BHP Billiton Limited
(BHP - Free Report
) has entered into an agreement with Guyana Goldfields Inc. to acquire its 6.1% interest in SolGold Plc for $35 million. With this deal, BHP Billiton gains share in SolGold’s flagship Cascabel porphyry copper-gold project in Ecuador. Consequently, this is in sync with BHP Billiton’s strategy of increasing exposure to the red metal to capitalize on its long-term prospects.
Cascabel: A Highly Prospective Deposit
SolGold’s Cascabel project is located in the Imbabura province of northwest Ecuador. Northern Ecuador falls within the under-explored northern section of the richly endowed Andean Copper Belt — which churns out almost half of the world’s copper production. Ecuador’s relatively untapped reserves have made it a hot exploration destination for copper of late. It is believed to possess similar prospects as its southern neighbors, Peru and Chile, both of which are major copper producers.
Cascabel is claimed to be a highly prospective deposit with indicated and inferred resources of 1.08 billion tons (Bt) at 0.68% copper equivalent, with a contained metal content of 5.2 million tons (Mt) of copper and 12.3 million ounces of gold. The project lies on the margin of the Eocene and Miocene metallogenic belts which boast some of the world’s largest porphyry copper and gold deposits. Notably, the La Escondida Copper Mine in Chile — the world’s largest producer of copper — has the same age host rocks as Cascabel.
Financials of the Deal
Per the terms of the agreement, BHP Billiton will acquire 103.1 million shares in SolGold for a total purchase price of 27.4 million GBP ($35.2 million). The purchase price represents a premium of 20% to the 20 day volume-weighted average LSE price of SolGold shares as determined on Sep 4, 2018. The total purchase price is valued at around $35.3 million.
Why is BHP Billiton Betting on Copper?
Copper is a major industrial metal and plays a particularly important role in emerging countries. Given its varied applications, the trends in the copper market are often considered useful indicators of the state of the global economy. China accounts for the largest share of global copper consumption as well as having a large share in the total production of pure copper. In the long haul, expectations of a rising middle class in Asia, particularly China and India, which are likely to spend more on consumer goods such as air conditioners and refrigerators in the coming years, will stimulate demand for copper. Further, the booming market for electric vehicles will significantly impact demand for copper over the next decade.
Primary output from currently operating mines is reportedly likely to decline over the coming decade. To meet rising demand, new mines will have to be developed, which are scarce as well as capital intensive. The impending deficit in copper will drive copper prices in the future. Consequently, BHP Billiton along with other miners like Rio Tinto plc (RIO - Free Report
) are keen on investing in copper assets to capitalize on the long-term fundamentals of the metal.
Over the last year, BHP Billiton’s shares yielded a return of 5%, against the industry
’s decline of 5%. The company is gaining competency on the back of sturdier productivity and remains on track to deleverage balance sheet over time. It is making operations more efficient on the back of smarter technology adoption across the entire value chain along with reducing capital and exploration expenses.
BHP Billiton currently carries a Zacks Rank #2 (Buy).
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