Rio Tinto, BHP Group copper acquisitions set tone for year of high-premium deals

Australia's top two iron ore producers' determination to secure significant copper assets foreshadows a year of high-premium acquisitions as the market considers a copper deficit forecast for the long term.

On Dec. 16, Rio Tinto Group finally closed its US$3.1 billion deal to buy the remaining 49.21% interest in Turquoise Hill Resources Ltd. that it did not already own for US$33 per share. With it came a direct 66% ownership of Mongolia's giant Oyu Tolgoi copper-gold operation, one of the top 10 copper deposits in the world, according to S&P Global Market Intelligence data. Mongolia's government owns the remaining interest in the property.

Rio Tinto's deal closing came a couple of weeks after Australian copper producer OZ Minerals Ltd. said its board intended to recommend BHP Group Ltd.'s A$28.25 per share cash offer. The new offer was 13% higher than the mining major's A$25/share bid that was rejected in August as undervaluing the target.

"The [Rio Tinto] deal highlights the scarcity of these copper assets globally, which we've known for some time, but we've got some commercial transaction markers now," UBS co-head of mining research Lachlan Shaw told S&P Global Commodity Insights, referring to both acquisitions.

"If you assume significant resource-to-reserves conversion and make some assumptions around the [capital expenditure] to do so, Rio Tinto has paid high-US$3 per pound, not quite US$4 per pound, for mopping up the minority stake. That's not too dissimilar to what BHP is proposing to spend to acquire OZ."

Rio Tinto's acquisition "sets the scene for next year and [highlights] the importance of having world-class assets in a market which is significantly short copper," said Liam Twigger, executive director of financial advisory Argonaut Securities and chairman of SolGold PLC. SolGold's Cascabel copper-gold project in Ecuador has attracted the interest of BHP and Newcrest Mining Ltd.

Greater premiums

Though S&P Global Commodity Insights' Metals and Mining Research team sees a copper market surplus of 285,000 tonnes for 2023, assets are expected to attract greater premiums during the year. This is largely in anticipation of the surplus turning into a 226,000-tonne deficit in 2026, at which point the London Metal Exchange three-month price is expected to average US$9,620/t.

Some believe the deficit will hit sooner, including Goldman Sachs, which flipped its 2023 forecast of a refined copper surplus to a deficit in early December. Higher demand expected from China's plans to ease its COVID-19 restrictions and December announcements of lowered output guidance from key producers seemed to bolster the bank's argument.

"At the moment, we're in a period of volatility and uncertainty with supply chain disruptions and people are talking recessions, but I am absolutely convinced that in 2023 there is going to be a very serious updraft in the copper equities market, pricing, M&A and people looking for deals," EMR Capital Pty. Ltd. Executive Chairman Owen Hegarty said in an interview.

EMR Capital attracted KoBold Metals Co. to invest US$150 million earlier in December to buy a controlling stake in the undeveloped Mingomba copper deposit, which forms part of the Lubambe property in Zambia. EMR Capital also owns 45% of copper producer 29Metals Ltd., which was the Australian Securities Exchange's biggest mining IPO in over a decade in mid-2021.

"There are not that many good copper projects, or even developments, going around," Hegarty said. "Premiums will go up because more and more people are looking, assets are becoming more difficult and cost more to develop as permitting takes longer, all amid supply chain shortages and jurisdictional issues."

Oyu Tolgoi's underground expansion also suffered cost blowouts and delays, which Rio Tinto attributed in 2021 to geological factors.

Undervalued copper

Turquoise Hill minority shareholders Pentwater Capital Management LP and SailingStone Capital Partners LLC previously expressed objections to Rio Tinto's acquisition offer, which they said undervalued the target.

"The proposed price implies an equity value of C$8.65 billion, which is a fraction of the free cash flow that Pentwater expects Turquoise Hill to generate over the next decade," Pentwater said in September after Rio Tinto signed definitive agreements to buy out Turquoise Hill's minority shares.

Though Pentwater and SailingStone agreed to withhold their votes and enter into arbitration for dissent proceedings and certain other claims, Rio Tinto terminated the agreements after Quebec's Autorité des marchés financier stepped in to delay a vote on the acquisition.

The Autorité des marchés financier moved to step in after another Turquoise Hill shareholder, Caravel Capital Investments Inc., also filed a complaint to the Ontario Securities Commission and the Quebec regulator over fairness grounds, The Globe and Mail reported Nov. 4. Turquoise Hill's minority shareholders eventually approved the takeover Dec. 9.

While not commenting specifically on Rio Tinto's deal, Hegarty said it is clear that "you can't ever have enough quality copper."

Twigger summed up the urgency in an interview: "We used to generally have six weeks' copper inventories around the world, now we're down to less than 4.7 days. At some point it will turn into what's happening in lithium where the market will pay anything to get supply."

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