Bloomberg News

Inmet Bidders Seen Lured by Big Copper Deposit

November 30, 2012

Inmet Bidders Seen Lured by Big Copper Deposit

Inmet operates mines in Finland, Spain and Turkey and plans to begin copper and gold production at Cobre Panama in the first quarter of 2016. Photographer: Oliver Bunic/Bloomberg

Inmet Mining Corp. (IMN), owner of the world’s second-biggest undeveloped copper deposit, is forecast by investors and analysts to attract rival takeover offers after it rejected a C$4.86 billion ($4.89 billion) bid from First Quantum Minerals Ltd. (FM)

First Quantum offered C$70 a share in cash and stock for Toronto-based Inmet on Nov. 25, a month after proposing a purchase at C$62.50, Inmet said on Nov. 28. The improved offer is 33 percent more than Inmet’s closing share price the day before it announced that it had been approached.

Inmet will “go into play” if there are any signs of interest from the “supergiant” mining companies, said David Baskin, president of Baskin Financial Services Inc. in Toronto, naming Rio de Janeiro-based Vale SA as a “logical buyer.”

“If you start seeing signs of interest from those guys, you will get a bidding war,” Baskin, whose company manages about C$440 million and owns about 120,000 Inmet shares, said in a telephone interview from Toronto. Inmet is probably worth C$85 a share, he said.

Teck Resources Ltd. and Freeport-McMoRan Copper & Gold Inc. (FCS:US) may also be interested, Alex Terentiew and Ross Yakovlev, analysts at Raymond James Ltd. in Toronto, said yesterday in a note.

Cobre Panama has 6.5 billion tons of copper resources, the second-highest of any undeveloped copper project, according to data compiled by Bloomberg. Dogged by rising spending, regulatory delays and funding concerns, it’s expected to cost $6.2 billion and produce 266,000 tons a year on average when construction is complete. A project of that size would dwarf First Quantum’s past and present operations in Zambia, Mauritania and the Democratic Republic of Congo.

Bid Review

First Quantum said yesterday it was “surprised and disappointed” by the rejection after inviting Inmet three times to enter into talks.

“The transaction would have presented an opportunity to realize immediate and attractive cash value for the holders of Inmet shares,” Vancouver-based First Quantum’s Chairman and Chief Executive Officer Philip Pascall said in a statement.

Flora Wood, an Inmet spokeswoman, said in an e-mail yesterday the company had no further comments about First Quantum’s proposal.

Inmet rose 3.4 percent to C$67.75 at the close in Toronto.

The company said Nov. 28 that its board and advisers reviewed the offer and decided it wasn’t in the best interests of investors. Inmet also said it adopted a shareholder-rights plan, or poison pill, to block an unsolicited bid.

‘Public Auction’

Sharon Loung, a First Quantum spokeswoman, didn’t return requests for comment.

Inmet operates mines in Finland, Spain and Turkey and plans to begin copper and gold production at Cobre Panama in the first quarter of 2016.

The multiple offers from First Quantum suggest Inmet is now a “takeover target,” while the public disclosure by Inmet “effectively opens a public auction,” Stephen Bonnyman, a Toronto-based analyst at BMO Capital Markets, said in a Nov. 28 note. Bonnyman said he raised his price target on Inmet to C$82 from C$71.50 to reflect BMO’s expectation of competing bids.

Inmet shareholders will probably hold out for a higher offer, given 50 percent to 55 percent of the company is owned by five long-term investors, said Orest Wowkodaw and Adam Gofton, analysts at Canaccord Financial Inc. in Toronto. A “substantially higher offer” likely in the range of C$80 to C$90 a share would be needed to motivate Inmet to sell, especially as its work at Cobre Panama has removed some of the project’s risks, he said in a note yesterday.

Leucadia Stake

Leucadia National Corp. (LUK:US), based in New York, owns 16 percent of Inmet and Temasek Holdings Pte Ltd., Singapore’s state investment company, has 11 percent, according to data compiled by Bloomberg.

Inmet didn’t have to issue its Nov. 28 statement revealing that it declined the offers from First Quantum, said John Stephenson, a portfolio manager at First Asset Investment Management Inc. in Toronto.

“They are probably looking to create an auction,” Stephenson said. A logical buyer of Inmet would be Freeport “since it badly needs the growth.”

First Quantum’s revised offer values Inmet at about 7.4 times its current earnings before interest, taxes, deprecation and amortization, according to data compiled by Bloomberg. The average Ebitda multiple from nine bids for metal miners announced this year and valued at more than $100 was 6.9, the data show.

