Mitsubishi eyes a slice of Kolwezi

Adastra Minerals‘ (AAA-T, AAA-L) directors have unanimously urged shareholders to reject a hostile takeover bid by First Quantum Minerals (FM-T, FQM-L), instead touting a plan to sell Mitsubishi Corp. (MSBHY-O) a 14.9% stake in the Kolwezi copper-cobalt tailings project in the Democratic Republic of the Congo (DRC).

Under the proposed scheme, Japan’s largest general trading company would pay US$37.5 million in cash for a share in Adastra’s subsidiary Kingamyambo Musonoi Tailings (KMT) — the company that owns Kolwezi. Mitsubishi would also provide a US$12.5-million shareholder loan to KMT on Adastra’s behalf, and extend a completion guarantee to the project lenders.

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

The agreement is subject to due diligence, a definitive agreement, and approval by each company’s board.

In the end, the deal with Mitsuibishi, and the pending exercise of options on 7.5% and 10% stakes in KMT held by International Financial Corp. (IFC), the financing arm of the World Bank, and Industrial Development Corp. of South Africa (IDC), would see Adastra diluted to a 50.1% interest. The government of the DRC holds a 5% stake, while state-owned Gcamines retains a 12.5% interest.

The IFC and IDC options will be executed once the government amends KMT’s articles of association; the administrative procedure is expected shortly.

Adastra says the proposed Mitsubishi transaction, when adjusted for the estimated value of Adastra’s assets excluded from the deal, offers more value to Adastra shareholders than First Quantum’s offer of one of its own shares in exchange for every 17.5 Adastra shares tendered.

First Quantum’s bid expires on Mar. 10. The company’s CEO Philip Pascall previously said his company did not intend to boost its bid, and will look to have securities regulators set aside Adastra’s recently adopted shareholders’ rights plan, calling it “an unnecessary delaying tactic.”

“Adastra believes First Quantum’s offer is financially inadequate, opportunistic, and fails to recognise the value of the Kolwezi project,” said Adastra chief executive Tim Read in a prepared statement. “First Quantum wants Adastra shareholders to contribute 45% of a combined group’s copper-equivalent resources and accept only 7% of the combined group’s equity.”

The Kolwezi project centres on two tailings dams containing a resource of 112.8 million tonnes of oxide tailings grading 1.49% copper and 0.32% cobalt. The dams are left over from the mineral concentrator facility in Kolwezi, which processed high-grade ore from the Kov and other nearby mines from 1952 onward.

Adastra initially envisaged annual production of 5,500 tonnes cobalt and 30,000 tonnes copper over a 53-year mine life, with cash costs forecast among the lowest in the world. The plan carries a price tag of around $300 million. Adastra says the resource is also capable of supporting double that annual production rate for 29 years.

The company now says that a definitive feasibility study scheduled for completion in early March, is expected to put annual production at closer to 5,900 tonnes cobalt and 33,200 tonnes copper. The new plan is expected to come in under US$350 million. The higher capital cost is expected to be offset by higher production.

Pending a positive outcome to the study, construction could begin before the year-end, with first production conceivable by mid-2008.

Frist Quantum said that if its bid were successful, it would completely re-engineer the project, incorporating expertise gained in operating the Bwana Mkubwa copper mine in Zambia.

Shares in Adastra were 35, or 15%, better at $2.65 in afternoon trading in Toronto following the news on Feb. 17; First Quantum was 78 higher at $38.18.