Earlier this week, Glencore Xstrata (GLEN) announced that it had reached a deal to sell the Las Bambas copper project in Peru to a consortium of Chinese buyers for $5.85 billion. The deal fulfils a commitment Glencore had made to China's Ministry of Commerce in exchange for the latter's approval of the Glencore merger with Xstrata. The price tag is nearly $1.5 billion more than the asset's $4.4 billion carrying value at year-end 2013 and $850 million more than the $5 billion we assumed Glencore would obtain.
Given the mostly negative sentiment surrounding copper, we were surprised Glencore bagged such a high price. Mere months ago, with copper trading at $3.30/lb, rumours had pegged a range of $5 billion to $6 billion for Las Bambas, with most speculation centring on the low end of the range. It is a bit surprising to see a deal struck at the top end of the range despite copper having since breached the sub-$3.00/lb level for the first time since 2010. Prices have recovered only slightly from their March lows and sit at $3.02/lb.
Given our bearish copper price outlook, we think Glencore is unloading Las Bambas at a good price and at the right time. We see the red metal averaging $3.00/lb this year, which would mark its third consecutive year of declines. We expect prices to fall further in 2015 to $2.67/lb. Expectations of decelerating demand growth in China (where copper use is heavily tied to real estate and infrastructure) and fairly robust mine supply additions (by copper standards) underpin this outlook.
Our sterling fair value estimate for Glencore Xstrata shares therefore remains at 260p apiece, as a stronger GBP since our last update offsets the incremental value accretion from the Las Bambas sale.
