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Picking buyout candidates in the copper space

But despite the lower level of competition, the standards are tougher now: mines need to have community support, and ideally be close to existing infrastructure to cut costs, as well as being big enough to meaningfully increase supply.

On top of that, as we have heard repeatedly, the low-hanging fruit has largely been picked in this space. 

Management teams at BHP (BHP) and Rio Tinto (RIO) have talked more about buying very early-stage projects rather than more advanced options, and there is plenty of wisdom to this. It leaves them with less work to un-do, as shown by Anglo American (AAL) throwing significant cash at the former Sirius Minerals fertiliser mine in North Yorkshire, although the knock-down purchase price means it has plenty of breathing room on return-on-equity.

London investors had been waiting years for SolGold (SOLG) to release a detailed study into the Cascabel copper-gold project in Ecuador. This prefeasibility study, released last month, outlined a $2.7bn (£2.2bn) development that would bring on an average of just over 130,000 tonnes a year of copper from an underground mine, plus a significant amount of gold. 

The study caused a spike in the share price to over 40p and then back to the 25p-30p level it has consistently returned to in recent years. What makes this an apple further up the tree, to continue the metaphor, is the depth of the deposit (resulting in a long build process and higher costs than an openpit) and its location in Ecuador, which has had little mining development, although another big copper mine has been in production for just over two years. Investors have been betting on existing shareholders BHP or Newcrest Mining (AU:NCM) buying out the company for years but they are still waiting. 

The deal many juniors look up to is the 2018 buyout of Arizona Mining by South32 (S32), which paid $1.3bn for a pre-production zinc-lead-manganese asset (and some smaller options) in the US. The company was valued at $1.6bn, and the Hermosa project’s last net present value before the sale was $2bn.

A similar discount for mining hopeful SolGold (SOLG) would see it taken out for £2.35bn, around 3.7 times its current market capitalisation, based on its recent pre-feasibility study for the Cascabel copper mine, which outlined a net present value of $2.9bn. This is a very basic calculation that doesn’t account for the difficulty in building a mine in the Ecuadorian hills compared with the US, to be clear. It’s also worth remembering that a copper mine would attract a higher valuation at the moment, given the metal’s prices and strong demand outlook.  

Others in a similar boat are being more direct about the plan to shine up a project enough so that a major buys it. Oroco Resource Corp (CA:OCO), which is developing a copper mine in Mexico, has even hired one of the Arizona Mining executives, Richard Lock, to be chief executive and make that pitch again to the big players. 

Oroco is in a sweet spot where it can point to a good amount of copper at the Santo Tomas site with some certainty because of historic drilling, but it hasn’t committed to a single mine plan or development strategy. It's not a perfect company. A mine build would have challenges – moving a river, at a cost of tens of millions of dollars for one – and its shares were heavily ramped last year, scaring off big buyers and then leaving many retail buyers underwater when it fell back again. 

Even Noront, the nickel company from which BHP backed off from eventually, has a mineral resource but is still some way off a final investment decision. The logic around ‘derisking’ projects through detailed studies could actually scare off buyers rather than encourage them as it can lock in plans with governments and other involved parties. 

SolGold will be hoping it doesn't get left on the shelf. As Brooke Macdonald, chief executive of the 15 per cent owner of Cascabel, Cornerstone Capital Resources (CA:CGP) told Investors' Chronicle in 2020, "junior companies [have] got into trouble trying to build a project of this size".