Glencore Boosts Zinc Bet With Deal to Buy Peru Miner Stake

(Bloomberg) -- Glencore Plc is doubling down on its zinc bet after the metal's price rallied to a 10-year high.

The Swiss commodities giant, already the world's top zinc miner and trader, said on Tuesday that it's planning to increase its stake in Peru's Volcan Cia. Minera SAA, the largest producer of the metal in Latin America. 

Glencore has agreed to buy 27 percent of Volcan's Class A voting shares from members of the Letts family and will offer to boost its stake to as much as 48 percent in a public tender that could push the total price tag to $956 million. 

The deal gives Glencore even more exposure to zinc, which has surged on supply cutbacks and China's tougher curbs on mining. The metal has rallied 28 percent this year and is the best performer on the Bloomberg Commodities Index.

The Peruvian company's shareholding structure means Glencore will control at least 51 percent of the available voting shares even if there is no further uptake of the public offer, according to analysts at Barclays Plc and Macquarie Capital Ltd.

"Although their economic interest looks low, they will now effectively have control of the company and can manage the operations as they see fit," Grant Sporre, an analyst at Macquarie, said by phone.

Read more: Glencore Gets What It Wants With Tightest Zinc Market in Years

Volcan's Class B shares, which are more actively traded, rallied almost 40 percent in the two weeks leading up to the deal. The stock rose 6.5 percent to 1.31 Peruvian soles on Tuesday. Glencore's offer price of $1.215 compares with the current value of the Volcan's A shares of 3.20 soles (98 U.S cents.)

"While the headline price does not appear overly cheap, taking control of Peru's largest zinc and lead producer with good assets, resource optionality and growth potential in what is probably one of the richest polymetallic regions globally appears well timed," Barclays analysts Ian Rossouw and Amos Fletcher said in a note.

Glencore shares rose 0.9 percent to 356.65 pence by 2:13 p.m. in London. The stock has climbed 29 percent this year amid a broader mining rally.

As other major miners such as Rio Tinto Group and BHP Billiton Ltd. have focused on bigger dividends, share buybacks and other ways to reward shareholders, Glencore has been an exception. While profits improved during the first half, Glencore kept its dividend unchanged and said in August that it would use its balance sheet to pursue selective growth opportunities.

The deal comes two years after the Swiss firm decided to cut about 500,000 metric tons of its zinc production to bolster prices. In the first five months of 2017, there was a global deficit in zinc of 181,000 tons, according to the World Bureau of Metal Statistics.

“Paying up for Peruvian zinc exposure would appear to suggest that Glencore is in no hurry to restart” the idled capacity, Hunter Hillcoat, an analyst at Investec Plc in London, wrote in a note.

Another option could be to reduce ouput at one of the Volcan mines and then ramp up production elsewhere, according to Macquarie's Sporre.

"If you're going to moderate production and you now have a bigger footprint in that Peruvian basin, you can produce the same amount but at a lower cost," Sporre said.

Read more: Glencore's Volcan bid should galvanize zinc mining

Before the deal, Glencore owned 18 percent of the Class A shares, which carry voting rights, and 0.02 percent of the B shares, giving it a total economic interest in Volcan of 7.7 percent.

It also has a marketing agreement for Volcan's metal and owns other mines in the same area, including Yauliyacu and Iscaycruz. Glencore halted production at Iscaycruz in October 2015 and control of Volcan will be positive for the commodity trader when it brings the mine back online, according to Sporre.

"When Glencore ramps these mines up there are big opportunities for synergies," he said.

Peter Grauer, the chairman of Bloomberg LP, is a senior independent non-executive director at Glencore.

--With assistance from Thomas Biesheuvel Jack Farchy and Mark Burton

To contact the reporter on this story: Tom Wilson in London at twilson128@bloomberg.net.

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Liezel Hill