M&A: Glencore Close to Royalty Sale or Spin-Off

Issue 186, July 2017

Zug-based trading giant Glencore is weighing its strategic options in the royalty market, Global Mining Observer reports.

The company's legal and corporate finance teams in London and Switzerland are working to create a new standalone royalty vehicle to go after royalty deals in copper, zinc, nickel and cobalt, according to separate sources in London and Canada directly involved in the process.

The vehicle would be pumped with royalties sitting in Glencore's portfolio, including a claim over the giant Antamina copper-zinc mine in Peru. Glencore also owns royalties over the Horne gold project in Quebec, the Red Chris copper mine in British Columbia, the El Pilar copper deposit in Mexico and the Komarovskoye gold mine in Kazakhstan, which Glencore sold last year, holding onto a royalty that rises with the gold price.

Glencore recently appointed Scotiabank to explore a sale of its large royalty package, Reuters reported in May. The process has attracted bids “well in excess of $300m”, according to banking sources. But Glencore's head office in Switzerland has flipped from selling-off assets to chasing acquisitions and is now working on a parallel proposal to create its own company modelled on gold royalty group Franco-Nevada, but with a focus on base metals.

Glencore has not pulled its sales process with Scotiabank and it remains unclear whether a royalty sale or spin-off is its preferred option, but the company is in discussions with pension funds over a cash injection into its proposed new vehicle. The company would be kept unlisted, but could float in London or Canada once it has rolled-up scale of over a billion dollars, according to sources familiar with Glencore's thinking.

Glencore's royalty package, which also includes a claim over the Highland Valley copper mine owned by Canada's Teck, has been bundled together from across Glencore's vast portfolio. In the 1990s, under former CEO Willy Strothotte, Glencore expanded from trading commodities into owning mines and has since turned over hundreds of mining assets, from nickel to cobalt. In 2012, it paid $31bn for its mining affiliate Xstrata, a company it helped to build through at least 40 takeovers of older firms, from Canadian nickel group Falconbridge to Australian miner MIM. As such, Glencore's inventory is stuffed with more than 50 royalties, many focused on copper-gold belts in Canada and South America.

“Very Profitable”

Several royalty groups have looked at Glencore's portfolio in recent months. It covers “very profitable mines” and is “heavily base metals weighted”, streaming group Wheaton Precious told Global Mining Observer last week. London-listed royalty group Anglo Pacific, which specialises in non-gold royalties, has held discussions with Glencore but is low down Glencore's list of preferred strategic options, according to banking sources.

If Glencore formally drops the possibility of a sale, its new vehicle would join a lengthening list of firms to recently break into the royalty space, from gold group Osisko to Toronto-based Triple Flag, which is backed by hedge fund Elliott. Pan American Silver, led by mining investor Ross Beaty, also recently spun-off a new royalty group, Maverix Metals, which has been on a run of deals in the last twelve months.

But Glencore would be the first group to roll into the royalty market with a huge portfolio of existing assets. It could bolster the portfolio further, according to sources involved, by writing new royalties over its own mines when it preps the vehicle for an IPO, jacking-up cash flow from Glencore's current multiple of 6 to 10 times to the multiple commanded by royalty players, closer to 30 times. Glencore's trading desks are meanwhile plugged into hundreds of metal producers and often invest in equity or debt to secure metal off-take, but could now add royalty components to future transactions.

Other top-tier mining firms are also toying with the buoyancy of the royalty market, which has closed over $20bn of deals in the last ten years. Rio Tinto recently agreed to sell its thermal coal business in Australia, but held onto a royalty over the mines that is linked to the coal price. Vancouver-based Goldcorp has also carved-out royalties in each of its recent deals.

Glencore's new royalty vehicle is “in the very latest stages” of being structured, according to sources involved. Franco-Nevada, Osisko and Triple Flag have all looked at parts of Glencore's royalty portfolio but could not be reached for comment. Glencore declined to comment.

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