Freeport's Mine Deal Points Way to More Buying by Japan Inc.

  • Japan's corporates sitting on $3 trillion cash, Bernstein says
  • Sale of Morenci mine stake is a `good deal' for Freeport

The $1 billion purchase by Sumitomo Metal Mining Co. of a stake in a U.S. copper mine signals the potential for further deals from Japanese companies, according to Sanford C. Bernstein & Co., which flagged the impact of the stimulus program being under taken by the Bank of Japan.

“With Japanese corporates sitting on about $3 trillion of cash earning a negative rate of return, the incentive to deploy that cash in real assets is compelling,” analyst Paul Gait wrote in a report on Tuesday. This “should help ameliorate some of the more acute instances of financial distress in the sector,” he said, referring to mining.

Freeport-McMoRan Inc. announced on Monday that it has agreed to sell a 13 percent holding in the Morenci open-pit mine in Arizona to Sumitomo Metal, which already had a minority stake in the venture. The transaction was good news for Freeport as it’ll help the company to cut debt, according to Gait. It also signaled the potential for more yen-based purchases as the BOJ acts to bolster the world’s third-largest economy.

The deal is “an implicit move away from U.S.dollar-financing to yen-based financing and exposure to a central bank determined to inject liquidity into the global financial system,” Gait wrote. “It also shows that the market for assets more broadly is still open, which is good news for the other miners.”

Cutting Debt

Many metals producers are cutting debt, output and spending after a rout in raw materials that sent the Bloomberg Commodity Index to the lowest in more than 20 years. Freeport, which is seeking to lower debt by $5 billion to $10 billion, last month flagged it would consider deals involving core operations. 

The deal is expected to be completed in mid-2016, according to Sumitomo Metal, which is seeking to raise its annual copper production interest to 300,000 metric tons. Shares in the Tokyo-based company climbed on Tuesday.

The BOJ has ratcheted up monetary easing in concert with government efforts to spur higher wages, consumer spending and investment. It added to stimulus this year by introducing negative rates out of concern that market volatility and China’s slowdown have increased the risks of a delay in changing Japan’s “deflationary mindset.”

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