Considering the US$1.2 billion price tag on the sale of a 30% stake in Teck Resources Ltd.'s Quebrada Blanca copper project, Bernstein analysts asked two questions in a recent note: Why do some Japanese investors appear to pay more than others for mining assets? And, using the deal's implied copper reserve price as a yardstick, is Anglo American PLC undervalued?
On the first question, Bernstein said two explanations that often turned up were that Japanese investors are less "sophisticated" than others and end up paying more, or their cost of capital is higher due to a lack of domestic investment options.
But the analysts liked neither reason, saying Japanese investors are as sophisticated and have essentially the same cost of capital as anyone else, and the analysts viewed the answer as more a matter of how the copper price is considered in the long term and what that means for asset valuation.
Quebrada Blanca Phase 2, or QB2, is considered a top-tier asset, and the price the Japanese investors — Sumitomo Metal Mining Co. Ltd. and Sumitomo Corp. — are paying suggests that the mine's copper reserves are worth about US$1,291/t, according to the report.
While that may look like overpaying, the Bernstein analysts said that in this case, the investors are just more patient, while also noting an average copper price of US$6,570/t this year.
"We believe that commodity prices are mean reverting, and that this means that for long-term investors, mining assets are a much lower risk investment than they are for short-term investors," the team wrote.
"A focus on short-term price volatility often obscures the longer-term price stability of commodities. The price that Sumitomo has paid for QB2 seems to reflect both an understanding of this fact, and an investment horizon that is long enough to take advantage of it, the team wrote.
The analysts also did a bit of rough valuing of Anglo American in light of the price paid for Quebrada Blanca reserves, which indicated that Anglo American's copper business, accounting for reserves, is worth about 95% to 121% of the company's market capitalization.
"So, buy Anglo for the copper and get the diamonds, coal, nickel, iron ore and platinum assets for free," Bernstein said.
Steel bites
In other research, BMO analysts said steel tariffs may be having an impact on contractor orders in the infrastructure sector when it comes to items made of steel.
On the one hand, it noted that new orders picked up in the nonmanufacturing Institute for Supply Management survey. "The details looked respectable, with new orders up 1 point to a five-month high of 62.5," it said.
But it also noted the pickup "could reflect some pulling forward of orders ahead of the anticipated rise in tariffs."
Further, the analysts pointed out that feedback in the sector suggests that steel tariffs are having an impact on capital-improvement projects already underway with contractors taking a closer look at orders with steel-containing items.
"We would highlight this clearly shows that steel tariffs are already making infrastructure spending more expensive in the U.S.," the BMO analysts said.