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

Andrew Michelmore, chief executive officer of Minmetals Resources Ltd. Photographer: Jerome Favre/Bloomberg
Andrew Michelmore, chief executive officer of Minmetals Resources Ltd. Photographer: Jerome Favre/Bloomberg

April 4 (Bloomberg) -- Minmetals Resources Ltd., 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, Australia-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 dropping its C$5 billion offer for Canada’s Lundin Mining Corp.

“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.

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, a unit of state-owned China Minmetals Group, rose 2.4 percent to HK$6.72 at the 4 p.m. close in Hong Kong trading, giving it a market value of HK$19.9 billion ($2.56 billion). Equinox gained 32 percent to C$7.55 as of 4:20 p.m. in Toronto Stock Exchange trading, and Lundin fell 4 percent to C$8.

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

Chinese companies announced at least $33.7 billion of mining, oil exploration and production deals in 2010, according to Bloomberg data, buying mining and oil assets to help secure raw-material supplies to feed the nation’s growing economy.

Australia, Laos

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.

The offer represents a premium of 32 percent to the volume weighted average Equinox share price of the 20 days through April 1, according to Bloomberg data. That compares with an average premium of 26 percent for takeovers of mining companies worth at least $500 million that were completed in the past 12 months, 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.

Copper Record

Minmetals has been studying Equinox for “well over a year” and built a 4.2 percent stake in the company during 2010, he said.

The Hong Kong-based company is offering 11.5 times earnings before interest, tax, depreciation and amortization compared with the average of 6.8 times Ebitda in three comparable deals in 2007 and 2008, according to data compiled by Bloomberg.

Copper for delivery in three months on the London Metal Exchange traded at a record $10,190 a metric ton on Feb. 15. The metal has climbed 17 percent in the past year as demand exceeded production. Copper would account for 60 percent of Minmetals’ total production in fiscal 2015 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, an analyst at Danske Bank A/S in Copenhagen ranked by Bloomberg as the most accurate industrial-metal forecaster over two years. “You’ve got to be bullish copper for the next few years.”

Buy, Build?

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.

“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,” Gluskie said.

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.

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 reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.

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

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