Candente Copper a likely takeover target?

Candente Copper‘s (DNT-T) sizeable Canariaco Norte copper-gold deposit in northern Peru has been receiving a lot of buzz lately, with a few analysts tipping the project  as a likely takeover target.

The project is a “very attractive acquisition target due to its very large resource size and low political-risk jurisdiction,” analyst Chris Chang of Laurentian Bank Securities wrote in a June 15 research note. 

Even with the red metal’s price cooling down, Chang says the company is still on his takeover radar.

“In the current environment where metal prices are kind of soft, and there’s a lot of greater macro concerns, it might be a stalled up process. But I do think when the market eventually recovers it will be a takeover,” he said during an Oct. 18 interview. 

Candente acquired the property in an auction nearly a decade ago from the Peruvian government, after the National Service of Geology and Mining, Placer Dome and BHP Billiton (BHP-N) explored at different times from 1967 to 2000. 

Since then, the junior has carried out various drill programs and studies on the 163-sq.-km project, located 700 km from Lima and 110 km from the city of Chiclayo. 

The project, which sits in the Western Cordillera in Peru’s Canaris district, hosts a measured and indicated resource of 7.5 billion lbs. copper, 1.7 million oz. gold and 45.2 million oz. silver from 752.4 million tonnes grading 0.45% copper, 0.07 gram gold and 1.9 grams silver per tonne. 

It has another 157.7 million tonnes with slightly lower copper, gold and silver grades at a 0.3% cut-off. 

The company’s CEO, Joanne Freeze, told Bloomberg in late September that the company has signed confidentiality agreements with about 10 potential buyers. Freeze adds that Candente can advance the project itself if it does not reach an agreement. 

Canariaco Norte is a “highly profitable” project and copper has strong long-term fundamentals, Walter Spagnuolo, the company’s manager of investor relations, wrote in an email to The Northern Miner. “Peru remains one of the best places on the planet to build a new mine, and we are fully financed and moving forward on Canariaco Norte, Sur and Quebrada Verde aggressively,” he says. 

The debt-free company will continue to optimize the large-scale project and expects to complete a feasibility study and an environmental and social impact assessment by mid-2012. Candente launched the feasibility in April after releasing a positive prefeasibility study in March. 

The study envisions Canariaco Norte producing 262 million lbs. copper, 39,000 oz. gold and 911,000 oz. silver each year over a 22-year mine life.

Using a long-term copper price of US$2.25 per lb. and an 8% discount rate, the study pegs the project’s after-tax net present value at US$1.06 billion, and internal rate of return at 18.8%.

To focus on its prized asset and two nearby exploration targets, Canariaco Sur and Quebrada Verde, Candente spun out its non-core Peruvian assets into the newly listed Cobriza Metals (CZA-T), which debuted on Oct. 12 at 50¢ apiece.

Before Cobriza started trading, Candente provided it with US$6 million so it could kick off exploration work on the Don Gregorio and Arikepay properties. 

Candente’s existing shareholders as of Oct. 11 received one Cobriza share for every five Candente Copper shares held. Shareholders hold 86% of the new company, while Candente Copper retains 14%. 

It has fewer projects in its pipeline, but the junior’s plan to build a large copper project on its own is still rather ambitious. 

Chang predicts that because of the project’s significant start-up costs – estimated at US$1.6 billion – Canariaco Norte would do well in the hands of a large diversified producer or a deep-pocketed mid-tier.

He lists Southern Copper (SCCO-N), HudBay Minerals (HBM-T, HBM-N), Freeport-McMoRan Copper & Gold (FCX-N) and Antofagasta (ANTO-L) as some of the companies that may be eyeing Canariaco Norte, plus a few foreign state-owned miners. 

Given the uncertainty around Peru’s new mining taxes following the June presidential elections, Chang says it could add to the delay in a takeover bid. 

Peru’s parliament approved changes to the royalty taxes on Sept. 22, which could bring in an extra $1.1 billion in taxes a year. 

As outlined by Deloitte, mining companies lacking legal stability agreements with the Peruvian government will be subjected to royalties ranging from 1% to 12% on operating profit. These companies will also have to pay a “special tax” ranging from 2% to 8.4% on operating profit. Miners with legal stability agreements will pay a “special contribution” between 4% and 13.12% on operating profits. 

On Oct. 18 Chang said he hasn’t seen what the exact tax rates would be for Candente. 

Under the previous regime, companies paid a sliding scale royalty of 1% to 3% on net concentrate revenue and a 30% income tax rate. 

“The fact that it’s mostly attached to profits and not revenues is looking quite reasonable,” Candente’s CEO told Bloomberg on Sept. 22. 

At presstime Candente traded at $1.08 within a 52-week range of 50¢-$2.63. 

Based on six analysts’ predictions, Candente Copper has a price target between $2.50 and $3.90.