TORONTO (miningweekly.com) – Analysts and investors on Thursday welcomed the announcement that Canadian base-metals-miners Inmet Mining and Lundin Mining will merge, creating a new Canadian copper producer worth at least C$9-billion.
Both companies have mines in Europe, and each brings a big copper project to the union – Lundin owns a minority interest in Freeport-McMoRan Copper & Gold's large Tenke Fungurume copper/cobalt mine, in the Democratic Republic of Congo, while Inmet has said it will make a production decision this year on the Cobre Panama project, in which it owns 80%.
Some analysts raised the question of rival bidders for either company, while others dismissed the idea. However, the combined firm could be viewed seen as a takeover target itself, assuming the deal closes.
“It's an excellent transaction, a good fit for both these companies,” Stifel Nicolaus analyst George Topping said in an interview.
“They produce similar metals, they are a similar size, they're in similar jurisdictions, it clearly makes sense to put the two together.”
Altogether, the new firm, to be named Symterra Corp, could be producing more than 500 000 t/y of copper by 2017, according to Lundin and Inmet.
The companies started informal talks on the deal about two months ago, executives said on Thursday.
With an expected market value of more than C$9-billion, Symterra could eventually rival First Quantum Minerals (valued at C$10,8-billion at the close of business on Thursday) for the position of Canada's second-biggest copper producer, behind sector leader Teck Resources.
The new company has the potential to take the place of Canadian firms like Inco and Falconbridge, which were swallowed up by bigger foreign miners last decade, Lundin chairperson Lukas Lundin said on Thursday.
He said he expects to see a rerating of the Symterra market value, beyond the simple one-plus-one of adding the two companies together.
Inmet CEO Jochen Tilk commented that scale and financial muscle are increasingly important for copper producers looking to grow.
“This transaction is our attempt at putting ourselves in a position not only to compete, but to be a major player in copper in the next decade and beyond,” he said on a conference call.
Inmet has said for sometime it was looking at acquisition opportunities, but had warned that the potential targets were limited.
Tilk also told Mining Weekly Online as early April 2010 that it would be “sensible” to consider a merger with a rival company if the opportunity considered itself.
“We view this as brilliant transaction as it would create a sizeable copper producer with a meaningful pipeline of growth,” Raymond James analyst Tom Meyer wrote in a note on Thursday.
“The Tenke expansion potential combined with the Cobre Panama development project provides world-class operations today with a potentially world class operation in the near future, an ideal combination in a robust commodity price environment.”
The deal also solves Lundin's need for a new CEO, after current chief Phil Wright announced last year he would retire in the first half of 2011, commented Topping.
Tilk will be CEO of Symterra after the deal closes and Lundin chairperson Lukas Lundin will be appointed nonexecutive chairperson.
Lundin said on Thursday the deal will create a new mining “powerhouse”, at a time when copper prices are testing record levels.
The company will also be “well positioned” to finance new growth opportunities that come up, he said.
ROOM FOR RIVALS?
The Lundin/Inmet deal was the third significant transaction involving a Canadian mining firm announced in as many days.
On Monday, HudBay Minerals said it will buy Norsemont Mining, for the junior's Peruvian copper project, and US-based Cliffs announced a day later that it had agreed to acquire Canadian iron-ore producer Consolidated Thompson Iron Mines for C$4,9-billion.
With all the excitement around dealmaking in the sector, the question must be asked whether another company might step in with a rival offer for either Lundin or Inmet?
The deal was structured so that neither company receives a premium, which could make a premium offer from a third party attractive for shareholders.
But Stifel's Topping said he does not think a rival proposal is likely, simply because the merger between the two “just makes a lot of sense”. The C$120-million break fee included in the merger agreement may also act as a deterrent.
He added that a rival bid can never be ruled out, but commented that it might make more sense for a potential acquirer , especially one of the senior producers like Freeport-McMoRan Copper & Gold, to wait until the merger closes and then make a play for the combined company.
Inmet's Cobre Panama could definitely be viewed as “desirable” for the senior copper miners, Topping said.
The Cobre Panama project (previously know as the Petaquilla copper project) is expected to produce an average of 255 000 t/y of copper, 90 000 oz of gold, 1,5-million ounces of silver and 3 200 t of molybdenum over a 30-year mine life.
Inmet has said it intends to make a production decision this year on Cobre Panama, and could start production at the mine in 2015.
The company owns 80% of the asset, after selling a 20% stake to Korea-owned LS-Nikko.
Inmet had indicated it was looking to take on another partner for the project, which will likely cost around $5-billion, including spending on a power plant.
Tilk said in October the firm could lower its holding to between 55% and 60%.
However, the added scale provided by the Lundin transaction means the firm will have more options when looking at financing the project and it could retain a bigger slice of the asset, he said on Thursday.
The combined company will have C$1,3-billion in cash, plus money coming in from an investment in Inmet by Singapore's Temasek Holdings. That will put it well on the way to funding the equity requirement of the project if it were to keep the 80%.
TENKE STAKE IS 'CORNERSTONE'
Executives on Thursday's conference call said that the combined company could look at divesting assets viewed as non-core after the deal closes, but were unwilling to comment further.
Tilk did emphasise, though, that there were no plans to divest of the stake in the Tenke Fungurume mine, which he said will be a “cornerstone” of the new firm.
The mine already produces more than 250-million pounds of copper and 18-million pounds of cobalt a year, and Freeport is looking at a series of expansion to boost output.
If assets are to be sold off, Lundin's troubled Aguablanca mine would probably be at the top of the list, Topping guessed.
On Inmet's side, the Cayeli mine in Turkey could be a contender “if there is one”, he said.
Shares in Inmet Mining rose 6,2% on Thursday, to C$79,39 a share by 16:22 in Toronto, while Lundin dipped 1,9%, to C$7,75 apiece.
Lundin agreed to an acquisition by another Canadian firm, HudBay Minerals, in December 2008, but the deal unravelled because of opposition by certain HudBay shareholders.
The announcement also comes almost a year after two other Canadian base-metal-miners, Quadra Mining and FNX Mining, announced that they would merge their businesses.