With no rival bids, Inmet falls to First Quantum

VANCOUVER — In the end, predictions of a bidding war for Inmet Mining (IMN-T) ended up as much ado about nothing. Instead, the lack of rival bids for a company with three operating mines and a huge, undeveloped copper project in Panama ended up an apt illustration of the acquisition-shy state of mining today.

When First Quantum Minerals (FM-T) made its first pitch for Inmet in late November, analysts resoundingly called the $70-per-share bid too low. Inmet’s board agreed, turning down the offer just as they had turned down an even lower First Quantum offer in a private approach a month prior.

And almost everyone agreed that, with Inmet now in play, a higher bid would soon emerge. It was just a question of who and how much.

First Quantum disagreed. Three weeks after being rebuffed by Inmet’s board the company went hostile, taking its deal directly to Inmet shareholders. It also boosted the bid slightly to $72 per share.

First Quantum president Clive Newall said his company went hostile after repeated failures to engage Inmet in discussions. His team, however, had been approached by what Newall described as “a fairly large proportion of the Inmet shareholder base.”

Fairly large was a fair description. By midnight on March 11, a total of 43.2 million Inmet shares had been tendered to First Quantum’s offer, representing 61.45% of Inmet’s fully diluted outstanding count. First Quantum had earlier amended the minimum tender condition of its offer to just 50%, so with that bar met, the company could start taking up the shares tendered to date.

The only question that remained was whether First Quantum would fully seal the deal. If 66.7% of Inmet shares were tendered, First Quantum would be able to buy up the shares not tendered and fully take Inmet over. The company extended the expiry deadline again, to March 21, and urged Inmet’s remaining shareholder to offer up their shares.

By midnight on March 21, the question had a clear answer. Inmet tendered 60.1 million shares to the offer, representing 85.5% of the company’s outstanding count. Now First Quantum just has to tidy up the loose ends. The company extended the offer deadline again until March 27, in the hopes of boosting the tendered count to 90% so that First Quantum can scoop up the remaining 10% using a compulsory acquisition. If the tendered count remains below 90%, First Quantum will need another transaction to buy the outlying shares.

Either way, it’s game over for Inmet. Despite all the predictions of a bidding war and a better price, in the end Inmet went quietly into the arms of a Canadian mining big brother at a lower price than almost anyone imagined.

It seems there are three main reasons why.

The first is that Newall and his team played a great game. They made a series of well-calculated moves and through it all remained confident that no rival suitors would emerge. Their reasoning: First Quantum is the only copper company around today interested in taking on the immense challenge of developing Cobre Panama, the jewel in Inmet’s portfolio.

Cobre Panama is one of the largest undeveloped copper projects in the world, expected to produce a whopping 300,000 tonnes of copper a year for 40 years. But it is also a low-grade monster of a project that could cost US$6.2 billion to build.
First Quantum already operates two large-scale copper mines and has plans to build a third, so it has the kind of experience needed for Cobre Panama. There are simply not many other copper miners out there with similar know-how that are on the hunt for acquisitions, which is why First Quantum gambled that it was the only contender in the Inmet race.

The second reason Inmet ended up on the auction block at a lower price than most predicted is that, while First Quantum played its hand perfectly, Inmet faltered. It seems that the company assumed a white knight would materialize. But one never did.

As the weeks went by with nary a knight in sight, Inmet could have sat down with First Quantum and negotiated a friendly deal at a higher price. First Quantum said it tried over and over to get Inmet’s directors to the table, even stating publicly that it might offer more money if it could see Inmet’s confidential data on Cobre Panama.

Inmet refused for months, from the time of First Quantum’s initial, private offer in October through until February. By the time the companies met across a boardroom table, things had changed. Specifically, the third reason for Inmet’s failing had arrived on the international scene: copper prices had fallen, and mining majors were writing off huge losses on overpriced acquisitions. In blunt terms, today’s investment environment is not the kind that begets blockbuster deals.

To boot, with months having passed since its first offer, First Quantum was increasingly confident that no rival suitors would emerge. The markets seemed to agree: Inmet’s stock only briefly traded above the offer price since it was tabled. And First Quantum had spent those months quietly building up support among Inmet shareholders. Those factors combined to convince First Quantum that it should stick with its $72 bid.

The gamble paid off. It also led to one of the few major mergers and acquisitions (M&A) in the mining sector of late.

M&A activity keeps the mining sector fired up, but recently that fire has been getting dampened from left and right. For one, the major mining companies that head the sector have announced a list of outrageous writedowns, erasing $12 billion of their value in the last year alone, after having overpaid for assets during the previous few years.

The writedowns have rightfully made investors and boards shy away from acquisitions. In fact, most mining majors have publicly eschewed asset purchases for the next few years, focusing instead on optimizing their existing assets.

Commodity prices have not helped. Copper, the one metal that has fared reasonably well in the post-recession years, is now showing signs of weakness. The spot price has fallen to US$3.50 per lb. from US$3.80 per lb. five months ago. Perhaps more tellingly, copper futures have declined 10% in the past few weeks.

This acquisition-shy environment played a major role in getting First Quantum the project that could vault it into the big leagues. Output from Cobre Panama — plus organic growth from FM’s existing mines in Zambia, Peru and Finland — should have the company pumping out 1.3 million lb. copper a year by 2018. This would make it one of the globe’s top-five copper producers.

However, that will only happen if the company can get Cobre Panama into production without any big debacles, and that will be a challenge.

The project will be one of the largest mining endeavours ever attempted in Panama, which is an untested mining jurisdiction. And in a sector that has seen most big development projects plagued with cost overruns, it will take all of First Quantum’s skill to keep Cobre Panama’s price tag below the projected US$6.2 billion. In fact, First Quantum has never built a project of Cobre Panama’s scale before, so it may take more skill than the miner has to offer at the moment.

News that 85.5% of Inmet shares had been tendered to First Quantum’s offer prompted a 58¢ share price slide, bringing First Quantum shares to $20.02. When it took its Inmet offer public in November First Quantum saw its share price rise above $22, but it then fell through January and February to a low of $18.08. First Quantum has 476 million shares outstanding.