|OK, so they’ll be rolling in cash. The obvious question is: what will they do with it all? There are four categories:
- Organic growth: ideal, but while most companies have major projects in the pipeline few of those projects are actually shovel-ready, so opportunities for organic growth are limited.
- M&A: will happen, but deals face two obstacles at the moment. First, valuations are reasonable, with most stocks already counting in a long-term copper price of US$3 per lb. and acquirers have to pay a premium. That means the spot price probably has to get above $3.50 per lb. before deal prices will make sense to the market. Second, miners are very wary of political risk, so operations in risky jurisdictions nullify a lot of potential deals. Freeport, for instance, has attractive assets in Latin America but no one wants to take on the risk of Grasberg in Indonesia.
- Strengthening balance sheets: some money will go this way, though copper miners’ balance sheets are generally in good shape, with 16 of the 18 companies Citi tracks carry a net debt-to-EBITDA below 1.5.