Philip Pascall, CEO of First Quantum Minerals Ltd., is hoping the third time is the charm in his attempt to buy Inmet Mining Corp. That's not likely. Despite the global economic uncertainty there is still a lot to like about copper and in particular Inmet's jewel asset, its Cobre Panama development. Investors have already pushed Inmet stock above First Quantum's latest offer, a half-cash, half-stock – and arguably half-hearted – $72 per share bid announced Sunday, just 2.9 per cent higher than its last bid three weeks earlier. Their bet that a better price awaits is a sensible one.
Copper is the backbone of any industrial expansion and pricing has proven resilient in recent years, fuelled by continued demand from emerging BRIC countries. At the height of the credit crisis in October, 2008, the head of Chile's state-owned copper mining giant Codelco warned the super cycle in copper prices had come to "an abrupt end." It turned out to be more of a dramatic pause. Copper prices, which had more than quadrupled since the early 2000s, fell by two-thirds in the second half of 2008, but just two years later were trading even higher than before the crisis. The price has since eased back and there are concerns that production will rise faster than demand next year, but prices are still where they stood in mid-2007, when the global economy was humming. Any bet on continued growth in China and India is a bet on copper.
If copper pricing is indeed stable or heading up, Inmet's Panamanian mine is about as good an asset as they come. Cobre Panama will be one of the largest, and one of the few, major copper mines to come on-stream in the next five to seven years, it's located in a relatively secure jurisdiction and is supported by the local government. Last week, Inmet increased its estimate of the mine's copper reserves by 27 per cent, and boosted its forecast of expected mine life to 40 years from 31. Meanwhile, concerns about Inmet's ability to finance its 80-per-cent stake of the $6.2-billion (U.S.) development costs melted away this year after it raised $1.5-billion in debt and $1-billion by channelling future revenues from gold and silver mined at Cobre to Franco-Nevada Corp.
First Quantum's offer has its appeal – the price on the table is a lot higher than where Inmet stock was trading last month, before the takeover interest surfaced, and still gives shareholders a chance to participate in any further runup in copper prices. But there's no reason for investors to get their share certificates out of the vaults just yet. The list of potential bidders who would – or should – be interested in Inmet includes Vale SA, BHP Biliton PLC, and, despite its recent move into energy, Freeport-McMorRan Copper & Gold Inc. Inmet is likely to change hands, and possibly sell to First Quantum, but investors should wait for a formal auction for that to happen. It should be well worth their lack of effort.