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Mining Weekly 52/’12: Copper Wars continued, South African taxes

December 24, 2012 Comments off

Top Stories:

  • Copper Wars: First Quantum raises takeover bid for Inmet
    • Almost 2 years after the consolidation in the copper mining industry was accelerated by the proposed merger of Lundin and Inmet, First Quantum is trying to take over Inmet to form a major copper producer. Inmet’s board rejected two earlier, lower bids, and is now facing a $5.1bn takover offer.
    • The proposed Lundin-Inmet (Symterra) merger did not materialize because Equinox made a takeover bid for Lundin, after which Equinox was acquired by Barrick, which ‘won’ a bidding war with Minmetals.
    • In attempts to get the Cobre Panama project funded Inmet earlier this year sold a stream with most of the planned precious metals production to royalty company Franco Nevada for an investment of approx. $1bn.
    • Sources: Wall Street Journal; Financial Times; Newsday

    Copper Wars - Inmet - First Quantum

  • ANC will not nationalize South African mines, but wants to increase taxes
    • The ruling ANC party has turned down a plan to nationalize the mining sector in the country. At the same time the party leaders do call for increased taxes to keep a larger part of the benefits from natural resource extraction in the country. No details on the tax increases have been given yet.
    • Sources: The Globe and Mail; Wall Street Journal; Financial Times

Trends & Implications:

  • The copper industry is in a phase of consolidation because many large development projects are in the hands of relatively small miners who don’t have the funds to develop the large projects on their own. With project pipelines being scrutinized in the light of slowing demand growth, large miners are searching for and buying those projects that are actually going to make it, and small miners with and without good development projects try to team up to combine operating assets with strong development projects.
  • South Africa is already one of the countries with the highest effective tax rates to mining companies in the world, combining a 28% income tax rate with a 10% secondary tax, and adding mining royalties depending on the mineral mined. Further tax increases will make it very unlikely that foreign companies try to enter into the South African mining landscape, but will also make it more attractive for the large South African players to try to expand abroad.

2012 | Wilfred Visser | thebusinessofmining.com

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Copper wars: Barrick outbids Minmetals for Equinox

April 26, 2011 Comments off

“Barrick Gold Corporation announced today that it has entered into a support agreement with Equinox Minerals Limited for Barrick to acquire, through an all-cash offer, all of the issued and outstanding common shares of Equinox (including the shares represented by Equinox’s CHESS Depositary Interests) by way of a friendly take-over offer. The Offer is for C$8.15 per Equinox share in cash, or a total of approximately C$7.3 billion. The Offer represents a 30% premium based on Equinox’s closing share price on the Toronto Stock Exchange on February 25, 2011 (the last trading day before Equinox announced its intention to make a take-over bid for the common shares of Lundin Mining Corporation). The Offer also represents a 16% premium over the per share price under the offer for Equinox proposed by Minmetals Resources Ltd. on April 3, 2011 (which offer has not yet commenced).”

Source: Barrick Press Release, April 26 2011

Observations:

  • Barrick’s appearance as a white knight is a surprising turn in the copper wars, which started in January when Inmet and Lundin announced plans to merge into Symterra
  • Minmetals dropped its bid for Equinox the day after Barrick’s offer, saying that entering into a bidding war would destruct value for its shareholders.

Implications:

The bid by Barrick has two interesting implications: a continued uncertainty about consolidation in the copper industry; and changing dynamics in the relationship between gold and copper miners.

  • Consolidation in the copper industry: although Minmetals appears not to enter into a bidding war, other offers for Equinox might follow. The incentive to keep Barrick out of the copper industry might trigger players like Freeport-McMoran and Xstrata/Glencore to make an offer. Furthermore the players that started the copper wars, Inmet and Lundin, are available as takeover or merger targets again.
  • Copper vs. Gold dynamics: Barrick’s entrance into the copper arena is a significant change of strategy for the gold miner. Its Chilean copper operations did not account for more than 10% of revenue until now, but the copper output will be doubled by adding Equinox’ capacity. Operational synergies with Equinox’ assets in Zambia and Saudi Arabia will not be achieved, thus the acquisition is purely a move for increased diversification. Other gold miners, sitting on piles of cash, might follow Barrick’s strategy.

©2011 | Wilfred Visser | thebusinessofmining.com

Xstrata awaits Glencore overtures

April 14, 2011 Comments off

“Xstrata’s silence speaks volumes. The miner is just waiting for a proposal after Ivan Glasenberg, the head of Glencore, made clear that he is gunning for the London-listed multinational, in which the commodities trader owns a 34 per cent stake.

Breaking a decade-long silence, Mr Glasenberg says he sees value in combining Glencore with Xstrata. ‘Why has that not happened? It is a value debate. Xstrata … seems more comfortable for Glencore to go public and get a market price before they may or may not enter into discussions,’ he adds.

