Andrew Michelmore, chief executive officer of Minmetals Resources Ltd. Photographer: Luis Enrique Ascui/Bloomberg
Minmetals Resources Ltd. (1208), the Hong Kong unit of China’s biggest metals trader, made an unsolicited offer of about C$6.3 billion ($6.5 billion) in cash for Equinox Minerals Ltd. (EQN), gaining control of Africa’s largest copper mine.
Minmetals bid C$7 a share, 23 percent more than Perth-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, whose shares rose 28 percent in Sydney today, dropping its C$4.4 billion offer for Canada’s Lundin Mining Corp.
The deal, China’s biggest minerals takeover, would give 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.
“The Minmetals bid could prompt another interested buyer to put forward an alternative proposal,” said Angus Gluskie, who manages about $350 million at White Funds Management Pty. “ “An improving global economic outlook is giving buyers the confidence that prices should remain firm for some time.”
Minmetals, a unit of state-owned China Minmetals Group, traded at HK$6.56 on April 1, giving it a market value of HK$19.5 billion ($2.5 billion). Equinox rose A$1.58 to A$7.29 (C$7.30) at 11:15 a.m. in Sydney trading, the highest since June 22, 2004. The company’s board will meet to consider the offer, it said in a separate statement. Lundin Mining Corp. (LUN) shares were up 3.5 percent at C$8.33 at the April 1 close of trading on the Toronto stock Exchange.
Chinese companies spent more than $30 billion last year buying mining assets and oil deposits to help secure raw material supplies to feed the nation’s growing economy. 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 premium of 33 percent to the volume weighted average Equinox share price of the past 20 days compares with an average premium of 24 percent for resources deals of at least $500 million during last year, 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. Minmetals has been studying Equinox for “well over a year” and built a 4.2 percent stake in the company during 2010.
The Hong Kong-based company is offering 11.3 times earnings before interest, tax, depreciation and amortization compared with the average of 7.2 times EBITDA in 10 comparable deals from 2007 to 2009, 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 and is expected to rise as mine shortages curtail supply.
“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, a Bloomberg top-ranked analyst at Danske Bank A/S in Copenhagen. “You’ve got to be bullish copper for the next few years.”
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,” said White Funds’ Gluskie.
Producers haven’t kept pace with demand because reserves are becoming harder to find and ore quality is declining, meaning less copper is extracted from each ton of rock.
Minmetals Resources is advised by Deutsche Bank AG and Macquarie Capital Advisors.
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. Minmetals completed the $1.85 billion cash and share acquisition in December of parent company China Minmetals’s Australian unit.
All 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.
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