Lundin to buy Candelaria from Freeport

VANCOUVER — Rumours had been swirling for months over Lundin Mining’s (TSX: LUN; US-OTC: LUNCF) eyeing of Freeport-McMoRan’s (NYSE: FCX) 80% stake in the Candelaria copper-mining complex in Chile’s Atacama province, and on Oct. 6 the companies finally struck an all-cash agreement for the asset.

Lundin has been seeking to increase its exposure to copper, and president and CEO Paul Conibear said in a conference call to discuss the purchase that Candelaria is a “tremendous strategic fit” that will bolster its status as a “leading intermediate base-metals producer.”

The purchase price is US$1.8 billion in cash, plus customary adjustments. Freeport will also receive contingent consideration of up to US$200 million in aggregate, calculated as 5% of net copper revenues in any annual period over the next five years if the average annual realized copper price exceeds US$4 per lb. Lundin will hold an 80% interest in Candelaria, with Japan’s Sumitomo keeping its 20% stake.

To help fund the purchase, Lundin signed a side deal with  Franco-Nevada (TSX: FNV; NYSE: FNV) to sell a gold-and-silver stream from the mine in exchange for an upfront deposit of US$648 million. Under the agreement Franco will acquire 68% of gold and silver production from Candelaria until 720,000 oz. gold and 12 million oz. silver have been delivered. Franco could receive 40% of total gold and silver production.

The remaining US$1.2 billion in cash for the purchase will likely be funded with a US$1-billion senior-secured debt and a bought-deal equity financing totalling US$600 million. Lundin also intends to repay and retire an outstanding US$250-million term loan, with proceeds from the financings. The company has a US$1-billion senior-secured bridge loan commitment, while the Lundin family trust and Franco will reportedly participate in the equity financing.

“The deal is completely in line with our growth strategy, and fits in with our Eagle acquisition last year. Candelaria is immediately accretive on key operating metrics, including cash-flow earnings per share,” Conibear said. “We are also increasing and diversifying our copper production, which makes us a top-twenty global copper producer. We’re adding fundamental core strength and large, open-pit copper capabilities, which are things we have been striving for over the past few years. The operation also carries low technical and execution risk.”

Situated in Chile’s prolific Region III, Candelaria is expected to produce 156,000 tonnes copper, 97,000 oz. gold and 1.9 million oz. silver in 2014 on a 100% basis.

Annual average life-of-mine production — based on current reserves — is expected to be 126,000 copper, 77,000 oz. gold and 1.4 million oz. silver.

The operation is widely viewed as a global model for an open-pit iron oxide-copper-gold-copper production.

By-product cash costs are estimated at US$1.80 lb. copper in 2014 and US$1.69 per lb. over the mine life, excluding the gold- and silver-stream adjustment — or US$2.06 per lb. in 2014 and US$1.93 per lb. over the mine’s life, inclusive of the stream agreement.

Current reserves support a 14-year mine life and total 380 million proven and probable tonnes grading 0.54% copper, 0.13 gram gold per tonne and 2.01 grams silver per tonne. Total in-situ copper reserves are estimated at 2 million tonnes, assuming US$2 per lb. copper.

“A particularly important thing to note is that we’re operating in a world where we’re seeing increasingly lower grades coming from mines producing more challenging concentrates in Europe and South America,” Conibear added. “Candelaria is well known for its high-quality, pure-copper concentrate. It’s marketable and demands a premium for those reasons.”

Candelaria has two operations: The main open-pit and Candelaria Norte underground mine feed a central 75,000-tonne-per-day concentrator; and the nearby Ojos del Salado underground complex — which includes the Alcaparrosa and Santos mines — hosts a stand-alone, 3,800-tonne-per-day concentrator.

Lundin also picks up three infrastructure-related assets in the deal. First, the company acquires a wholly owned port facility 100 km from the mine at Punta Padrones, which is shipping up to 600,000 wet tonnes annually, but has a 3.5-million-wet-tonne capacity per year. Second, Candelaria comes with a 10-year power contract. Annual electrical costs were pegged at 12¢ per kilowatt hour last year. Finally, a 500-litre-per-second desalination plant was recently commissioned to serve the mine’s water needs.

“We believe there is excellent potential for life-of-mine extensions here via underground exploration, pit optimization and a really intriguing property position that accompanies the asset,” Conibear said. “We’ll be aggressive in our exploration efforts over that greater package over the next few years.”

He said Lundin is budgeting roughly $30 million annually on exploration programs at Candelaria over the next three to five years.

Lundin says the acquisition could boost its copper production 129% by 2015 to 267,000 tonnes per year.

The transaction has an effective date of June 30, 2014, and is to close by year-end.

Freeport chairman James R. Moffett said in a release that the transaction “represents another important step in our ongoing debt-reduction plan and follows the completion of our US$3.1-billion sale of Eagle Ford shale assets in June. We remain committed to our balance sheet objectives while focusing on our large portfolio of high quality assets and resources, which provide strong current cash flows and have attractive growth characteristics.”

Freeport expects to record a US$450-million after-tax gain on the transaction.

Lundin shares fell 11¢ to close at $5.22 per share after the deal was announced. Lundin has 586 million shares outstanding for a $3-billion market capitalization.

Freeport shares were off US89¢ on news of the sale to close at US$31.60. Freeport has 1.04 billion shares outstanding for a US$33.5-billion market capitalization.

Franco-Nevada shares also dropped on the deal, slipping 67¢  to close at $52.69, but had more than recovered to trade at $56 a day later. Franco has an $8.3-billion market cap.