Analysis-Mining industry struggles with valuation gap amid shift to copper By Reuters

By Clara Denina and Félix Njini

LONDON (Reuters) – Major mining companies are struggling to balance investors' expectations of strong returns with paying the premiums needed to buy unique companies, as global demand for the metal drives up valuations.

Large diversified miners, including Rio Tinto (NYSE:), BHP Group (NYSE:) and Glencore (OTC:), pressured by a slowdown in global economic growth and falling commodity prices, are seeing coal producers Rival copper grows gradually out of reach, with stocks benefiting from the metal's strong prospects.

While shares of Rio, BHP and Glencore have fallen 10% to 15% this year, valuations of sole copper producers, including Freeport-McMoRan (NYSE:), Ivanhoe Mines (OTC and Teck Resources (NYSE have risen, even as benchmark copper prices retreated after hitting a record high of more than $11,000 a metric ton in May of this year.

“Engaging in big copper deals makes boards nervous when fluctuations in other commodities, such as iron ore and coal, are likely to persist,” a banker who has worked on several transactions told Reuters. mining.

“And since copper companies have performed better, it is difficult for diversified miners to pay huge premiums when their share prices have fallen more in comparison,” the banker added.

BHP, Rio Tinto and Glencore trade at multiples of five to six times earnings, while Teck, Freeport and Ivanhoe trade at almost double that, the banker said.

Copper, used in energy and construction, will benefit from growing demand from the electric vehicle sector and new applications such as data centers for artificial intelligence.

Investors in the biggest miners don't always take into account the long-term prospects for the metal when they offer higher premiums to try to seal a deal, said Richard Blunt, partner at law firm Baker McKenzie.

“Investors just 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 big issue,” Blunt said.

Over the past three years, thanks to rising commodity prices, most miners have paid record dividends that, while popular, are seen as eroding the industry's ability to generate production growth through of exploration, mining development or consolidation.

EXPENSIVE HISTORY

Investors have good reason to keep an eye on management's deal ambitions, as most miners have a corporate history littered with failed and sometimes costly acquisitions.

Rio Tinto's $38 billion deal for Alcan in 2007 generated a 65% premium and subsequent writedown, while BHP's $12 billion deal for US onshore shale oil and gas assets in 2011 It sold again for $10 billion in 2018.

Some management teams have tried to return to mergers and acquisitions, but without success or only partially.

“There is the purely financial aspect, which is the resistance of current shareholders to significant bonuses,” said Michel Van Hoey, senior partner at McKinsey & Company.

“If you look historically, 10 years ago, we went through a significant wave where some companies probably overpaid for their transactions. Now, executives have become a little more conservative,” he added.

Glencore finally struck a deal for 77% of Teck's steelmaking coal assets after its $23 billion bid for the entire Canadian miner was rejected, while BHP was forced to walk away from Anglo American (JO 🙂 even after revising their initial offer twice to attract the smaller rival.

Both BHP and Glencore initially made equity proposals for their target companies.

“In past cycles, companies like Rio Tinto made major cash purchases at peak times, only to see prices plummet, making them look reckless,” said one mining investor.

“Today, the trend has shifted towards equity-based deals to mitigate risks, but that is more expensive, especially at a time when commodity prices are falling.”