Some analysis on copper M&A21 Jan 2022 09:09
This is from a 2018 RFC Ambrian paper, it seems good context for all things SOLG.
1) Ideally, majors try to grow their resources, reserves and copper production at the lowest cost possible. To do this, larger companies tend to have a pipeline of opportunities, brownfield and/or greenfield, but sometimes gaps in the pipeline must be filled with acquisitions. This means that a SOLG acquisition is still plan B for a BHP, other prevailing strategies failing.
2) The data shows a preference for acquiring operating or later-stage development assets, with 51% of the deals being for operating assets and a further 13% for assets at the pre-production stage, and a further 23% at the feasibility stage. This goes to show that the likely scenario a major may be looking for is to bid for SOLG later even if it comes at a higher price.
3) Looking at the split between company and property acquisitions over time, the data shows that the number of company acquisitions was significant in 2011-2013, but since then property acquisitions have been the dominant type of acquisition.
4) Looking at the stage of development of the underlying assets, the data shows that the price paid for operating assets has been US$307/t (US¢14/lb), preproduction US$211/t (US¢10/lb), feasibility US$193/t (US¢9/lb) and exploration US$74/t (US¢3/lb). I have referenced these numbers before in some of my earlier posts and I use them in my own models. On this basis AND without factoring in any premiums or discounts based on specifics like country risk or grades or mining method or shareholder structure, SOLG is worth 27.9p at the exploration stage, 58.1p at the feasibility stage, 79.5p at the development stage, and 115.7p at the production stage. This is based on the original MRE data, which we hope to improve upon with the PFS of course.
5) 63% of deals have been execute in cash.
6) There is shortage of quality resources, particularly at the late exploration/development stage. The takeover targets list gets shorter if the following are factored in: ability to self-fund (critical in the current SOLG narrative), ability to obtain permits (again this is has been a critical factor in the SOLG narrative all along with their local cooperation strategies), project economics (this is what we are waiting to determine), shareholding structure (SOLG has played the diversity well because ownership is fragmented and a takeover is not straightforward as many interests have to be satisfied).
7) At the macro level, there is no doubt that majors of all sizes and characteristics have to replenish their pipelines, so there should be pressure in SOLG favour, but of course we don't know if and when and how this will manifest for SOLG.
8) Asian companies have increased their share of the copper acquisition in recent years.
9) Overall the majors are in good financial shape to start a new M&A cycle, but will be cautious given the early 2010s experience.
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