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Miners: Discount for Glencore/Anglo American; Premium for BHP/Freeport -Jefferies

By Barani Krishnan -- Major mining companies Glencore (OTC:GLNCY), Anglo American (LON:AAL), South32 (OTC:SOUHY) and Vale (NYSE:VALE) are trading at discounts to replacement cost while Rio (NYSE:RIO), Teck (NYSE:TECK) and First Quantum (NASDAQ:QMCO) are at small premiums instead based on their enterprise value, or EV, versus a tonne of copper in production, Jefferies said in a note Thursday.

BHP Group Ltd ADR (NYSE:BHP), Antofagasta (LON:ANTO) and Freeport (NYSE:FCX), meanwhile, trade at 50% premium or more to replacement cost, the investment bank said.

Teck and First Quantum could also be compelling merger targets based on their large copper assets and long-term growth in copper, Jefferies added.


“We calculate copper-equivalent production for the major miners in our coverage,” Jefferies said in the note analyzing the major companies in the mining space. “We then calculate total EV per tonne of copper-equivalent production and compare that to the industry average capital cost for a greenfield copper project ($22.5k/t, on our conservative estimates).”

“For these companies, share buybacks should be more compelling than acquisitions or investment in organic growth,” Jefferies said, referring to Rio, Teck and First Quantum.

And while it described BHP, Antofagasta and Freeport as trading at lofty premiums to replacement costs, Jefferies said it still viewed them as “undervalued.”

“These companies should consider acquisitions, dividends and possibly even organic growth as being preferable to share repurchases,” it added.

Jefferies said it arrived at its conclusion by:

* Calculating attributable revenue for each company as its share of 2024E production for each commodity multiplied by Jefferies’ long-term price forecast for each commodity.
* Dividing the total attributable revenue from all segments for each company by Jefferies’ long-term copper price forecast of $8.8k/tonne ($4.00/lb) to calculate copper equivalent tonnes of production based on 2024E volumes.
• Multiplying copper equivalent tonnes by the capital cost of $22.5k/tonne for an average greenfield copper mine to derive replacement cost for each company (this is a conservative estimate as the average capital cost for undeveloped copper projects is closer to $30k/tonne based on WoodMac data).
• Comparing replacement cost to current enterprise value in each case (EV value calculations include all net tangible liabilities ex PPE rather than just reported net debt).

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