Capstone Mining Corp., the owner of copper mines in Mexico and northern Canada, is considering about $500 million in acquisitions as the world’s biggest producers sell assets amid a commodities rout.
Capstone has seen as many as eight mines that are up for sale in about the past six months and expects that there will be more, Chief Executive Officer Darren Pylot said. The company is mainly scouting for producing copper mines in the Americas to add about 100 million pounds of copper, he said. He declined to name the assets attracting Capstone’s interest.
“It’s a buyers’ market,” Pylot, 45, said in an April 16 telephone interview from Vancouver, where the company is based. “There are more assets for sale than companies that have the ability to buy them.”
BHP Billiton Ltd., based in Melbourne, and Rio Tinto Group are among mining and metals companies selling assets to shore up earnings and cut costs after more than $60 billion of writedowns in the industry. Copper has slumped 12 percent this year on the London Metal Exchange on signs of slowing growth in China, the world’s largest consumer of the metal used in pipes and wiring. Nickel dropped 11 percent, aluminum fell 9 percent, while gold futures tumbled 17 percent in New York as its status as a safe haven has diminished.
BHP, the world’s biggest mining company, has the potential for asset sales of $25 billion and London-based Rio Tinto $10 billion, Deutsche Bank AG analysts said in a note last month.
Jennifer White, a spokeswoman for BHP, and Illtud Harri, a Rio Tinto spokesman, declined to comment on whether any of the companies’ assets may be for sale.
There has been speculation that Capstone is interested in acquiring BHP’s Pinto Valley copper mine in Arizona, said Garnet Salmon, a Toronto-based analyst at Jennings Capital Inc.
“Pinto Valley is a fringe asset for BHP,” Salmon said yesterday in a telephone interview. “It’s an asset that could provide the 100 million pounds Capstone is looking for.”
Patrick Morton, a Toronto-based analyst at RBC Dominion Securities Inc., said in an April 3 note to clients that the acquisition of Pinto Valley would “establish Capstone as a significant midcap copper producer.”
Capstone fell 2.6 percent to C$1.90 at the close in Toronto. The company, which has been eyeing potential acquisitions for more than a year, has seen its stock fall less than other mining and materials producers. It’s down 21 percent this year, compared with a 27 percent drop in the Toronto Stock Exchange’s 59-company materials index.
China’s economy expanded 7.7 percent in the first quarter from a year earlier, figures showed on April 14. That compared with an 8 percent median forecast in a Bloomberg News survey and 7.9 percent in the prior quarter. China expanded last year at the slowest pace since 1999 after growing at an average rate of 11 percent in the previous 10 years.
Because it’s a buyer’s market, Capstone is able to “get a good look” before deciding whether an asset is a good fit, Pylot said.
“If you looked at a 100 million-pound producer or thereabouts I think you are looking at somewhere in that half-a-billion-dollar range,” the CEO said. “We could go slightly higher than that or obviously slightly lower than that.”
A cautious approach makes sense, said George Topping, a Toronto-based analyst at Stifel Nicolaus & Co.
“The market would rather they took their time, or even do nothing, rather than blow their brains out with a bad acquisition,” Topping, who rates Capstone a buy, and has a 12-month price target of C$3.80 ($3.70) on the stock, said yesterday by phone. “Baby steps is what people want.”
Capstone isn’t alone in seeking deals.
HudBay Minerals Inc., a Toronto-based copper and zinc producer, is willing to spend about C$400 million on acquisitions to replenish its pipeline of mine developments, Chief Executive Officer David Garofalo said in February. Lundin Mining Corp., a Canadian metals producer based in Toronto, also has assessed potential acquisitions in Europe, Chief Executive Officer Paul Conibear said in an interview in February.
“Everything that has been put out there for sale by majors or other entities, private companies, we have had a very good look at,” Capstone’s Pylot said.
Capstone, which had $500 million in cash on its balance sheet as of Dec. 31 and a market capitalization of C$739.6 million as of yesterday, is scouting for producing mines especially in Canada, the U.S., Mexico, Chile and Peru, Pylot said.
“The key is it shouldn’t be too big, you know, that you’re betting the entire company on the success of the acquired asset,” Topping said.
Capstone has forecast output of 85 million pounds of copper this year, which will rise to more than 300 million as it increases production from its existing mines and starts operations at the Santo Domingo copper project in Chile, Pylot said. Capstone operates the Cozamin copper-silver-zinc-lead mine in Mexico’s Zacatecas State and the Minto copper-gold-silver mine in Canada’s Yukon Territory.
“We’d love to be at that 400-million-pound mark within the next five years, when Santo Domingo is built, which means we’d like to add another 100 million pounds of copper production between now and 2018,” Pylot said.
Capstone bought the Santo Domingo project when it acquired Far West Mining Ltd. in June 2011 for C$445 million. Seoul-based Korea Resources Corp. owns 30 percent of the mine and is Capstone’s biggest shareholder, according to data compiled by Bloomberg.
Capstone could approach Korea Resources or another partner to help fund a future acquisition if it decided the deal was too large to take on alone, Pylot said.
Gook-Ho Lee, a Korea Resources representative on Capstone’s board of directors, wasn’t immediately available to comment, Andy Kim, manager of the company’s office in Toronto, said yesterday by telephone.
Capstone plans to complete a feasibility study and file an environmental-impact study for Santo Domingo this year, Pylot said. The company is targeting production by 2018 and plans to bring its Kutcho project in the Canadian province of British Columbia on line by 2016.
Copper futures for July delivery fell 1.7 percent to settle at $3.163 a pound on the Comex in New York. Prices dropped 3.6 percent on April 17, the biggest decline for a most-active contract since Dec. 14, 2011.
Copper probably needs to stay above at least $3 a pound to provide an incentive for miners to invest in projects and maintain supply, Pylot said.
“There is opportunity for an astute buyer to pick up an asset on the cheap,” Topping said.