The Strategist

Copper Is a New Precious Metal

04/06/2016 - 16:35

In today’s world, copper can be considered a precious metal, and major companies from the metallurgical sector understand this. Anglo American and Glencore are willing to sell assets related to iron ore or coal, yet they still stick to copper.
The whole reason is that the world would face a serious shortage of copper by the end of this decade, caused by the fall in the sector investment occurred for some time ago.

Even Rio Tinto Group, one of the largest mining and metals companies, recently stated it’s going to put head of the unit dealing with copper on the seat of the next chief executive officer.

Meanwhile, BHP Billiton is also focusing on this metal, which is confirmed by additional investment of $ 10 billion received from reducing dividends and capital expenditures.

Anglo American, in turn, refused to sell the copper mines, justifying the decision by the fact that this is the most important world-class assets. According to the company, the whole copper strategy is built on them, yet the excessive debt load reduced their credit rating to the "junk" level.

The total value of mergers and acquisitions in the sector was $ 3.1 billion in 2015. This is the lowest level in 5 years, according to Bloomberg. Ernst & Young says that there were only 27 transactions during the year (compared to 38 coal and 117 gold deals). The low level of activity is likely related to the lack of means in the market.

Market participants themselves said that they are having a lot of negotiation, but few real deals as sellers and buyers have different price expectations.

Copper companies are waiting for a rebound in copper prices this year. The cost of metal has increased by 19% compared to the January lows, while the growth in the quarter was the first in nearly two years.

Now metallurgists are linking their hopes with copper, as this would get them out of debt and improve their positions in terms of falling demand for metals.

However, not everyone shares this optimism. According to Goldman Sachs, "bearish" tendency will reign the market until 2018, while Barclays predicts a drop to $ 4 thousand per ton. Now, a ton of copper is worth about $ 4.78 thousand. The metal has lost 6% since 17 March.

Perhaps this recession will encourage the companies to sell copper assets. The I quarter has already brought a deal worth $ 1.8 billion. However, we are not talking about large and important assets in the market so far. Large companies do not want to buy "junk". Instead, they are going to wait for the really valuable assets.


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