BC Business
First Quantum Minerals takeover | BCBusinessA hostile mining takeover creates drama worthy of a soap opera.
B.C.’s third-biggest miner just got a lot bigger. With its successful takeover of Inmet Mining Corp. of Toronto, First Quantum Minerals Ltd. boosted its top line by more than $1 billion to just over $4 billion, cementing its spot as third-biggest miner in the province, behind Teck Resources Ltd. and Goldcorp Inc.
The hostile takeover unfolded rapidly over a three-month span, with Inmet, the reluctant bride, beseeching shareholders to resist the offer and vainly holding out hope for a white knight to come to the rescue.
First Quantum’s intentions were made public on November 28, when Inmet announced it had rejected First Quantum’s friendly offer that valued Inmet at $70 a share—a premium of 33 per cent over the previous day’s closing price of $52.80. First Quantum’s bid immediately turned hostile, with the company appealing directly to Inmet shareholders, urging them to tender their shares for a combination of cash and First Quantum shares that valued Inmet at $72 a share.
Throughout the process, Inmet urged shareholders to wait for a higher price, citing an average target price of $79 among analysts and holding out the prospect of a friendly bid emerging from another mining company to trump First Quantum’s offer. But First Quantum held fast and finally triumphed with the April 2 announcement that it had amassed 93 per cent of Inmet’s shares and would acquire the remainder through a statutory compulsory acquisition. The total cost of the acquisition is estimated to be $5.1 billion. It pales in comparison to Switzerland-based Glencore International PLC’s $54-billion takeover of the U.K.’s Xstrata PLC, but still qualifies as the second-biggest M&A deal in the global mining patch in the past year.
Inmet has producing copper mines in Turkey, Finland and Spain, but this takeover battle was over the jewel in the Inmet crown: Cobre Panama, a massive copper deposit currently in development and expected to start production in 2016.
Despite recent volatility in commodity prices, the acquisition gives First Quantum the potential to bring a major new discovery to production at an opportune time. “We have growth in Asia and significant growth in the world economy, so the medium- to long-term outlook for commodities is still very strong,” says Glenn Ives, Deloitte’s mining leader in Canada for the Americas.
First Quantum stated at the outset of the takeover that the rationale was the company’s belief it could bring Cobre Panama into production much more economically than Inmet could, thanks to First Quantum’s in-house expertise.
Kerry Smith, an analyst with Haywood Securities Inc. in Toronto, suggests that the point at which the courtship turned hostile was the brief period in late December 2012 when Inmet gave First Quantum a peek at the financial books for the Cobre Panama project. “At first, [First Quantum] said, Let’s make this a friendly deal; give us a look at the books, and we’ll see if we can bring value to the operation,” Smith says. “They looked at the books and didn’t sweeten the offer, but instead made a hostile bid.” The reason, he thinks, is that First Quantum believed nobody else could bring the project to production as economically as it could.
The likelihood of a white knight charging in to outbid First Quantum became increasingly unlikely as mining companies began filing their 2012 year-end financials, with one major after another citing massive writedowns, many resulting from previous acquisitions.
The acquisition adds Inmet’s three operating mines to First Quantum’s existing mines in Zambia, Australia, Finland and Mauritania, boosting annual copper production from just over 300,000 tonnes to about 420,000 tonnes. Once it begins production, the Cobre Panama mine is expected to produce about 300,000 tonnes of copper annually in its first decade and more than 10 million tonnes over its projected 40-year lifespan.
“They’ve basically positioned themselves with this merger to be the go-to name if investors are looking for a copper stock in Canada, and they could be the go-to stock in North America,” says Smith. Although Teck Resources is a much bigger company, it is not a pure copper play, he notes, pointing to Teck’s diversified interests in coal, zinc and oil.
The only remaining question is whether First Quantum can deliver on its promise to drive value to shareholders through its development of the Cobre Panama project, or whether, down the road, it will just be another writedown.
“The big question is whether they will be able to reduce the capital costs as much as they expect,” says Ives, referring to First Quantum’s plan to cut costs by taking the planning and construction of the mine in-house rather than contracting it out. “That will not be a next-week story, but maybe a next year story. If they can, I’d bet on them.”