First Quantum sweetens bid for Inmet to $5.1B

First Quantum Minerals (FM-T, FQM-L) has stepped up its game to take over Inmet Mining (IMN-T), boosting its hostile offer to $5.1-billion in hopes of winning over Inmet shareholders, after failing twice to entice the company’s board in recent months. 

The revised deal offers $72 per Inmet share in cash and equity, up from $70 a share previously, and represents a 65% premium to Inmet’s Nov. 23 close, the last trading day before the previous bid.

First Quantum chairperson and CEO Philip Pascall says the acquisition would create a leading copper firm, placing it in the top-five copper producers within the next five years, with a 23% annualized growth in copper production. By 2018, the company forecasts combined copper output of 1.3 million tonnes.

If the bid succeeds, the copper powerhouse would have projects in eight countries, including seven producing mines and three large development projects in Sentinel (Zambia), Haquira (Peru) and Cobre Panama (Panama).

Inmet’s 80%-held Cobre Panama is the driving force behind the bid. The project is slated to reach commercial production in 2016, with annual copper output averaging 266,000 tonnes over the mine’s minimum 30-year life.

“In BMO Research’s view, the combination of the two companies make a great deal of sense given the geographic diversification, the focus on copper production, and the quality and scale of the asset base,” BMO Nesbitt Burns analyst Stephen Bonnyman writes in a note.

Raymond James analyst Alex Terentiew agrees, noting the offer is a “logical and strategically appropriate move” for First Quantum, and that “at $72 per share, the offer is 9% accretive to First Quantum’s net asset value [assuming no capital cost savings are realized].”

Commenting on what the company could offer Inmet, Pascall says that First Quantum has commissioned five mines in the last 10 years, each on time and on budget, at costs below industry standards. He believes First Quantum could use its project-development skills to bring the estimated $6.2-billion Cobre Panama project online, at a potentially lower cost.

While Cobre Panama is larger in scale than First Quantum’s operating mines, Pascall points out that the firm’s Sentinel development project in Zambia has a similar throughput and processing plant to Cobre Panama.

Inmet says it will review the offer, and advises shareholders to withhold action until then.

First Quantum plans to mail the formal offer and takeover bid circular to Inmet shareholders in January 2013. The offer requires approval from two-thirds of Inmet shareholders.

Analysts believe Inmet’s major shareholders will play a key role in determining what will happen next, noting that a higher bid from First Quantum or another suitor is likely to follow.

“Given the highly concentrated nature of Inmet’s shareholder base [the top five shareholders own 50% to 55% of Inmet shares], we believe that a markedly higher offer — likely in the range of $80 to $90 per share — would be required to motivate Inmet shareholders to accept First Quantum’s unsolicited offer,” Canaccord Genuity analyst Orest Wowkodaw says in a note.

Analyst Tom Meyer at Scotia Capital, who would also like to see an offer closer to $85 an Inmet share, maintains it would be difficult for First Quantum to increase its bid without conducting extensive due diligence on Cobre Panama.

To date, First Quantum has used only public information to review the project. Its previous requests for more detailed information were denied, as Inmet said the earlier offers of $70 a share in November and $62.50 a share in October were too low.

BMO’s Bonnyman states that First Quantum could raise its bid to $78 per share before the deal becomes dilutive to the company’s net asset value, assuming the offer has a 70% cash and 30% share component.

Under the current offer, Inmet shareholders could choose to get $72 per share in cash; 3.2962 First Quantum shares, plus $0.01; or $36 in cash plus 1.6484 shares, subject to an overall mix of 50% cash and 50% equity, which works out to $2.5 billion in cash and 115.9 million shares.

The company plans to fund the cash portion with cash-on-hand and by arranging a US$2.5-billion acquisition facility.

The offer represents a dilution of up to 24%. Terentiew of Raymond James says that First Quantum could add $2 a share to the offer price before it reaches a 25% share dilution, and would require approval from its shareholders. The current offer does not require its shareholders to vote.