In February, Mick Davis, Xstrata chief executive, raised the prospect of a merger too, telling analysts that the prospect of an independently listed Xstrata and Glencore is ‘unsustainable in the long term’.”

Source: Financial Times, April 12 2011

Observations:

  • Glencore plans to float 20% of the company, worth some $12bln, in an IPO. Current management will retain majority shareholdership.
  • Glencore today announced the composition of its new board of directors, which will include former BP CEO Tony Hayward and former Xstrata CEO Peter Coates.

Implications:

  • The trend to stronger integration of mining firms and trading firms (the trader’s value chain), which is exemplified by the potential Glencore/Xstrata merger, can also be seen in Chinese Minmetals’ foray into mining by forming MMR earlier and planning to acquire Equinox this month.
  • Now that it appears Glencore will IPO prior to merging with Xstrata, its options to combine the two firms are to buy all other shares of the company, to try to get 50%+ of the shares to enable financial consolidation, or to pursue a real (share exchange) merger. With Xstrata’s current market value of $67bln (and Glencore holding 34% of the shares) gaining control will cost Glencore at least $12bln, with a full takeover costing over $45bln.
  • Glencore will be able to use the $12bln raised in the IPO, could leverage this by taking on more debt, and could issue additional shares in a later stage to raise more capital, but it will likely try to convince Xstrata shareholders to accept Glencore shares as a (partial) payment. In this way the combined company will retain significant firepower to do additional opportunistic acquisitions.

©2011 | Wilfred Visser | thebusinessofmining.com

Copper wars: Minmetals in $6.5bn bid for Equinox

April 4, 2011 Comments off

“China’s Minmetals Resources has launched a C$6.3bn (US$6.5bn) unsolicited bid for Equinox Minerals, the Australian-Canadian copper miner which itself is in the throes of seeking to acquire Vancouver-based Lundin Mining. The bid is the largest-ever unsolicited takeover attempt by a Chinese mining company, at a time when China’s miners are increasingly seeking to go abroad.

Minmetals on Sunday night said its all-cash offer of C$7 per share, a 23 per cent premium to Friday’s closing price, was a superior alternative for Equinox shareholders to the Lundin acquisition, offering them ‘certainty of value and timing in realising their investments’.

The bid is conditional on Equinox dropping its offer for Lundin. Andrew Michelmore, Minmetals’ chief executive, said that the Chinese group was only interested in buying Equinox, which he said aligned with Minmetals’ strategy for growth and enhanced its global production portfolio.”

Source: Financial Times, April 4 2011

Observations:

  • Minmetals is the third stage in the developing copper wars for consolidation in the industry. In the first stage Lundin and Inmet proposed a merger of equals named Symterra. In the second stage this merger was derailed by a takeover attempt of Lundin by Equinox.
  • Minmetals is one of the most active Chinese companies in foreign investment, buying most of the assets of Australian OZ Minerals to form Minerals and Metals Group (MMG) in 2009 for $1.4bln. It appears Minerals and Metals Group and Equinox will be combined. MMG is mainly run by western managers.

Implications:

  • For most shareholders the all-cash offer of Minmetals will be preferable to the takeover of Lundin, which would increase the gearing of the company to dangerous levels. Equinox’ management might be able to get a slightly better price from Minmetals, but it is unlikely that the company will stay independent.
  • The announcement of Minmetals comes on the same day the World Copper Conference kicks off in Santiago. Many of the industry’s CEOs are gathered for this event. Also today, Chinalco announced its intention to expand the scope of activities from aluminium to other commodities, including copper. It is unlikely that other state-controlled Chinese companies will come with a competing offer for Equinox, but the meetings around the Copper Conference might trigger other M&A developments in the industry.

©2011 | Wilfred Visser | thebusinessofmining.com

Lundin and Inmet abandon proposed merger

March 30, 2011 Comments off

“Lundin Mining Corporation and Inmet Mining Corporation jointly announced today that they have terminated the arrangement agreement dated January 12, 2011 between them in accordance with its terms.

As a result, the formerly announced Special Meetings of Shareholders of both Inmet and Lundin Mining, scheduled for April 4, 2011, are cancelled. The parties have agreed that Inmet’s right to a break fee of $120 million, in accordance with the arrangement agreement, will be preserved in connection with the unsolicited offer of Equinox Minerals Limited to acquire Lundin Mining.”

Source: Inmet Press Release, March 30 2011

Observations:

  • Continuation of the merger became highly unlikely after the government of Panama did not give permission to coal-fire the power plant for Inmet’s flagship Cobre Panama project. Any alternative source of power will reduce project value by over 10%, causing a material change to the proposed merger agreement. Still Inmet will receive $120mln because the breakup is attributed to the Equinox offer.
  • Lundin advised its shareholders to reject the competing offer by Equinox last week. Key arguments mentioned in the explaining circular are: inadequate pricing; high leverage of resulting company; potential shortage of cash for investments; and increased geo-political risk. However, mr. Lundin commented that he would be willing to sell a an adequate price.

