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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

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Is BHP Billiton too big to grow?

November 5, 2010 1 comment

The (provisional) refusal of the Canadian government to let BHP Billiton acquire PotashCorp of Saskatchewan is the third regulatory limitation to growth the company faces in a short period. As regulators around the world are afraid the company gains a dominant position in mineral markets, what options does the CEO, Marius Kloppers, have left to grow the company?

Observations:

  • In February 2008, shortly after mr. Kloppers took over as CEO, BHP did a hostile takeover bid for its largest rival: Rio Tinto. The offer, worth approx. $165bln, was withdrawn in November 2008 after regulators indicated the deal would not gain anti-trust approval and the access to debt dried up in the capital markets.
  • After the failed acquisition, the two companies agreed to try to realize a significant part of the synergies the merger would have created by setting up a Joint Venture to develop the Pilbara iron ore deposit in Western Australia. However, after both Australian and European regulators indicated this would create an iron ore player that would be too dominant, the plans were cancelled last month.
  • The $39bln offer for PotashCorp appears to be a move in which BHP Billiton does not build up a dominant position in any market. If BHP manages to break the cartel-based pricing system for potash the deal might actually benefit the world economy. Still the Canadian government seems to be inclined to let the deal stall to protect the domestic industry and tax revenues.

Implications:

  • BHP Billiton has approx. $12bln cash on the balance sheet and is earning more cash rapidly due to the high iron ore price. Typically mining companies need approx. 2-3% of asset value in operating cash, leaving BHP with some $10bln excess cash. The low leverage and the high credit rating of the company enable it to raise at least $30bln additional cash by increasing debt. However, it is hard to select acquisition targets that might actually lead to a combination that will be approved by regulators.
  • The company will either need to focus on acquiring large players in markets where it does not have a strong presence yet, or focus on acquiring many smaller players or individual assets. As the company is trying to reduce the portfolio complexity, expansion into completely new markets is unlikely. Potential acquisition targets might be Newmont, Goldcorp, Freeport-McMoran or Eldorado in the gold market and Eramet, Inmet Mining and Outokumpo in the base metal market. Expansion into the industrial minerals sector would also be an option.
  • The best way for mr. Kloppers to make a name for himself would be to make BHP Billiton the first major western mining company to build up a strong operating presence in China and/or India. Creating a Joint Venture with a local player might be the best option to achieve this.

©2010 | Wilfred Visser | thebusinessofmining.com

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