Poland’s KGHM to Buy Quadra FNX for $2.84 Billion to Add U.S., Chile Mines

Dec. 6 (Bloomberg) -- KGHM Polska Miedz SA, the copper miner with the largest European output, agreed to buy Canada’s Quadra FNX Mining Ltd. (QUX) for about C$2.87 billion ($2.84 billion) in the largest overseas acquisition by a Polish company.

KGHM will pay C$15 a share, a 41 percent premium to Quadra’s 20-day volume-weighted average price, the Vancouver- based company said today in a statement. The transaction, expected to close in the first quarter, will be funded using existing cash on hand, Quadra said.

The state-controlled company is buying miners outside Poland as it seeks to cut production costs and raise output. The purchase will allow Lubin-based KGHM to increase annual production by more than 100,000 tons starting in 2012 from 570,000 tons planned this year, KGHM said.

The KGHM offer values Quadra at 0.83 times net asset value, which is low compared with recent deals, Greg Barnes, a Toronto- based analyst at TD Newcrest Inc., said in a note to clients.

“There is room for a higher offer, in our view,” Barnes said. A possible bidder is Rio de Janeiro-based Vale SA (VALE3), he said.

Quadra, which trades under the symbol QUX, climbed 40 percent to C$15.88 at the close in Toronto. The shares dropped 32 percent this year through yesterday.

‘Serial Disappointer’

“The market had treated QUX’s management as a serial disappointer and they heavily punished the price of the company’s shares,” Raymond Goldie, a Toronto-based analyst at Salman Partners Inc., said in a telephone interview. A bidding war for Quadra is likely, he said.

The Quadra board considered starting a broader process to sell the company after receiving the KGHM offer a few weeks ago, Chief Executive Officer Paul Blythe said in a telephone interview today.

"We decided that the deal that we’ve got, the bird in the hand, was the best way to go," Blythe said. "It was a significant premium to our stock price."

There have been $18.5 billion of copper acquisitions valued at $100 million or more announced this year, with an average premium of 31 percent, compared with $8.71 billion a year ago, according to data compiled by Bloomberg.

Besides Vale, Antofagasta Plc may be a possible bidder, George Topping, a Toronto-based analyst at Stifel Nicolaus & Co. said in a telephone interview.

‘Bad News’

KGHM dropped 8 percent to 122.2 zloty in Warsaw following the announcement.

"It’s really bad news because there won’t be a big dividend," Tomasz Duda, an analyst at Ipopema Securities SA, said in a telephone interview. "They are buying poor assets with high production costs and they are overpaying."

The acquisition is KGHM’s second takeover outside Poland in almost two years. Chief Executive Officer Herbert Wirth said today in an e-mailed statement that buying Quadra will make his company "more immune to price slumps on the cyclical copper market."

The plan to buy Quadra is an "interesting idea," Maciej Wewior, a spokesman for the Polish Treasury Ministry, KGHM’s biggest shareholder, said by phone today. The ministry has a 32 percent stake in the company.

KGHM has all necessary approvals from its owners for the acquisition, Wirth said today at a press conference in Warsaw.

Combined Production

The combined company will have annual copper production of 1.4 billion pounds (635,000 metric tons) once Quadra’s Sierra Gorda copper and molybdenum project in northern Chile reaches its designed capacity, KGHM said in its own statement.

KGHM estimates that its average copper production costs will be at least 20 percent lower in 2018 as a result of adding the Quadra assets, Wirth said.

Quadra was created last year when Quadra Mining Ltd. acquired FNX Mining Co. for about C$1 billion. The company owns the Robinson mine in Nevada, Carlota in Arizona, Franke in Chile and the Morrison and Podolsky operations in Canada’s Sudbury basin.

Quadra, which produced 224 million pounds of copper and 7 million pounds of nickel in 2010, announced last month that it would wind down production at Carlota and Podolsky and adjust the mine plan at Franke to focus on the "flagship" Robinson and Morrison mines.

Sierra Gorda

The company announced a joint-venture agreement with Sumitomo Metal Mining Co. and Sumitomo Corp. in May to develop Sierra Gorda.

KGHM participated in the process Quadra ran to find a joint-venture partner on Sierra Gorda and came forward in recent weeks with a proposal to buy the company, Blythe said in his company’s statement.

The agreement includes a breakup fee of C$75 million that would be payable to KGHM if Quadra accepts a higher offer, both companies said. KGHM has a right to match any superior proposal.

The breakup fee is relatively low, Stifel’s Topping said. “It’s not really going to stop anybody” from making a competing bid, he said.

The value of the deal was calculated using the 191.5 million shares of Quadra that are outstanding, according to data compiled by Bloomberg.

Quadra said it was advised by BMO Capital Markets, and GMP Securities LP is offering a fairness opinion to the company’s independent committee of directors. KGHM said it was advised by BNP Paribas SA and Rothschild.

To contact the reporters on this story: Liezel Hill in Toronto at lhill30@bloomberg.net; Maciej Martewicz in Warsaw at mmartewicz@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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