Chinese group agrees $5.85bn Las Bambas mine deal

A Chinese consortium led by MMG extends China's global acquisition spree by agreeing to buy the major Peruvian copper mining project.
The Las Bambas copper project in Peru
The Las Bambas copper project in Peru

A Chinese consortium led by Hong Kong-listed miner MMG has agreed to buy the Las Bambas copper project in Peru from Glencore Xstrata for $5.85 billion in cash, providing further evidence of China’s continuing drive to secure more of the world's natural resources.

The deal, for what promises to be one of the world's biggest copper mines, showcases the ability of Chinese companies to flex their deal-making muscles thanks to cheap debt financing. It is the largest cross-border deal out of Asia, excluding Japan, so far this year and a shade bigger than Belgian brewing giant Anheuser-Busch InBev's buyback of South Korean Oriental Brewery.

Melbourne-based MMG, which has mines in Australia and the Democratic Republic of Congo and is controlled by state-owned China Minmetals, has a 62.5% stake in the consortium. Guoxin International Investment and Citic Metal hold stakes of 22.5% and 15%, respectively.

Equity investors initially welcomed news of the deal sending MMG's share price nearly 9% higher to HK$1.85 by the close on Monday.

"Our view [on the acquisition] is fairly positive," Matthew Whittall, a metals and mining analyst at Investec, said in a phone interview. "What drives that view is MMG's access to low-cost debt. Their cost of debt is 3-5% and, on that basis, it is easy to justify the acquisition given their low cost of capital," he said.

According to a research note by Barclays, the acquisition could prove a “game-changer" for MMG as it would propel it into the world's top-15 copper mining companies. The deal, which is expected to close by the end of September, would also turn MMG into the biggest listed copper miner by volume in Asia, overtaking Jiangxi Copper.

Chinese lenders provide debt

In addition to the $5.85 billion price tag, the consortium will pay for all capital expenditure and costs incurred in developing Las Bambas from January 1, 2014 to closing, Glencore Xstrata said in a statement. Las Bambas incurred capital expenditure and other costs totaling $400 million in the first quarter of 2014, raising the total potential deal size so far to $6.25 billion.

Barclays estimates that the total funding required for the acquisition and subsequent capital expenditure runs to $8.25 billion, of which MMG will have to contribute $5.2 billion.

The consortium has obtained a commitment letter from China Development Bank to arrange a syndicated facility to help fund the acquisition and develop the project. ICBC and Bank of China will participate in the facility.

In its Hong Kong stock exchange filing, MMG said the consortium will provide equity of up to $3.56 billion. One source familiar with the matter said about 60-65% of the total deal, including the acquisition price and subsequent capital expenditure, will be financed by debt.

Las Bambas, which has yet to go into production, had gross assets of $4.4 billion and posted a loss of $20,000 for the financial year ended December 31.

The project is scheduled to start production in 2015 and is expected to produce in excess of two million tones of copper in its first five years of operation. It was one of the world's few early-life copper mining assets available for sale.

“Las Bambas is strategic in terms of long-term copper supply for the Chinese,” the person familiar with the deal said.

Chinese bidder seen preferred

Glencore Xstrata’s sale of Las Bambas was one of the conditions the Chinese authorities laid out to allow Glencore’s merger with Xstrata, which was announced about a year ago. As such, the market expectation is that Las Bambas would go to a Chinese bidder, assuming it made a reasonable offer.

That didn't stop Glencore from running a sales process, which attracted international bidders such as Newmont Mining and funds including Magris, led by former Barrick Gold CEO Aaron Regen. However, with the mining sector currently plagued with oversupply, metals and mining companies globally have been more focused on cutting costs and de-leveraging. Hence, the Chinese consortium's access to cheap funding was seen as a distinct advantage. 

“Given what's happened to the mining sector over the last year, with major companies reducing costs, capex and leverage, it is difficult to see how they would be competitive versus the Chinese consortium,” said the person familiar with the deal.

The bidding was a long-drawn out process and, according to a second source familiar with the matter, it took about a year of negotiations.

MMG has been hungry for assets for some time and in 2011 made an unsuccessful bid for Canadian group Equinox Minerals, which controls one of Africa's largest copper mines at Lumwana in Zambia. At the time MMG was known as Minmetals Resources.

Chinalco, another large Chinese state-owned enterprise, was also among the bidders but pulled out around October last year. Chinalco was advised by Goldman Sachs and Morgan Stanley. The state-owned company already has a copper mine in Peru at Toromocho.

MMG's Las Bambas deal is still subject to approval by Chinese and Peruvian regulators and MMG shareholders. China Minmetals which owns about 74% of MMG’s shares has committed to vote in favour of the transaction.

There is a $250 million break fee – and the consortium needs to pay Glencore Xstrata if the deal doesn’t go through due to a lack of Chinese or Peruvian regulatory approval.

The break fee is the third-highest among Chinese acquirers who disclosed break fees, according to Dealogic. Shuanghui International's break fee of $275 million for its acquisition of Smithfield Foods and China Petrochemical Corp’s $262 million break fee for its acquisition of Addax Petroleum in 2009 are the only two that are higher, Dealogic data shows.

Bank of America Merrill Lynch and Citi advised MMG Ltd. Deutsche Bank advised China Minmetals. BMO Capital and Credit Suisse advised Glencore Xstrata. White & Case was the legal adviser to the consortium.

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