By Clara Denina and Felix Njini
LONDON- Leading mining companies are struggling to balance investor expectations for hefty returns with paying the necessary premiums to buy pure play copper companies as global demand for the metal sends valuations soaring.
Big diversified miners including Rio Tinto BHP Group and Glencore pressured by a slowdown in global economic growth and falling commodity prices, are watching rival copper producers gradually grow beyond their reach, with shares benefiting from the metal’s robust outlook.
While shares of Rio, BHP and Glencore have slumped between 10 percent and 15 percent this year, the valuations of pure play copper producers including Freeport-McMoRan Ivanhoe Mines and Teck Resources have risen, even as benchmark copper prices retreated after hitting a record high above $11,000 a metric ton in May this year.
“Engaging in large copper deals makes the boards (of directors) nervous when fluctuations in other commodities, like iron ore and coal, are likely to persist,” a banker, who has worked on several mining transactions, told Reuters.
“And since copper companies have performed better, diversified miners find it challenging to pay massive premiums when their share prices have dropped more in comparison,” the banker added.
BHP, Rio Tinto and Glencore trade at multiples of five to six times earnings, whereas Teck, Freeport, and Ivanhoe are at nearly double that, the banker said.
Copper, used in power and construction, is set to benefit from burgeoning demand from the electric vehicle sector and new applications such as data centers for artificial intelligence.
The long-term outlook for the metal isn’t always factored in by investors in the bigger miners when they offer higher premiums to try and seal a deal, said Richard Blunt, a partner at law firm Baker McKenzie.
“Investors only want to know what’s going to happen to the value of their company over the next three to six months, and that’s a major problem,” Blunt said.
In the past three years, thanks to higher commodity prices most miners have paid record dividends, which – although popular – are seen as eroding the industry’s ability to generate production growth via exploration, mine development, or consolidation.
Investors have good reason to keep a wary eye on management’s dealmaking ambitions as most miners have a corporate history littered with failed and sometimes costly acquisitions. – Reuters
