Glencore Sells Copper Project Stake as Mining Deals Hot up

   By Rhiannon Hoyle 
 

SYDNEY--Glencore Xstrata PLC (GLEN.AU) is selling its majority stake in one of the Asia-Pacific's biggest unmined copper deposits, the latest in a flurry of asset sales across the mining industry that suggests dealmaking may be picking up as some commodities rebound.

Australian copper-and-gold miner PanAust Ltd. (PNA.AU) said Friday it would buy the Frieda River deposit in Papua New Guinea from Glencore for as much as US$125 million, including an initial payment of US$75 million and a royalty of up to US$50 million once a mine is operating.

A series of assets sales in recent months has followed a notable lull in dealmaking over the past year as miners struggled with falling commodity prices and rising costs.

Last week, Glencore and Japan's Sumitomo Corp. (8053.TO) agreed to buy Rio Tinto PLC's (RIO.LN) stake in the Clermont coal mine in eastern Australia for around US$1 billion.

South African miner Gold Fields Ltd. (GFI.JO) recently agreed to buy three mines in Australia from Canadian peer Barrick Gold Corp. (ABX) for about US$300 million, while Rio Tinto agreed to sell its controlling stake in the Northparkes copper-and-gold mine in Australia to a Chinese company for US$820 million.

Also on Friday, BHP Billiton Ltd. (BHP) confirmed it had signed an agreement to sell a coal mine in New Mexico to the Navajo Nation, a native American community, for roughly US$85 million, part of the mining giant's ongoing efforts to drive down costs and exit smaller operations around the world.

According to a mid-year report by Ernst & Young, there were only 350 merger-and-acquisition deals across the global mining sector in the first half of 2013, down 30% on-year. At the time, the consultancy said a sustained improvement in commodity prices was needed to trigger increased buying interest during a period when some of the world's biggest miners were starting to shop around for unwanted assets.

Since then, the value of many commodities, like iron ore and copper, have rebounded as Chinese imports climbed and fears of a sharp slowdown in the world's No. 2 economy abated. Copper is up 10% since its year-to-date low in June. Gold is about 7% higher.

PanAust said it would take an 80% interest in the Frieda River project. The remaining 20% is controlled by joint-venture partner Highlands Pacific Ltd. (HIG.AU). PanAust has also agreed to take a 7.5% stake in Highlands for A$5 million. The Wall Street Journal reported in August that the company was in talks with Glencore to purchase its stake.

PanAust is no stranger to operating mines in impoverished Southeast Asian nations lacking infrastructure and skilled workers. It has two active pits in Laos that produce copper and gold, and the Brisbane-based company accounts for about 30% of that country's exports.

"From a strategic point of view, Frieda River provides us with the basis for growing production beyond our current mine life in Laos," PanAust Managing Director Gary Stafford said in an interview. "It gives us another string to our bow."

Glencore inherited the Frieda River project through its multibillion dollar takeover of Xstrata PLC earlier this year, but has signaled a preference for owning active mines that produce commodities it can sell through its trading arm. It has been reviewing its assets since its acquisition of Xstrata.

Xstrata had estimated a mine at the Frieda Rive site, near the border of the Sandaun and East Sepik Provinces of northwest Papua New Guinea, would cost more than US$5 billion to build and could produce 204,000 metric tons of copper and 305,000 troy ounces of gold annually in an operation lasting around two decades.

PanAust said it was targeting a smaller operation there, however. The company said it intended to spend up to US$1.8 billion to produce closer to 100,000 tons of copper and 160,000 ounces of gold a year, over a period of at least 18 years. It would export metal concentrate via barge down the winding Sepik River.

"We thought the previous model was a bit too big and cumbersome," said PanAust's Mr. Stafford. "We think our approach will be viable."

He said he hoped to have approvals in place to begin construction at the site by the end of 2016. It would probably take two years to build the necessary infrastructure, before PanAust had an operational mine there, Mr. Stafford said.

The Papua New Guinea government has the right to acquire a 30% stake in the project. If it were to exercise that right, PanAust would sell down to 55% and Highlands to 15%, PanAust said in a statement. Glencore confirmed the deal in a separate statement.

Write to Rhiannon Hoyle at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires