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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

Symterra: Inmet, Lundin Merger to Forge Copper Mining Giant

January 19, 2011 Comments off

“Inmet Mining Corp.’s planned merger with Lundin Mining Corp. will catapult the combined 9 billion Canadian dollars (US $9.1 billion) miner among the world’s biggest copper producers as demand for the widely used industrial metal shows no signs of easing.

The combined company, to be known as Symterra Corp., will generate annual production of around 500,000 metric tons of copper starting in 2017, up from around an estimated 205,000 metric tons this year, ranking it among world’s top five senior copper producers. Chile’s Antofagasta PLC is the biggest copper producer, with output of more than 600,000 metric tons estimated for this year.

Inmet and Lundin, both based in Toronto, will combine five copper mines in Portugal, Spain, Turkey, Sweden and Finland with two huge copper projects—Inmet’s 80%-owned Cobre Panama operation, one of the world’s largest undeveloped copper projects with a mine life exceeding 30 years, and Lundin’s 24.8% stake in the Tenke Fungurume mine in the Democratic Republic of Congo. The initial phase of that project calls for a 40-year mine.”

Source: Wall Street Journal, January 13 2011

Observations:

  • Although both headquartered in Toronto, Lundin and Inmet don’t have operations in North America. Most of the current production takes place in Europe, with focus of production in the future shifting to Asia, Africa and potentially Latin America.
  • The market capitalization of both firms is roughly equal at $4.4bln. Inmet has demonstrated a stable performance over the past years with profit margin in the range of 25-50%. Lundin has not been as profitable yet, but has access to the promising Tenke Fungurume project.

Implications:

  • The main driver for the merger is combined spending power for the development of Cobre Panama and Fungurume and the dilution of political risk associated with operation in Papua New Guinea and Congo.
  • Analysts point to the difference in corporate cultures of the two companies as a potential obstacle for smooth integration. The composition of the new board, with Inmet’s Jochen Tilk as president & CEO, indicates that Inmet’s ‘corporate citizenship’ culture might become dominant.

©2011 | Wilfred Visser | thebusinessofmining.com

The Rise of China in Mining

October 4, 2010 4 comments

China is rising as a global superpower in the mining industry. Ore from mining companies all around the world is shipped to Chinese ports to fuel the growth of the economy. Building relationships with Chinese government and customers is a top priority for many business leaders. However, few people in the industry know that China itself is a major producer of many minerals. This article explores the Chinese rise of production, the rise of demand, the rise of Chinese mining firms and the rise of investment and sketches the implications for the mining industry of the changing role of the country.

 

1. The Rise of Production

China’s mining industry is the world’s largest in many aspects: the country has 200,000 collectively owned mines1, employing over 10 million miners; it is the world’s major producer of coal, lead, zinc, tin and rare earth minerals and also ranks high in output of iron ore, gold, bauxite and other minerals.

The country has been a major producer for decades, but the enormous demand, the opening of the market to private investors and the introduction of modern mining techniques has boosted the productivity and production of the industry. Significant reserves of most minerals allowed China to grow the market share of mining output for all major minerals in the past 15 years (Figure 1). The growth of the iron metal content output share is even more remarkable when considering that Chinese iron ore typically has a very low metal content: while share of iron content grew from 14% to 15% since 1995, the share of gross weight grew from 24% to 37%2.

Figure 1 - Chinese share of world mining output

The largest part of worldwide reserves of rare earths, titanium, tungsten & molybdenum are in China. These minerals are crucial in the production of many high tech products, giving China a powerful position in international trade. Recently the country has demonstrated this power by implementing export quota for rare earth minerals, favoring the domestic high tech industry.


2. The Rise of Demand

China hardly exports any minerals; all domestic mine production is absorbed by the domestic. Value of total mineral exports in 2009 was a mere $0.2bln, 60% of which was molybdenum3. Until a few years ago the country was a net coal exporter, but the growing demand from the utility and steel industry has turned it into an importer. Though the country does not export ores, it has been building a large iron and steel industry, exporting at a total value of $53bln in 2008. In the same year the production of 500Mt of crude steel accounted for 38% of the world production2. In 2009 the imports exceeded exports, as steel companies responded to the crisis by cutting production. Stepping up production will turn the country into a net exporter of steel again.

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