First Quantum offers $460M for 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 (PEA) 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 Minerals exchange each Antares share for either 0.07619 of its 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 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 copper-gold 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 company, which will be owned 90.1% by existing Antares shareholders and the rest 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 added that 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 it 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 at 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 run simultaneously.

Each year the Haquira mine should produce 425 million lbs. copper, 5 million lbs. moly, 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) 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 produce a copper lb. for US$1.04, net of by-product 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% moly, 0.04 gram gold and 1.79 grams silver. Inferred resources add 333.7 million tonnes averaging 0.535% copper, 0.009% moly, 0.03 gram gold and 1.49 grams silver. Haquira’s oxide resources come in at 215 million measured and indicated tonnes of 0.466% copper plus 72.2 million inferred tonnes averaging 0.41% copper.

First Quantum’s share price fell on the day following the Antares offer, but that drop may relate more to its third quarter production numbers. Those numbers are down compared to the third quarter of 2009 because in August, the Democratic Republic of the Congo (DRC) government arbitrarily withdrew the mining permit for the Frontier copper 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 that the government took Frontier in retaliation for the company’s move to contest the earlier 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 move towards geographical diversification. And at least one mining analyst supports its bid to acquire Antares.

Kerry Smith, a mining analyst with Haywood Securities, rated the move positive, saying Haquira has the potential to add 500 million lbs. of 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 online 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 Antares takeover news to close at $82.66. The company has a 52- week trading range of $48.20- $100.32 and 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.