Acquisitions in the metal mining sector were slow leading up to the new year, but two deals were announced over the course of late November to early January that could be the start of further consolidation in the space. The first deal, struck in Canada, was of the multi-billion dollar variety. The second deal, also of the Canadian sort, albeit in a much smaller capacity.
In the first deal that was announced, First Quantum Minerals (FQVLF.PK) announced that it commenced its offer to acquire Inmet Mining for total consideration of approximately C$5.1 billion. Under the terms of the offer, each Inmet Mining (IEMMF.PK) shareholder would have the option to elect to receive consideration per Inmet share of (i) C$72.00 in cash or (ii) 3.2967 First Quantum shares, or (iii) a mix of C$36.00 in cash plus 1.6484 First Quantum shares.
The big selling points of the deal are the size and increased liquidity and strong financial position of the two organizations as well as the combining of the copper assets. Specifically, the enhanced scale, liquidity and industry presence through its rapidly expanding copper production footprint with the capacity to deliver, according to third party research analyst estimates, in excess of 1.3 million tons of copper production per annum by 2018, which would make the combined entity a top five copper producer. The enhanced financial profile with greater liquidity, greater free cash flow generation ability and enhanced flexibility to raise capital when necessary at a lower long-term cost of capital,
The merger of the two would create a new global leader focused on copper with industry-leading copper production growth, based upon third party research analyst projections, of over 24%, compounded annually, from 2012 to 2018, driven by a strong pipeline of low capital intensity development projects and low cost expansions of existing operating assets. Inmet's shares had a strong second half of 2012 run but the acquisition offer gave it a nice boost as you can see below.
In the second deal, Alamos Gold (AGIGF.PK) announced that it commenced an offer to acquire Aurizon Mines (AZK) for approximately C$780 million in cash and shares. The big selling point is the fact that the combined companies will form one of the strongest and lowest risk production and growth profiles in the gold sector today. Specifically, the combination of Alamos and Aurizon will immediately create a new leading intermediate gold mining company with increased diversification, scale and liquidity. The combined entity is anticipated to have an estimated market capitalization of approximately $2.6 billion, with enhanced visibility among the international investor community as well as continued exposure to the North American capital markets through listings on both the TSX and the NYSE. The combined company, with two steady producing, low cost mines located in stable jurisdictions, will be strongly positioned for growth. As one might expect, AZK's shares immediately spiked after a sluggish two months as you can see from the chart below, courtesy of Yahoo Finance.
With that said, here are three more miners which may be in play here for acquisition-hungry companies:
Molycorp (MCP) is one of the world`s leading manufacturers of custom engineered rare earth and rare metal products and is vertically integrated from its world-class rare earth resource to its advanced downstream processing facilities. With 26 locations across 11 countries, the company also produces rare earth magnetic materials through its Molycorp Magnequench subsidiary, including neodymium-iron-boron (NdFeB) magnet powders, used to manufacture bonded NdFeB permanent rare earth magnets. Through its Intermetallics Japan joint venture with Daido Steel and Mitsubishi (MSBHY.PK), Molycorp manufactures next-generation, sintered NdFeB permanent rare earth magnets. Through its Molycorp Advanced Water Technologies subsidiary, the company markets and sells its proprietary, cerium-based advanced water purification technology called SorbX for use in municipal and industrial wastewater treatment, recreational water, and pool and spa water treatment markets.
The company has run into some trouble as the stock has tumbled from $35 a share to just above $7 a share over the past 10 months. However, now some are calling MCP a takeover target and it has been subject of takeover rumors. Bloomberg reported that Molycorp's low valuation and the chance to lock in rare-earth resources could spur manufacturers from Nissan Motors (NSANF.PK) to Siemens (SI) to make a bid, according to Byron Capital Markets. After expanding its refining and processing operations with last year's purchase of Neo Material Technologies, the $1.3 billion company may even appeal to private equity firms, Robert W. Baird. Goldman Sachs suggested that Molycorp could fetch $15 a share in a takeover, a 100% premium plus to the current share price. Also, on February 5 MCP's shares rose on takeover chatter.
Swingplane Ventures (SWVI.OB) holds an option to acquire a 75% interest in 32 mining claims in an intriguing region of copper deposits located in the Atacama Desert of northern Chile. Known generically as the Algarrobo property, the area is in the administrative division of Region III, approximately 25 kilometers east of the port of Caldera, 43 kilometers northwest of Copiapo and 850 kilometers north of the country's capital, Santiago.
Notably, Swingplane Ventures is a copper play that could become a takeover target with further consolidation in the copper space following the First Quantum takeover offer for Inmet. The stock was recently discussed by the investment research firm, Zacks. The firm said that the prospects for discovery of additional high-grade copper veins on the tenures controlled by the option held by Swingplane Ventures are promising. Recent production from Roble 2A in 2009 and 2010 and the driving of three drifts on the newly discovered Veta Gruesa vein on Roble 5B strongly suggest the continuation of high-grade copper veining in several of the Roble tenures. In addition, the discovery of other veins (Manto Ossa and Descubridora), along with several subordinate veins, advocate for the existence of other significant veins parallel to the three Main Veins and networks of secondary veins in the Roble tenures.
Swingplane last week was initiated by a separate research firm that slapped a $10 takeover target on the stock. Research Capital Investment, the firm that initiated the stock, is run by Jason Livak who before joining Research Capital Investment, spent years at Worldwide Advisors, LLC as a portfolio manager, equity analyst and an educator specializing in strictly small cap equity investing. There seems to be a lot of current media exposure for going on Swingplane that has put it more in the public eye compared to other micro-cap stocks.
On a side note, while all investments involve risk, micro-cap stocks are among the most risky. Many micro-cap companies tend to be new and have no proven track record. Some of these companies have no assets or operations. Others have products and services that are still in development or have yet to be tested in the market. Another risk that pertains to micro-cap stocks involves the low volumes of trades. Because micro-cap stocks trade in low volumes, any size of trade can have a large percentage impact on the price of the stock.
Harmony Gold (HMY) engages in the exploration, extraction, processing, and smelting of gold in South Africa and Papua New Guinea. The company has approximately 10 underground operations; and various surface operations, including an open cast mine and 9 processing plants, which are located in goldfields in the Witwatersrand basin of South Africa, as well as the Kraaipan Greenstone Belt. It also explores for silver, copper, and molybdenum through its Papua New Guinea projects.
Harmony was mentioned as a takeover target back in the spring of last year when the valuation of the company was $4.4 billion. Now, the valuation has fallen to $3.0 billion and it should be that much more attractive to other gold majors looking for new supply. Despite the possibility of an acquisition, the stock has struggled over the past year and is down more than 40% compared to a gain of more than 10% for the S&P 500.
On February 3, Harmony Gold announced earnings for the last quarter of 2012. Harmony said that the headline profit was $143 million for the six months ended Dec. 31 compared with $191 million the year before. Operating profit fell to $360 million from $396 million while gold produced in the first six months totaled 613,658 ounces down from 614,529 the year before. Following earnings, Citigroup upgraded the stock based on valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.