beyondbrics

Minmetals – the Chinese state-owned miner – is taking a punt on copper. On Monday, it unveiled an unsolicited bid for Australian-Canadian miner Equinox. Worth $6.5bn – it represents the biggest ever takeover offer by a Chinese miner.

The bid has given the sector a boost – Jiangxi Copper gained 3.6 per cent in Hong Kong trading. But it comes at an uncertain time for the red metal.

For Minmetals, a successful takeover would be a big step on the road to becoming a more diversified global miner. At the moment, zinc currently account for 63 per cent of Minmetals production, while copper is just 25 per cent. After the deal, copper would jump to 60 per cent of production.

The deal shouldn’t come as a huge surprise – Chinese mining companies like Minmetals are looking to acquisitions for growth, as the FT’s Leslie Hook reports:

Andrew Michelmore, Minmetals’ chief executive, said in a statement late on Sunday that the offer for Equinox “aligns with Minmetals’ strategy for growth, enhancing our global production portfolio”.

Minmetals said the acquisition would extend its production horizon beyond 2030 and more than double its exposure “to the attractive fundamentals of the copper market”.

But what about the timing? While copper is still up more than a third since the start of 2010, the rally appears to have stalled in recent weeks. After hitting a record high in February, it has fallen 8 per cent. Many mining companies have got jitters over the rally, as Jack Farchy reported in Monday’s FT.

Mining companies have been hedging a portion of their copper production since the start of the year, several senior bankers said.

“For a while, hedging had become unfashionable. This has changed,” said François Combes, head of commodities trading at Société Générale. “You have to go back at least five years to find the last time there was genuine hedging of this scale.”

One source of worry is whether Chinese demand for copper is even for real. As FT Alphaville’s Izabella Kaminska has been reporting on for while now (Read her latest here: Why the Chinese copper financing scheme is a big deal), there are some concerns that copper has been imported into China for use solely as collateral for credit, not for construction.

It does make sense to presume that high Chinese commodity imports over the course of 2009 and 2010 resulted from a mixture of real, ‘fake’, and speculative demand combined.

These trades would have been done to take advantage of low commodity prices either as an ultimate inflation hedge, a pure commodity bet and/or a cheap financing scheme.

If and when price falls begin to threaten unrealised profits accrued from bargain-basement purchases, real interest rate performance, and/or call for additional collateral to be put up against leveraged positions — liquidation becomes a massive risk.

Minmetals’ offer represents a 33 per cent premium for Equinox. With the Equinox share price depressed due to its outstanding bid for Lundin (which it would have to abandon if the Minmetals deal were to proceed) – there’s a case for shareholders to ask for even more cash from the Chinese bidder at a time of uncertainty over the outlook for copper.

But with the backing of China’s state-owned banks almost guaranteed, Minmetals can afford it. And Chinese resources companies’ global hunt for reserves shows little sign of abating.

Related reading:
Miners turn to hedging as copper rally stalls – FT
Why the Chinese copper financing scheme is a big deal – FT Alphaville
Equinox / Lundin: synergies ignored – Lex
Chinalco sees Rio as key partner – FT
China coal mine sale: caveat emptor – beyondbrics