[Update] Inmet rejects First Quantum’s takeover bid

Shares of Inmet Mining (IMN-T) are still climbing after it made two separate announcements yesterday, indicating it has turned down a second takeover bid from First Quantum Minerals (FM-T) and has adopted a shareholder rights plan to provide it more time to dissect future offers.

Inmet said it received an “unsolicited, non-binding, highly conditional” offer from First Quantum on Nov. 25, 2012, where the larger miner by market cap proposed to acquire it for $70 apiece. First Quantum, which has two copper-gold mines in Africa and nickel mines in Australia and Finland, had offered to pay Inmet through an even mix of cash and shares.

That would have worked out to be a total cash payment of $2.461 billion and 112.679 million First Quantum shares.

Inmet, which operates three primary copper mines globally and is in the midst of constructing a fourth mine in Panama, said it reviewed the proposal and chose to dismiss it as “it is not in the best interests of Inmet shareholders.”

The Toronto-based firm also revealed that First Quantum made a similar unsolicited pitch on Oct. 28, for $62.50 per Inmet share, which it declined on Nov. 1.

Around this time Inmet was engaged in its own takeover struggle for its Panamanian neighbour Petaquilla Minerals (PTQ-T), which operates a small gold mine next to its 80%-held Cobre Panama copper project. But that bid failed as Petaquilla said it didn’t consider the full value of its assets.

Perhaps that’s something that came up as Inmet was evaluating First Quantum’s offer. The $70-per-share offer represents a 33% premium to Inmet’s Nov.27 close and roughly a 28% premium to the 20-day volume weighted average share price, writes Scotiabank analyst Tom Meyer in a note, adding he didn’t anticipate the bid.

“We were very surprised by FM’s proposal given that FM was built on early-stage development projects where its engineering and construction experience could be applied in such a way to enhance project returns,” Meyer writes. “Although the construction of the Cobre Panama project is still at an early stage (began in May), the engineering & procurement is advanced and may not lend itself to FM’s typical modus operandi.”

As there’s often a market discount applied to development projects compared to producing ones, Meyer suggests First Quantum may have wanted to snatch Inmet at a discount before the company finished constructing its Cobre Panama, which is estimated to reach commercial production in early 2016.

“According to our estimates there is a steep market discount applied to development projects vs. producing companies (P/NAV of 0.25x for developers vs. 0.72x for producers). It is possible FM may want to exploit this market inefficiency, given that IMN’s Cobre Panama project represents 44% of our operating net asset value.”

Meyer continues on to say it is unlikely First Quantum will succeed with a $70-range bid as it fails to consider the long-term value of Cobre Panama.

“We believe that First Quantum would have to offer something closer to 1.0x NAVPS or $84 to be successful,” says Meyer, pointing out that he doesn’t believe First Quantum has the financial capacity to do so.

However, First Quantum’s chairman and CEO Philip Pascall maintains the transaction “would have presented an opportunity to realize immediate and attractive cash value for the holder of Inmet shares while preserving the opportunity for both sets of shareholders to participate in the substantial upside value that we believe would be created through a combination.”

Pascall says the company is both “surprised and disappointed” at how Inmet’s board shrugged off the offer without any discussions with First Quantum.  

Inmet also announced it’s putting in place a shareholder rights plan, not to ward off other suitors but to buy it more time to review future proposals and seek alternatives.  

The rights will become exercisable if any firm or individual tries to buy 20% or more without a waiver, and will allow the rights holders to purchase a share at half the current market price, the company explained in a release. Holders will get one right per Inmet share.

Under the rights plan, an offer that is presented to all shareholders with identical terms and conditions and remains open for a minimum of 60 days, among other things, will be considered a “permitted bid.”

In late afternoon trading, Inmet shares were up 4% to $64.77 on heavy volume after spiking 17% or $9.20 to close Nov. 28 at $62. Inmet has 69.4 million shares outstanding and a market cap of $4.47 billion.

First Quantum was trading down less than a percent at $20.65. It lost 1.6% or 34¢ to close yesterday at $20.80. The miner has a market cap of $9.8 billion and 476.3 million shares outstanding.