Melbourne: Minmetals Resources, China’s biggest metals trading firm, on Monday offered $6.5 billion to buy Equinox Minerals, chasing the target company’s copper assets in Zambia and Saudi Arabia.
Equinox’s Australian shares surged more than a quarter on the news.
China, which accounts for 40% of the world’s demand for copper, is on a mining acquisition spree as prices for the red metal hover near record highs.
Minmetals, which owns mining operations in Australia and Asia, said it would offer C$7 per share for Equinox, a 23% premium to Equinox’s close in Toronto last Friday of C$5.71. It would be China’s fourth-biggest outbound M&A deal, according to Thomson Reuters data.
Chief executive Andrew Michelmore said the offer was Minmetal’s best price and told Reuters he was not considering increasing it, speaking ahead of a media briefing in Hong Kong.
The offer is conditional on Equinox dropping its C$4.7 billion bid for Canada’s Lundin Mining, which has been the subject of a separate takeover tussle between Equinox and Inmet Mining.
Equinox’s Australian shares jumped 27% to A$7.25, while Minmetals’ shares rose 0.6% to HK$6.60.
Investors said it was possible rival bidders could emerge for Equinox, but said they may be deterred by Minmetals’ financing power.
While Minmetals has a market value of just $2.5 billion, the metals trading firm said its bid was being funded with credit from Chinese banks and equity investments by Chinese institutions.
“Ultimately no one wants to get into a bidding war with Chinese-related parties, given that Chinese companies are perceived to have a lower cost of capital relative to western companies,” said Tim Schroeders, a portfolio manager at Pengana Capital.
Not a knockout
Investors said the offer premium was reasonable but not necessarily high enough, as Equinox’s shares had declined in recent weeks on concerns about the Lundin deal.
“I would describe it as a realistic offer but not a knock-out bid,” said James Bruce, portfolio manager at Perpetual, which recently sold its Equinox shares.
“It’s a cleverly timed bid by Minmetals. We thought Equinox were paying too much for Lundin and were taking on too much debt in that deal.”
Equinox said in a statement its board planned to meet to consider the Minmetals bid. It has not yet made a recommendation to shareholders to accept or reject the bid.
A source familiar with Equinox said the Minmetals approach caught the company by surprise. Equinox executives are currently in Canada marketing the Lundin offer, which Lundin’s board has urged shareholders to reject.
The deal marks the latest in a string of Australian mining takeovers involving Michelmore, who has been criticized by some disgruntled investors for his track record on mergers and acquisitions.
He was at the helm of WMC Ltd in 2005 when it was sold to BHP Billiton for $6 billion, a sale seen as too cheap after nickel prices rocketed shortly after the deal was completed.
He went to work for Russian oligarch Oleg Deripaska for two years after that before returning to Australia to head zinc miner Zinifex, which merged with Oxiana to form OZ Minerals.
A year later, the global financial crisis sank OZ under a debt pile, clearing the way for Minmetals to buy most of its assets for $1.4 billion.
Zambia, Saudi projects
The main attractions at Sydney-and Toronto-listed Equinox are its Lumwana copper and uranium mine in Zambia, Africa’s third-largest copper mine by production, and the Jabal Sayid copper development in Saudi Arabia, due to start production next year.
Those mines could attract Xstrata, Antofagasta and possibly Norilsk Nickel, analysts said.
BHP Billiton and Rio Tinto are seen as unlikely to enter the fray for Equinox, as Lumwana’s production costs do not meet their acquisition criteria.
Brazil’s Vale is also unlikely to pounce, as it is about to get a new boss and is under pressure to invest at home.
Surging global demand for copper plus the high cost and long lead time to bring new resources to production has fuelled expectations of more takeover activity and a prolonged bull run in the red metal.
London Metal Exchange copper touched a record high of $10,190 a tonne in February, and on Monday stood at $9,350. It has risen some 120% in the past two years.
The bid comes a week ahead of the expiry of Equinox’s offer for Lundin, which itself called off a merger with Canadian peer Inmet last week that was to create a C$9 billion Canadian copper producer.
Lundin was not immediately available for comment on Monday.
“This bid might be taken as a bit of a sigh of relief by Equinox investors and it is not a bad price to be offered, but that depends on your view of copper prices,” said Peter Chilton, portfolio manager at Constellation Capital Management.
Minmetals said it submitted an application to Australia’s Foreign Investment Review Board (FIRB) on 11 March, and said it expected to win approval in time to go ahead with the deal by mid-2011.
The company also did not expect opposition from Canada’s foreign investment authorities as Equinox’s key operations are outside Canada.
That is in stark contrast to Minmetals’ bid for Canadian nickel miner Noranda in 2005, which failed in the face of a labour outcry over human rights in China.
Deutsche Bank and Macquarie are advising Minmetals on the offer.