World’s biggest miner speeds hunt for copper assets, buys stake in SolGold

World’s largest miner BHP (ASX, NYSE:BHP) (LON:BLT) has bought a 6.1% stake in Ecuador-focused explorer SolGold (LON:SOLG) (TSX:SOLG) for $35 million, increasing this way its exposure to copper as the Cascabel project is believed to have the potential to become one of the largest copper-gold assets ever discovered.

The Melbourne, Australia-based giant has acquired 103.1 million shares in SolGold from Guyana Goldfields (TSX:GUY), at 26.592 pence per share. The figure represents 20% premium to the 20 day volume-weighted average price of 22.16 pence per share, it said.

The deal sets the stage for a potential showdown with Australian gold miner Newcrest Mining (ASX:NCM), the top shareholder in SolGold, which is Cascabel's majority owner and operator, with a 14.54 % stake.

Two years ago, the Canadian junior rejected an offer from BHP to buy a 10% intertest in the company, which paved the way for Newcrest’s acquisition.

The Cascabel project is located in the northern portion of the Andean copper belt in Ecuador, renowned for hosting almost half the world’s copper known reserves

BHP, already the world's second-biggest listed copper miner, has raised its annual exploration spending in the last two years with the purpose of finding new copper and oil deposits. The mining giant is committed to make of those two commodities the pillars of its future growth.

“Consistent with our positive long-term outlook, copper is a key exploration focus for BHP as we seek to replenish our resource base and grow this important business,” BHP’s chief executive Andrew Mackenzie said in the statement.

Miners are scrambling to acquire copper reserves amid forecasts that supply of the metal significantly outstrip supply from 2020, due to increasing demand for power generation and electric vehicles (there’s 300kg of copper in an electric bus and nine tonnes per windfarm megawatt).

The Cascabel copper-gold project, in northern Ecuador, is one of the very few new ones expected to come online in the near future. According to Colin Hamilton, director of commodities research at BMO Capital Markets, the current copper pipeline is the lowest seen this century, both in terms of number and capacity.

“After delivery of Cobre Panama (with the main ramp early next year) we are left with a gap until we see the next batch of 200ktpa-plus projects in 2022-23. This is when the likes of Kamoa, Oyu Tolgoi Phase 2, and QB2 are likely to offer meaningful supply growth,” Hamilton said in April.

Prices for copper, however, have dropped almost 20% in London so far this year, due to a combination of factors, including a strengthening dollar, mounting trade disputes and emerging market turmoil.

“Highly prospective” location

Ecuador has gained ground as a mining investment destination in the past two years thanks to a revised regulatory framework and a major investor engagement campaign that has already attracted around 420 applications for concessions in less than a year.

Mackenzie himself said the investment allowed BHP to tap into a “highly prospective” mining destination, partly given its relatively untapped reserves.

In March, another big miner, Anglo American (LON:AAL), landed in the South American country. Through a deal with Canadian gold junior Lumina Gold (TSX-V:LUM) (OTC:LUMAF), the company plans to develop two copper and gold concessions there.

Currently, the nation’s emerging mining sector employs 3,700 people, but the government estimates the figure will rise to about 16,000 in the 2017-2020 period.

SolGold's shares shot up on the news, jumping 20% in London to at 26.32p at 8:35am local time, while they were trading more than 17% higher in Toronto to 41 Canadian cents at 9:30am ET.