Quadra Up for Grabs With Escalating Price Driving Deal: Real M&A

Quadra FNX Mining Ltd. is poised to secure the largest takeover price increase in North America as the cheapest copper bid on record leaves room for Vale SA (VALE3) or Antofagasta (ANTO) Plc to make a competing offer.

Poland’s KGHM Polska Miedz SA agreed this week to buy Quadra for C$2.28 billion ($2.26 billion) including net cash, valuing the Canadian miner at 5.2 times net income, the lowest for a copper takeover of similar size, according to data compiled by Bloomberg. The price is also a 36 percent discount to net asset value, based on analysts’ estimates compiled by Bloomberg. After closing 5.4 percent above the bid yesterday, Quadra is more likely to draw a higher offer than any other deal greater than $500 million in North America, the data show.

While the Vancouver-based company agreed not to solicit rival proposals to KGHM’s C$15 a share in cash, Quadra may still lure offers from Vale (VALE5) or Antofagasta with its copper deposit in Chile and mines in the U.S. and Canada, according to Stifel Nicolaus & Co. With analysts expecting Quadra to reach C$18.28 in the next 12 months as an independent company, a bidding war may push the price tag to as much as C$28.25, 88 percent higher than the current agreement, said Salman Partners Inc.

“The stock is trading at a premium to the C$15 bid not only because the offer seems to be at a deep discount to fundamental value and what the consensus target prices were, but also because it was pretty clear that there had not been an auction process,” Catharine Sterritt, a Toronto-based risk arbitrage strategist at Scotia Capital Inc., said in a telephone interview. “There are other people who will be interested.”

‘Not Emotions’

Kristina Howe, a spokeswoman for Quadra, didn’t respond to a phone call or e-mail requesting comment.

“The price we offered for Quadra is a result of fundamental analysis and not emotions,” said Dariusz Wyborski, a spokesman for Lubin, Poland-based KGHM. (KGH) “It’s a fair price and we don’t see ourselves getting into a bidding war.”

A representative for Rio de Janeiro-based Vale said the company doesn’t comment on rumors or speculation. Representatives for London-based Antofagasta didn’t respond to e-mails.

KGHM, the copper miner with the largest European output, announced on Dec. 6 its agreement to purchase Quadra at a 43 percent premium to the stock’s 20-day trading average. The company, which is 32 percent owned by the Treasury Ministry in Poland, said the deal will boost annual production by 100,000 tons from 570,000 tons planned this year. The transaction, expected to close in the first quarter, will be the largest overseas acquisition by a Polish company, data compiled by Bloomberg show.

Cheapest Copper Takeover

At 5.2 times net income, Quadra would be the cheapest copper takeover greater than $500 million on record, the data show. Excluding Quadra, deals in the industry have cost a median of 12.5 times profit.

After declining 32 percent this year, Quadra shares were up 39 percent in the last two days. The stock closed yesterday at C$15.81, indicating that traders who profit from mergers and acquisitions expect a richer bid. Quadra is trading the most above its bid of any pending North American takeover valued at more than $500 million, according to data compiled by Bloomberg.

“The trading is telling us, at the very least, KGHM is going to have to up their offer,” George Topping, a Toronto- based analyst at Stifel Nicolaus, said in a phone interview. “Who would tender at a C$15 bid when you can just sell it in the marketplace for where it’s trading now?”

Quadra fell 1 cent to C$15.80 at 9:55 a.m. in Toronto.

‘Too Low’

The deal is “too low” relative to the value of Quadra’s underlying assets, he said. KGHM’s bid is about 36 percent less than Quadra’s net asset value of C$23.60 a share, based on the average of four analysts’ estimates compiled by Bloomberg, including Topping, who pegs the value at C$20 a share.

“The pricing looks low compared with the net asset value of the company,” Raymond Goldie, a Toronto-based analyst at Salman Partners, said in a phone interview. “The market is thinking there will be another bid.”

