High Copper Prices Make Canadian Copper Juniors Attractive Targets

BANGALORE/TORONTO (Reuters) – A record run for copper prices, fuelled by Chinese industrial demand, has the world’s most prolific copper producers shopping for smaller miners capable of boosting their output almost immediately.

Dozens of Canadian-based juniors have the potential to become prime targets. The strongest candidates already have operating mines with healthy growth profiles, and their share prices are undervalued, analysts say.

The drive to acquire is especially urgent because the output at some of the world’s top producers is falling. Rio Tinto (RIO.L: Quote) sees copper demand doubling in the next 15 to 20 years but the Anglo-Australian mining giant experienced a 16 percent drop in mined production last year.

“We really haven’t developed the next generation of new mines in terms of finding large-scale projects,” said analyst John Hughes at Desjardins Securities. “Without the next wave of proper supply, junior companies with large resources will continue to be targets for the larger mining companies.”

As a consequence, senior producers such as First Quantum (FM.TO: Quote) and Freeport-McMoRan (FCX.N: Quote), as well as Vale (VALE5.SA: Quote), BHP Billiton (BLT.L: Quote) and other diversified miners, will line up to buy established production rather than invest in development projects from scratch, analysts say.

“It takes such a long time to find something, then permit it, then build it, then ramp it up,” said David Radclyffe, an analyst at BMO Capital Markets. “You’re going to miss that leverage to the current price that you can get today.”

Rapid urbanization in China, India and other developing nations is one of the main factors pushing demand for copper and other materials used in construction and manufacturing.

According to a Reuters poll of analysts, this trend will result in a copper shortfall of 444,000 tonnes this year. This has prompted the world’s top miners to invest billions of dollars in expanding production over the next five years. The fastest way to do that is through acquisitions.

Radclyffe points to Capstone Mining (CS.TO: Quote) as an ideal target. The company forecasts 85 million pounds of copper concentrate in 2011 from its mines in Canada and Mexico, and has growth potential at three sites. The company’s shares have risen just 7 percent in the past 90 days.

Another takeout possibility is Mercator Minerals (ML.TO: Quote), which is producing copper and molybdenum at its Mineral Park property and has two development projects in Mexico. Mercator’s shares have risen over 42 percent in the same time period.

Meanwhile, a longer-term possibility is Baja Mining (BAJ.TO: Quote), which is just one month into a two-year construction phase at its Boleo project in Mexico, and Copper Mountain Mining (CUM.TO: Quote), which is bringing the past-producing Copper Mountain project in British Columbia back online.

M&A FEVER

With most producers feeling flush having built up cash surpluses, and with copper hitting yet another record high earlier this month at $10,190 a tonne, M&A frenzy is gripping the sector. Mid-caps, not the big players, have taken the lead.

In January, Lundin Mining (LUN.TO: Quote) and Inmet Mining (IMN.TO: Quote) announced plans to join forces to form Symterra, a C$9 billion ($9.1 billion) copper producer. [ID:nN12239651]

HudBay Minerals (HBM.TO: Quote) is buying Norsemont Mining (NOM.TO: Quote) to gain access to the Constancia project, which has the potential to produce 172 million pounds of copper a year.

Last year, First Quantum bought Antares Minerals for its Haquira project — a Peruvian mine that will cost $2.1 billion to develop and will produce 425 million pounds of copper annually.

“I guess most of the activity we’ve seen at the moment has been in the mid-caps, who’ve been looking to add new projects to strengthen their growth profile,” said Radclyffe.

But predators be warned, Radclyffe said the hunters could become the hunted as the consolidation phase ramps up and the majors look to mid-tiers to boost their own bottom lines. On that note, Rio Tinto has said it plans to spend $80 billion in expansion over the next five years.

“It’s still much cheaper to buy existing production rather than try to build it,” said Radclyffe, suggesting Quadra FNX (QUX.TO: Quote), Equinox Minerals (EQN.AX: Quote) and First Quantum could all emerge as targets for still larger producers.

($1=$0.99 Canadian) (Additional Reporting by Euan Rocha, Editing by Frank McGurty)

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