China reaffirmed its ambition to become a global player in the natural resources industry this week when state-owned Minmetals Resources revealed plans for a C$6.3 billion ($6.5 billion) offer for Equinox Minerals. Minmetals is interested in Equinox for the copper mines it owns in Zambia and Saudi Arabia.
The planned deal, which Minmetals announced on Monday, received a fillip yesterday when Australia’s Foreign Investment and Review Board (FIRB) indicated that it had no objection to Minmetals buying Equinox. The deal is also subject to regulatory approvals in Canada, but specialists say that it would be hard for the Canadians to reject the deal as Equinox has no underlying assets based in the country.
Minmetals intends to offer C$7 a share in cash for all the Equinox shares outstanding. The price represents a 33% premium to the 20-day volume-weighted average price (Vwap) of Equinox shares on the Toronto Stock Exchange (TSX) and a 23% premium to the price at which Equinox closed on Friday, the last trading day before Minmetals announced its intention to table a bid. Equinox has a primary listing on the TSX and is also listed on the Australian Securities Exchange.
Minmetals Resources is a subsidiary of China Minmetals Non-ferrous (CMN), a division of China Minmetals Corporation, which is one of the largest state-owned enterprises in China. Minmetals Resources is 75% owned by its state-owned parent and the balance is held by minority shareholders.
Last year Minmetals Resources bought Minerals and Metals Group (MMG) from CMN. MMG was the name given to a portfolio of businesses that comprised primarily the Oz Minerals assets CMN bought for $1.39 billion in 2009 after regulators in Australia thwarted CMN’s attempts to take over the entire Oz Minerals. Minmetals was advised on the 2009 takeover by UBS, while Oz Minerals was advised by Caliburn Partnership and Goldman Sachs JBWere. Minmetals paid $1.85 billion to CMN for MMG’s portfolio of zinc, copper, lead, gold and silver mines. Minmetals has secured shareholder approval to raise up to $1.6 billion of equity to finance the asset restructuring.
The deal streamlined CNM’s Australian assets and brought most of them under the fold of Hong Kong-listed Minmetals Resources. “We have created the platform that will launch MMR into 2011 as the international, upstream base metals flagship of the China Minmetals group,” said Li Fuli, chairman of MMR at the time, commenting on the strategic rationale for the deal. Rothschild advised MMR and Macquarie Capital advised CMN on the asset restructuring. The 2010 deal also saw MMG chief executive Andrew Michelmore become chief executive of Minmetals Resources. Michelmore was earlier chief executive of Oz Minerals. He resigned from that position in May 2009 after the company struck a deal to sell most of its assets to CMN. He then became chief executive of MMG.
Michelmore seems to have spent the 18 months when he was running MMG establishing his credibility with his new Chinese bosses. And, if the bid for Equinox is an indication, he has been successful. Some sources said that the Equinox opportunity was shown to Michelmore by bankers almost as soon as he started his new job, but he was not then in a position to progress it.
At a press conference at the Four Seasons in Hong Kong on Monday, Michelmore said that Equinox has been on his radar screen for almost two years. However, he was also candid in saying that it was not possible for Minmetals to pursue the acquisition until it had completed the restructuring of its asset portfolio.
“Timing is never perfect,” he said, when pressed about why he did not launch a bid for Equinox earlier. However, the timing is not imperfect either. Minmetals is benefiting from the fact that Equinox shares have traded down recently — the price of C$7 represents a premium of slightly more than 11% to the share price of Equinox before it launched a hostile bid for Lundin Mining Corp in early 2009.
Michelmore stressed repeatedly at the press conference the unique advantage Minmetals had in securing financing for the Equinox bid. “The banking finance we get from Chinese banks is more like equity,” he said. Chinese bankers will back Minmetals for the long term and will show the patience necessary for the company to extract value out of its mining assets, he added. “A 70:30 debt-to-equity ratio is achievable for us,” Michelmore said, making no attempt to hide his scorn for Western bankers and the traditional syndicated loan market, which most of his competitors have no choice but to borrow from.
