Analyst’s figures show Amax takeover candidate despite debt

Following the acquisition of Falconbridge Ltd. (TSE) by Amax for $2.8 billion, Zaunscherb estimates Amax’s discounted cash flow (DCF) per share will be $42.05(US). With 85 million shares issued, Zaunscherb’s DCF analysis values Amax at $3.6 billion(US).

However, Amax’s common shares trade at $27.50 per share on the New York Stock Exchange — a price which represents a discount to Amax’s DCF per share of almost 35%, according to Zaunscherb’s analysis.

“I’d make an offer in the $30-$32 range,” Zaunscherb says, a price that could trigger a bidding war. Although Amax will be saddled with long-term debt of about $3 billion following its Falconbridge acquisition, Zaunscherb says there will still be plenty of cash flowing into the company for debt servicing.

Noranda, which was attempting to take over Falconbridge via open market purchases of the company’s shares, is an obvious bidder for Amax. Assuming the company tenders its Falconbridge shares to Amax, it will be left with a cash pool of $607 million(C). Another $1.5 billion(US) could be generated by a prospective acquisitor by selling off non-core Amax assets such as Amax Coal and possibly Climax. “Alumax is Amax’s most important component. That you’d keep,” Zaunscherb says.

Noranda’s chairman, Alfred Powis, has said that his company could arrange credit facilities ranging up to $3 billion for such an acquisition.

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