Bidding War Erupts For Frontera Copper

A bidding war is emerging for Frontera Copper (FCC-T, FRCPF-O) that is pitting the Invecture Group against Southern Copper Corp. (PCU-N).

At presstime, Invecture, an alternative asset manager headquartered in Mexico City that invests in what it deems are mispriced securities, had upped its Dec. 3 unsolicited takeover bid for Frontera to 75¢ per share from 59¢ and extended the time that shareholders may tender to Feb. 16.

The move comes after Frontera’s board gave the thumbs up to a friendly rival offer from Southern Copper on Feb. 4. Southern Copper had offered to acquire all of the Canadian junior’s outstanding shares at a price of 65¢ apiece and at the time, Frontera described Southern Copper as a white knight rescuing it from Invecture’s inferior bid.

Southern Copper’s negotiated takeover offer valued Frontera’s equity at about $42 million and was a 12% premium over the company’s closing share price of 58¢ on Feb. 3.

It was also a 10% premium over Invecture Group’s first all-cash offer of 59¢ per share and a 38% premium over Frontera’s closing price of 47¢ per share on Dec. 2, the day prior to Invecture’s initial bid.

Invecture’s enhanced bid on Feb. 6 represents a 15.4% premium over Southern Copper’s bid.

On Feb. 9, Rodney Prokop, Frontera’s vice-president of investor relations, told The Northern Miner that Frontera’s board had not yet had an opportunity to evaluate the new offer.

John Detmold, Invecture’s chief executive, clearly believes Frontera is worth fighting for.

“We continue to view the increased valuation as appropriate in the context of Frontera’s reserves; the quality and grade of the ore and the industrial operation — in the context of our outlook for copper prices and in the context of the fact that we’re very long-term investors and we’re willing to wait until copper comes back to more rational levels,” Detmold said in an interview from Mexico City.

Currently, Invecture owns 19.9% of Frontera. In a press release on Feb. 6, the company said it had binding lock-up agreements with holders of another 27.1% for an aggregate of 47% of Frontera shares that are committed to its revised bid.

“With a closing possible in as little as ten days and a tendering requirement which is significantly less than the two-thirds required by Southern Copper, the Invecture bid is clearly superior and we expect that it should receive the support of Frontera shareholders,” Detmold declared in a prepared statement.

To succeed, Invecture’s bid requires 50% of Frontera shares to be tendered to the offer.

Under its agreement with Frontera, Southern Copper has the op- portunity to match any competing bids for the company and is entitled to a break fee of $2.1 million if the merger isn’t consummated.

Frontera produces copper cathode from its Piedras Verdes run-of-mine heap-leach copper operation in Sonora, Mexico. In November, operations were temporarily suspended due to low copper prices.

Prokop says the company will wait for copper prices to recover before determining when to restart the mine.

Commercial production at Piedras Verdes, in the foothills of the Sierra Madre Occidental Mountains, 21 km from the town of Alamos, began in October 2006. The mine reached full production capacity in May 2007.

In 2007, the mine produced 53.7 million lbs. of LME Grade-A quality cathode at a cash cost of US$1.30 per lb.

Frontera estimates that from 2008 to 2024, the mine will produce a total of 1.02 billion lbs. copper. The annual rate of production capacity is 70 million lbs. at an estimated average life-of-mine cash operating cost of US$1.32 per lb.

Piedras Verdes has proven and probable reserves of 193.6 million tonnes grading 0.36% total copper. The copper deposit is an elongated porphyry, 4 km long in an east-west direction and 0.5 km wide in a north-south direction.

At the end of 2008, Frontera held US$10 million in cash.

Southern Copper is one of the largest integrated copper producers in the world. Its largest shareholder, with 79.2%, is Grupo Mexico (GMBXF-O, GMEXICOB-M), a Mexican company listed on the Mexican Stock Exchange.

Southern Copper produces copper, molybdenum, zinc, silver, lead and gold. It operates the Toquepala and Cuajone mines in the Andes Mountains, southeast of Lima, and a smelter and refinery west of the Toquepala and Cuajone mines in the Peruvian coastal city of Ilo.

Southern Copper also has open-pit operations, including the La Caridad and Cananea mine complexes.

Also in the Phoenix, Ariz.-based company’s stable are five underground mines that produce zinc, copper, silver and gold; a coal mine, which produces coal and coke; and industrial processing facilities for zinc and copper.

Invecture is oriented towards base metals, but it has looked at precious metals plays as well. The group’s offer for Frontera, however, is the first formal bid for a mining company in its three-year history, Detmold says.

On its website, Invecture says that many of its investments are seen as hedges against what it expects to be a highly inflationary environment during 2010 and 2011.

Invecture has a preference for mines in Mexico because they are easier to manage, but Detmold says that preference doesn’t preclude it from looking at operations in other countries as well. One of the attractions of Frontera’s operations, he explains, is that they are a two-hour flight from Mexico City “in a country in which we obviously understand the operating environment.”

In Toronto, Invecture’s raised bid drove up Frontera’s share price.

On Feb. 9, the Canadian copper producer’s shares gained 10¢ or 14.7% to close at 78¢ per share. The company has a 52-week trading range of 22¢-$5.72 per share and 64.5 million shares outstanding.

“Both of our offers are 100 per cent cash,” Detmold concludes. “I hold the board of directors (at Frontera) in the highest regard and I have no doubt that they will base their decision on what is best for their shareholders.”