Ivan Glasenberg’s GlencoreXstrata is selling its Peruvian copper project Las Bambas to a Chinese consortium. The London stock exchange listed company, which is based in Baar Switzerland, announced today it has signed an agreement for the sale with a consortium owned 62.5% by MMG Limited, 22.5% by GUOXIN International Investment Corporation Limited and 15.0% by CITIC Metal Co., Limited.
The consortium has agreed to pay approximately US$5.85 billion for the project, in cash, and the deal is expected to close during the third quarter of 12014, subject to regulatory approvals and other usual conditions. The consortium has also agreed to re-fund at closing the project’s continuing 2014 capital expenditure requirements up until closing. As at the end of March, such 2014 expenditures have to date already totaled some US$400 million.
This is a huge success for Ivan Glasenberg, as it will now take a very large chunk of leverage out of the company, both with the money coming in for the sale, and for the capital expenditures, which are still substantial, to finish the mine which are now avoided.
Agreement on a transaction has been widely expected for some time, with a signing even thought to have been possible last month which then didn’t happen. One can infer, therefore, that with recent falls in copper prices the last minute bargaining must have been quite tough between two hardened sets of negotiators, causing the almost one month delay.
Whilst GlencorXstrata has been required to sell an asset such as Las Bambas in order to satisfy Chinese anti-trust authorities over its merger last year with Xstrata, even so the company was not obligated to do so either at a loss, or at a price below an economic appraisal prepared by two independent banks of its own choosing. Any such appraisal would certainly tend, one might think, to look past short-term price fluctuations, to a considerable extent therefore and focus mainly on long term trends.
Commenting on today’s announcement, Ivan Glasenberg, CEO of Glencore said: “Today’s announcement demonstrates our commitment to maximising value for our shareholders. 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. Our willingness to sell reflects the level of the offer and our conviction that we can utilise the sale proceeds to create additional shareholder value.”
Glencore merged with its then 34% held affiliate Xstrata last spring after many months of seeking, and obtaining, regulatory approvals in several international jurisdictions, including by the Chinese Government.
When it finally gave its own green light for the merger to go ahead, the Chinese Ministry of Commerce had demanded that Glencore should subsequently divest itself of a large copper project, with Glencore’s Las Bambas project in Peru as the first choice. As a huge consumer of copper, China is understandably keen to avoid too much concentration of supply.
In July of 2013, the newly merged Glencore Xstrata therefore formally announced a process to sell its entire interest in the Las Bambas copper mine project with a quietly publicized expectation at the time of obtaining a price somewhere around, or perhaps even above, US$6 billion for the mine, which is due to enter into production in 2015. Las Bamabas is known to have over 10.5 million tons of copper in the portions of the mine already assessed.
A number of potential Chinese bidders then formed a consortium under the leader ship of the state owned China Minmetals Corp, leading to today’s announcement. The consortium member MMG Limited is 74% owned by China Minmetals which has itself irrevocably already voted in favour of the transaction.
With US$35.6 billion of total net debt at December 31st, 2013, Glencore can certainly make good use of the money, which will now make a major dent in reducing its debt. Thereafter, in future years Glencore expects its capital expenditure needs to go down substantially throughout the company as well, as all the remaining new projects in its pipeline are now said to be nearing completion and will subsequently enter into incremental revenue generating capability.
The deal to sell Las Bambas has taken several nail biting months, where both sides of the table have had to look ahead to the long range picture against a background of rapidly falling copper prices – generally not the best environment to have to sell something to be sure.
With possible business loan defaults in China appearing in the press, too, recently and with large warehouse stocks of copper in the country, which have become popular in China to be used as loan collateral for business loans outside the mining industry itself, the price of the commodity has been exceedingly volatile.
The Chinese purchase of Las Bambas will continue a trend; the country’s mining companies have long been buying overseas assets to secure raw materials. China accounts for roughly 40% of global copper demand, and Las Bambas should help give it a greater measure of control over the global copper market.
Knowing who you are is an important issue for any company, and in their recently issued 2013 Annual Report Glencore now defines the merged entity of Glencore and Xstrata, quite simply, as “a leading integrated producer and marketer of commodities.”
Glencore produces, refines, processes, stores and transports metals and minerals, energy products and agricultural products. They also engage in worldwide trading of the same kinds of products as well, though Glencore likes to call it “marketing” rather than trading, in order to make it sound more important.
The company operates globally, supplying physical commodities sourced from third parties as well as its own production to industrial consumers, such as the automotive, steel, power generation, oil and food processing industries. Glencore is also in the services business, providing financing, logistics and other services to other producers and consumers of commodities. Consolidated revenues in 2013 totaled almost US$234 billion.
Glencore’s metals and minerals producing activities are all derived from base metals and minerals, i.e. zinc, copper, cobalt, coal etc. and do not presently include mining of gold, silver or diamonds.
About Ivan Glasenberg
Ivan Glasenberg joined Glencore in April 1984 and has been Chief Executive Officer since January 2002. Mr Glasenberg initially spent three years working in the coal/coke commodity department in South Africa as a marketer, before spending two years in Australia as head of the Asian coal/coke commodity division.
Between 1988 and 1989, he was based in Hong Kong as head of Glencore’s Hong Kong and Beijing offices, as well as head of coal marketing in Asia, where his responsibilities included overseeing the Asian coal marketing business of Glencore and managing the administrative functions of the Hong Kong and Beijing offices.
In January 1990, he was made responsible for the worldwide coal business of Glencore for both marketing and industrial assets, and remained in this role until he became Chief Executive Officer in January 2002.