Global mining giants see copper, used in energy and construction, benefiting from rising demand from the electric vehicle sector and new applications such as data centres for artificial intelligence.
Major global mining companies are struggling to balance investor expectations of big returns with paying the premiums needed to buy pure copper companies as global demand for the metal sends valuations soaring.
Diversified miners such as Rio Tinto, BHP Group and Glencore, under pressure from slowing global economic growth and falling commodity prices, are seeing rival copper producers gradually grow beyond their reach, with shares benefiting from the metal's solid outlook.
While shares in Rio, BHP and Glencore have fallen 10% to 15% this year, valuations of pure copper producers such as Freeport-McMoRan, Ivanhoe Mines and Teck Resources have risen, even as benchmark copper prices retreated after hitting a record high of more than $11,000 a metric tonne in May this year.
"Getting involved in large copper deals makes boards nervous when fluctuations in other commodities, such as iron ore and coal, are likely to persist," a banker who has worked on several mining transactions told Reuters .
"And as copper companies have been outperforming, diversified miners are finding it difficult to pay massive premiums when their share prices have fallen further, by comparison," the banker added.
BHP, Rio Tinto and Glencore are trading at multiples of five to six times earnings, while Teck, Freeport and Ivanhoe are trading at almost double that, the banker said.
Copper, used in energy and construction, will benefit from growing demand from the electric vehicle sector and new applications such as data centres for artificial intelligence.
Investors in the biggest miners don't always take into account the metal's long-term prospects when offering higher premiums to try to close a deal, said Richard Blunt, a partner at law firm Baker McKenzie.
"Investors just want to know what's going to happen to the value of their company in the next three to six months, and that's a big problem," Blunt said.
Over the past three years, thanks to rising commodity prices, most miners have paid record dividends, which, while popular, are seen as eroding the industry's ability to generate production growth through exploration, mine development or consolidation.
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Investors have good reason to be wary of management's dealmaking ambitions, as most miners have a corporate history littered with failed and sometimes costly acquisitions.
Rio Tinto's $38 billion deal for Alcan in 2007 involved a 65% premium and a subsequent write-down, while BHP's $12 billion deal for US onshore shale oil and gas assets in 2011 sold for $10 billion in 2018.
Some management teams have attempted to return to M&A, but with little or no success.
"There is the purely financial aspect, which is the resistance of existing shareholders to significant premiums," said Michel Van Hoey, a senior partner at McKinsey & Company.
"If you look historically, 10 years ago, we went through a significant wave where some companies probably overpaid for their transactions. Now, executives have become a little bit more conservative," he added.
Glencore eventually settled for 77% of Teck's steelmaking coal assets after its $23 billion bid for the entire Canadian miner was rejected, while BHP was forced to pull out of Anglo American even after revising its initial offer twice to woo its smaller rival.
Both BHP and Glencore initially made takeover proposals for their target companies.
"In past cycles, companies like Rio Tinto engaged in substantial cash acquisitions at peak times, only to see prices plummet, making them look reckless," said one mining investor.
"Today, the trend has shifted toward equity-based deals to mitigate risks, but that is more expensive, especially at a time when commodity prices are falling."