Implications:

  • Equinox refers in its circular to a 64% premium paid since 2004 in large mining takeovers. This reference could be seen as a counterbid to the 26% pre-announcement premium of Equinox’ offer. Increasing the premium to approx. 40% (to $9.00/share) will convince most shareholders to tender their shares if the financial risk can be sufficiently covered.
  • No competing bidders for Lundin have emerged and Lundin does not report looking for alternatives at this moment. As Equinox is stretching its financial capacity with this deal, a competing bidder might be able to take over Lundin by offering only slightly more than a potential sweetened Equinox bid.

©2011 | Wilfred Visser | thebusinessofmining.com

Copper wars: Equinox, Lundin & Inmet

March 1, 2011 Comments off

“African-focused copper miner Equinox Minerals (EQN.TO) offered C$4.8 billion ($4.9 billion) to buy Canada’s Lundin Mining (LUN.TO) in an unsolicited bid that threatens to scuttle Lundin’s rival C$9 billion tie-up with Inmet Mining. The cash and shares bid could kick off a bidding war for the base metal miner as near record copper prices and expected supply shortages spurs another round of consolidation in the global resources sector, analysts said.

The proposed bid comes just over a month after Lundin and Inmet Mining Corp (IMN.TO), a copper miner with operations in Spain, Turkey and Finland, agreed to combine and create a new Canadian copper mining major called Symterra, worth about C$9 billion ($9.2 billion).”

Source: Reuters, February 28 2011

Observations:

  • Equinox offers a combination of cash and shares, worth C$8.10 per share of Lundin; a 26% premium over current share price. This is more or less the price to which Lundin’s shares increased after the January 12 announcement of the merger with Inmet, but Lundin’s share price has dropped over 20% in the past 5 weeks.
  • The proposed deal between Lundin and Inmet to form Symterra is a ‘friendly’ merger, in which the boards advise the shareholders to vote for the exchange of shares in a shareholder meeting (planned for March 14th). Equinox’ offer is a ‘hostile’ takeover: an official procedure in which an offer is made for all outstanding shares, for which no board approval or shareholder approval from the target is required.

Implications:

  • Equinox’ board presents the deal as clearly superior to the Symterra merger plan, using the short term growth perspective as key argument. The value driver for the Symterra deal would be the development of Inmet’s Cobre Panama project, for which it required the spending power of Lundin. The recommendation of Lundin’s board to the shareholders will be crucial for the outcome of the battle.
  • A combination of forces of the 3 companies should not be ruled out, as it would maximize the synergies between the firms. This would create a player with copper output similar to Rio Tinto’s copper production. Clearly combining 3 companies would not only face integration obstacles, but would also depend heavily on the ability of the management teams to cooperate.
  • Potential rival bidders for Lundin (and/or Equinox and Inmet) include BHP Billiton, Rio Tinto, Freeport-McMoran, Teck, First Quantum, and Chinese players. Vale communicated that acquisitions of this size would not be likely, though it would help the company to diversify. With the battle for ownership opened it would be surprising if more than one company out of the group of Lundin, Equinox and Inmet survives this year stand-alone.

©2011 | Wilfred Visser | thebusinessofmining.com

Equinox Bids for Citadel Shares

October 26, 2010 Comments off

“Zambia-focused copper producer Equinox Minerals Ltd. plans to leap into the top 20 of global copper producers with a 1.25 billion Australian dollars (US$1.24 billion) bid for explorer Citadel Resource Group Ltd.

On Monday Equinox, whose Lumwana mine produced nearly 44,000 metric tons of copper in the three months to Sep. 30, launched a recommended cash-and-share bid for Citadel, which is focused on the Jabal Sayid copper-gold project in Saudi Arabia. Equinox aims to produce 260,000 tons a year by 2014, of which 60,000 tons would come from Jabal Sayid.”

Source: Wall Street Journal, October 25 2010

Observations:

  • Global annual copper output in 2009 was 16Mt, growing at a modest annual rate of 3-5%. The 260,000 tons per year by 2014 would therefore correspond with approx. 1.3% of global copper production.
  • The share price of both companies increased after the cash & stock offer, signaling investors expect the merger to create value.

Implications:

  • The acquisition offer is part of a renewed interest in acquisitions in the mining industry, as companies that have survived the crisis with cash reserves are trying to grow by mergers.
  • The exact source of synergies for the merger is unclear. The bid holds a premium of approx. 20%, which appears to be much more than what management and trading synergies could achieve.
  • Many recent acquisition attempts in the mining industry appear to be more driven by management politics than by financial rationale. Highest synergies in the mining industry are typically achieved in the logistical area (as attempted by the Australian BHP-Rio Joint Venture). The Equinox-Citadel combination, operating in Zambia and Saudi Arabia, is not expected to realize any savings in this area.

©2010 | Wilfred Visser | thebusinessofmining.com

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