China is taking the extremely long view on copper.
State-owned Chinese firms are making big bets on Canadian copper companies at a time when other investors are backing away amid weak commodity prices and a shaky international geopolitical climate.
Last week, state-owned Chinese miner Jiangxi Copper Co. Ltd. announced it had amassed a 10.8-per-cent stake in Vancouver-based First Quantum Minerals Ltd., through Pangaea Investment Management Ltd. Jiangxi also said it may end up increasing its stake to 16.6 per cent through a share purchase agreement with an unnamed counterparty.
Vancouver-based Ivanhoe Mines Ltd., which is developing the giant Kamoa-Kakula copper resource in the Democratic Republic of Congo (DRC), has attracted two major Chinese backers over the past few years. CITIC Metal Group Ltd., which first invested in Ivanhoe just more than a year ago, is its biggest shareholder with a 26.4-per-cent stake, and Zijin Mining Group, which got involved in 2015, has a 13.9-per-cent share. (The holdings are contingent on a recent shareholder agreement closing.) Zijin also has a 39.6-per-cent stake in the Kamoa-Kakula project.
The investment by deep-pocketed Chinese investors into two of Canada’s best-known copper companies comes in the midst of a protracted period of weakness for the commodity itself, and a continuing trade war between the United States and China that has scared off the big Western miners from investing in copper.
“Major diversified miners have been unwilling to acquire copper miners due to a high level of risk aversion and a focus on austerity and capital returns. But the Chinese are making acquisitions in copper and the timing is brilliant,” Chris LaFemina, analyst with Jefferies, wrote in a note to clients last week.
Copper futures closed at US$2.62 a pound on Friday. Leveraged to the health of the world economy, the industrial commodity has fallen about 10 per cent since April. Copper peaked in 2011 during the height of the last great commodities boom at around US$4.50 a pound.
Unlike publicly traded companies that are pressed to show returns every single quarter, and whose minute-to-minute financial condition often depends on the direction of volatile and fickle commodity prices, state-controlled Chinese entities can afford to take a much longer viewpoint.
“We do not believe Chinese state-backed companies are concerned about near-term cyclical risk. Their focus is more likely on the strategic benefit of controlling large-scale copper resources for decades via acquisitions at low prices during a weak point in the cycle,” Mr. LaFemina said.
Chinese financial support has allowed Ivanhoe to move forward in developing Kamoa-Kakula, which the Canadian company touts as one of the largest undeveloped copper projects in the world, despite sluggish copper prices.
The investment from Jiangxi Copper in First Quantum, meantime, sent shares in Canada’s biggest copper company soaring. First Quantum also said Jiangxi is considering buying a stake in its Zambian copper assets, Kansanshi and Sentinel, which are also the two largest copper mines in Africa. RBC Dominion Securities Inc. analyst Sam Crittenden estimates that First Quantum could generate US$1-billion by selling a 20-per-cent stake in the mines.
As to whether the Chinese could take it one step further, and buy either Ivanhoe or First Quantum outright? Various standstill agreements preclude a hostile move on either company from their existing Chinese shareholders over the next few years. Still, that doesn’t rule out a friendly arrangement in the interim.
Clement Kwong, managing director with Pangaea Investment, said Jiangxi is happy with its equity stake in First Quantum for the time being, and stressed that it has historically been a conservative investor, only making big strategic moves after deep forethought.
“Jiangxi hasn’t done anything silly or crazy,” he said.
Jefferies’s Mr. LaFemina, meantime, isn’t sure how it will all turn out for First Quantum. “While we do not believe a full takeover is likely, time will tell what the end game is.”
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