Sumitomo Metal Puts Gold Top of List After Freeport Mine Buy

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  • President Nakazato wants to double production to 30 tons
  • Bernstein estimates Japan Inc. has $3 trillion cash pile

Sumitomo Metal Mining Co., the Japanese metals producer that agreed to spend $1 billion this week to expand its portfolio of copper assets, is still in shopping mode. The next target on its list: gold.

The company, which owns Japan’s sole gold mine, is seeking to secure more stakes in gold assets and wants to double output by 2021, according to President Yoshiaki Nakazato. It intends to buy new or existing mines, as well as undertake exploration, Nakazato said this week after announcing the plan to expand its holding in Freeport-McMoran Inc.’s Morenci copper mine.

The odds of gold deals in 2016 are being boosted as rising prices for the metal on renewed demand for a haven combine with the need of diversified miners to sell assets to pay down debt. Japanese companies may be well-placed, according to Sanford C. Bernstein & Co., which said on Tuesday that the country’s negative interest rates increase the incentive for local companies to spend more of their estimated $3 trillion cash pile in real assets.

“They have a chance,” Keiju Kurosaka, an analyst at Mitsubishi UFJ Morgan Stanley Securities Co. said, referring to Sumitomo Metal’s hunt for a gold deal. “There are more assets for sale than there used to be. The key is whether the company will be able to find anything that would suit its needs.”

Stock Drops

Sumitomo Metal, which rallied 2.4 percent on Tuesday after the Freeport deal was announced, gave up the gains on Wednesday, dropping 3.5 percent to 1,093 yen in Tokyo. The shares have lost 26 percent this year as the Nikkei 225 Stock Average fell 17 percent.

“We are upbeat on the company’s steady strategies for longer-term growth,” Credit Suisse Group AG analyst Shinya Yamada said in a report received on Wednesday, citing Sumitomo Metal’s initiatives including plans to acquire gold interests. Credit Suisse rates the stock a buy, with a target of 1,700 yen.

After slumping for three straight years, gold has rebounded in 2016 as financial-market volatility, including gyrating oil prices and sinking stock markets, spurred demand for haven assets. In 2016, gold for immediate delivery advanced 14 percent to $1,210.33 an ounce, beating all other raw materials in the Bloomberg Commodity Index. Last week, bullion gained to $1,263.48, the highest level since February 2015.

Sumitomo Metal remains a small player in the global gold industry. In addition to Japan’s Hishikari mine on the nation’s southern island of Kyushu, it has the Pogo mine in Alaska. The combined output from the two sites is about 16 tons a year and Nakazato wants to boost that to 30 tons.

The recent gains in the yen, as well as weaker currencies of South Africa and other resource countries, has made gold mines more accessible to Sumitomo Metal, according to Kurosaka. Still, the company will face tougher hurdles in finding an attractive deal like the Morenci purchase as owners may only be willing to sell at high prices, he said.