.40 a pound a couple of months ago and only rebounded after
China stepped in to take advantage of the bargain to build its
strategic reserves.
Cesco is maintaining its forecast for average copper prices this
year at $1.50 to $1.80 per pound, but with volatility.
International copper sales will fall slightly compared with last
year, but not as far as others are predicting, Guajardo said.
Jon Barnes, principal consultant at consultancy CRU, said
Wednesday that world copper consumption is expected to fall by
between 2 million and 3 million metric tons in 2009, a decline of
15% to 20% on the year.
Most of the drop will come from decreased purchases by the
developed world, but buying by developing countries, particularly
China, should partially compensate, Guajardo said.
"Chinese buying depends on the price," he said. "If it's low,
they will buy; if prices go up, then not."
It looks like prices will continue to depend on China, with not
much hope for a recovery in Europe and the U.S. anytime soon.
Despite the price drop, worldwide copper output is expected to
rise this year, as a number of planned projects and expansions come
online. Production should rise 1% to 2.5% this year, Guajardo
said.
There's likely to be a 200,000-ton copper surplus this year, but
"that depends on the Chinese," he said.
If the price of copper rises to $2 a pound, then companies may
be tempted to restart shuttered projects, but the key issue is
stability. With so much uncertainty regarding future prices,
companies are unlikely to make long-term commitments until things
are a bit clearer. "There's no assurance that we've already seen
the worst of the crisis," Guajardo said.
-By Shane Romig, Dow Jones Newswires; 54-11-4590-2438;
shane.romig@dowjones.com