Update:Bidding war heats up for Frontera Copper

A bidding war is emerging for Frontera Copper Corp. (FCC-T, FRCPF-O) that is pitting the Invecture Group against Southern Copper Corp. (PCU-N).

Invecture, an alternative asset manager headquartered in Mexico City that invests in what it deems are mispriced securities, has upped its Dec. 3 unsolicited takeover bid for Frontera from 59¢ per share to 75¢ per share and extended the time that shareholders may tender to Feb. 16.

The move comes after Frontera’s board gave the thumbs up to a friendly takeover offer from Southern Copper on Feb. 4. Southern Copper had offered to acquire all of the Canadian junior’s outstanding shares at a price of 65¢ per share in cash and at the time, Frontera described Southern Copper as a “white knight” rescuing it from Invecture’s inferior bid.

Southern Copper’s negotiated takeover offer valued Frontera’s equity at about C$42 million and was a 12% premium over the company’s closing share price of 58¢ on Feb. 3.

It was also a 10% premium over Invecture Group’s first 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 initial bid.

Now Invecture is upping the ante with its raised bid, which is a 15.4% premium over Southern Copper’s bid.

John Detmold, Invecture’s chief executive, clearly believes Frontera is worth fighting for. “We continue to view the increased valuation as appropriate in the context of Frontera’s reserves; the quality and grade of the ore and the industrial operation; in the context of our outlook for copper prices and in the context of the fact that we’re very long-term investors and we’re willing to wait until copper comes back to more rational levels,” he told The Northern Miner in a telephone interview from Mexico City.

Currently Invecture owns 19.9% of Frontera “and has binding lock-ups with holders of another 27.1% for an aggregate of 47% of Frontera shares, which are currently committed to Invecture’s increased bid,” Invecture said in a press release on Feb. 6.

“With a closing possible in as little as 10 days and a tendering requirement which is significantly less than the two-thirds required by Southern Copper, the Invecture bid is clearly superior and we expect that it should receive the support of Frontera shareholders,” Detmold, declared in a prepared statement.

On Feb. 9, Rodney Prokop, Frontera’s vice president of investor relations, said in an interview that Frontera’s board has not yet had an opportunity to evaluate the new offer.

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 the Phoenix, Arizona-based company’s 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.

Invecture is oriented towards base metals, but it has looked at precious metals plays as well. The group’s offer for Frontera, however, is the first formal bid it has made in its three-year history, Detmold says.

On its website Invecture spells out that many of its investments are seen as hedges against what it expects to be a highly inflationary environment during 2010 and 2011.

Invecture has a preference for mines in Mexico because they are easier to manage but Detmold says that preference doesn’t preclude the investment group from looking at operations in other countries as well. One of Frontera’s benefits, he explains, is that it is a two-hour flight from Mexico City “in a country in which we obviously understand the operating environment.”

In Toronto Invecture’s raised bid drove up Frontera’s share price.

The Canadian copper producer’s shares gained 10¢ or 14.7% to close at 78¢ per share on Feb. 9. The company has a 52-week trading range of 22¢-$5.72 per share and 64.5 million shares outstanding.

“Both of our offers are 100% cash,” Detmold concludes. “I hold the board of directors [at Frontera] in the highest regard and I have no doubt that they will base their decision on what is best for their shareholders.”