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First Quantum Takeover Trade Turning on Anglo-Rio Talk: Real M&A

Molten Copper Is Poured From A Furnace Into A Cauldron
For mining companies seeking a deal in copper, no producer in the industrialized world is offering faster earnings growth than First Quantum Minerals Ltd. Photographer: Bartek Sadowski/Bloomberg

For mining companies seeking a deal in copper, no producer in the industrialized world is offering faster earnings growth than First Quantum Minerals Ltd.

Canada’s second-largest copper producer, which jumped the most in four months last week on takeover speculation, is projected to boost earnings before interest, taxes, depreciation and amortization by 84 percent over the next three years, according to analysts’ estimates compiled by Bloomberg. That’s more than any copper mining company based in developed markets and three times the industry median, the data show.

First Quantum, which operates on four continents from Europe to Africa, plans to more than triple copper production within five years as it starts up mines in Peru, Finland and Zambia, and the company’s co-founder and president said last month that the “only way” for the price of copper is up. The Vancouver-based company could attract Anglo American Plc, which is entangled in a dispute with Chile’s state-owned copper producer over ownership of its local unit, and help Rio Tinto Group double output of the metal, Liberum Capital Ltd. said.

“First Quantum certainly has an attractive growth platform in copper, which judging by the capital budgets of all of the majors is where everyone wants to be right now,” Daniel Rohr, an analyst with Morningstar Inc. in Chicago, said in a telephone interview. “Potentially a cheap way of buying into that market is to go buy a company like First Quantum.”

Sharon Loung, a spokeswoman for First Quantum, which has a market value of about $10 billion, didn’t respond to phone calls and an e-mail requesting comment.

Zambian Copper Mine

James Wyatt-Tilby, a spokesman for London-based Anglo, and Tony Shaffer, a spokesman for Rio, also headquartered in London, declined to comment on whether the companies have considered buying First Quantum.

Shares of First Quantum climbed 8.8 percent to C$21.11 at today, the most since Nov. 30. The gain was the largest in the Bloomberg World Mining Index.

First Quantum operates the Kansanshi copper mine in Zambia, which it’s expanding, and the smaller Guelb Moghrein copper and gold operation in Mauritania. The company is planning a new mine, Sentinel, in Zambia, and will build a copper smelter at Kansanshi to process ore from the two mines in the country. First Quantum said March 6 that it anticipates production of as much as 290,000 tons of copper this year.

Outside of Africa, First Quantum restarted the Ravensthorpe nickel mine in Western Australia in October, almost two years after agreeing to buy the asset from BHP Billiton Ltd. The company is building a nickel and copper mine in Finland and is also studying a copper project in Peru.

‘Focus in Africa’

Nickel production will rise to “well over” 100,000 tons a year as projects in Australia and Finland ramp up, compared with as much as 40,000 tons this year, according to estimates from the company and Clive Newall, the president and co-founder.

First Quantum is appealing “because of its focus in Africa,” said Larry Seruma, a New York-based portfolio manager for Nile Capital Management LLC’s Nile Pan Africa fund, which owns First Quantum shares. “The company’s nickel assets are also attractive, but I think the real attraction would be the copper assets.”

As mining production increases, analysts project that First Quantum’s Ebitda will reach $2.35 billion in 2014, an 84 percent gain from 2011, estimates compiled by Bloomberg show. That compares with a median of 25 percent growth among copper mining companies with market values of at least $1 billion, the data show. It’s also the highest rate among companies operating in developed markets.

Shares Rally

Shares of First Quantum rose 7.1 percent on April 5 after The Guardian newspaper said on its website, without citing anyone, that there was “talk” Rio, Glencore International Plc and a company based in China may be looking at First Quantum.

The same day, Ash Lazenby, a London-based analyst at Liberum Capital, said in a note that Anglo and Rio are among probable bidders.

