Is Another Copper Star On The Rise?

By Stephen D. Simpson, CFA | December 17, 2012 AAA

It's not all that often that the Street seems to agree on something, but there is widespread agreement among analysts and investors that Freeport McMoRan's (NYSE:FCX) bids for Plains Exploration (NYSE:PXP) and McMoRan Exploration (NYSE:MMR) are both bad ideas. Assuming they go through, then, Freeport McMoRan may find its luster as a copper play dulled. Lucky for investors, then, a new option may be on the rise.

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It Hasn't Been an Easy Ride
The new option I'm referring to is First Quantum Minerals (OTC:FQVLF). First Quantum may be best known for an unfortunate event a few years ago, when the Democratic Republic of Congo expropriated the company's assets within that country. The company ultimately reached a settlement with Eurasian Natural Resources (OTC:EURNY) for $1.25 billion, but it was clearly a setback for the company.

First Quantum has recovered well, and has substantial copper assets in friendlier locales like Zambia, Finland and Peru. While First Quantum is a copper producer today, it's also a growth-oriented company as management intends to triple production by 2016.

SEE: Evaluating A Company's Management

Now Trying to Get Even Bigger
The reason I mention First Quantum as a potential option for disgruntled Freeport investors is that the company is trying to upgrade itself even further. The company has made two unsuccessful friendly bids for Inmet Mining (TSE:C.IMN), (a fellow Canadian copper miner), and has now launched a hostile bid.

The latest bid (the hostile one) is a slight improvement from the last friendly bid and values the company at C$72 a share (about 5.5 times the average sell-side 2013 EBITDA estimate). The bid is a little convoluted, as it offers three different options to Inmet investors. Inmet investors can choose from all cash, 3.2962 First Quantum shares and C$0.01 per share, or basically a half-and-half offer of C$36 per share and 1.6484 First Quantum shares.

It's not hard to see why First Quantum wants Inmet. Not only does Inmet operate in friendly areas like Spain, Turkey and Finland, it also has the Cobre Panama project - one of the only top-tier copper projects not currently in the hands of a large mining company. Not only does Cobre Panama potentially hold sizable amounts of copper (perhaps over 260 karat per year), but the production costs look quite favorable once the mine is up and running.

Should First Quantum get Inmet, the combined company would likely be a top-five producer by 2018 with over 1 million metric tonnes of copper production. It would also give the combined entity three top-tier development projects, an appealing blend of production and growth projects and a more diverse asset base spread across Zambia, Panama and Finland.

SEE: Analyzing An Acquisition Announcement

Go Bigger, or Go Home
All of that said, I don't think C$72 gets the deal done. At five-and-a-half times EBITDA, this deal comes in below the recent average of copper transactions (about six-and-a-half times), and there's no reason to think that Inmet should get a discount (even if there are sizable capex demands for Cobre Panama). First Quantum will likely have to go at least to C$80 (if not C$90), but the good news is that the company can pay these higher bids without really losing much value in the process. In other words, C$72 for Inmet would certainly be a bargain worth celebrating, but the deal still makes economic sense at higher levels.

The Bottom Line
With Freeport's ill-considered foray into petroleum and natural gas, names like Southern Copper (NYSE:SCCO) and Teck Cominco (NYSE:TCK) start looking marginally more interesting as alternatives. I do believe, though, that First Quantum is also very much worth a look - even though it's not listed on a United States exchange and buying these shares will require a little extra work (and likely a higher commission).

Absent a deal for Inmet, I believe these shares are worth at least C$25, and that's without giving much credit to the company's growth/production expansion potential. Clearly this company needs a healthy market for copper to really thrive, but investors who believe there is still room to run in the commodity super-cycle should definitely spend a little time learning more about First Quantum.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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