First Quantum weighing sale of minority stake in Zambian copper assets

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Shares in First Quantum Minerals Ltd. nosedived on Monday after it batted away speculation it could be acquired any time soon, instead saying it has held talks about selling a minority stake in some of its Zambian assets.

Last Thursday, Bloomberg reported that the Toronto-based senior copper miner had attracted takeover interest in light of its floundering share price. The Globe and Mail later reported that Chinese state-owned firm Jiangxi Copper Co. Ltd. had approached First Quantum but hadn’t yet made a formal takeover offer. First Quantum’s share price jumped a total of 20 per cent in the last two trading sessions of last week.

In a statement on Monday, First Quantum said it “has not engaged in any discussions regarding a takeover bid or other change of control transaction and has no knowledge of potential take-over bids, change of control transactions or proposals.”

Shares in the miner fell 9.7 per cent on Monday to close at $11.03 on the Toronto Stock Exchange.

“There was definitely the enticement that someone was going to take the company out, and people traded into that,” said Darren Sissons, portfolio manager with Oakville, Ont.-based Campbell, Lee & Ross Investment Management.

“As with all trading on rumour, if that trade falls apart, then there’s significant downside.”

First Quantum said it was “aware of speculation" regarding a potential transaction with China’s Jiangxi, but the company didn’t say whether it had held talks with the company or not.

Jiangxi, which has mining properties in China, Peru and Afghanistan, has been vocal about wanting to bulk up on copper assets. Two years ago, the company’s chairman said it planned to make acquisitions in Africa.

First Quantum is Canada’s largest pure play on copper with a market valuation of $8.4-billion and assets in Europe, Australia, Central America and Africa. In Zambia, the company operates two mines: Sentinel and Kansanshi, the continent’s biggest copper mine.

For much of the past year, First Quantum’s share price has been under pressure amid high debt and weak copper prices.

Sam Crittenden, mining analyst with RBC Dominion Securities, wrote in a note to clients on Monday that a deal to sell a stake in its Zambian assets would help the company pare back its debt and give it additional liquidity as it concentrates on ramping up production at Cobre Panama , its newest mine in Panama.

Over the past few years, First Quantum has spent about US$6.7-billion building Cobre Panama, a promising copper project it inherited as part of the acquisition of fellow Canadian miner Inmet Mining Corp. in 2014. Touted as the company’s big growth asset, Cobre Panama also accounts for much of the company’s US$7.6-billion debt load.

First Quantum’s shares are trading at a discount compared with the large diversified global miners such as Rio Tinto PLC and BHP Billiton Ltd. in part because of its heavy exposure to copper. The commodity has fallen 12 per cent since mid-April in light of slowing global economic growth and a protracted trade war between the United States and China.

Christopher LaFemina, analyst with Jefferies, believes the shaky macro-economic environment is conducive to deal making in the copper sector.

“We believe M&A at the asset level (minority stakes, joint ventures) will increase in copper mining, especially if Chinese buyers take advantage of current weak market conditions to make strategic investments,” he wrote in a note to clients on Monday.

“If fundamentals begin to improve, as we expect, larger-scale acquisitions will be more likely.”

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