Inmet's Cobre Panama project
The rationale for First Quantum's "highly conditional" bid for Inmet Mining is one of the unique cases where outsiders all nod in approval over a proposed acquisition.
Inmet's Cobre Panama project is both widely regarded as a high quality asset and one of the few large-scale copper mines currently being developed in the world. Copper prices have also held in. Though they aren't north of $4 (U.S.) per pound any more, they haven't plummeted, and there are signs the global economy is shoring up, which at the very least offers support at current levels.
There is, however, one big question mark around this potential deal: Price. First Quantum's already lobbed in two offers, one nearly 15 per cent higher than the other, and Inmet rejected both. "Clearly a second, and enhanced, offer from First Quantum suggests that Inmet continues to trade below its fair market value," noted BMO Nesbitt Burns analyst Stephen Bonnyman.
Because Cobre Panama is such a massive, capital-intensive project, many analysts believe investors simply haven't appreciated how much value is embedded because they have yet to taste the fruits of all the labour. But these analysts acknowledge that there is tons of value there, should the mine ever get up and running, and that could be why the rival miner is moving now. "First Quantum is trying to get in early, before value is realized," suggested Raymond James analyst Alex Terentiew.
If true, it makes sense for Inmet to hold out for the highest price. However, there's no formal word on whether the company is even open to a takeover, or if they are dead set on going it alone. Inmet hasn't even entertained talks with First Quantum, according to someone familiar with the negotiations, so the prospective buyer may not even know much more than the average observer.
As the dance plays out, it will be interesting to see just how far First Quantum is willing to reach. Many miners overstretched when they bid wildly during the big commodity supercycle that spanned October 2010 to April 2011, and they're paying the price for it now in the form of massive writedowns or incredibly weak earnings.
And if Inmet ends up being open to selling, it's going to milk every last cent from prospective bidders. The company even put a poison pill in place to give it time to go out and find its higher possible offer should a formal bid materialize. Plus, Inmet's top shareholders include Leucadia National Corp., Temasek Holdings and Caisse de Depot et Placement, which combined hold about 30 per cent, according to Capital IQ, so they could band together to demand an incredibly high price.
In that scenario, it may be impossible to ever find a middle ground. Not only may First Quantum be hesitant to overpay, one of its "claims to fame is its ability to design and build large mining projects quicker and at a lower cost than others," noted Cormark Securities analyst Cliff Hale-Sanders. "Given the stage of development at Cobre Panama and the capital sunk to date, we see little opportunity for this to happen and achieve cost savings."