Brazil Set to Battle China in Africa For Copper, Cobalt Mines: Real M&A

Brazil and China are heading for a battle of strategic necessity over copper in Africa that will leave the winner walking away with the most expensive acquisition of a diversified minerals company.

Jinchuan Group, the biggest Chinese nickel producer, is considering a bid for Johannesburg-based Metorex Ltd. (MTX) to rival Vale SA (VALE5)’s offer, two people familiar with the deal said yesterday. Metorex yesterday closed 6.1 percent above Rio de Janeiro-based Vale’s proposal of 7.35 rand a share, the most of any pending deal in Africa, making it the likeliest to garner a higher price tag, according to data compiled by Bloomberg.

Vale, the world’s largest iron-ore producer, and Jinchuan are seeking Metorex’s copper and cobalt mines in the Democratic Republic of Congo and Zambia after demand in China for copper used in construction and appliances pushed the metal to a record this year. Vale’s 7.9 billion rand ($1.2 billion) offer already values Metorex at 30.2 times earnings before interest, taxes, depreciation and amortization, the richest diversified minerals takeover greater than $1 billion, the data show. Bids may reach 10 rand a share, said First Asset Investment Management Inc.

“The Chinese and the Brazilians have voracious appetites” for mining, said Andrew Ross, partner and global equity trader at First New York Securities LLC, a New York-based proprietary trading firm that bets on stocks, commodities, currencies and derivatives. “They view themselves in direct competition for these strategic natural resource assets.”
Competing Bid

A Vale official in Rio de Janeiro, who declined to be named citing corporate policies, said the company had no comment. Jacques de Bie, a spokesman for Metorex, referred to the company’s June 17 statement disclosing an “unsolicited, non- binding expression of interest” from another party.

“It’s not yet a bid or a firm offer or a firm intention to make an offer,” de Bie said. “It’s just an expression of interest at this stage.”

Jinchuan has not made a decision regarding a bid, one person said yesterday, asking not to be identified because it’s too early in the process. Wang Wanshou, a Jinchuan official, said yesterday that he had no information on the deal. A call to the company office outside business hours wasn’t answered.

Metorex owns the Ruashi copper and cobalt open-pit mine in the Katanga province of Congo, as well as the Chibuluma underground copper mine in Zambia. The company has an estimated 4.74 million tons of copper resources, it said in April.
‘Hard to Find’

“Good copper assets are hard to find and Zambian copper assets are prized,” said John Stephenson, who helps manage C$2.7 billion ($2.8 billion) at First Asset Investment in Toronto. “Both Vale and Jinchuan could use the copper exposure and it would be a huge benefit for both.”

Metorex shares climbed 0.8 percent to 7.86 rand as of 4:24 p.m. in Johannesburg. Vale slipped 0.1 percent to 44.44 reais in Sao Paulo.

Vale is aiming to increase production of copper almost fivefold to 1 million metric tons by 2015. The company, which made 75 percent of its revenue last year from iron-ore mining, cut its target this week for 2015 output of the steelmaking ingredient by 10 percent.

It already has a presence in Zambia via its joint venture with Johannesburg-based African Rainbow Minerals Ltd. to develop the Konkola North copper project. Vale Chief Executive Officer Murilo Ferreira, who started in the role in May, told investors that month that the company needs to speed up its studies on how to increase copper output.
‘Very Strategic’

“Vale has not been successful thus far in building out a meaningful copper business with their assets in Brazil,” said Anthony Rizzuto, an analyst at Dahlman Rose & Co. in New York. “You’re looking at a company that has and needs to pay up to be able to expand this business, which they regard as being very strategic in nature.”

Brazil’s gross domestic product grew 7.5 percent in 2010, the fastest pace in more than two decades, according to a central bank survey of economists published May 30. The country overtook Italy last year to become the world’s seventh-largest economy, according to the International Monetary Fund.

Vale’s bid at 30.2 times Ebitda of 262.3 million rand in the most recent 12 months for which finalized financial statements were available was about three times the next highest valuation ever paid in the diversified minerals industry for a takeover greater than $1 billion, Bloomberg data show. The prior record was Xstrata Plc’s purchase of Jubilee Mines NL for 10.1 times Ebitda, or $2.5 billion, announced in 2007.
Estimated Earnings

The offer by Vale is much cheaper based on Metorex’s projected earnings. The Brazilian company would be paying 3.7 times the Ebitda of 2.1 billion rand estimated for this year, data compiled by Bloomberg show.

Metorex’s biggest shareholder, Industrial Development Corp., said it’s “premature” to take a position regarding other bidders. IDC, which is South Africa’s state lender, in May threw support to Vale’s bid.

“We don’t have a position on a new offer as no new offer has been presented so far,” Mbuyazwe Magagula, the new head of mining for IDC, said in an interview yesterday.

Shareholders are scheduled to vote on Vale’s offer July 22. Metorex’s agreement allows other potential acquirers to review the same information that was given to Vale, leaving the door open to other bids.
‘Doesn’t Surprise Me’

Jinchuan Chairman Yang Zhiqiang said in a March interview that the closely held company is looking to buy stakes in overseas copper mines. The Gansu Province-based company produced about 400,000 tons of copper, 130,000 tons of nickel and 6,000 tons of cobalt last year.

“Copper and cobalt are in strong demand in China,” said Bernard Horn Jr., president of Boston-based Polaris Capital Management LLC, which manages over $4 billion and more than 25 million Metorex shares. “So it certainly doesn’t surprise me that some Chinese buyers are potentially interested.”

China agreed in January 2008 to help rebuild Congo in return for access to copper and cobalt. Congo has a third of the world’s cobalt, which is used in medical implants and rechargeable batteries.

Premier Wen Jiabao said in February that China, the world’s largest user of copper, plans to build 36 million affordable homes in the next five years.

“Copper demand will continue to expand,” Dahlman Rose’s Rizzuto said. “Copper is a basic building block of infrastructure development.”
Copper Prices

Copper for delivery in three months on the London Metal Exchange has nearly tripled to $9,072 a ton as of June 28 since the end of 2008 and climbed as high as a record $10,190 on Feb. 15. The metal, which is used in electric cables and plumbing, will average $9,750 this year and $10,000 in 2012, according to the median of analysts’ estimates compiled by Bloomberg. Mining companies haven’t kept pace with demand because reserves are becoming harder to find and the quality of ore is declining, meaning less copper is extracted from each ton of rock.

Metorex closed at 7.80 rand yesterday, the highest price since October 2008 and 6.1 percent above Vale’s offer, data compiled by Bloomberg show.

“The share price has been trading above the offer price, so obviously there are some investors out there who are pretty convinced there is going to be a better offer,” said Stephen Meintjes, head of research at Imara SP Reid in Johannesburg.

A “knockout bid” may be closer to 9 rand a share, he said. First Asset Investment’s Stephenson said a bidding war may reach 10 rand a share or more.
Congo Mining Projects

The deal isn’t as expensive based on future earnings from three mining projects in Congo that haven’t started operating, Meintjes said. Two of the projects are “within a few kilometers” of the Zambian border, according to Metorex’s website, which is where Vale and African Rainbow Minerals are developing the Konkola North copper mine.

Even though Metorex’s assets are “worth a lot of money,” they will require additional capital from a buyer to bring them into production, Polaris’s Horn said.

“There’s a potential bidding war for this African asset,” First New York’s Ross said. “There’s a race for assets worldwide going on. China and Brazil are at the forefront of that race.”