The Conversation (0)
This week, Lundin Mining joined the ranks of companies in the mergers and acquisitions game, with the announcement that it would be scooping up Freeport McMoran’s 80 percent interest in the Candelaria mining complex in Chile.
The most recent company to join in the merger and acquisitions game is Lundin Mining (TSX:LUN), who announced on October 6 that it would be scooping up Freeport McMoran’s (NYSE:FCX) 80 percent interest in the Candelaria mining complex in Chile. For a substantial all-cash price of $1.8 billion, plus US$200 million in contingencies, the Canadian miner will be picking up both the Candelaria/Ojos del Salado mining operations, but also the supporting infrastructure. The remaining 20 percent will continue to belong to Sumitomo Metal Mining.
What makes this a good deal?
Lundin CEO and President, Paul Conibear, was quoted in the company’s press release, ”The acquisition of Candelaria is a unique opportunity to acquire a large scale, high quality copper operation with strong cash flows in an excellent mining jurisdiction.”
Conibear went on to add that the transaction will provide Lundin increase operational and geographic diversification, with a well-balanced financing structure enabling the company to maintain a strong balance sheet moving forward.
As Haywood Securities analyst, Kerry Smith puts it, Lundin’s acquisition is “transformational,” insofar that it effectively doubles Lundin’s copper production, adds a low-risk operation – already in production in a good political jurisdiction. The acquisition also pushes Lundin on to the top 20 global copper producers list.
Financing
To finance the acquisition, Lundin will be looking at a combination of US$1.0 billion of new senior debt, a US$648 million up-front payment from Franco-Nevada for a gold and silver stream, and a US$600 million bought-deal equity financing at C$5.10 per share. Furthermore, the Lundin Family Trust will be taking C$100 million of the equity and Franco-Nevada is taking up to C$50 million.
While the company is certainly on board with the deal, the financing is a little complex. The Financial Post’s Peter Koven highlighted that analysts generally tend to steer clear of deals with complex financing arrangements. Luckily, in the case of Lundin, analysts “love it.”
Jackie Przyblowski, analyst with Desjardins Capital Markets noted that along with being immediately accretive to all Lundin’s near-term financial metrics, the acquisition of Candelaria “also establishes a strategic foundation in Chile, from which Lundin can develop other attractive assets.”
Also jumping on the band wagon was Alex Terentiew, from Raymond James who outlined how Candelaria’s location helps diversify Lundin’s cash flow further away from the Democratic Republic of Congo. Terentiew also noted that the deal means the company’s balance sheet remains for-the-most-part “un-levered.”
As Smith wrote in a note to clients, the Franco-Nevada stream is not expensive to Lundin. “Based on the life-of-mine average contained production in concentrate (based pay factors) of 126,000 tonnes per annum copper, 77,000 ounce of gold, and 1.4 million ounces of silver, Franco-Nevada is getting about an 8 year payback at US$1,300 per ounce gold – they get their return as new reserves are added and as the gold price moves higher.
Bottom line
Overall, Lundin’s acquisition of Candelaria is being seen as a positive for the company, adding about 300 million pounds of copper production to the company’s 2015 expectations. In a time where prices have forced companies to cut costs, and investors have shied away from the market, it is refreshing to see that there are still some deals to be had.
Securities Disclosure: I, Vivien Diniz, hold no investment interest in any of the companies mentioned.