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M&A talk provides spark in depressed copper sector

Recent media speculation that Canadian base metals major First Quantum Minerals is mulling a takeover offer for, or at the least considering a sell-down of, its Zambia-based Kansanshi and Sentinel copper operations has spurred some life in an otherwise depressed copper space, analysts at CIBC say.
M&A talk provides spark in depressed copper sector M&A talk provides spark in depressed copper sector M&A talk provides spark in depressed copper sector M&A talk provides spark in depressed copper sector M&A talk provides spark in depressed copper sector

A First Quantum Zambia asset sell-down can potentially unlock value and reduce its risk profile

"Market speculation on the potential acquisition of First Quantum provided a short respite to copper-levered names. However, the negative effects of the US and China trade dispute on global economic growth continue to weigh on mining equities," analyst Oscar Cabrera said in a note to clients.

He said the bank remained cautious on copper mining equities near term, given the negative sentiment on copper prices.

"Nevertheless, a potential sell-down of a minority interest in First Quantum's Zambia assets, or an attempted takeout could result in a strong First Quantum share price appreciation."

First Quantum responded to media speculation on September 23, saying it had held, and continued to hold, discussions with Jiangxi Copper regarding a potential sale of a minority interest in its Zambian copper assets.

CIBC proceeded to calculate what either forming a Zambia joint venture or a takeout would mean for First Quantum, saying the former could improve First Quantum's balance sheet and reduce sovereign risk, while the latter could result in significant alpha generation.

CIBC reviewed copper M&A transaction multiples over the past 25 years to establish a fair value for a 30% sell-down of First Quantum Zambia assets and a potential takeout.

It analysis suggests a First Quantum takeout fair-value range of C$15.51-$17.53 per share using a 20% takeout discount/premium, a consensus copper price of US$2.95/lb and average transaction multiples. On the other hand, CIBC estimated First Quantum could raise $2.7-$1.3 billion with a 30% stake sell-down of its Zambia assets.

CIBC concluded a sell-down of First Quantum's Zambian assets would improve the company risk profile because it would lower First Quantum's debt leverage; reduce the company's exposure to Zambia which accounted for about 35% of First Quantum's operating assets and development projects adding about $22.4 billion to the net asset value; and establish a partnership with one of the world's largest consumers of copper concentrate.

The company is currently finishing construction of its US$6.7 billion Cobre Panama mine on the Atlantic coast of Panama, which remains on track to produce between 140,000-175,000t copper in 2019, with more than 80% of production expected in the second half of the year. Production is expected to ramp up to more than 375,000t/y copper under an expanded operation from 2023 onwards.

First Quantum's share price (TSX:FM) is 34% lower than the year ago, at C$9.67, capitalising the company at $6.6 billion. The stock has traded between $7.84-$16.63 over the past 12 months.