Copper prices dropped from 1 month highs after credit ratings firm Standard & Poor’s warned that it would be reviewing the creditworthiness of Germany, France and 13 other Eurozone members. Three month copper on the London Metal Exchange lost USD 105 or 1.3% on the news to close at USD 7,835 per tonne. In New York, the key March COMEX contract fell by USD 0.04 to settle at USD 3.5755 per lb.
The big news to hit the copper market was KGHM‘s announcement that it would acquire Quadra FNX Mining, a Canadian copper producer with USD 2.94 billion market cap. While the purchase of a copper miner by KGHM came as no surprise to market followers, the end target was unexpected. The Polish miner announced earlier this month that it was in the market to acquire a copper producer due to its cash healthy position and its desire to expand its copper assets. Rumors circulated that the bid would be for a Canadian copper mining company with assets in South America. Speculation, however, focused on Candente Copper, a much smaller company than Quadra with a market cap of USD 142.09 million.
Quadra confirmed that it had agreed to the acquisition on Tuesday. KGHM will spend about CAD 3 billion plus debt to purchase Quadra. Quadra shareholders will receive CAD 15.00 in cash for each share tendered 32% premium to Quadra’s closing price on the Toronto Stock Exchange. The deal is worth a total of about CAD 3.5 billion including USD 500 million in debt. KGHM intends to finance the acquisition using existing cash on hand.
The KGHM offer values Quadra at 0.83 times net asset value. A value that, according to Greg Barnes, a Toronto based analyst at TD Newcrest Inc which is low compared to recent deals. There is room for a higher offer, in our view.
Lubin based KGHM is looking for assets outside of Poland in order to cut production costs and raise output. The purchase of Quadra will boost the company’s annual production from the current 570,000 planned for 2011 by more than 100,000 tonnes starting in 2012.
With a looming supply deficit, there is a worldwide effort to boost copper production. So far this year, the macroeconomic picture has dampened copper’s demand, and therefore prices. Without the macroeconomics clouding copper, prices would have most likely witnessed an aggressive spike due to a plethora of supply disruptions. These disruptions include the falling ore grades at the world’s largest copper mine, Escondida, ongoing strikes at Freeport McMoRan‘scopper operations as well as other various weather-related disruptions.
Xstrata said that it has positioned itself very well for the looming supply deficit and will continue to expand output. Its business plan to increase resources at its key projects was on track and on schedule. The company’s executives proclaimed that they were better positioned compared to most copper miners, for the next boom as the company used the 2008 crisis as an opportunity. Reportedly, as the markets tumbled, Xstrata got a jump start on expansion by venturing into new projects and ordering equipment.
In 2011, Xstrata copper boosted its total contained copper in its mineral resources by 10% to 97 million tonnes an increase the miner says lays the foundation for its target of increasing copper output by more than 50% to 1.5 million tonnes per year by the end of 2014. In addition, Xstrata sees substantial volume growth in the H2 of 2012 as well as cost savings from switching to lower-cost productions. The company is targeting 20% structural reduction in costs from lower cost operations; it will raise copper equivalent volumes by 50% by year end 2014. Xstrata will spend an estimated USD 19.5 billion during 2012 to 2014 on expansion.
(Sourced from copperinvestingnews.com0
