Beijing's forced sale of Glencore Peru mine may play into China's hands

HONG KONG Tue Jun 4, 2013 6:33am EDT

The logo of commodities trader Glencore is pictured in front of the company's headquarters in the Swiss town of Baar November 20, 2012. REUTERS/Arnd Wiegmann

The logo of commodities trader Glencore is pictured in front of the company's headquarters in the Swiss town of Baar November 20, 2012.

Credit: Reuters/Arnd Wiegmann

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HONG KONG (Reuters) - Beijing's demand that Glencore Xstrata Plc (GLEN.L) sell a copper mine in Peru may bring rich dividends for China Inc., as two companies linked to Chinese state-backed groups are weighing rival bids for the $5 billion-plus project.

Interest from Chinese state companies in Glencore's Peruvian mine is a rare case of an asset sale forced by a government as a condition of merger approval working in favor of its own national champions, and underscores China's new-found clout in regulating global takeovers.

Chinalco Mining Corp International (3668.HK) and Hong Kong-listed MMG Ltd (1208.HK), both linked to a Chinese state-owned enterprises, are considering offers for Glencore Xstrata's Las Bambas mine, according to people close to the matter, less than three months after Beijing blessed Glencore's $35 billion purchase of Xstrata.

Under the deal struck with Beijing's Ministry of Commerce in April, Glencore has three months to begin the process of selling Las Bambas, one of the group's biggest development projects, with the expectation of finding a buyer by the end of August 2014.

If the company does not get a binding sale and purchase agreement by the deadline, and have a transfer of ownership by the end of June 2015, Glencore has the option to sell other project sites.

People familiar with the matter say that Glencore intends to explore a sale and has hired BMO Capital Markets and Credit Suisse (CSGN.VX) to advise on the process. No deadlines for the auction have been set, the people said.

Chinalco Mining Corp International, a unit of China's state-run aluminum group, and MMG Ltd, controlled by China's Minmetals, are in talks with banks to advise them on bids for Las Bambas, which is slated to produce a minimum of 440,924 tons a year.

"I'm not sure they're trying to create opportunities," said an Asia investment banker not directly involved with the deal, referring to the Chinese government. "But is it coincidental? Probably not entirely."

The Glencore-Xstrata deal closed after Glencore agreed in April to sell the Peruvian mine.

MMG is controlled by state-owned China Minmetals Corp and headquartered in Melbourne, with an Australian CEO, Andrew Michelmore. It owns copper, lead and zinc mines in Australia, Laos and Democratic Republic of Congo, and has repeatedly said it is looking for acquisitions of between $1 billion and $7 billion to help it meet a five-year target to grow into a mid-sized, global diversified miner.

An MMG spokeswoman declined to comment.

FINANCING

Chinalco Mining Corp, which raised $400 million through a Hong Kong IPO in February, is developing a copper-molybdenum-silver mine in central Peru. The company has a market value of just $1.5 billion and it would need funding from its parent or other institutions to finance any bid.

"Chinalco Mining International follows closely valuable M&A opportunities in the market," the company said in a statement. "However, at this stage, we have not made any decisions regarding the potential bidding process."

People familiar with the matter say Chinalco Mining and MMG are in talks with investment banks to pursue a bid, and that they are not the only companies interested. The two companies are yet to appoint any investment banks to advise on the deal, the sources said.

"The impression in the market is that China would love for this to end up in Chinese hands," said one person familiar with the process. "That would likely be an overhang on any process. No one wants to go in and spend the time and money to be a stalking horse for a Chinese bidder," the person said.

MMG shares fell 2.3 percent on Tuesday, while Chinalco Mining lost 0.8 percent. The benchmark Hong Kong share index .HSI was flat. Glencore shares were up 1 percent in London.

Sources declined to be identified as the sale process is confidential. A Glencore spokesman declined to comment.

At the time of the Glencore-Xstrata deal, Chinese authorities were focused on Glencore's influence over the copper market. The forced divestment reflects China's appetite for metal and the political side of the regulator's mission, as much as Glencore's own weight.

Combined, Glencore and Xstrata account for roughly 7 percent of global copper supply, and analysts and traders have estimated that Glencore controls between 10 and 14 percent of Chinese copper concentrate imports.

Xstrata approved development of Las Bambas over a four-year period in August 2010, four months before Glencore first unveiled merger plans with Xstrata. Demand for copper has since waned, with the metal's price down about 8 percent this year.

(Reporting by Denny Thomas; Additional reporting by Sonali Paul in Melbourne and Clara Ferreira Marques in London; Editing by Michael Flaherty and Daniel Magnowski)

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