Quadra FNX chief executive officer Paul BlytheTim Fraser
Canadian copper rivals Quadra Mining Ltd. and FNX Mining Company Inc. are combining forces to create an acquisition-hungry producer that is betting the red metal's price will stay high for the long run.
The proposed "merger of equals" will combine Quadra's projects in the United States and Chile with FNX's operations in Sudbury, a prolific mining region, with the goal of expanding that base into other territories, possibly including Australia and elsewhere in South America.
The new company, Quadra FNX Mining Ltd., will have a market capitalization of $3.5-billion and combined revenue of $1.5-billion. It will also have about $580-million in cash and investments as a starting point for its consolidation strategy, and $50-million in bank debt.
Demand for copper is expected to surge this year, after a drop during last year's recession, and rise steadily over the next few years as demand outweighs constrained supply.
"This really gives us a bulked-up company now," FNX chairman Terry MacGibbon, who will become non-executive chairman of the new company, said on Tuesday. "We think there are opportunities in the industry that are available now."
Quadra chief executive officer Paul Blythe, who will fill the CEO role at the new company, said the plan is to become larger by buying other miners.
"Proactively, the drive would be copper as our main focus," Mr. Blythe said, but added that other base metals will be considered as targets.
While FNX is also considered a nickel company, about 75 per cent of its revenue today comes from copper.
The new company, whose merger must be approved by shareholders, will produce about 300 million pounds of copper and 150,000 ounces of precious metals in 2011, as well as various byproduct metals.
The company's growth ambitions come as copper prices are expected to stay strong as mine supply tightens and inventories fall.
"The copper market remains much tighter than the other base metals," RBC Dominion Securities said in a recent note.
Analysts expect a global copper shortage this year and prices to range from about $3.10 (U.S.) to $3.50 a pound.
China's increased appetite for copper is behind a $1-billion joint venture that Quadra struck two weeks ago with Chinese state-owned utility State Grid International Development Ltd. to develop Quadra's Chilean copper projects.
Tuesday's merger announcement came as a surprise to many, who saw FNX as a possible takeover target at a premium price, given its progress with certain projects.
The $1.5-billion, all-stock deal sees each FNX share exchanged for 0.87 Quadra shares, which amounts to a small premium for FNX shareholders.
"We don't think anyone saw this coming," TD Newcrest analyst Greg Barnes said in a research note. "That being said, the merged company is expected to be a more copper-focused company."
Selling FNX for a premium would be "cheating our shareholders," FNX's Mr. MacGibbon said. "We weren't looking to sell the company. We didn't sell the company. What's important to me here is that it's a merger of equals. We retained all that we've worked for over the last number of years."
FNX and Quadra shareholders will be asked to vote on the proposed merger in May.
The deal includes a $40-million (Canadian) break fee, and the right for either company to match a competing offer.
It is unlikely another bidder will come forward, TD's Mr. Barnes said in his research note, given that FNX is considered too small for majors such as Vale and Xstrata.
"Potential candidates to make a bid for FNX include HudBay [Minerals] but with no CEO in place, this seems like a low probability. In fact there is the possibility that the new Quadra FNX could be seen as a possible acquirer of HudBay (although that may be getting ahead of ourselves at this point)."
QUADRA (QUA)
Close: $16.98, down 40¢
FNX (FNX)
Close: $15.14, up 29¢