Hostile Bid?

There’s a 50-50 chance First Quantum takes its offer directly to shareholders, said John Hughes, an analyst at Desjardins Securities Inc. in Toronto.

Teck, the Vancouver-based company that mounted a failed bid in 2006 for Canadian nickel producer Inco Ltd., is a potential suitor because it’s a major copper producer in the Americas and has a strong balance sheet, Hughes said.

Teck previously had a 26 percent stake in Cobre Panama, Raymond James’s Terentiew said. Given the recent delays at Teck’s own copper projects, Teck now has a void in copper growth that its management may want to fill, Terentiew said.

“Although there may be some hesitation on the part of Teck’s management, given that re-approaching Inmet may look as admission that the original stake sale was a mistake, we nonetheless believe that Teck would be interested in the project,” he said.

Rising Costs

Freeport, which has mines in Indonesia and Congo, has never shied away from investing in developing countries and may need to expand its copper output after 2015, Hughes said. Terentiew said Phoenix-based Freeport’s open pit-mining expertise may make it a possible suitor.

Vale, with its major operations in Brazil, has some familiarity with Canadian companies after its acquisition of Inco, so it could be “a logical buyer” of Inmet, Baskin said.

A press official at Vale in Rio de Janeiro said the company doesn’t comment on market speculation. Marcia Smith, a Teck spokeswoman, and Eric Kinneberg, a Freeport spokesman, both declined to comment on speculation their companies would be interested in Inmet.

“The prospect of a bidding war is unlikely,” said Don Reed, the chief executive officer of Franklin Templeton’s Canadian unit. “If another company was going to bid, we most likely would have seen some evidence by now.”

‘The Rigmarole’

George Topping, an analyst at Stifel Nicolaus Canada Inc. in Toronto, said the chance of other bidders is low because senior companies would only be interested in Cobre Panama and none of Inmet’s three other assets.

“To go against First Quantum, it has a be a senior company,” Topping said. “Three out of the four mines senior companies don’t want, so they’d have to go through the rigmarole of divesting those assets.”

Investors around the world are becoming increasingly focused on the ability of management to bring mines in on time and on budget after costs ballooned at multibillion-dollar projects being developed by Barrick Gold Corp. (ABX) and Anglo American Plc.

First Quantum was founded in 1996 by its CEO Pascall, who has more than three decades of mining engineering experience. The company is the world’s 13th-largest copper producer and predicts it will become the sixth-biggest in 2016, it said in a February presentation.

First Quantum “has proven to be the best mine builders in the business,” First Asset’s Stephenson said.

Three Operations

Since 2000, First Quantum has acquired the three mines it currently operates: the Kansanshi copper mine in Zambia, the Guelb Moghrein copper and gold mine in Mauritania, and the Ravensthorpe nickel mine Australia.

It acquired several other British and Canadian companies exploring for metals, according to data compiled by Bloomberg.

Ravensthorpe was a project jettisoned by BHP Billiton Ltd., the world’s largest mining company.

“So far, it’s been operating a few quarters, and it’s been going well” under First Quantum’s ownership, Topping said.

In 2009, the Congolese government stripped First Quantum of its rights to the Kolwezi copper project, which was 75 percent complete at the time. London-based Eurasian Natural Resources Corp. bought rights to Kolwezi the following year, after which First Quantum began legal action against ENRC.

The dispute was only resolved this year when ENRC agreed to pay First Quantum $1.25 billion for First Quantum’s share of the Kolwezi, Lonshi and Frontier assets in Congo.

Bond Sale

Last year Inmet struggled to keep financing for Cobre Panama on track amid plans by the Panamanian government to revise sections of the country’s mining laws.

Inmet said in August that Franco-Nevada Corp. (FNV) pledged $1 billion in financing for construction of Cobre Panama. In exchange, Franco-Nevada got a so-called revenue “stream” from gold and silver mined as byproducts.

The financing deal with Franco-Nevada followed Inmet’s sale in May of $1.5 billion of eight-year callable bonds to help pay construction costs.

“There’s nothing complicated about the mine, except that it’s big,” Wowkodaw said yesterday in a phone interview. “First Quantum has never done a project on that scale, but neither has Inmet.”

To contact the reporters on this story: Christopher Donville in Vancouver at cjdonville@bloomberg.net; Lydia Mulvany in New York at lmulvany1@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net


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