Jun. 27 (Bloomberg) - Mitsubishi Corp. (8058), the Japanese trader that trumped Codelco to buy a stake in Anglo American Plc. (AAL)'s Sur copper unit, expects it to generate as much as $500 million a year, becoming the company's second-biggest earner.
The $5.4 billion record purchase for Mitsubishi was worth it to grab a slice of what will be the world's fifth-biggest copper producer as supply dwindles, Jun Kinukawa, the chief executive officer of Mitsubishi's metals unit, said in an interview. He declined to comment on a legal dispute over the purchase, saying it is a "problem between Codelco and Anglo."
Copper, the best-performing commodity on the London Metal Exchange in the past year, has set Anglo and Rio Tinto Group racing to develop mines and expand existing assets. Mitsubishi paid twice as much as Codelco, the world's biggest producer, had offered for the Sur stake.
"This is the kind of return we're looking for on our money, these are the type of projects we want," Kinukawa said in an interview at the company's Tokyo headquarters. Sur by itself may earn Mitsubishi, co-owner of the world's top coal exporter, a third of the profits it makes from the fossil fuel, he said.
Mitsubishi dropped 1.9 percent to 1,525 yen in Tokyo. The stock is down by the same percentage this year, compared with a 2.5 percent gain in the benchmark Nikkei 225 index.
"Competition is very tough for copper assets, and it's hard for the traders to secure more exposure to the metal," said Kazuhisa Mori, an analyst with Barclays Plc. in Tokyo. "That's the reason Mitsubishi paid the money."
Copper and a $12 billion iron ore project in Australia form part of Mitsubishi's strategy to bolster revenue away from its coal unit as the BHP Billiton Mitsubishi Alliance venture it half owns lowered output due to labor disputes. The strikes that began last year have cut output to as low as 60 percent of capacity at times during the past three months, Kinukawa said.
Lower coal shipments are putting pressure on Mitsubishi CEO Ken Kobayashi's target of a record 500 billion yen ($6.2 billion) in profit for the year ending March 31, 2013.
"It's very difficult to predict what's going to happen in the next couple of months," Kinukawa said, adding that he couldn't provide a forecast on the impact on output.
The metals unit, including copper, accounted for 38 percent of net income in last financial year, ahead of energy and consumer goods. Mitsubishi earned 15 billion yen of net income from copper, behind coal which accounted for 119.3 billion yen.
Mitsubishi expects returns of about 30 billion yen to 40 billion yen a year from Sur, Kinukawa said, without saying when that will be achieved.
Barclay's Mori said Sur could add as much as 30 billion yen to Mitsubishi's bottom line this year. The court dispute is unlikely to affect the deal, he said. Nomura Securities Co. analyst Yasuhiro Narita said his forecast for Sur profit this year ranges between 15 billion yen to 20 billion yen.
"It's up to the market to decide whether the profits correspond to the sums they paid for Sur, but given the current price weakness in copper there are some concerns," Narita said by phone in Tokyo.
Morgan Stanley (MS) forecasts a 130,000 metric ton shortage in copper this year to widen to 170,000 tons next year. Copper may gain 16 percent to $8,525 a ton in the fourth quarter, according to the median of 22 analyst estimates compiled by Bloomberg. Demand from China, the world's biggest consumer of the metal used to make wire and pipes, has grown every year for at least a decade, according to Bloomberg Industries.
With Sur and other assets Mitsubishi can secure 300,000 tons of copper a year, Kinukawa said, up from 140,000 tons last year. Anglo is spending $2.8 billion expanding Sur's Los Bronces mine to almost double capacity to 440,000 tons a year. There may be a further expansion in five to ten years, he said.
Anglo sold Mitsubishi the 24.5 percent stake in Sur in a transaction disputed by Codelco. The state company filed a lawsuit in a Santiago court on Jan. 10 seeking to annul the sale, which it says was aimed at thwarting its bid to exercise its option to buy 49 percent of Sur for about $6 billion.
Officials at Codelco's press office in Santiago declined to comment on the legal proceedings.
Codelco said June 22 it would continue efforts to reach an out-of-court settlement with Anglo, seeking an extension of the negotiation period. Codelco acquired the option through a 2002 agreement.
Mitsubishi's offer also pits it against Mitsui & Co. which agreed to lend Codelco $6.75 billion for the purchase of Sur shares in return for an option to later buy half of the acquired stake. Codelco CEO Thomas Keller went to Tokyo to hold talks with Mitsui and Mitsubishi as part of efforts to end the dispute, La Tercera reported on June 21.
"We've set our sights on being close to the top 10" copper producers globally, Kinukawa said. "Coal and copper would be our two main pillars with the other commodities filling out the rest."
Chile's Antofagasta Plc (ANTO) was the No. 10 producer of copper last year with 449,000 tons, while Codelco, the world's biggest producer, mined 1.72 million tons, according to London-based consulting company CRU.
Mitsubishi is pushing on with the $12 billion Jack Hills iron ore development in Western Australia, which could produce 20 million tons a year and includes the construction of a port that can handle at least double that capacity.
Mitsubishi may select one or two partners, possibly from China, Japan or South Korea, to buy as much as a 50 percent stake to help develop the operation, Kinukawa said. Chinese mills may buy the ore from the mine, he added.
China's Sinosteel Corp., Baoshan Iron & Steel Co., Angang Steel Co., or South Korea's Posco may partner Mitsubishi in the project, Reuters reported in February, citing unidentified people close to the deal. Kinukawa declined to name potential partners.
Jack Hills, with resources of 4 billion tons, will be Mitsubishi's first iron ore project in Australia, he said. Australia has become a high-cost production center with labor costs, new taxes and energy costs spiraling, Kinukawa said.
Still, it is cheaper and less risky for Mitsubishi to expand current projects in the country than to move to develop the promising coal territories of countries such as Indonesia, Mozambique or Mongolia, he said.
"It's all relative," Kinukawa said. "It'd be very tough for us to move out of Australia."