Copper M&A set to get hotter as industry players look for more exposure ahead of supply deficits

Situation normal in the copper markets following the Trump administration going soft on tariffs in a belated recognition that as much as he would like the US to be self-sufficient in the red metal, it is years away from having the new mines and smelters required.

Traders front-running earlier threats of a 50% across the board copper tariff by rushing copper into the US were sorely disappointed, with the administration back pedalling to a no tariff position on copper cathode and concentrates.

There is to be 50% tariff on copper pipes and wiring, the domestic supply of which will continue to rely heavily on imports of cathodes. But that is now a problem for US inflation rather trade flows in the global copper market.

The back pedalling on copper tariffs sent the US copper price down 20% to $US4.44/lb, reducing the arbitrage to the more indicative LME pricing to next to nothing, so situation normal has resumed.

It was a period of distortion in which some traders made plenty, and others lost plenty. But what it has not done is take away from overarching thematic in the copper market that electrification of everything and AI is to place unprecedented pressure on copper supplies in coming years.

It was mentioned here recently that the International Energy Agency has warned 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.

The intent of the Trump administration’s moves on tariffs is to remove the supply threat which it views as a threat to national security. More domestic mines and smelters is the answer, not distorting tariff regimes.

Copper M & A:

The thematic of a looming copper shortage and the higher prices that will be needed to drive a supply response are the main drivers of the recent wave of mergers and acquisitions at the asset and corporate level in the copper space.

The industry knows what is coming and is buying its way to greater exposure, acquiring copper producers and advanced copper developers to fill out their copper exposure ahead of the pending boom.

That equity markets are not fully on board with a copper boom thesis is reflected in the recent spate of copper asset and corporate acquisitions being conducted at big premiums to ruling equity valuations.

Three recent examples:

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

ASX-listed American copper developer/explorer New World Resources (NWC) received a 5c a share bid in May. A bidding war ensued with the winning bid by private equity group Kinterra of 6.7c a share representing a pre-bid premium of 168%.

South Africa’s Harmony made an agreed $1.6 billion takeover bid for Cobar copper producer MAC Copper (MAC) at a 32% premium to the 30-day VWAP, or a 20.7% premium on a pre-bid basis

Before those recent examples there was BHP’s 49% premium takeover of OZ Minerals and the Salim Group of Indonesia paying a 79% per-bid premium for South Australian copper developer Rex Minerals.

Whose Next?:

There is a clear disconnect there between short-term equity valuations and what the longer view-taking corporate/private equity types are paying for copper assets.

And on the assumption that the copper thematic pans out as expected, there is going to be more activity in the ASX space.

The inclination there is to say a lot more action. But the ASX sector has become hollowed out as it is.

But there are two ASX copper stocks that have flagged to the market that they are putting the disconnect to the test – Sunstone (STM) and Hot Chili (HCH). It makes them what might be called situation stocks.

In its June quarterly released this week Sunstone – trading at 1.7c for a market cap of $105m – said it continued to advance partnership opportunities to unlock the value of its substantial gold and copper discoveries in Ecuador.

“This process has involved several parties accessing Sunstone’s data room and undertaking site visits. Several opportunities and structures have been explored, with some more advanced than others, including corporate level transactions; project-level joint venture earn-in agreements and combinations with complementary nearer-term development assets,” Sunstone said.

“As a result of these discussions, an attractive opportunity has advanced to the stage where an offer could be finalised. Additional parties continue to participate in this process, with the most recent site visits in June and July.

“Due diligence under signed confidential agreements continues to be undertaken. At this stage, timeframes are unknown, and there is no certainty or assurance that any proposals will be received or, if received, will be acceptable, either in principle or otherwise, or will result in a binding transaction.”

It is not surprising that interest is swirling around the company.

In the south of the country its Bramaderos gold-copper project has a resource of 2.7Moz of gold equivalent and an exploration target of 7M to 13Moz of gold equivalent.

In the north, its El Palmar gold-copper project has a 1.2Moz gold equivalent resource estimate and a 15M -45Moz gold equivalent exploration target.

Meanwhile, Hot Chili, trading at 57.5c for a market cap of $88m, is fresh from a PFS on is Costa Fuego copper-gold project at low altitude in Chile – 116,000tpa of copper equivalent at an all-in sustaining cost of $US1.85/lb of copper (after by-products) for 20 years.

It is the start of the story as 35km from the project the company has made the exciting La Verde discovery (308m at 0.5% copper and 0.3g/t gold from surface). It’s a potential game-changer as it looks to be part of a bigger swarm of copper-gold porphyries.

In its June quarterly this week the company said it is currently assessing several non-binding, indicative, incomplete and conditional proposals received under its partnering process, with BMO Capital markets its adviser.

The process is at the asset-level to “introduce one or more qualified partners with the financial, technical and operational capability to assist in funding and delivering each project (it includes a desalination project),’’ Hot Chili said.

Like Sunstone, it cautioned that there is no certainty the partnering process will result in a transaction or binding agreement. And like Sunstone, there is nothing preventing a discussion about partnering at the asset level spilling over in to a full-blown takeover bid at the right sort of premium.

Energy Transition Minerals (ETM):

Energy Transition Minerals (ETM) got a mention here back on March 7 when it was a 7.5c stock on the basis that its stalled Kvanefjeld rare earths project near the town of Narsaq in south-west Greenland had been put on the map by Donald Trump.

It was when President Trump was talking up the idea that Greenland’s undeveloped rare earths treasure trove might be best put in the hands of the US by the US buying the whole country.

The strategic importance of huge Kvanefjeld resource has not gone away whether the US buys Greenland or not. The more recent restrictions placed on exports of rare earths by an industry-dominant China has made sure of that.

ETM is nevertheless now back at a more sedate 4.4c a share. Not to worry. While the longer term Kvanefjeld story pans out, ETM has travelled from Greenland’s arctic climes down to sunny Spain to snare a tin-tantalum-niobium mine.

At least that is the expectation following an earlier announcement from the company that it was the preferred bidder in an auction of the mothballed Penouta mine by the administrator of the mine’s previous failed owner.

ETM also indicated that the pick-up would be at a knock down price given the scale of the resource, and the capital sunk by the previous owner into an open-cut and processing operation.

Penouta is the only project of its type in the EU which as a bloc, is just as anxious as Donald Trump is to reduce its dependency on China for the critical metals found at Penouta. Confirmation ETM has added another strategic metals string to its bow is expected imminently.