Minmetals intends to finance the Equinox offer through a combination of cash, long-term credit facilities provided by Chinese banks and equity investments by Chinese entities, although it has not disclosed the exact split between the various sources.
Equinox is a company on a mission to become one of the world’s largest pure-play copper producers. In 2009, it commissioned the Lumwana copper mine in Zambia, the country’s largest foreign investment project. Last year, it launched a successful bid for Citadel Resource Corp for around $1.2 billion. The Melbourne-based company’s main attraction was the Jabal Sayid project, which is Saudi Arabia’s biggest copper deposit.
Then, in February, shortly after completing its Citadel acquisition, Equinox launched a C$4.8 billion cash-and-share takeover offer for Lundin. Equinox is seeking to add Lundin’s copper assets, comprising 24% of a mine in the Democratic Republic of Congo and 100% of two mines in Portugal and Sweden, to its portfolio.
Equinox secured financing for the cash component of the Lundin bid through a $3.2 billion bridge facility, which was to be led by Goldman Sachs and Credit Suisse. The bridge is intended to be refinanced through a combination of medium- and long-term debt instruments. Some specialists have said that Equinox’s planned financing is very aggressively leveraged.
On Monday, after Minmetals’ announcement, Equinox said that it was postponing to April 26 the shareholder meeting it had originally scheduled for April 11. The main agenda item shareholders are to consider is the Lundin acquisition. However, the 20% collapse in Equinox’s share price after it announced the Lundin bid seems a sure sign that shareholders are nervous about the size of the acquisition.
Minmetals has not yet tabled a bid; so far it has only announced its intent, so Equinox has not yet formally advised shareholders on how they should react.
Even so, it seems fairly clear what the market thinks — Equinox shares rose to C$7.35 after Minmetals announced its intention to bid. Specialists said long-only funds were sellers and hedge funds were now entering the stock to capture the price-arbitrage opportunity between the traded price and the Minmetals offer, and were also betting that Minmetals would increase its offer for Equinox. Specialists said the Equinox shareholding was widely dispersed with no controlling shareholders. Minmetals has built up a position of 4.2% in Equinox.
Minmetals did not rule out increasing its bid at the press conference on Monday, though Michelmore repeatedly highlighted that the intended C$7 per share offer was fair and had been reached after intense deliberation and number crunching. Minmetals has made it a condition of its bid that Equinox abandon its takeover of Lundin and Michelmore categorically said at the press conference that a combine of Equinox and Lundin was of no interest to Minmetals.
As is common in hostile M&A situations, a number of investment banks stand to make — or lose — a large fee depending on the outcome. Deutsche Bank is lead adviser to Minmetals with Macquarie Capital as joint adviser. Deutsche has stolen a march on UBS, which advised Minmetals on its 2009 takeover of part of Oz Minerals. It cannot have hurt that Henry Cai, who was chairman of Asia investment banking and head of China investment banking at UBS at the time of the 2009 Minmetals mandate, jumped ship to Deutsche last year as chairman of corporate finance for Asia and head of the corporate and investment bank (CIB) in China. Macquarie has won repeat business from a client that it earned money from last year as well on the asset restructuring. And Minmetals will pay out further fees this year for its planned equity raising. Deutsche and Macquarie had no comment on the deal.
Equinox is advised on the Lundin bid by Goldman Sachs. But the cream for both Goldman and its consortium partner, Credit Suisse, is likely to be what they stand to earn from the bridge loan facility and the takeout following that. And that money will not be banked if Equinox withdraws its bid. Some sources said Goldman Sachs and Credit Suisse had secured a role as defence advisers to Equinox on the bid from Minmetals. Goldman Sachs and Credit Suisse did not respond to requests for comment.
Lundin has been advised by Scotia Capital and Haywood Securities on the bid by Equinox.
