China squirrels away copper for a sunny day

Coming hard on the heels of last month’s $US6.25 billion acquisition of Glencore Xstrata’s Las Bambas copper mine by China’s MMG group, the prospective $1.4bn bid for PanAust by the state-owned Guangdong Rising Assets Management says something interesting about China’s view, not just of the longer term outlook for copper, but of China’s economic growth prospects.

One could throw Baosteel’s $1.4bn with Aurizon for Aquila Resources and its iron ore project into the discussion but copper is a particularly significant metal for the Chinese to be focusing on.

Of all the metals, copper has arguably both the best long-term supply and demand fundamentals and is the most leverage, not just to growth in China’s economy which already consumers about 40 per cent of the world’s copper production, but to the attempted shift in that economy’s emphasis towards consumption.

Guandong Rising, or GRAM, has had a stake in PanAust since 2009, when it outlaid about $180 million to buy 19.9 per cent of the copper-gold producer. Recent volatility in copper prices, partly due to the general unwinding of commodities-based financing in China, has impacted PanAust’s share price and that -- along with the medium-term outlook for copper -- may have influenced the timing of GRAM’s move.

PanAust disclosed today that GRAM had approached it last month with a confidential and non-binding indicative offer of $2.20 a share, subsequently increased to $2.30 a share. While the target’s board has dismissed the approach, saying the price remained materially below the level at which an offer would be recommended, it has granted GRAM access to due diligence.

PanAust has producing copper, gold and silver mines in Laos but also has the majority interest in the  Inca de Oro copper-gold project joint venture with Codelco in Chile and late last year agreed to buy a majority interest in the Frieda River copper‐gold project in Papua New Guinea from Glencore Xstrata for payments of up to $125m.

This year it expects to produce about 65,000 or so tonnes of copper and up to 165,000 ounces of gold but if the Chilean project starts producing and it completes the deal with Glencore there is a lot of production upside.

Copper is an interesting commodity given the big shifts that have occurred in supply and demand in other commodities as a result of the massive surge in resource sector investment and consequent, albeit lagged, surge in production over the past decade. There hasn’t been quite the same increase in copper production as in other commodities, partly because of declining grades at established big mines but also because new resources have tended to be in difficult jurisdictions and have been costly and expensive -- and have had protracted timelines -- to develop.

China’s interest in the metal could, alongside the MMG (and, perhaps, the Baosteel) transaction, be interpreted as a sign of confidence in its own economic outlook but also in the prospects for its success in encouraging a greater level of domestic consumption, which would exacerbate its copper requirements.

Acquiring direct access to the metals it believes it is going to need more of in future during a period when prices -- and share prices -- are depressed because of the glut of supply in most commodities, the unwinding of commodity-backed financing deals and concerns over the current condition of China’s economy would be a sensible and opportunistic strategy if China’s economic growth does stabilise and the intensity of its usage of copper continues to rise.