Big predators start consuming under-valued copper companies as disconnect to metal price rolls on

It was mentioned here last week that the junior copper sector was ripe for a wave of takeover activity.

The idea was that the failure of the juniors to recover from the broad market sell-off in April meant they had become disconnected in a major way from what continues to be historically high copper prices.

What’s more, there is a global rotation under way from financial instruments towards hard assets (including physical gold), suggesting that under-priced copper assets would increasingly be sought in response to the looming supply deficit in the electrification metal.

Fleshing out the argument was the recent actions of BHP in the copper space – its $9.6 billion acquisition of OZ Minerals and its $US2 billion acquisition of a half share in the Filo del Sol discovery in the Andes.

It was suggested there would be a trickle down M & A impact on the under-priced junior copper sector.

Well, the wave arrived on cue this week.

On Monday the ASX-listed Mongolian copper explorer/developer Xanadu Mines (XAM) attracted a $160 million or 8c a share bid – a 57% premium to market – on the strength of its stake in the Kharmagtai copper-gold project.

The action might not be over just yet as Xanadu’s partner in the project, China’s Zijin, which Xanadu introduced in to the project in March 2023, has yet to declare if it has other ideas.

It has been a long road for Xanadu to this point.

Kharmagtai now ranks as a 4.7Mt copper and 11Moz gold resource (Xanadu 38.25% interest) but a development cost approaching $1 billion has long made it a bridge too far for Xanadu to go it alone.

Introducing Zijin with its deep pockets to the project was part of the solution to have the project’s value better reflected in Xanadu’s market value.

But this market didn’t buy into the story, clearing the way for the bidder (a consortium of Singapore-based miner Boroo and Xanadu director Ganbayar Lkhagvasuren) to force the value issue with the premium offer. It’s now over to Zijin to respond, or not.

The action at Xanadu was followed by Wednesday’s bid for ASX-listed American copper developer/explorer New World Resources (NWC), last mentioned here in July 2024 when it was a 2.9c stock.

The 5c a share agreed bid is from AIM-listed Central Asia Minerals (LON:CAML) and represents a 95% premium to New World’s 30-day VWAP, and a 150% premium to the issue price in the company’s March capital raise.

There is a similarity between Xanadu and New World which owns the high grade Antler copper project in Arizonia in that the market never gave New World full value for Antler, which is on a pathway to becoming a low-cost 30,000tpa copper equivalent producer.

The CAML bid exploits that market shortcoming but at least rewards New World for the work put in over the years in advancing Antler to development status. While New World’s home market of the ASX did not value Antler fairly, the outsider in CAML is obviously closer to the mark.

The same could be said about Xanadu and its Kharmagtai project. Actually, there is another example – last year’s $393 million takeover of ASX-list South Australian copper developer Rex Minerals by Indonesia’s Salim group at a 79% premium.

Take the three examples of ASX-listed copper juniors getting taken out at big premium’s to their market price and it seems that while equity markets are not onboard with the copper market thematic of a looming supply shortage and bumper prices, industry players – including the central planning authorities in China – clearly have.

There were two reminders during the week on just why industry players and China - the world’s biggest consumer of the red metal – are jockeying for bigger positions in copper.

Trading house Mercuria’s chief forecaster Nicholas Snowdon told the LME Asia Week conference in Hong Kong that he was predicting a copper concentrate deficit this year of 700,000t and a 300,000t deficit for refined metal that could push prices to record highs.

“The copper market today stands in an acute state of vulnerability, and for us, it’s a question of when, not if, that this market moves into a state of scarcity that may well happen in the second half of this year,” Snowdon said.

Then there was the International Energy Agency warning that demand for copper is set to outstrip supply by 30% within the next decade, with security of supply further threatened by China’s growing dominance of the refining market.

And given this week’s M & A activity, it is worth noting that the celebrated mining cycle defining clock of junior-focussed fund manager Lion Selection was last reported to be at 4 o’clock on its way to boom time 6 o’clock. What prompts the transition to 6 o’clock?

The arrival of mergers and cash takeover bids, no less.

Sunstone:

The premium bids within days of each other for Xanadu and New World has got the market thinking about which juniors have big resource bases that equity markets are undervaluing but industry players/China might not be.

Sunstone (STM) - last mentioned here on January 23 when it was a 0.7c stock – was clearly one that was zeroed in on in Thursday’s market. On much bigger than usual volumes, it popped 7% higher to 1.5c for a market cap of $89m.

Sunstone has a 3.9Moz gold equivalent (gold-copper-silver) resource base across two projects in the north and south of Ecuador, with much bigger “exploration targets” pointing to the potential for major growth.

The resource base is more gold than copper but as noted last week, the trickle down impact on gold juniors from the wave of M & A activity at the big end of town of the gold sector has been underway for at least 12 months.

It’s now the turn of the junior copper stocks, remembering that if there is a mix of gold and copper, wonderous things can happen to the cost of production for gold after copper credits. Just ask Newmont at Cadia, or Evolution at Ernest Henry.

Sunstone’s success in Ecuador has long been overlooked by its home ASX market. That, and the scale of the development opportunity, has prompted it to seek out potential strategic partners.

Thursday’s action in the stock post Xanadu and New World has the market thinking a step further about a premium takeover bid for company emerging.

Shaw & Partners has just initiated on the stock with a 12-month price target of 3c a share based on the company growing its resource base by 50% over the next 12 months and trading at $52 EV/AuEq oz, in-line with its peer group.

It noted that a successful partnership process could bring significant financial and technical resources to accelerate both project's development, rapidly unlocking their full value.

“This makes Sunstone a ‘situation stock’ with potential for significant corporate catalysts,” Shaws said.

Copper juniors:

In light of the Xanadu and New World bids, and what may come of Sunstone’s strategic partnering process, the rest of the junior copper stocks – particularly those with sizeable but underappreciated resource bases – also stand to benefit.

Among their ranks are names like Coda (COD), Caravel (CVV), Havilah (HAV), Hammer (HMX), Carnaby (CNB), and KGL Resources (KGL).

The action in Xanadu and New World is a clear signal that the world around them has changed, and that buyers/strategic investors for their projects/company could come from anywhere while equity markets are asleep at the wheel with their valuations.

Finally, on the exploration front, AusQuest (AQD) moves back into the limelight now that a drilling rig is due to be rolling up to its Cangallo copper-gold porphyry discovery in coastal Peru. It’s the one that generated excitement in January.

Assay results from the first two drill holes (400m apart) into the 100% owned virgin prospect included a 348m hit from near surface in the first hole grading 0.26% copper with some gold counts.

The upcoming drill program will start from the known mineralisation and start to step out with RC holes to determine where some diamond holes should be drilled in the next drilling program to get a better handle on the potential of the find. The drilling is potentially high-impact stuff.

AusQuest was up 8% in Thursday’s market to 5.3c for a market cap of $72m.