Minmetals May Need to Raise C$6.3 Billion Equinox Bid by 29%

Minmetals Resources Ltd. (1208), a unit of China’s biggest metals trader, may need to raise its C$6.3 billion ($6.5 billion) unsolicited cash offer for Equinox Minerals Ltd. about 29 percent to win over investors in the copper producer.

“If you’re long-term shareholders and willing to own this for the next two to three years, this offer, C$7 a share, is nothing,” said Huy Hoang, a fund manager at Singapore-based HDH Capital Management Pte, which owns about 1 million shares in Equinox. He said C$9 a share is just the “starting point.”

Minmetals’ bid is 23 percent more than Perth-based Equinox’s closing price in Toronto on April 1, the Hong Kong- based company said today in a statement. The Chinese-funded bid depends on Equinox, whose shares rose 29 percent to close at A$7.35 (C$7.35) in Sydney trading today, dropping its C$4.4 billion offer for Canada’s Lundin Mining Corp. (LUN)

“Some investors could be waiting out for a potentially higher bid to emerge,” Anna Kassianos, an analyst at Austock Securities Ltd., said in an e-mailed note, citing a possible “ceiling price” of C$8 a share.

The deal, China’s biggest minerals takeover, would give Hong Kong-based Minmetals Chief Executive Officer Andrew Michelmore control of the Lumwana copper mine in Zambia and Saudi Arabia’s biggest copper deposit. Mining companies are competing to secure assets after a dearth of new global projects and demand from China drove copper prices to a record this year.

Photographer: Jerome Favre/Bloomberg

Andrew Michelmore, chief executive officer of Minmetals Resources Ltd. Close

Andrew Michelmore, chief executive officer of Minmetals Resources Ltd.

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Photographer: Jerome Favre/Bloomberg

Andrew Michelmore, chief executive officer of Minmetals Resources Ltd.

Global Outlook

“An improving global economic outlook is giving buyers the confidence that prices should remain firm for some time,” said Angus Gluskie, who manages about $350 million at Sydney-based White Funds Management Pty. “Equinox could actively liaise with an alternate bidder.”

Minmetals, or MMG, a unit of state-owned China Minmetals Group, rose 2.4 percent to HK$6.72 at 4:00 p.m. close in Hong Kong trading, giving it a market value of HK$19.9 billion ($2.6 billion). Equinox gained A$1.64 to close at its highest since June 22, 2004. Lundin increased 3.5 percent to C$8.33 at the April 1 close of trading on the Toronto stock Exchange. Lundin’s shares traded in Sweden today fell 3.5 percent.

Equinox’s board will meet to consider the offer, the company said in a separate statement. Minmetals is being advised by Deutsche Bank AG and Macquarie Capital Advisors.

Chinese companies spent more than $30 billion last year buying mining assets and oil deposits to help secure raw material supplies to feed the nation’s growing economy. Minmetals owns the world’s second-biggest zinc mine and other assets in Australia, Laos and Canada. Michelmore said in January he was targeting copper, lead and zinc mines.

“Prospective bidders for Equinox Minerals may be reticent to become involved in a bidding war with Chinese interests,” said Tim Schroeders, a Melbourne-based money manager at Pengana Capital Ltd., which manages about $1 billion.

Bid Premium

The offer premium of 33 percent to the volume weighted average Equinox share price of the past 20 days compares with an average premium of 24 percent for resources deals of at least $500 million during last year, according to data compiled by Bloomberg.

“It fits perfectly into the key areas we want to grow in, extending our mine life, expanding our portfolio of regions, leveraging on our management and technical expertise to extract value and most importantly it’s supported by our majority shareholder,” Michelmore said during a media conference call. Minmetals has been studying Equinox for “well over a year” and built a 4.2 percent stake in the company during 2010.

The Hong Kong-based company is offering 11.3 times earnings before interest, tax, depreciation and amortization compared with the average of 7.2 times EBITDA in 10 comparable deals from 2007 to 2009, according to data compiled by Bloomberg.

Curtail Supply

Copper for delivery in three months on the London Metal Exchange traded at a record $10,190 a metric ton on Feb. 15 and is expected to rise as mine shortages curtail supply. Copper would account for 60 percent of Minmetals’ total production in fiscal 2015, compared with 25 percent, should the takeover succeed, the company said in a presentation.

“The global recovery is becoming more broad-based and you’re not going to see any new mines coming on stream for at least this year,” said Christin Tuxen, a Bloomberg top-ranked analyst at Danske Bank A/S in Copenhagen. “You’ve got to be bullish copper for the next few years.”

For miners, mergers and acquisitions are a faster, cheaper route to production than constructing projects from scratch, Standard Chartered Plc said last year in a report. The cost of building a copper mine has more than doubled in the past five years, according to the report.

Buy, Build?

“The costs of acquiring mining leases and building mine infrastructure have escalated materially over recent years, and in many cases it is now cheaper to buy an existing business than develop capacity internally,” said Sydney-based White Funds’ Gluskie.

Producers haven’t kept pace with demand because reserves are becoming harder to find and ore quality is declining, meaning less copper is extracted from each ton of rock.

The offer requires approval from Chinese and Australian regulators. Minmetals lodged an application with Australia’s Foreign Investment Review Board on March 11, Michelmore said.

Minmetals is seeking to acquire a minimum of two-thirds of its target’s outstanding shares. Minmetals completed the $1.85 billion cash and share acquisition in December of parent company China Minmetals’s Australian unit.

All financing for the proposed deal will be arranged with Chinese banks through a combination of existing cash reserves, long-term credit facilities and equity, including investments in Minmetals by Chinese institutions, the company said in a statement.

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net;

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net.

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