September 25, 2019 / 3:11 AM / 8 months ago

Breakingviews - Canadian miner gives copper a belated deal patina

First Quantum Minerals Chairman, CEO and Director Philip Pascall looks on during their annual general meeting for shareholders in Toronto, May 9, 2012. REUTERS/Mark Blinch (CANADA - Tags: BUSINESS)

HONG KONG (Reuters Breakingviews) - Copper is looking shinier. Canadian miner First Quantum has attracted the interest of China’s Jiangxi Copper. The metal’s weak price and similarly depressed industry valuations make it a good time to prospect for deals.

    Diggers were left scarred by their pre-2011 M&A, but balance sheets have been repaired and investors are beginning to contemplate fresh growth. For the likes of Rio Tinto, copper sits atop the shopping list. Existing mines are ageing, and new supply may not keep up with long-term demand, as renewable sources of energy and electric cars take off.

    As one of only a few focused operators, First Quantum makes a logical target. Bringing the giant Cobre Panama mine – one of the largest untapped copper deposits in the world – to production adds to the allure, even if has contributed to a $7 billion-plus net debt burden. The company said it was not aware of takeover interest, but Jiangxi Copper has accumulated a nearly 10% holding in recent months and First Quantum has hired defence advisers, according to various media reports.

    The Toronto-listed miner’s equity value has roughly halved in five years. Selling a stake in its Zambian assets – as the company has confirmed it is in talks to do with Jiangxi Copper – or others would help beyond just cutting debt. The operation has been plagued by unpredictable government demands and a punitive tax regime, and its Chinese peer has clout in Lusaka. Rival Freeport-McMoRan presents similar problems for suitors. Its South American business holds appeal, but it has ageing U.S. pits and runs Indonesia’s troublesome Grasberg mine.

    Either way, Jiangxi Copper will help gauge broader interest in First Quantum. There’s an opportunity to get deal timing right this time around. Copper is trading below $6,000 a tonne, weighed down by broader economic concerns. The price required to get miners excavating is widely estimated at above $7,000.

    Assuming a generous 40% premium to First Quantum’s undisturbed price, buying the equity would cost $7.4 billion. Rio Tinto, for one, will generate roughly $10 billion in free cash flow this year alone, according to estimates collected by Refinitiv. Combined, these factors give the red metal a deal glint.


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