Quadra, which was created last year when Quadra Mining Ltd. acquired FNX Mining Co. for about C$1 billion, produced 224 million pounds of copper and 7 million pounds of nickel in 2010.

The company, with operations including the Morrison mine in Canada’s Sudbury basin and the Robinson mine in Nevada, plans to start production in 2014 at the $3 billion Sierra Gorda copper and molybdenum mine in Chile.

‘Sweet Spot’

“The sweet spot of the Quadra asset base is the development projects,” Alec Kodatsky, an analyst at Canadian Imperial Bank of Commerce, said in a phone interview from Toronto. “There is not an infinite number of copper deposits that are available out there, and certainly Quadra has some of the better ones.”

Vale, the world’s largest iron-ore producer, may enter the bidding because it already has nickel and copper operations in Sudbury and would gain control of Quadra’s “most attractive” asset, the Sierra Gorda project, Stifel’s Topping said.

“Sierra Gorda is a low-cost, undeveloped copper asset,” Scotia Capital’s Sterritt said. “For someone like Vale that has been actively looking at copper acquisitions and has the Sudbury connection, it would particularly make sense.”

Vale, with a market value of $120 billion as of yesterday, said Nov. 28 that it plans to invest $21.4 billion in mining projects in 2012 to boost the output of commodities including copper. In July Vale abandoned a bid for Metorex Ltd., the owner of copper and cobalt mines in Zambia, after China’s Jinchuan Group offered a higher price.

No Auction

Antofagasta, a $19 billion producer of copper in Chile, also has a project in Sierra Gorda and may be interested in acquiring Quadra, according to Stifel’s Topping.

Paul Blythe, chief executive officer of Quadra, said on a conference call Dec. 6 that the board had to choose between “a substantial premium on the table that may go away” and proceeding with an auction process. Quadra has agreed not to solicit rival offers and has given KGHM a five-day right to match superior bids.

“We’ve got the deal that we’ve got,” Blythe said in a phone interview this week. “It is a significant premium. We’re comfortable as a board recommending the deal. If anybody sees it differently then they are going to step up and say so.”

John Tumazos, founder of Very Independent Research LLC in Holmdel, New Jersey, said he doesn’t expect any other proposals.

Xstrata, Minmetals

“What I read into the agreed-upon price was that the Quadra management didn’t have 100 percent confidence in the copper price or the moly price, and they didn’t have 100 percent confidence in their operations,” he said in a phone interview. “If someone wants to bid higher, they have to think they can run the mines better.”

Still, other potential bidders for Quadra include Xstrata Plc (XTA) of Zug, Switzerland, and China’s Minmetals Resources Ltd. (1208), Greg Barnes, a Toronto-based analyst at TD Securities Inc., wrote in a Dec. 7 note to clients.

Xstrata has neighboring operations in Sudbury and may also be interested in the Sierra Gorda project, Barnes said. Emily Russell, a spokeswoman for Xstrata, said the company doesn’t comment on market speculation.

Minmetals, a unit of state-owned China Minmetals Corp., “has been actively bidding for intermediate copper producers”, Barnes said. The company’s attempt to acquire Equinox Minerals Ltd. earlier this year was trumped by Barrick Gold Corp. Kathleen Kawecki, a spokeswoman for Minmetals, said the company doesn’t comment on market speculation.

‘Opportunistic Bid’

Quadra should command C$28.25 a share in a takeover, comparable to its net asset value, estimates Salman Partners’ Goldie. That would be 7.4 percent higher than Quadra’s record high of C$26.31 in 2008, the data show. TD Securities’ Barnes said a buyer needs to offer at least C$17 a share to get support from investors.

Even before the KGHM acquisition was announced, analysts on average were projecting that Quadra’s stock would climb to C$18.28 (QUX) on its own within a year, according to estimates compiled by Bloomberg.

“It’s an opportunistic bid,” said Stifel’s Topping. “As long as the world doesn’t fall apart, then there ought to be a higher offer.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Liezel Hill in Toronto at lhill30@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Simon Casey at scasey4@bloomberg.net.

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