First Quantum sweetens Adastra bid (March 20, 2006)

It took more than two months of steadfast protestations of opportunism and inadequacy by Adastra Minerals (AAA-T, AAA-L), but First Quantum Minerals (FM-T, FQM-L) has finally added a cash sweetener to its hostile takeover bid.

The new bid includes $2.65 per Adastra share, and is accompanied by an improved share-exchange alternative of one First Quantum share for every 14.76 Adastra shares tendered, compared with the 17.5 shares required under the original all-share exchange offer launched in mid-January.

The cash portion of the deal is capped at $36.3 million, while the limit to shares is set at 4.9 million. Assuming full pro ration, the offer equates to 0.057 of a First Quantum share accompanied by 42 for each share of Adastra.

The offer represents a premium of 8.2% over Adastra’s closing share price in Toronto on Mar. 17 — the last business day before the revised deal’s announcement. It has been extended by a further 11 days to the end of March, and First Quantum now requires just a simple majority of its prey’s shares to be tendered, down from the previous condition of two-thirds.

First Quantum said that the number of shares up for garbs under the new bid is unchanged from the original offer in order to limit share dilution to its shareholders. The cash option will be funded via internal resources.

“This is our full and final offer which will not be increased,” said First Quantum chief executive Philip Pascall in a prepared statement.

“In arriving at our offer, we have undertaken a thorough review of publicly available information about the Kolwezi project and, based on our extensive experience of building this kind of project in the region, we believe that our offer represents excellent fundamental value as well as being at a substantial premium to the market," he concluded.

Adastra’s special committee said that at first blush, it was "disappointed at the level of the revised offer." Still, the company and its financial advisers plan to review the revised bid and make a formal recommendation to shareholders as soon as possible. In the meantime, shareholders were urged to "take no action with respect to the revised offer."

But wait, there’s more!

As an added bonus, Adastra shareholders that tender to the offer will be eligible for First Quantum’s recently announced dividend of 26.5 per share payable on May 10.

If successful in its bid, First Quantum plans to have its shares moved to the London Stock Exchange’s main board from the Alternative Investment Market (AIM).

First Quantum previously said it would pull its offer if Adastra’s plan to sell a 14.9% stake in the Kolwezi copper-cobalt project in the Democratic Republic of the Congo to Mitsubishi Corp. (MSBHY-O) were consummated. Under that deal, the Japanese trading company would fork over US$37.5 million in cash, provide a US$12.5-million project loan, and extend a completion guarantee to the project lenders.

Mitsubishi would also buy all of Kolwezi’s copper production at London Metal Exchange grade-A prices (less a commission) for 15 years, and sell cobalt production in selected regions.

The agreement is subject to due diligence, a definitive agreement, and approval by each company’s board.

A recently completed definitive feasibility study gives a hearty thumbs-up to a 2.3-million-tonne-per-year operation at Kolwezi. The study, by Murray & Roberts Engineering Solutions and GRD Minproc, pegs the project’s after-tax internal rate of return (IRR) at 31.1%; the IRR of Adastra’s 65% stake rings in at 40.4%, while its net present value is estimated at US$284 million, (or C$3.93 per fully diluted share), based on a discount rate of 12%.

The estimated price tag of US$305 million, includes US$34 million for spares, first fill, inventories, insurance, and a US$27-million contingency fund. Some US$7 million worth of potential savings have been outlined, and a “value engineering process” aimed at identifying further savings will be completed over the next two months.

The proposed operation would focus on two tailings dams containing resources of 112.8 million tonnes of oxide tailings grading 1.49% copper and 0.32% cobalt to annually produce 33,200 tonnes of copper and 5,900 tonnes of cobalt.

Murray and GRD estimate operating costs at US57 per lb. of copper and US$2.08 per lb. of cobalt, on a co-product basis.

Construction is expected to begin before yearend, with first metal production conceivable by the second half of 2008.

“The completion of the DFS is a major accomplishment that allows Kolwezi to move ahead, on schedule, towards first metal production in 2008,” said Adastra chief executive Tim Read. “We can now proceed to complete the project finance.”

South African state-owned Industrial Development Corp. and Investec Bank have been mandated to arrange US$80 million to US$120 million in financing for Kolwezi; the Royal Bank of Scotland is working on orchestrating another US$60 million to US$75 million.

Adastra and SRK Consulting have also completed an environmental and social impact assessment (ESIA) and environmental and social management plan (ESMP). International Financial Corp. (IFC), the financing arm of the World Bank, has confirmed that both meet the Equator Principles (environmental and social safeguards for project financing) and World Bank guidelines.

The ESIA concludes that “overall, the project will generate significant benefits to the area both in terms of environmental improvements and socio-economic development.”

Said Read: This is another crucial step in the development of Kolwezi, and will permit the project financing to proceed. The approval by the IFC of this exhaustive document further emphasises Adastra’s commitment to best practice in project development.”

The balance of the project is held by the IFC with 7.5%, the Industrial Development Corp. of South Africa (IDC) owning 10%, the government of the DRC with a 5% stake, and state-owned Gcamines retaining a 12.5% interest.

Adastra’s recently posted a net loss of US$3.2 million (or 4 per share) for the three months ended January 31, owing mostly to $2.7 million spent on fending off First Quantum’s unwanted advances. The year-earlier loss came to $741,817 or a penny a share. At quarter’s end, Adastra had cash and equivalents totalling US$10.3 million, and was running a deficit of US45.9 million.

In contrast, First Quantum turned soaring copper prices into record profits of US$152.8 million or US$2.48 per share in 2005 — up a hefty 446% over the previous year. Strong fourth-quarter earnings of US$57.1 million, or US93 per share, were up 514% over the corresponding period of 2004.

Shares in Adastra were17, or around 7%, better at $2.62 in late-afternoon trading in Toronto following the news on Mar. 20; First Quantum suffered a late slip to sit at $39.04, 7 off its previous close.