First Quantum sweetens Adastra bid (March 27, 2006)

It took more than two months of steadfast protests of opportunism and financial inadequacy by Adastra Minerals (AAA-T, AAA-L), but First Quantum Minerals (FM-T, FQVLF-O, FQM-L) has finally added a cash sweetener to its hostile takeover bid for the company.

The new bid includes $2.65 per Adastra share, and is accompanied by an improved share-exchange alternative of one First Quantum share for every 14.76 Adastra shares tendered, compared with the 17.5 shares required under the original offer launched on Jan. 18.

The cash portion of the deal is capped at $36.3 million, while the limit to shares is 4.9 million. Assuming full pro ration, the offer equates to 0.057 of a First Quantum share accompanied by 42 for each share of Adastra.

The offer represents a premium of 8.2% over Adastra’s closing share price in Toronto on March 17 — the last business day before the announcement of the revised deal. The offer expires at the end of March, and First Quantum now requires just 50.1% of its prey’s shares to be tendered, down from the previous condition of 66.7%.

First Quantum said that the number of shares up for grabs under the new bid is unchanged in order to limit share dilution to its shareholders. The cash option will be funded by internal resources.

“This is our full and final offer which will not be increased,” said First Quantum chief executive Philip Pascall in a statement.

“In arriving at our offer, we have undertaken a thorough review of publicly available information about the Kolwezi project and, based on our extensive experience of building this kind of project in the region, we believe that our offer represents excellent fundamental value as well as being at a substantial premium to the market.”

Adastra’s special committee said that at first blush, it was “disappointed at the level of the revised offer.” Still, the company and its financial advisers plan to review the revised bid and make a formal recommendation to shareholders as soon as possible. In the meantime, shareholders were urged to “take no action.”

As an added bonus, Adastra shareholders who tender to the offer will be eligible for First Quantum’s recently announced dividend of 26.5 per share, payable on May 10.

If successful in its bid, First Quantum plans to have its shares moved to the London Stock Exchange’s main board from the Alternative Investment Market (AIM).

First Quantum previously said it would pull its offer if Adastra’s rival plan to sell a 14.9% stake in the Kolwezi copper-cobalt project in the Democratic Republic of the Congo (DRC) to Mitsubishi (MSBHY-O) was consummated. Under that deal, the Japanese trading company would fork over US$37.5 million in cash, provide a US$12.5-million project loan, and extend a completion guarantee to the project lenders.

Mitsubishi would also buy all of Kolwezi’s copper production at London Metal Exchange grade-A prices (less a commission) for 15 years, and sell cobalt production in selected regions.

Kolwezi feasibility

A recently completed feasibility study gives a hearty thumbs-up to a 2.3-million-tonne-per-year operation at Kolwezi. The study, by Murray & Roberts Engineering Solutions and GRD Minproc, pegs the project’s after-tax internal rate of return (IRR) at 31.1%; the IRR of Adastra’s 65% stake rings in at 40.4%, while its net present value is estimated at US$284 million, (or C$3.93 per fully diluted share), based on a discount rate of 12%.

The estimated price tag of US$305 million, includes US$34 million for spares, first fill, inventories, insurance, and a US$27-million contingency fund. Some US$7 million worth of potential savings have been outlined, and a “value engineering process” aimed at identifying further savings will be completed over the next two months.

The proposed operation would focus on two tailings dams containing resources of 112.8 million tonnes of oxide tailings grading 1.49% copper and 0.32% cobalt to annually produce 33,200 tonnes copper and 5,900 tonnes cobalt. Murray and GRD estimate operating costs at US57 per lb. of copper and US$2.08 per lb. of cobalt, on a co-product basis.

Construction is expected to begin before year-end, with first metal production possible by the second half of 2008.

“The completion of the DFS is a major accomplishment that allows Kolwezi to move ahead, on schedule, towards first metal production in 2008,” said Adastra chief executive Tim Read.

