First Quantum Chasing Inmet Seen Start of Bids: Real M&A

The cheapest copper mining deal in five years has traders convinced that First Quantum Minerals Ltd. (FM)’s latest bid for Inmet Mining Corp. (IMN) won’t be its last.

The C$5.1 billion ($5.2 billion) offer values Inmet, owner of the second-biggest copper mine under construction, at the lowest multiple of earnings before interest, taxes, depreciation and amortization for a deal of its size in the industry since 2007, according to data compiled by Bloomberg. Inmet shares climbed yesterday 1.2 percent above the C$72-a-share proposal -- First Quantum’s third offer for the Toronto-based company since October -- indicating arbitrageurs who bet on acquisitions expect another boost, the data show.

After Inmet last week raised estimates for the amount of copper contained at its Cobre Panama mine, Canaccord Financial Inc. said it would take a bid of at least C$80 a share to win over investors, particularly with the top shareholders controlling a majority of the stock. While Inmet could draw other suitors, Vancouver-based First Quantum’s desire for a friendly deal suggests it may be willing to pay more whether or not there are rival bidders, according to Bank of Montreal.

“The market is clearly saying that we are going to need a higher price to push this through,” Barry Schwartz, a Toronto- based fund manager at Baskin Financial Services Inc., which oversees about C$450 million including Inmet shares, said in a telephone interview. Cobre Panama “is going to be one of the greatest mines that’s going to come on stream in the second half of the decade. We’re running out of quality finds of copper, and Inmet has one of them.”

Twice Spurned

Flora Wood, a spokeswoman for Inmet, declined to comment on the potential for an increased bid. The company yesterday said it hadn’t yet received the latest offer and that it will evaluate any formal proposal.

Sharon Loung, a spokeswoman for First Quantum, didn’t respond to a phone call or e-mail seeking comment yesterday.

First Quantum, a producer of copper in Africa and nickel in Australia and Finland, said on Dec. 16 that it offered C$72 in stock and cash for each Inmet share, raising its bid for the company after Inmet spurned two earlier unsolicited proposals of C$62.50 and C$70. The latest price is 36 percent more than Inmet’s closing level on Nov. 27, the day before the company disclosed the two prior offers and adopted a poison pill to thwart a hostile takeover.

Including net debt, the proposal values Inmet at 7.6 times its Ebitda during the past 12 months, according to data compiled by Bloomberg. That’s the lowest Ebitda multiple among deals of $500 million or more in the copper-mining industry since Teck Resources Ltd. (TCK/B) bought Aur Resources Inc. in 2007, the data show.

‘More Value’

Inmet gained 4.3 percent yesterday to C$72.85 on news of First Quantum’s increased offer, signaling traders expect an even higher bid, said Sachin Shah, a Jersey City, New Jersey- based special situations and merger arbitrage strategist at Tullett Prebon Plc.

Today, Inmet shares fell 0.2 percent to C$72.71.

“I don’t think this is the final number,” Shah said in a phone interview. “This mine obviously has more value.”

Inmet’s Cobre Panama deposit contains an estimated 51 billion pounds of copper, according to the company, the second- highest of any undeveloped copper project. It’s expected to cost $6.2 billion and produce an average of 266,000 tons a year of the metal when construction is complete.

Deal Catalyst

“The Cobre Panama project is the catalyst, if you like, for our interest in Inmet,” Clive Newall, First Quantum’s president, said in a Dec. 16 phone interview. “Our desire in all this is always to engage with Inmet to have the opportunity to look at the project and see what benefits we can bring to it.”

Given the value of the Cobre Panama project, First Quantum may need to increase its offer to C$80 to C$90 a share to convince investors to sell, according Orest Wowkodaw, a Toronto- based analyst for Canaccord. That’s at least a 52 percent premium to Inmet’s Nov. 27 closing price.

“With an attractive suite of low-cost operating assets, and significant projected future growth from the Cobre Panama project, we believe there is a strong likelihood that Inmet will attract an improved offer from First Quantum” or another suitor, Wowkodaw wrote in a note to clients yesterday.

Teck Possibility

Teck Resources, the owner of Canada’s largest copper mine, would be the most likely competing bidder because it operated the Cobre Panama project until 2008 when “it got into severe balance sheet stress,” Wowkodaw said. The company is better positioned to buy Inmet now that it has C$3.9 billion in cash and “no material near-term debt maturities,” he said.

Chris Stannell, a spokesman for Vancouver-based Teck, said the company doesn’t comment on speculation about mergers and acquisitions, when asked whether it’s considering a bid for Inmet.

The Dec. 16 statement from First Quantum suggests it’s interested in negotiating a friendly deal with Inmet, which implies that it may be willing to boost its offer even if other buyers don’t step in, Stephen Bonnyman, an analyst at Bank of Montreal, wrote in a note that day.

First Quantum may be able to find “further savings” should Inmet provide it with more detailed information on Cobre Panama, and it would be open to discussing with Inmet’s board “how the benefits of such additional savings might best be shared between the shareholders of the enlarged group,” the company said in its statement.

All Cash

“We advise clients to hold for a higher bid,” Bonnyman, who’s based in Toronto, wrote in his note. “This is likely the first step in a bidding process, with likelihood of other bidders.”

An all-cash offer for more than C$80 a share would probably seal the deal, especially given that merger arbitrageurs and hedge funds may have taken positions and would prefer cash to shares in another company, said Schwartz of Baskin Financial Services. Still, he’s so bullish on the Cobre Panama project and Inmet’s prospects that he said he’d be “perfectly happy” if the company remained independent.

On the other hand, before First Quantum’s interest was disclosed, Inmet traded for 28 percent less than yesterday’s price and there’s risk that the stock could return to that level should First Quantum walk away and other buyers not emerge.

Buy Recommendations

Still, 13 out of 15 analysts recommend purchasing Inmet shares, data compiled by Bloomberg show. They estimate on average that the stock will climb above C$78 in the next year, higher than First Quantum’s latest offer, the data show.

Salman Partners Inc.’s Raymond Goldie has the highest share-price target at C$121 and says an offer below C$79 is likely unacceptable, based on premiums paid in historical deals and the long-term price of copper.

“Anything below C$79 won’t work,” Goldie said in a phone interview from Toronto. “Either another bidder or some other catalyst is going to get the price up.”

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

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Simon Casey at scasey4@bloomberg.net

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