Quadra FNX ups Victoria resource

Infill drilling at Quadra FNX Mining‘s (QUX-T) polymetallic Victoria project in Sudbury, Ont., has increased inferred resource tonnage by 16% and raised by 32%, 26% and 4% its contained nickel, copper and total precious metals, respectively, the company says. 

Victoria now has inferred resources of 14.5 million tonnes grading 2.5% nickel, 2.5% copper and 7.6 grams of total precious metals per tonne.

Metal prices used for the updated resource were US$5 per lb. copper, US$14.50 per lb. nickel, US$2,910 per oz. platinum, US$910 per oz. palladium and US$1,820 per oz. gold, with the Canadian and U.S. dollars at par.

Borehole geophysical surveys have demonstrated extensions of electromagnetic conductance that the company interprets as sulphide mineralization down-dip of the known Victoria Zone 4 mineral envelope. The company says more conductive domains have been discovered several hundreds of metres to the west of Zone 4 and will be drill-tested this year.

Last year the company produced 220 million lbs. copper, 103,000 oz. of total precious metals and 10 million lbs. nickel. Consolidated payable production for the three months ended Dec. 31, 2011, reached 59 million lbs. copper, 24,000 oz. of total precious metals and 3 million lbs. nickel.

Quadra FNX added that Robinson, its open-pit copper mine in Nevada, delivered “record ex-pit mining volumes and continuing grade improvement as mining transitioned into the higher grade benches at the bottom of the Ruth pit.”

The company has mines in Nevada, Arizona, Chile, and Canada. Its two development-stage projects are Victoria and its flagship Sierra Gorda, a copper-molybdenum project in Chile.

Last December, Polish copper mining giant KGHM made an all-cash offer for the company of $15 per share – a 41% premium to Quadra’s 20-day, volume-weighted average price – and Quadra’s board has backed the offer. A shareholders’ meeting is planned for February.

Tom Meyer, a mining analyst at Scotia Capital, has a one-year target price on Quadra FNX of $17.50 per share.

“We believe KGHM’s $15-per-share offer does not account for the potential at Victoria, Sierra Gorda, and improving operating flexibility and exploration optionality at Robinson,” he wrote in a Jan. 16 note to clients.

Meyer added that the KGHM offer implies a price-to-net-asset-value multiple of 0.53 times, whereas its peers trade at 0.62 times price to NAV.

The acquisition requires 66% approval from Quadra FNX’s shareholders. The deal is also subject to regulatory approvals that fall under the Investment Canada Act.

KGHM operates three mines in Poland: Lubin, Rudna and Polkowice-Sieroszowice, as well as three smelters and a wire rod plant.

Shares of Quadra FNX closed at $15.32 on Jan. 16 after touching a high of $15.34 earlier in the day. The company has a 52-week range of $7.69-$17.55 and about 191.5 million shares outstanding.

Analyst Orest Wowkodaw of Canaccord Genuity has a hold on the stock with a 12-month price target of $17 per share, “which continues to anticipate a bump in the offer price offered by KGHM.” He notes that the company’s recent fourth-quarter operating results were below his expectations, and largely attributed to the Robinson mine. Production in that quarter “continues to highlight the higher than average operating risk associated with the company’s non-Sudbury producing assets,” he commented
in a Jan. 17 summary. “We now forecast 2012E-2014E payable copper production of 239 million lbs., 234 million lbs. and 289 million lbs. (from 252 million lbs., 239 million lbs. and 305 million lbs.), respectively.”

In terms of valuation Wowkodaw points out that Quadra is currently trading at a 2012 estimated and 2013 estimated enterprise value to EBITDA of 5.4 times and 5.5 times, and at a 40% discount to his revised 8% net present value (NPV) estimate of $25.39 per share, which compares with his mid-cap base metal producer coverage universe averages of 7.4 times and 5.7 times and a 36% discount to NPV.