Inmet Mining Corp. has a week to respond officially to a hostile takeover bid from rival First Quantum Minerals Ltd., but few expect anything short of a rejection of the $5.1-billion offer.
The owner of the coveted Cobre Panama copper project in Central America has until Jan. 24 to respond, and people familiar with the situation say it will come out swinging, recommending against the takeover and signalling progress in its search for an alternative palatable to shareholders.
Central to its defence will be a critical analysis of First Quantum's track record on cost controls, meeting production targets and building mines in Latin America, said a source.
The company will allege First Quantum has a history of underestimating capital costs, as well as argue the Vancouver-based firm has no experience with capital projects the size of Cobre Panama, which will cost $6.2-billion to put into production.
How this plays out could prove critical to Inmet's defence because the First Quantum bid of $72 a share is in cash and stock, which means the hostile suitor must convince investors of the value of its own shares.
"The board is expected to recommend against the offer," said a source familiar with the Inmet stance. The source said Inmet will also follow the playbook of takeover defence tactics and point to confidentiality agreements and standstills it has signed with unnamed parties who might become rival bidders.
Agreements could also be signalled with parties interested in taking a minority stake in Cobre Panama, which would make a takeover by First Quantum far less likely.
Executives of Africa-focused First Quantum, known in the industry for its proven engineering team, believe they can build Cobre Panama more efficiently than Inmet. As proof, they point to the Sentinel project they are building in Zambia that will have similar output but will be completed at about a third of the price, some $2-billion.
They also point at projected capital costs at Cobre Panama that have gone from $3.5-billion in 2008 to $4.3-billion in 2010 and $6.2-billion today.
Cobre Panama will be the biggest mining project in the history of Central America, as well as the largest capital project in Panama since the Panama Canal and its subsequent expansion.
The project has come into the cross-hairs of global miners amid signs that prices for copper, the industrial metal that powered Chinese infrastructure development, could be poised for renewed growth in coming years.
The Vancouver-based company wants to acquire Inmet, based in Toronto, to help it build a Top 5 global copper producer. The plan depends mostly on getting its hands on Cobre Panama, which has the potential to produce up to 300,000 tonnes of copper per year.
In its circular filing next week – likely on Tuesday or Wednesday – Inmet will also probably point to its value potential as it develops Cobre Panama, one of the world's largest undeveloped copper assets and one of the few of that size under construction, and in a stable jurisdiction.
"One of the reasons they have some justification to say no – and I'm not saying it's the right thing or the wrong thing – is that as Cobre Panama comes into production the market will continue to re-rate the shares as they see that this thing is working after all," said Raymond Goldie, an analyst with Salman Partners Inc. who has a target price of $121 a share on Inmet.
Just days before First Quantum announced its decision to go hostile in December, Inmet published new data showing a 27-per-cent increase in reserves and a 10-year extension of the mine life at Cobre Panama, showcasing future value as the takeover battle loomed.
Inmet said on Jan. 12 the board and its advisors were engaged in a thorough and rigorous process to evaluate First Quantum's offer and to explore the full range of all potential alternatives that may provide greater value to Inmet shareholders, including activities commenced prior to First Quantum's bid.