Lundin to sell Tenke stake 
to Chinese 
PE firm 
for US$1.1B

Six months after Freeport-McMoRan (NYSE: FCX) agreed to sell its 56% stake in the Tenke Fungurume copper-cobalt mine in the Democratic Republic of the Congo (DRC) to China Molybdenum, joint-venture partner Lundin Mining (TSX: LUN; US-OTC: LUNMF) has struck a deal to sell its 24% interest in the mine to a Chinese private equity firm, BHR Partners, for US$1.14 billion.

Lundin’s president and CEO Paul Conibear stated that while it was “a difficult decision,” given the company’s 20-year history at Tenke, the sale would help the company “incrementally grow with projects and operations we control, while maintaining a strong balance sheet.”

Under the agreement, Lundin is selling its indirect 30% interest in TF Holdings — a Bermuda holding company that owns an 80% stake in Tenke Fungurume Mining — for US$1.14 billion in cash. The arrangement also has a contingent consideration of up to US$51.4 million, made up of US$25.7 million if the average copper price exceeds US$3.50 per lb., and another US$25.7 million if the average cobalt price exceeds US$20 per lb., within a 24-month period starting on Jan. 1, 2018.

In examining the rationale for the move, Pierre Vaillancourt, a mining analyst at Laurentian Bank Securities, pointed out that Lundin Mining has benefitted from a strong partnership with Freeport throughout the life-of-mine,” and that “with Freeport gone, Lundin was faced with the uncertainty of a less-experienced new partner, which may not have been as advantageous to the company.

Processing facilities at the Tenke Fungurume copper-cobalt mine in the Democratic Republic of the Congo. Credit: Lundin Mining.

“In the context of a vocal and somewhat unpredictable DRC government as its other partner (20%), and a major capital commitment for the next phase of expansion at the mine, taking the money was prudent,” he said in a research note, adding that he has raised his target price on Lundin Mining from $7 per share to $8 per share to reflect a stronger copper price environment, a more robust balance sheet and lower political risk.

Vaillancourt also noted that the sale “provides plenty of opportunity for the company to add another asset,” and that it might consider Serbia, and targets within Eastern Europe’s Tethyan belt. It might also consolidate its position in Chile, he said, or “look north to Peru for expansion.”

CIBC analyst Alec Kodatsky kept his target price on the company at $6 per share.

“On the strategic front, the sale of Tenke removes it from the DRC and eliminates the uncertainty of operating the asset with a new partner. Lundin can now refocus on its core assets and return to evaluating strategic growth opportunities, and has the potential to return value to shareholders in the form of a dividend,” he wrote in a research commentary on the transaction.

“The flip side, however, is that Lundin has sold its best copper asset at what looks to be the bottom of the cycle (albeit for a reasonable price), and is now tasked with finding a replacement in a highly competitive market for assets as copper prices improve. We would expect the use of proceeds remains top of mind for investors.”

One fund manager in Europe with deep expertise in Africa described the sale in an email to The Northern Miner as “normal,” and “not unexpected.”

The fund manager, who requested anonymity, said that “the Chinese are a massive copper user and they have plans to become a force in the growing electrical vehicle market. Of course, DRC has a difficult geography, and a few big companies have come unstuck there. But one feels the Chinese can handle the dynamics. So why not?”

Stefan Ioannou of Haywood Securities said in a research note that he views the sale favourably and noted that it would also improve sentiment about copper.

“The US$3.8-billion Tenke transaction (Freeport and Lundin considerations combined) — one of the largest since Glencore sold the Las Bambas mine in Peru to MMG (China MinMetals) for US$6 billion in 2014 — stands to bolster copper sentiment.

The deal follows Rio Tinto’s recently approved US$5.3-billion underground expansion of the Oyu Tolgoi mine in Mongolia — arguably a sign that the [Chinese] majors are willing to jockey for assets or production growth ahead of anticipated medium- to long-term copper price strength.”

Lundin Mining’s shares were up 3¢, or 0.5%, to $6.38 on the day, and at press time traded at $6.61 apiece.

Over the last year the company has traded in a range of $2.98 to $6.57 per share.