Candente Copper a possible takeover?

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 off as a possible takeover target.

The project is a “very attractive acquisition target due to its very large resource size and low political risk jurisdiction,” wrote analyst Chris Chang of Laurentian Bank Securities 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 were 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, Candente,” he said in a an interview on Oct. 18. 

Candente acquired the property in an auction nearly a decade ago from the Peruvian government, after Servicio Nacional de Geologia y Mineria, Placer Dome and Billiton (bhp-n, blt-l) explored the property at different times from 1967 to 2000.

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

The project, which sits in the Western Cordillera of the Peruvian Andes in the 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 at slightly lower copper, gold and silver grades, at a cutoff of 0.3%.

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

Canariaco Norte is a “highly profitable” project and copper has strong long-term fundamentals, says the company’s manager of investor relations, Walter Spagnuolo, 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.”

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

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

Using a long-term copper price of US$2.25 per lb. and an 8% discount, 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 the two nearby exploration targets Canariaco Sur and Quebrada Verde, Candente spun out its non-core Peruvian assets into the newly listed Cobriza Metals Corp. (cza-t), which debuted on Oct. 12 at 50¢ apiece.

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

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

Even with fewer projects in its pipeline, a junior single-handedly building a massive copper project is rather ambitious.

Chang predicts due to the project’s significant start-up costs – estimated at around 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), Freeport McMoRan (fcx-n), and Antofagasta (anto-l) as some of the companies that may have been eyeing Canariaco Norte, among few foreign state-owned companies.

 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 3 billion soles ($1.1 billion) a year for the country.

As outlined by Deloitte, mining companies lacking legal stability agreements with the 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” of between 4% and 13.12% on operating profits.

Chang noted as of Oct. 18 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 was quoted saying by Bloomberg on Sept. 22.

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

Based on six analysts’ predictions, Candente Copper has a price target of between $2.50 (Cormark Securities, June 8) to $3.90 (Dundee Capital Markets, Aug. 15).