On Monday 15th Canada’s government issued crucial consent for the merger of Anglo and Teck. The companies claim $1.4bn of potential recurring annual EBITDA synergies by combining the assets of Quebrada Blanca (QB) and Collahuasi in northern Chile. We seek to validate the concept using CRU’s Asset Platform data.
Investment Canada Act approval: A holiday season fillip for the merger’s prospects
On 9 December shareholders of Anglo American and Teck voted in favour of merging the two companies. This outcome followed recommendations by both companies’ boards which later garnered support from the major proxy advisors. On 15 December the process got a surprisingly early boost with crucial Canadian government approval relating to the Investment Canada Act. The process of seeking formal anti-competition approval from national trade departments will take several months and assuaging the Federal Trade Commission of the United States (FTC), the European Commission’s DG Competition and China’s State Administration for Market Regulation remain key hurdles to the merger completing. CRU’s first take on the initial 9 September merger proposal can be found here.
Central to the rationale to combine the two companies pursues a latent advantage of integrating the world class Collahuasi orebodies (44% Anglo American equity) and the state of the art mill facilities of QB (60% Teck). The two operations would be linked using a conveyor to haul high grade ore 10km from Collahuasi’s Rosario pit for processing through one of the two mill lines at QB.
The mineral endowment at both operations is extensive, but Collahuasi’s reserves are both larger and higher grade: its Sulphide Direct Feed reserve grade (excluding low grade ore and stockpiles) stands at 0.96% Cu almost double that of QB’s 0.52%. The current mine life of QB stands at around 23 years (with around further ~80% of mineralisation in resources) while Collahuasi reserves support a mine plan spanning 67 years. The key rationale for an integration is that by repurposing a line at QB to handle softer, higher grade Collahuasi ore, the enlarged operation would be able to pull forward significant production (and value) at a fraction of the capex needed to expand either operation on a stand-alone basis, deferring costlier expansionary options further into the future.
Two major conceptual mill expansion projects, Collahuasi 4th Mill Line and Collahuasi 5th Mill Line, if both delivered, could take the operation towards annual capacity of 0.9-1 Mt, with latest capital guidance pointing to $8bn or more per phase. At the time of commissioning QB2, Teck outlined a conceptual capacity doubling project (“QB3”),referred to as QBME, for which it withdrew its environmental permitting process in October 2023 following initial regulatory feedback. An enlarged joint venture would require detailed engineering design, permitting and capital development amounting to US$1.9 billion to cover plant optimisation at QB and to build the conveyor system spanning a direct distance between sites of around 10km.
Two major conceptual mill expansion projects, Collahuasi 4th Mill Line and Collahuasi 5th Mill Line, if both delivered, could take the operation towards annual capacity of 0.9-1 Mt, with latest capital guidance pointing to $8bn or more per phase. At the time of commissioning QB2, Teck outlined a conceptual capacity doubling project (“QB3”),referred to as QBME, for which it withdrew its environmental permitting process in October 2023 following initial regulatory feedback. An enlarged joint venture would require detailed engineering design, permitting and capital development amounting to US$1.9 billion to cover plant optimisation at QB and to build the conveyor system spanning a direct distance between sites of around 10km.
Anglo Teck merger aside, barriers to asset integration exist
Currently, both assets face operational challenges. Collahuasi is experiencing water shortages and throughput constraints. Collahuasi faces capacity issues relating to a lack of water availability, inhibiting throughput. The $3.2Bn “C20+” project seeks to address this issue with the development of infrastructure to deliver desalinated seawater, as well as debottlenecking the asset to a capacity of 210ktpd. CRU estimates this project is more than 80% complete.Meanwhile, structural issues reported at QB’s tailings management facility (TMF) dam is constraining throughput, with a civil engineering capital work programme to buttress the dam and optimise drainage underway. CRU assume that by 2027 Collahuasi’s water constraint and QB’s TMF-led processing constraint will be resolved.
In addition to current operational issues, Teck and Anglo lack full autonomy to enact a Collahuasi-QB JV, given the ownership structures of the two assets. Minera Collahuasi is an incorporated joint venture with an independent management team, Anglo’s partners being Glencore (44%) and Japan Collahuasi Resources (Mitsui, 12%). Teck (60%) manages Quebrada Blanca with the shareholding completed by Sumitomo group companies (30%) and Codelco (10%). A decision to form a broader JV would require the support of other stakeholders. Anglo and Teck have indicated that the symbiotic opportunity should be sufficiently compelling to align shareholder interests.
We evaluate the implication of a combination on the costs, cashflow and valuation using the following assumptions. (These have not been verified by the asset owners or operators):
- Incremental integration capex of $1.9 bn (2028-2029);
- Integration commissions at start of 2030;
- Collahuasi asset unchanged (for simplicity of assumptions);
- QB $/t ore mining costs ~30% higher (accounting for Collahuasi mine’s higher strip ratio and conveyor ore haulage to QB);
- QB head grade increase on average by ~45% (predicated on Collahuasi conveying only Direct Ore reserves to QB – no low-grade stockpiles);
- QB throughput capacity increase of 5% due to less competent Collahuasi ore;
- Aggregate QB recoveries improve by 2% from grade increase.
CRU model undershoots guided +175kt/y production uplift but cashflows shoot the lights out
Assigning Collahuasi feed to only one of QB’s two lines and using conservative assumptions to operational improvements yields an average production enhancement of 156kt/y for the 2030-50 period, with peak production of just under 900 kt/y Cu in the mid-2030s. Especially notable for production difference is the mitigation of production drop-off in the late 2040s when within the current plan QB will be rehandling low grade stockpiles. If the depletion rate of QB’s sulphide reserves were halved to make room for Collahuasi feed, the transition to low-grade would be deferred until the late 2050s. This plan is an uncommon example of a project that will meaningfully raise copper production without additional processing capacity.
As new, generally lower cost mines come online, existing mines are pushed to the right of the cost curve. This is the case shown here with Collahuasi situated just above median costs by 2032 and QB expected to sit in the 4th quartile. The integrated complex (red) would produce a powerhouse asset with aggregate costs only marginally above the level forecast for the smaller Collahuasi stand-alone.
Pre-tax cashflow estimates over the 2028-2050 (capturing the integration investment horizon of the required $1.9 bn capex) present a convincing scenario. Despite higher mine operating costs per tonne of ore, the higher value of that ore significantly boosts revenue. Recurring annual cashflows based on CRU’s macroeconomic and pricing assumptions by just over $1.5 bn.
CRU expect additional project merits to be communicated in due course, such as a potential for regenerative conveying, greater concentrate quality management, improved marketing options and additional port loading flexibility from two sites, as well acknowledging as as-yet unidentified headwinds. At face value it does appear a “win-win” scenario; an option to benefit Chilean exports, more copper units into tight copper market, as well of course generating more low-risk value for the stakeholders of both assets.
