Minmetals to bid for Equinox Minerals

Shares of Equinox Minerals (EQN-T, EQN-A) surged 31.5% or $1.80 per share to $7.51 on news that Minmetals Resources intends to launch a $6.3-billion bid for the company – one of the largest proposed mining deals 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 access to low-cost financing from China’s state-owned banks.

Minmetals’ proposed $7-a-share cash bid for Equinox, unveiled on April 3, is a 23% premium to Equinox’s closing share price of $5.31 on April 1 and an 11.6% premium to Equinox’s share price of $6.27 before the dual-listed company made its own bid for Lundin Mining (LUN-T, LUMI-O) on Feb. 28. It is also a 33% premium to the 20-day volume-weighted average trading price of Equinox shares to April 1.

The takeover bid from Minmetals is contingent on Equinox dropping its bid for Lundin Mining, as well as regulatory approval and permission from Investment Canada. The proposed deal has already received written approval 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 proposed 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 advanced Jabal Sayid copper project in Saudi Arabia, 350 km northeast
of Jeddah.

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,
and 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-gold operations in Laos, which produce about 65,000 tonnes of copper and 90,000 oz. gold each year. 

It also owns the Golden Grove underground mine in Western Australia, which  produces concentrates of zinc and copper, and the Roseberry mine in Tasmania, a polymetallic underground mine that has been operating since 1936 and which the company says has the potential to extend its lifespan beyond 2030.

Minmetals said it expects to mail the offer and circular to Equinox shareholders before May 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, the company said.

In a conference call announcing its intention to make an offer for Equinox, Minmetals’ chief executive Andrew Michelmore said the proposed transaction offers a compelling premium and is a “superior alternative to Equinox’s offer to Lundin.” 

“It’s all cash at a substantial premium with certainty of value,” he explained, “and removes future development risks that Equinox currently faces.”

In terms of Equinox’s offer to Lundin, Michelmore noted that it dilutes Equinox’s shareholding and would lead to the “retention of shareholders in a relatively highly leveraged company.”

He added that Equinox’s offer to Lundin “increases the geopolitical risk of the Democratic Republic of the Congo added to their portfolio and Equinox has not ruled out increasing its offer to Lundin.”

Equinox has delayed a scheduled meeting of its shareholders to consider its bid for Lundin from April 11 to April 26, and has extended its offer for Lundin until April 29.

Rutten of UBS Investment Research 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 reasoned. “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).”