Glencore Xstrata Strikes a Surprisingly Good Price for Copper Project

We're surprised Glencore managed to get such a high price for its Las Bambas sale in Peru, but the strength of the pound means our valuation is unmoved

Daniel Rohr, CFA 15 April, 2014 | 4:19PM

Earlier this week, Glencore Xstrata (GLEN) announced that it had reached a deal to sell the Las Bambas copper project in Peru to a consortium of Chinese buyers for $5.85 billion. The deal fulfils a commitment Glencore had made to China's Ministry of Commerce in exchange for the latter's approval of the Glencore merger with Xstrata. The price tag is nearly $1.5 billion more than the asset's $4.4 billion carrying value at year-end 2013 and $850 million more than the $5 billion we assumed Glencore would obtain.

Given the mostly negative sentiment surrounding copper, we were surprised Glencore bagged such a high price. Mere months ago, with copper trading at $3.30/lb, rumours had pegged a range of $5 billion to $6 billion for Las Bambas, with most speculation centring on the low end of the range. It is a bit surprising to see a deal struck at the top end of the range despite copper having since breached the sub-$3.00/lb level for the first time since 2010. Prices have recovered only slightly from their March lows and sit at $3.02/lb.

Given our bearish copper price outlook, we think Glencore is unloading Las Bambas at a good price and at the right time. We see the red metal averaging $3.00/lb this year, which would mark its third consecutive year of declines. We expect prices to fall further in 2015 to $2.67/lb. Expectations of decelerating demand growth in China (where copper use is heavily tied to real estate and infrastructure) and fairly robust mine supply additions (by copper standards) underpin this outlook.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Glencore PLC168.60 GBX0.08

About Author

Daniel Rohr, CFA  is a senior equity analyst at Morningstar.

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