China’s natural resources M&A on the ups

MMR's parent is China Minmetals, a state-owned enterprise (SOE). It is also the country's largest metals trader with a reputation for being aggressively ambitious; two years ago it acquired the lion's share of Oz Minerals' assets, a base metals miner Down Under, for $1.7 billion.

The current copper focus is easily understood given that China comprises 40% of current global demand for the red metal. And while the latter's market price has slipped somewhat of late, overall demand projections are not expected to follow suit: quite the reverse.

A key PRC acquisition priority

That's because there is a pronounced shortage of long mining life quality copper assets on offer at present, and likewise few new projects of scale being developed. Moreover, generally high copper prices and the long lead time needed to bring these onstream exacerbate this market situation.

According to London Metals Exchange data, copper prices have risen 120% over the past two years.

From this assets standpoint, Equinox Minerals is a compelling target, mainly because of its Lumwana copper/uranium mine in Zambia - Africa's third biggest - plus its interest in the Jabal Sayid copper project in Saudi Arabia, which is due to start producing in 2012.

"Equinox has long been viewed as an attractive takeover target due to its large-scale and long life copper asset in Zambia," Andrew Driscoll, regional head of resources with CLSA in Hong Kong, told AVCJ. "Copper, iron ore and coal assets sit atop China's shopping list for offshore resource investments.

"(More broadly), ongoing M&A activity in the mining sector reflects both strong balance sheets and the limited investment opportunities for acquirers, and recognition that in some cases it's cheaper to buy than build."

The trigger

The trigger that put Equinox in play was its own hostile C$4.7 billion bid for Vancouver-based Lundin Mining in February, which involved saddling itself with considerable debt (a reported C$3.2 billion bridge loan). Equinox's investor base wasn't solidly behind this move, which caused its share price to sink to the point where it presented a windfall opportunity that MMR couldn't resist, hence it's announced hostile bid of C$7 per share - a 23% premium to the target's closing share price on April 1.

On April 7, Equinox flatly rejected the MMR bid, calling it ‘opportunistic'. In the view of company president & CEO Craig Williams, the Chinese bid was aimed at ‘frustrating' Equinox's bid to buy Lundin Mining. He said that the MMR offer amounted to only a 9% premium, far below other offers in current mining takeover bids.

Equinox chairman Peter Tomsett added in a statement: "The lowball price announced by MMR significantly understates our value and disregards the potential of this company, especially in the light of the continuing strength in copper prices."

A Canadian market source, however, commented wryly that in terms of fair valuation, Lundin has come out publicly calling Equinox ‘hypocrites' because of their offering a lower premium for Lundin than MMR offered for Equinox.

"If Equinox says Minmetals has offered it a bad deal, then it offered Lundin an even worse deal."

But back to basics, Equinox is now in play, hoisted on its own petard so to speak. And the nature of its assets is likely appealing to other global miners; so other bids are a distinct possibility.

The limiter, however, may prove to be the perception of MMR's deep pockets. Although their market value is only about $2.5 billion, there is much more firepower than this suggests behind them in the form of Chinese bank credit and institutional investor support in the PRC.

"Having a powerful state-owned enterprise as a major shareholder provides a significant potential funding advantage for Minmetals Resources," as CLSA's Driscoll notes.

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• Topics
• Greater China
• CLSA Capital Partners