China Need to Acquire Africa Means Bid for Equinox Increases 18%: Real M&A
China’s need to acquire metal deposits in Africa is leading traders to bet that Minmetals Resources Ltd. (1208) will increase its offer for Australia’s Equinox Minerals Ltd. (EQN) more than any pending deal in Asia.
Equinox rose to C$7.55 yesterday, 7.9 percent more than the C$7-a-share offer from Minmetals, a unit of state-owned China Minmetals Group. The level above the bid was the largest of any takeover in Asia greater than $1 billion, according to data compiled by Bloomberg. UBS AG said fair value for a purchase of Equinox is C$8.28, 18 percent higher than the original proposal.
The unsolicited bid of C$6.04 billion ($6.2 billion), including net debt, would give Minmetals control of Perth-based Equinox’s copper mine in Zambia after demand from China drove the metal to a record price this year. The company is pursuing China’s biggest mining takeover after the country helped rebuild the Democratic Republic of Congo three years ago for access to copper and cobalt. Africa will account for 9.8 percent of the world’s copper output this year, UBS forecasts.
“The Chinese are back in the acquisition game,” said John Stephenson, a Toronto-based fund manager at First Asset Investment Management Inc. who helps oversee about C$2 billion including Equinox shares. “Copper is a strategic metal and they are very concerned about assuring their supply of materials that will allow them to continue to compete internationally. They want Equinox and they’re going to get it.”
Michael Vaughan, a spokesman for Equinox, declined to comment. The company’s shares rose 1 cent to C$7.56 at 4:10 p.m. today in Toronto.
Miche Paterson and Nick Maher, representatives for Minmetals, weren’t available for comment.
Minmetals would gain access to Equinox’s Lumwana project in Zambia, which processes about 20 million tons of ore per year into a copper concentrate. Equinox is aiming to produce 145,000 tons of copper this year, according to its website. Equinox also bought the biggest copper deposit in Saudi Arabia in January, and its first production is expected in 2012.
Minmetals of Hong Kong owns the world’s second-biggest zinc mine and other assets in Australia, Laos and Canada. Chief Executive Officer Andrew Michelmore said in January he was targeting acquisitions of copper, lead and zinc mines. Its parent company is China’s biggest metals trader.
Copper for delivery in three months on the London Metal Exchange traded at a record $10,190 a ton on Feb. 15. The metal, which is used in electric cables and plumbing, will average $9,750 this year and $10,150 in 2012, according to the median of analysts’ estimates compiled by Bloomberg. Mining companies haven’t kept pace with demand because reserves are becoming harder to find and the quality of ore is declining, meaning less copper is extracted from each ton of rock.
Equinox closed 7.9 percent above Minmetals’ bid in Toronto trading yesterday, the biggest gap for any pending deal involving a company from developed markets in the Asia-Pacific region, according to data compiled by Bloomberg.
Fair value for control of Equinox is about C$8.28 a share, based on copper forecasts and the value of its assets, Onno Rutten, a Toronto-based analyst with UBS, wrote yesterday. A bid of at least C$8 a share from Minmetals, which is seeking approval from more than two-thirds of Equinox’s investors, may be enough to get shareholders’ attention, according to David Davidson, an analyst at Paradigm Capital Inc. in Toronto.
“You can rest assured it’s not going to be C$7,” Davidson said. “You probably have room to negotiate the price higher.”
Minmetals’ offer valued Equinox’s equity at 24 times earnings, the most in a copper deal greater than $500 million, according to data compiled by Bloomberg. An acquisition at yesterday’s closing price of C$7.55 would be worth 9.8 times next year’s profit, which is projected to double from 2010 to a record. That’s in line with the 9.73 median ratio for publicly traded copper miners with market capitalizations greater than $1 billion, the data show.
It “will end up being a very attractive price for China’s Minmetals,” said John Goldsmith, a Toronto-based fund manager at Montrusco Bolton Investments Inc., which oversees about C$4.9 billion. “We’re dealing with a much higher copper price environment right now.”
Africa’s copper production may grow as much as 10 percent annually for the next five to 10 years, Tom Price, a commodity analyst for UBS in Sydney, said in an interview.
China has been acquiring mining assets across the continent. State-owned Jinchuan Group Ltd., China’s largest platinum producer, agreed on takeover terms with Johannesburg- based Wesizwe (WEZ) Platinum Ltd. in December. The deal includes a debt commitment, giving Wesizwe $877 million to build its first mine in South Africa, the world’s largest supplier of platinum.
China Guangdong Nuclear Power Group of Shenzhen, the nation’s second-largest reactor builder, made a 756 million- pound ($1.2 billion) bid for London-based Kalahari Minerals Plc (KAH) last month that would give the state-owned company access to Extract Resources Ltd. (EXT)’s Husab uranium project in Namibia. Kalahari owns about 43 percent of Perth-based Extract.
The Equinox deal is China’s largest ever proposed takeover of a mining company, and the 32 percent premium over the 20-day trading average is the most a Chinese company has paid for a mining deal greater than $500 million, according to data compiled by Bloomberg.
Minmetals has been studying Equinox for “well over a year” and built a 4.2 percent stake in the company during 2010, CEO Michelmore said on a media conference call this week.
Equinox shares had declined 8.9 percent before Minmetals’ offer since announcing a C$4.6 billion unsolicited bid for Lundin Mining Corp. (LUN) Feb. 28, which must be withdrawn if Minmetals prevails. Toronto-based Lundin rejected the offer March 20, and Equinox today extended the offer to April 29.
Minmetals’ acquisition requires approval from Chinese and Australian regulators. The company said it lodged an application with Australia’s Foreign Investment Review Board on March 11.
“The market is saying it expects it to get done and with more money on the table,” First Asset’s Stephenson said. “If you’re an Equinox shareholder, this is pretty darn good.”
Overall, there have been 6,313 deals announced globally this year, totaling $646 billion, a 27 percent increase from the $510 billion in the same period in 2010, according to data compiled by Bloomberg.
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