Glencore Xstrata Sells Las Bambas for $5.9B
Glencore Xstrata plc said Sunday, April 13, it has agreed to sell its giant Peruvian copper project Las Bambas to a Chinese consortium lead by China Minmetals Corp. for $5.85 billion.
The deal represents China's biggest ever mining acquisition and ends months of negotiations with the consortium, which emerged as the frontrunner to buy the asset last year. Chinese regulators had prevously made the sale of the project to an approved buyer a condition of their approval of Glencore's $34 billion takeover of Xstrata.
"Since we acquired Xstrata on 2nd May 2013, our team has taken decisive steps to de-risk Las Bambas, which has culminated in this compelling offer from the consortium," said Glencore Xstrata CEO Ivan Glasenberg in a statement. "Our willingness to sell reflects the level of the offer and our conviction that we can utilize the sale proceeds to create additional shareholder value."
Minmetals' offer is in the middle of the $5 billion to $7 billion price analysts had attributed to the copper project. It secures for China one of the world's largest untapped copper resources. Las Bambas is expected to produce more than 400,000 tons per year of copper, as well as gold and silver, and has total reserves of 6.9 million tons of copper, 1.8 million ounces of gold and 112.5 million ounces of silver.The project, which was part of Xstrata's stable of nonproducing assets, is due to begin shipping in 2015. It has already cost about $2 billion to develop, with a further $2.4 billion needed to bring it to full capacity. Under the terms of the deal, Minmetals' majority-owned, Hong Kong-listed unit MMG Ltd. will buy a 62.5% stake in the operation. Elion Holdings, a unit of state-backed investment firm Guoxin International Investment Corp. Ltd., will take a 22.5% stake, while Citic Metal Co. Ltd., a unit of China's giant sovereign investor Citic Group, will buy 15%. The partners will hold the asset through a joint venture company and will be entitled to output from the mine in proportion to their stakes. The total price paid for the project will be adjusted to account for Glencore Xstrata's investment in the operation from January 1 to the deal's close. Glencore said that it had spent about $400 million on Las Bambas in the first three months of the year. The purchase will propel Minmetals' MMG Ltd. into the top tier of global copper producers, making it the largest Asian producer ahead of Jiangxi Copper Co., according to a note by Barclays plc analyst Ephrem Ravi. China is the world's biggest importer of copper. It shipped in about 3.2 million tons of copper metal and 10.1 million tons of copper ore last year, equal to about 80% of its total need. MMG's "share of the production of the Las Bambas Project is expected to be almost 1.5 times the company's existing copper production once ramp up is complete," MMG said. "The copper resources of the Las Bambas Project...represent more than double the group's existing copper resources." A sale to a Chinese buyer has longed seemed the most likely outcome of the compulsory auction. Under the terms of China's approval of Glencore Xstrata's formative merger, the mining company had to present a list of possible buyers for approval by China's Ministry of Commerce, or Mofcom, by August 2014 and sign a deal by Sept. 30, 2014. Failure to strike an agreement by the September deadline would have triggered the compulsory sale of one of four other Glencore Xstrata copper projects in an auction that had no minimum price. The sale appears to suit Glasenberg, who is keen to create closer trading ties between Glencore and China, and who has made no secret of his dislike of capital intensive and higher risk brown field projects. "The proceeds from the sale will immediately and materially de-gear Glencore's balance sheet," the company said. "Any surplus capital, subject to maintaining an efficient balance sheet within Glencore's strong BBB/Baa credit ratings guidance, will be returned to shareholders, within an appropriate time frame and structure." Credit analysts at Moody's Investors Service last week warned that Glencore's Baa2 rating could be negatively affected if the company returned too much cash from the sale to shareholders, or returned cash before the company's credit metrics had improved. "Glencore Xstrata choosing to use a meaningful portion of the proceeds for debt reduction could improve its metrics at a time when they remain weakly positioned relative to Moody's guidance for the Baa2 rating," Moody's noted. The Chinese buyers said they will fund the deal using cash reserves and new debt from a syndicate facility arranged by China Development Bank and including Industrial and Commercial Bank of China Ltd. and Bank of China Ltd. The deal, which is expected to conclude in the third quarter of 2014, is conditional on approval by Chinese authorities. The buyers have agreed a break fee of $250 million. MMG is taking financial advice from Citigroup Inc. and Bank of America Merrill Lynch. Guoxin International Investment and Citic are taking advice from Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. China Minmetals has tapped Deutsche Bank AG for financial advice. Glencore Xstrata is taking financial advice from BMO Capital Markets Ltd. and Credit Suisse Securities (Europe) Ltd. MMG shares closed Monday at HK$1.86, up HK$0.16, or 9.4%. The company, which has a market capitalization of HK$9.84 billion ($1.27 billion), is 65% owned by China Minmetals. Shares in Glencore Xstrata traded Monday morning in London at 314.85 pence, up 3.25 pence, or just over 1%. The company has a market capitalization of £41.9 billion ($70 billion).
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