Minmetals Resources to bid for Equinox Minerals

Shares of Equinox Minerals (EQN-T, EQN-A) surged 31.5% or $1.80 per share to $7.51 today on news that Minmetals Resources wants to buy the company for $6.3 billion — the largest proposed minerals takeover bid in China’s history.

Hong Kong-listed Minmetals Resources, whose largest shareholder is Beijing-based China Minmetals Group, has an advantage over many of its competitors in the industry that are striving to grow bigger through mergers and acquisitions given its close ties to the Chinese government and easy access to low-cost financing from China’s state-owned banks.

Minmetals’ hostile $7 a share cash bid for Equinox unveiled over the weekendrepresents a 23% premium to Equinox’s closing share price in Toronto of $5.31 on Friday Apr. 1, and an 11.6% premium to Equinox’s share price of $6.27 before the Perth-based company made its own takeover bid for Lundin Mining (LUN-L) on Feb. 28.

The proposed offer from Minmetals is contingent on Equinox dropping its bid for Lundin Mining, as well as regulatory approvals and permission from Australia’s Foreign Investment Review Board.

Onno Rutten, an analyst at UBS Investment Research, wrote in a research note to clients that he sees a low probability of other bids for Equinox emerging, and believes that “shareholders could hold out for a bump by highly motivated Minmetals.”

Rutten has a buy on Equinox with a 12-month target price of $8 per share.

If shareholders approve the offer, the acquisition would more than double Minmetals’ exposure to the copper market. Equinox owns the Lumwana copper mine, about 220 km west of the world-renowned Zambian copper belt and the Jabal Sayid project in Saudi Arabia, about 350 km northeast of Jeddah.

For its part, Minmetals is one of the world’s largest zinc producers and a substantial producer of copper, lead, gold, silver and bauxite with operations in Australia and Asia in addition to advanced and early stage exploration assets across Australia, Asia and North America.

Its producing assets include the Century mine in Queensland, Australia’s largest open-pit zinc mine, which produces 500,000 tonnes of zinc a year, and the Sepon copper and gold operations in Laos, which produce about 65,000 tonnes of copper and 90,000 ounces of gold, respectively, each year.

In addition Minmetals owns the Golden Grove underground mine in Western Australia, which produces concentrates of zinc and copper, and the Roseberry mine in Tasmania, a polymetalic underground mine that has been in operation since 1936 and which the company says has the potential to extend its lifespan beyond 2030.

Minmetals said it expects to mail its offer and circular to Equinox shareholders within three weeks and will finance the proposed acquisition through a mixture of existing cash reserves, long-term credit facilities from Chinese banks, and equity including financial investments in Minmetals by Chinese institutions.

Equinox has scheduled a meeting of shareholders on Apr. 11 to consider its proposal to acquire Lundin.

Rutten of UBS Investment Research expects Equinox will now postpone the meeting and believes “the probability of Equinox closing the Lundin transaction has been substantially reduced.”

“An auction for Lundin might have gained momentum over the past weeks and we increase our probability of alternative offers emerging for Lundin to 60% (from 40% previously),” he continued. “However as the perceived threat of the hostile Equinox bid has been reduced, we believe that the probability of Lundin remaining independent has increased to 38% (from 10% previously).”