This Base Metal Miner Makes An Unusual Buy

Unexpected item yesterday from one of the world’s largest base metal mining companies.

Glencore. Which announced that the company is upping its exposure to an unexpected commodity.

The firm said it will buy Canada’s Caracal Energy. A firm specializing in African oil exploration.

Through the acquisition, Glencore gains an increased stake in fields in the central African nation of Chad. A move that doesn’t come as a complete surprise–given that Glencore already held 35% in the projects. And is involved in a number of other oil ventures in west Africa.

But by moving to buy out its partner here, the big miner is reaffirming its commitment to energy. Especially given that the purchase comes at a significant price tag of $1.35 billion.

The buy is especially interesting given that it comes on the heels of Glencore’s exit from another asset: the Las Bambas copper mine in Peru. The firm just finalized the sale of Las Bambas to a Chinese consortium. For a total of $5.85 billion.

So the cash was there to re-deploy. And management wasted little time in moving the chess pieces in its portfolio.

What does this tell us about the state of the market? Do energy projects simply have a greater allure, with prices in most metals markets continuing to languish?

The truth may have less to do with prices, and more to do with costs. Specifically, capital costs–which are continuing to run high in the mining industry.

A project like Las Bambas could thus be viewed as more of a liability in this environment. With the price tag for full development potentially setting Glencore back considerably.

Oil on the other hand, is viewed as having lower capital entry requirements. Along with quicker time to cash flow.

Glencore may thus be simply trying to adjust its cash inflows and outflows. An interesting strategy, given that costs in the petroleum business have also been rising of late.

We’ll see how this bet pays off. At the very least, it’s an important insight into what mining executives are thinking today.

Here’s to getting oily,

Dave Forest

dforest@piercepoints.com / @piercepoints / Facebook

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