MMG's new copper means a proper metamorphosis

For nearly five years Andrew Michelmore has demonstrated discipline and patience but the $US6.25 billion acquisition of Glencore Xstrata’s Las Bambas copper mine at the weekend will make the former WMC Resource chief executive’s MMG group a serious player in the base metals sector.

MMG was, of course, formed from the bulk of Oz Minerals assets that were acquired by China’s state-owned Minmetals group in 2009 when Oz Minerals was in the hands of its bankers.

Since then, while MMG has been bulked up through a reverse takeover of a Hong Kong-listed subsidiary and has made a couple of relatively modest acquisitions, the group has been prepared to kick a lot of tyres while waiting for a compelling transaction.

That opportunity came when China, as the price of approval for Glencore’s merger with Xstrata last year, insisted that Glencore Xstrata had to divest Xstrata’s Las Bambas copper project in Peru. There was something of an internal contest within China to see which would be the most favoured Chinese candidate to bid for the project, which MMG won.

Las Bambas, now close to first production, is regarded as one of the world’s best copper projects, with output of about 460,000 tonnes of copper a year once it hits full production, making it one of the top three or four copper mines in the world.

It is a “tier one” project built (some have said “gold-plated”) by a highly-credentialed operator that will elevate the quality of an MMG portfolio which has mainly tier two assets and take it a major step forward towards realising China’s ambition of using MMG as the vehicle for creating a major operating presence in non-ferrous metals.

While Glencore was effectively forced by China to put Las Bambas on the market it didn’t have to sell it unless the price-tag met its own expectations, so self-evidently it was comfortable with the outcome of what has been a protracted process that has resulted in, next to Chinalco’s investment in Rio Tinto during the financial crisis, one of the biggest resource sector investments China has made.

The deal will be transforming for both buyer and seller, with Glencore’s balance sheet deleveraged by the sale to the point at which Glencore’s Ivan Glasenberg has signalled that, with the merger with Xstrata bedded down and the synergies flowing at a greater rate than anticipated, he’s now in the market for some of the assets that the bigger houses like BHP Billiton and Rio Tinto are keen to shed.

It is, however, probably of greater consequence for MMG and the core of Australian executives managing the suite of mainly Australian assets off which China hoped to establish credibility and trust in the West.

The deal upgrades the quality of MMG’s copper and zinc-dominated asset base, diversifies its portfolio geographically by giving it a beachhead in South America and tilts a portfolio of base metals that was already biased to copper very firmly towards that metal, with copper rising from 54 per cent of MMG’s revenues today to 78 per cent by 2017.

That’s not a bad thing. Of all the non-ferrous metals, copper is seen to have the best longer term prospective supply-demand fundamentals.

MMG isn’t acquiring Las Bambas alone. It will own 62.5 per cent of the project and be the operator, with a Hong Kong-registered Chinese investment entity, Guoxin International Investment Corp, and CITIC Metal owning the rest. MMG itself is owned 74 per cent by the state-owned China Minmetals, which will provide a shareholder loan to MMG for the equity component of the deal and will guarantee the debt being raised for the purchase by China Development Bank.

The Las Bambas acquisition is very much a “China Inc” transaction and an important one in China’s efforts to get more direct access to key commodities.