First Quantum offers $460-million deal to buy Antares

Vancouver – In a big step towards diversifying its copper operations away from Africa, First Quantum Minerals (FM-T, FQM-L) is buying Antares Minerals (ANM-V) in a cash-and-share deal worth $460 million to gets its hands on the large Haquira copper-molybdenum-gold-silver project in Peru.

Haquira is one of the world’s largest undeveloped copper deposits and sits adjacent to Xstrata‘s (XTA-L, XSRAF-O) Las Bambas copper-gold project, which the major recently approved for development. A preliminary economic assessment of Haquira, completed in July, outlined an operation churning through 130,000 tonnes of ore daily to produce 8.3 billion lbs. copper, 97 million lbs. molybdenum, 522,000 oz. gold, and 24.3 million oz. silver over a 20-year mine life.

The deal would see First Quantum exchange each Antares share for either 0.07619 of a First Quantum share or $6.35 in cash, up to an aggregate maximum cash component of $250 million. Antares shareholders will have to elect to receive cash or shares or a combination, subject to the cash limit. If shareholders cumulatively want cash above the limit, the $250 million available will be pro-rated among those shareholders and the balance will be paid in shares.

The deal is worth $460 million. The implied $6.35 value for each Antares share represents a 41% premium to Antares’ closing price on Oct. 15 and a 46% premium to its 20-day, volume-weighted average share price.

As part of the deal Antares’ 50% interest in the Rio Grande project, located in northwest Argentina, will be spun out into a new exploration company called Regulus Resources. Regulus will also hold $5 million in cash. Antares shareholders will receive their pro rata share of the new venture, which will be owned 90.1% by existing Antares shareholders and 9.9% by First Quantum.

Antares’ board has unanimously approved the deal. In addition, the directors and senior officers of Antares along with several institutional shareholders that together hold 42% of Antares’ outstanding share count have signed on to vote in support of the deal.

“When we formed Antares in 2004, our objective was to discover a significant mineral deposit and develop it to the stage where it would be of interest to a major mining company,” said John Black, Antares’ president and CEO, in a statement. “The proposed transaction with First Quantum represents the culmination of our efforts over the past six years and the successful achievement of that goal.”

Black continued on to say Antares believes in First Quantum’s expertise in building and operating mines. As for First Quantum’s take on the deal, chairman and CEO Philip Pascall said Haquira is the right kind of project for his company: one where they can add material value while bringing it into production and then through efficient operation.

“The acquisition of Antares is another step in First Quantum’s stated strategy of geographical diversification,” said Philips. “Haquira is a world-class copper project and has the potential to significantly increase First Quantum’s copper production profile.”

That copper production would come from two parallel processing streams at Haquira. The project hosts a primary copper-moly-gold-silver resource that is covered by an oxide blanket containing leachable copper. The Haquira PEA recommended processing both types of ore – the operation would run 30,000 tonnes of oxide ore through a solvent extraction-electrowinning process while also running 100,000 tonnes of sulphide ore through a crushing and flotation facility each day.

For the first five years all ore would come from two open pits, a large one at Haquira East and a smaller one Haquira West, with an average strip ratio of 2.06 to 1. The mineralization at Haquira East reaches beyond 1,000 metres depth; the open pit will stretch to 700 metres depth and the ore beyond that will be mined from an underground operation. Since the underground mine will use long hole stoping with paste fill, the open pit and underground operations at Haquira East should be able to operation simultaneously.

Each year the Haquira mine should produce 425 million lbs. copper, 5 million lbs. molybdenum, 27,000 oz. gold, and 1.2 million oz. silver.

It is expected to cost US$2.06 billion and take 2.5 years to build the mine. The cost estimate assumes the need to finance all required infrastructure, which includes a concentrate pipeline to the nearest railhead 200 km away as well as a power line. Including the year-four costs of developing the underground mine at Haquira East increases the capital costs to US$2.82 billion. Once built, the mine should be able to produce a pound of copper for US$1.04, net of byproduct credits.

Using a base case copper price of US$2.25 per lb. and an 8% discount rate, the project carries an after tax net present value (NPV) of US$1.07 billion and should generate a 16.4% internal rate of return (IRR). Increasing the price of copper to US$3 per lb. brings the NPV to US$2.7 billion and increases the IRR to 26.3%.

Sulphide resources at Haquira stand at 354.6 million measured and indicated tonnes grading 0.628% copper, 0.014% molybdenum, 0.044 gram gold per tonne, and 1.79 grams silver per tonne. Inferred resources add 333.7 million tonnes averaging 0.535% copper, 0.009% moly, 0.032 gram gold, and 1.491 grams silver. Haquira’s oxide resources come in at 215 million measured and indicated tonnes grading 0.466% copper plus 72.2 million inferred tonnes averaging 0.41% copper.

First Quantum’s share price fell on the day following the announcement, but that may relate more to its third quarter production numbers. Those numbers are down compared to the third quarter of 2009 because in August the government of the Democratic Republic of the Congo arbitrarily withdrew the mining permit for the Frontier mine, forcing First Quantum to suspend operations. The operation, which employed 1,500 people and was the nation’s biggest taxpayer, now sits idle while First Quantum and the DRC government head to international courts. First Quantum alleges the government took the Frontier mine in retaliation for the company’s move to challenge the earlier illegal seizure and resale of its stake in another nearby copper project, Kolwezi.

Troubles in the DRC, where First Quantum spent $1 billion developing those mines, are precisely the motive behind its moves towards geographical diversification. And at least one mining analyst supports the move to acquire Antares.

Kerry Smith, a mining analyst with Haywood Securities, rated the move positive, saying Haquira had the potential to add 500 million lbs. copper production by 2015 to bring First Quantum’s annual copper output to 1 billion lbs. by 2016. Haquira would become the fourth project in First Quantum’s development pipeline, behind the Ravensthorpe nickel project in Australia, the Kevitsa nickel-copper-platinum group metals project in Finland, and the Sentinel copper project in Zambia. Ravensthorpe is expected to come on line in mid-2011 and First Quantum is working to obtain the permits to develop Sentinel, so Smith sees the company kicking off construction at Haquira in 2014.

First Quantum lost 41¢ on the news to close at $82.66. The company has a 52-week trading range of $48.20 to $100.32 and has 81 million shares outstanding. Antares, on the other hand, gained $2.09 on the news to reach $6.58, a new high and a welcome change from its 52-week low of $1.25. Antares has 65 million shares outstanding.