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First Quantum Takes Another Step Out of Africa
by Daniel Rohr | 20 Oct 10
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First Quantum announced on Monday the acquisition of Antares Minerals, owner of the Haquira copper project in Peru, at a sticker price of CAD 460 million, a 41% premium to Antares' Oct. 15 close. Thanks to a strong copper price ($3.80/lb as of Oct. 20), First Quantum indicated it has enough cash on the books to fund the CAD 250 million cash portion of the deal without outside financing. Actually getting the project up and running, however, is likely to require outside financing. Based on our reading of Antares' July 2010 Preliminary Economic Assessment (PEA), Haquira looks like a good asset. That said, commercial production is still several years and billions of dollars in new capital down the road. On balance, we view the deal as relatively neutral from an equity valuation perspective.
The proposed transaction, which is subject to Antares shareholder vote and regulatory approval, marks yet another step way from First Quantum's historical focus on African resource opportunities and into jurisdictions with relatively more developed political and legal institutions. Previous major moves out of Africa (not including those recently foisted upon the company by the powers-that-be in the DRC) included the June 2008 acquisition of Kevitsa (Finland) for CAD 281 million and February 2010 acquisition of Ravensthorpe (Australia) for $340 million. Collectively, these actions are aimed at closing what management has termed the "political risk discount" weighing on First Quantum shares.
To some extent, the loss of the DRC assets and acquisitions of nonproducing assets represent a swap out of political risk and into operational risk. That said, assuming all goes according to plan (never a sure thing in the world of mining), Haquira's economics look pretty good. Antares estimates an initial capital investment (including working capital) of $2.06 billion will be required to get the project up and running. While First Quantum management declined to specify a target date for commercial production (additional engineering studies must be completed), it indicated a 2015 startup would be "realistic and achievable." Once operational, Antares expects Haquira to average 425 million lbs of production over a 20 year mine life at an average cash cost (net of by-product credits) of $1.09/lb. Put in perspective, First Quantum's largest asset, Kansanshi in Zambia, produced 540 million lbs in 2009, representing 66% of the firm's total 824 million lb copper output. Kansanshi's cash costs were $0.99/lb versus $0.96/lb for the firm as a whole.
Provided copper prices remain at relatively elevated levels by the time commercial production kicks off, Haquira's profit potential looks fairly attractive. For its part, Antares puts the NPV of Haquira at roughly $1 billion, assuming an 8% discount rate, copper at $2.25/lb, gold at $908/oz, and molybdenum at $13/lb. Were we to take these assumptions as gospel, the deal adds about $550 million to First Quantum's equity value ($1 billion less $450 million). Of course, there are no gospel truths when it comes to mine valuation. Using our own assumptions, including a higher copper price, higher discount rate, and higher initial investment, we'd peg the project's NPV much closer to the price First Quantum has agreed to pay for Antares.
Xstrata's recent budget estimate for Las Bambas, Haquira's neighbor to the north, provides a convenient reference point for evaluating the reasonability of Antares' $2.06 billion capital investment estimate. Here, we see reason for a bit of skepticism. Xstrata estimates up-front capital investment for Las Bambas at $4.2 billion for initial annual capacity of 882 million lbs--nearly 20% higher on a per pound basis than Antares' estimate for Haquira. Notably, Xstrata has indicated that capital costs for Las Bambas will be lower than they might otherwise be since Xstrata can leverage infrastructure and knowledge associated with existing operations in the region at Tintaya.
With existing infrastructure in the region and commensurate ability to squeeze superior operating synergies, was Xstrata not the natural buyer of Antares? Taking Antares' PEA assumptions as given, Haquira would certainly create more value in Xstrata's hands than First Quantum's. And as a much larger firm with investment-grade credit ratings, Xstrata certainly had the balance sheet firepower to outbid First Quantum. As a consequence, we admit we're left wondering whether there's something about Haquira or Antares that made Xstrata shy away.