Anglo, which mines for everything from diamonds to platinum and coal, is the most likely acquirer, according to Lazenby. Buying First Quantum would restore some of Anglo’s copper volume after it sold a 24.5 percent stake in its Anglo American Sur SA unit, which includes the Los Bronces copper mine in Chile, to Mitsubishi Corp. in November, he wrote. Codelco, based in Santiago, is seeking to exercise an option dating from 1978 to buy 49 percent of Anglo American Sur and says the stake sale to Mitsubishi was an attempt to block its option.

With only $1.14 billion in net debt, Anglo also has “arguably the best balance sheet” among the larger U.K. mining companies and First Quantum’s Ravensthorpe nickel mine would complement the $46 billion company’s existing nickel business, Lazenby wrote.

Rio Tinto, Glencore

Balance sheets at the largest mining companies are “better than pristine,” Ken Hoffman, a Princeton, New Jersey-based metals and mining analyst for Bloomberg Industries, said in a phone interview. Those companies are “always out there looking for the next big mine or good asset. Any good assets -- and, in general, people believe these First Quantum assets are good assets -- are highly valued. You’re going to see deals.”

Rio, the world’s third-largest mining company, also has “adequate firepower to seek a deal” and would be able to double copper production by acquiring First Quantum, Lazenby said. Copper accounted for about 11 percent of Rio’s more than $60 billion in sales last year, data compiled by Bloomberg show.

Glencore, the commodities trader seeking to acquire Xstrata Plc, may also be interested in First Quantum, said Craig Macadam, a Toronto-based portfolio manager at Aurion Capital Management Inc., which oversees C$5.5 billion ($5.5 billion), including First Quantum shares.

Risks in Africa

“I’ve always thought Glencore was a natural buyer,” he said in a phone interview. First Quantum owns a minority stake in Glencore’s Mopani Copper Mines in Zambia.

Simon Buerk, a spokesman for Baar, Switzerland-based Glencore, declined to comment on whether the company is considering a bid for First Quantum.

Kerry Smith, a Toronto-based analyst at Haywood Securities Inc., and Morningstar’s Rohr said First Quantum’s operations in risky areas may deter buyers. The stock dropped the most in four months on March 6 after workers at its Kansanshi mine in Zambia went on strike over pay demands.

Still, some mining companies, including Rio, are increasingly looking for deposits in regions with high political and security risk to help meet commodities demands from China and India, Michael Humphreys, managing director at strategic consultancy Control Risks in Sydney, said in an interview last month.

Copper Prices ‘Up’

At a March 15 conference in London, First Quantum’s Newall said that “the only way, really, for copper prices is up” in the coming years as demand for the metal expands in China, India and Brazil. Copper for delivery in three months on the London Metal Exchange closed at $8,030 a ton today.

The metal used in electric wire, roofing and plumbing may average $8,377 next year before dropping to $8,000 in 2014, according to the median of analysts’ estimates compiled by Bloomberg.

With an enterprise value of almost $9.4 billion as of yesterday, First Quantum was valued at about $303 per metric ton of its copper equivalent reserves and measured, indicated and inferred resources, according to data compiled by Bloomberg Industries analysts Andrew Cosgrove and Hoffman. That’s based on the median of analysts’ estimated prices for the metal in 2015, and it’s less than the average of almost $521 per metric ton among similar-sized companies primarily focused on copper mining, the data show.

Takeover Premium

“There’s not many good operating copper companies out there,” Raymond Goldie, a Toronto-based analyst at Salman Partners Inc., said in a phone interview. “It’s much cheaper to go out and buy copper in the stock market than to buy it on the London Metal Exchange or to go out and find it yourself.”

First Quantum could fetch between C$33 and C$37 a share in a takeover, according to Seruma of Nile Capital, or as much as a 91 percent premium to yesterday’s closing price of C$19.40. Macadam of Aurion Capital says a premium of about 35 percent may be enough to close a deal, indicating a takeover price of more than C$26 a share.

“First Quantum is really trading at a discount to its true value,” Seruma said in a phone interview. “For a larger player, they would see this as an opportunity to buy at a very cheap price.”

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