Southern Copper plays white knight to Frontera Copper

Less than two months after the board of Frontera Copper Corp. (FCC-T, FRCPF-O) urged shareholders to reject an unsolicited takeover bid from Invecture Group, it is giving the thumbs up to a friendly takeover offer from Southern Copper Corp. (PCU-n).

Under the proposed deal Southern Copper would acquire all of the Canadian junior’s outstanding shares at a price of 65¢ per share in cash. The offer values Frontera’s equity at about C$42 million and is a 12% premium over the company’s closing share price of 58¢ on Feb. 3, 2009.

It is also a 10% premium over Invecture Group’s Dec. 3 all-cash offer of 59¢ per share and a 38% premium over Frontera’s closing price of 47¢ per share on Dec. 2, the day prior to Invecture’s bid.

Frontera’s board is unanimously recommending Southern Copper’s offer. “There was an offer on the table by Invecture that appeared likely to be successful unless we were able to find a white knight willing to pay our shareholders a higher price,” Rodney Prokop, Frontera’s vice president of investor relations said in an interview.

“Invecture had locked up two of our largest shareholders at 59¢ and unless we were able to find someone else willing to pay more than that it seemed clear that the 59¢ bid would prevail.”

The Invecture Group, an alternative asset manager based in Mexico City, invests in what it deems are mispriced securities. Many of its investments today are seen as hedges against what it expects to be a highly inflationary environment during 2010 and 2011, the company says on its website. All of its investments in basic industry so far have been in the mining sector.

Frontera produces copper cathode from its Piedras Verdes run-of-mine heap-leach copper operation in Sonora, Mexico. In November 2008 operations were temporarily suspended due to low copper prices.

“We’ll wait for copper prices to recover and make a determination at that time as to when to restart the mine,” Prokop said.

Commercial production at Piedras Verdes, in the foothills of the Sierra Madre Occidental Mountains, 21 km from the town of Alamos, began in October 2006. The mine reached full production capacity in May 2007.

In 2007, the mine produced 53.7 million lbs. of LME Grade-A quality cathode at a cash cost of $1.30 per lb.

Frontera estimates that from 2008-2024, the mine will produce a total of 1.02 billion lbs. copper. The annual rate of production capacity is 70 million pounds at an estimated average life-of-mine cash operating cost of $1.32 per pound.

Piedras Verdes has proven and probable reserves of 193.6 million tonnes grading 0.36% total copper. The copper deposit is an elongated porphyry, 4 km long in an east-west direction and 0.5 km wide in a north south direction.

At the end of 2008, Frontera held US$10 million in cash.

Southern Copper is one of the largest integrated copper producers in the world. Its largest shareholder, with 79.2%, is Grupo Mexico, a Mexican company listed on the Mexican Stock Exchange.

Southern Copper produces copper, molybdenum, zinc, silver, lead and gold. It operates the Toquepala and Cuajone mines in the Andes mountains, southeast of Lima, and a smelter and refinery west of the Toquepala and Cuajone mines in the Peruvian coastal city of Ilo. Southern Copper also has open-pit operations, including the La Caridad and Cananea mine complexes.

Also in its stable are five underground mines that produce zinc, copper, silver, and gold; a coal mine, which produces coal and coke; and industrial processing facilities for zinc and copper.

Formerly known as Southern Peru Copper Corp., the company was founded in 1952 and is based in Phoenix, Arizona.

The takeover news sent Frontera’s shares in Toronto up 9¢ or 15.5% to 67¢ per share with 3.4 million shares changing hands. The company has a 52-week trading range of 22¢-$5.72 per share and has 64.5 million shares outstanding.

At press-time Southern Copper Corp. was trading at US$15.98 per share with a 52-week trading range of US$9.12-$41.93 per share. The company has 871 million shares outstanding.