South African state-owned Industrial Development Corp. and Investec Bank have been mandated to arrange US$80-US$120 million in financing for Kolwezi; the Royal Bank of Scotland is working on orchestrating another US$60-US$75 million.

Adastra and SRK Consulting have also completed an environmental and social impact assessment (ESIA) and environmental and social management plan (ESMP). International Financial Corp. (IFC), the financing arm of the World Bank, has confirmed that both meet the Equator Principles (environmental and social safeguards for project financing) and World Bank guidelines.

The ESIA concludes that “overall, the project will generate significant benefits to the area, both in terms of environmental improvements and socioeconomic development.”

“This is another crucial step in the development of Kolwezi, and will permit the project financing to proceed,” Read said. “The approval by the IFC of this exhaustive document further emphasizes Adastra’s commitment to best practice in project development.”

The IFC holds a 7.5% stake in the project, with the Industrial Development Corp. of South Africa (IDC) owning 10%, the government of the DRC with a 5% stake, and state-owned Gcamines retaining a 12.5% interest.

Defence spending

Adastra says that during the three months ended Jan. 31, it spent some $2.7 million on fending off First Quantum’s unwanted advances, including retaining N M Rothschild & Sons as its financial adviser. The cash outlay pushed the company to a net loss of US$3.2 million (or 4 per share) during the period. A year earlier, the company lost $741,817 or a penny a share. At quarter’s end, Adastra had cash and equivalents totalling US$10.3 million, and was running a deficit of US$45.9 million.

In contrast, First Quantum turned soaring copper prices into record profits in 2005 and in the year’s final quarter.

Net earnings for the year were US$152.8 million or US$2.48 per share, up a hefty 446% over the previous year. Strong fourth-quarter earnings of US$57.1 million, or US93 per share, were up 514% over the corresponding period of 2004.

Copper production in 2005 was 263 million lbs. (119,117 tonnes), a strong 187% increase over the previous year’s output. Adding significantly to last year’s production was the Kansanshi mine, which came on-stream in April 2005, ramping up to production of 65.1 million lbs. (29,558 tonnes) copper in the fourth quarter. Total output from the mine last year was 153 million lbs. (69,579 tonnes) copper, accounting for more than half of the company’s total.

First Quantum realized an average copper sale price of US$1.66 per lb. in 2005. Gross selling price was US$1.79 per lb., above last year’s London Metal Exchange average cash price of US$1.67 per lb., due to favourable contract pricing terms.

At its 80%-owned Kansanshi operation, in Zambia’s North Western province, about 7.3 million tonnes of ore was mined in 2005 at an average grade of almost 2% copper. Combined annual cash costs for cathode and concentrate were US63 per lb. of copper, with a total cost of US79 per lb.

Operations at Bwana-Lonshi, in the Copperbelt province of Zambia, mined 981,000 tonnes of ore in 2005 averaging 5.1% copper to produce 109 million lbs. (49,538 tonnes) copper, up 19% from 2004. Cash costs of US68 per lb. copper were realized, with total costs of US93 per lb. In addition, acid production from Ndola and Solwezi totalled 260,796 tonnes for the year, up 86% from the 140,200 tonnes produced in 2004. However, surplus acid dropped substantially due to requirements at Kansanshi.

F
irst Quantum anticipates its 80%-owned Guelb Moghrein copper-gold project in Mauritania will reach commercial production by the third quarter of 2006. The operation is targeted to produce 66 million lbs. (30,000 tonnes) copper-in-concentrate and 70,000 oz. gold annually.

The Frontier Copper project, in the DRC, recently received government environmental approvals and was issued an exploitation permit. A scoping study on the copper-cobalt deposit envisages average annual production of 176 million lbs. (80,000 tonnes) contained copper.

Shares in Adastra finished 17, or about 7% better, at $2.62 in Toronto following the news of the sweetened offer; Adastra’s late snub tripped up First Quantum, which dropped 26 to $38.85.