Inmet Mining’s (IMN-T) shares climbed after two announcements on Nov. 28 indicated the miner has turned down a second takeover bid from First Quantum Minerals (FM-T) and adopted a shareholder rights plan to provide more time to dissect future offers.
Inmet said it received an “unsolicited and non-binding highly conditional” offer from First Quantum on Nov. 25, when the larger miner by market capitalization proposed to acquire it for $70 per share. First Quantum, which has two copper-gold mines in Africa and nickel mines in Australia and Finland, had offered to pay Inmet through an equal mix of cash and shares.
This would work out to a total cash payment of $2.5 billion and 112.7 million First Quantum shares.
Inmet, which operates three primary copper mines globally while it builds a fourth mine in Panama, says it reviewed the proposal and dismissed it, finding it was “not in the best interests of Inmet shareholders.”
The Toronto-based firm also revealed that First Quantum made a similar unsolicited pitch on Oct. 28 for $62.50 per Inmet share, which Inmet declined on Nov. 1.
Around this time, Inmet was engaged in its own takeover struggle for its neighbour in Panama Petaquilla Minerals (PTQ-T), which operates a small gold mine next to its 80%-held Cobre Panama copper project. The bid failed, with Petaquilla saying it didn’t consider the full value of its assets.
Perhaps this came up while Inmet evaluated First Quantum’s offer. The $70-per-share offer represents a 33% premium to Inmet’s Nov. 27 close and a 28% premium to the 20-day, volume-weighted average share price, Scotiabank analyst Tom Meyer writes in a note, adding that he hadn’t anticipated the bid.
“We were surprised by FM’s proposal, given that FM was built on early stage development projects where its engineering and construction experience could be applied in such a way to enhance project returns,” Meyer says. “Although the construction of the Cobre Panama project is still at an early stage [beginning in May], the engineering and procurement is advanced, and may not lend itself to FM’s typical modus operandi.”
A market discount is often applied to development projects compared to producing ones, and Meyer suggests First Quantum may have wanted to snatch Inmet at a discount before the company finished building Cobre Panama, which is estimated to reach commercial production in early 2016.
“According to our estimates, there is a steep market discount applied to development projects versus producing companies [with a price to net asset value of 0.25 times for developers versus 0.72 times for producers]. It is possible FM may want to exploit this market inefficiency, given that IMN’s Cobre Panama project represents 44% of our operating net asset value.”
Meyer says it’s unlikely that First Quantum would succeed with a $70-range bid, which fails to consider the long-term value of Cobre Panama.
“We believe that First Quantum would have to offer something closer to 1 times net asset value per share, or $84, to be successful,” Meyer says, pointing out that he doesn’t believe First Quantum has this financial capacity.
However, First Quantum’s chairman and CEO Philip Pascall maintains the transaction “would have presented an opportunity to realize immediate and attractive cash value for the holder of Inmet shares, while preserving the opportunity for both sets of shareholders to participate in the substantial upside value that we believe would be created through a combination.”
Pascall says the company is “surprised and disappointed” at how Inmet’s board shrugged off the offer without any discussions with First Quantum.
Inmet also announced putting a shareholder rights plan in place, which buys it time to review future proposals and seek alternatives.
The rights would become exercisable if any party buys 20% or more without a waiver. The rights holders could also purchase a share at half the current market price, the company explains in a release. Holders would get one right per Inmet share.
Under the rights plan, an offer that is presented to all shareholders with identical terms and conditions and remains open for a minimum of 60 days, among other things, would be considered a “permitted bid.”
In late afternoon trading, Inmet shares were up 4% to $64.77 on heavy volume after spiking 17%, or $9.20, to close Nov. 28 at $62. Inmet has 69.4 million shares outstanding and a $4.5-billion market capitalization.
First Quantum traded down less than a percent at $20.65. It lost 1.6%, or 34¢, to close Nov. 28 at $20.80. The miner has a market capitalization of $9.8 billion and 476.3 million shares outstanding.
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