MELBOURNE/SYDNEY Glencore Xstrata (GLEN.L) has agreed to sell its majority stake in an undeveloped copper mine in Papua New Guinea for $125 million to Australia-based PanAust Ltd PNA.AX., after more ambitious plans for the project were scaled back.
Xstrata put the 81.8 percent stake in the Frieda River project, potentially one of the largest in the Southern Hemisphere, up for sale nearly 18 months ago before the company was acquired by Glencore. At the time it was estimated to be worth more than $2 billion.
Before the Glencore acquisition, Xstrata had big plans for Frieda River, which was being designed to yield 304,000 tonnes of copper at an average cost of 71 U.S. cents per pound over the first five years. Some $200 million was spent on pre development work.
However, the mine plan has since been trimmed to focus on a smaller near term development, underscoring belt-tightening underway in the sector as the global mining boom fades.
PanAust has agreed to pay Glencore $75 million in two stages initially and up to $50 million more, based on a 2 percent net smelter return royalty, once the development is completed.
PanAust has also agreed to acquire a 7.5 percent stake in Highlands Pacific Ltd (HIG.AX), the minority partner in Frieda River, for A$5 million ($4.7 million).
Once the deal is concluded, PanAust will own 80 percent of Frieda River and Highlands Pacific 20 percent. The Papua New Guinea government has a right to acquire a 30 percent stake in the project.
"Frieda can be a great copper project for Papua New Guinea, but developing it as a mega-project as first envisaged 5 or 6 years ago by Xstrata would face a number of challenges given the current market environment," said John Gooding, managing director of Highlands Pacific.
Highlands Pacific stock galloped more than 45 percent higher to A$0.09. PanAust's shares eased 3 percent to A$1.96.
The sale will help Glencore meet a requirement to sell down copper stakes, imposed by the Chinese government as a condition for approving the takeover of Xstrata.
Glencore has already agreed to conduct a sale of the Las Bambas Copper mine project in Peru as part of a deal to get competition authorities in China to approves the Xstrata takeover. Chinese regulators feared the tie-up handed the newly formed commodities heavyweight too much power in copper.
Several sources have said that initial bids for Las Bambas - due to begin production in 2015 and one of the largest copper mines to come on the block in recent years - had come in around the $6 billion mark, including the sum invested in construction so far, dwarfing the PanAust sale.
Chinese resource giants Chinalco (3668.HK) and Minmetals lead a shortlist of suitors.
PanAust's announcement suggest it will look to spend between $1.5 billion and $1.8 billion to develop a mine producing 100,000 tonnes of copper annually from Frieda River and 160,000 ounces of gold.
"It gives us additional options within the asset portfolio and the opportunity to leverage our experience as a successful project developer in Laos, where the terrain has a number of similarities to the area around Frieda River," PanAust Managing Director Gary Staford said in a statement.
PanAust is one of only two companies mining copper and gold in Laos. It has set an annual production target of 90,000 tonnes of copper in concentrate in 2018, up nearly a third from the 62,000-65,000 tonnes it expects to mine this year.
The Frieda River project has had several owners since copper was discovered in the region in 1966 but none brought a project through to development.
Glencore was advised by Bank of America Merrill Lynch. ($1 = 1.0560 Australian dollars)
(Editing by Ed Davies)