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First Quantum Mechanics Get Complicated

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2023-06-16

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The hunt for copper is stepping up with Canada’s First Quantum Minerals, one of the world’s major miners, drifting into the sights of some of the world’s major players after it rejected an unsolicited bid from rival Canadian miner Barrick Gold.

News of the failed approach broke Thursday and saw First Quantum shares soar 17% at one stage on the Toronto Stock Exchange before settling back to end up 7.6% after investors learned of the rejection.

That valued First Quantum at around $US17 billion, or $C23 billion.

With Glencore stalking another Canadian miner in Teck Resources after its $US23 billion all paper offer was rejected a month or so ago, First Quantum might now find the urge to merge becomes irresistible.

At the same time Vale, the big Brazilian iron ore and metal miner (especially nickel and copper) is looking to sell at least 10% of its business to a cornerstone investor or investors worth $US2.5 billion.

An announcement is due soon on this deal which will see the metals side of Vale separated from iron ore next year.

The Barrick-Quantum news will also see attention focus on other Australian copper and nickel companies like Evolution Mining, especially after its recent successes at Ernest Henry in north Queensland to go with its Cowal mine in central Western NSW.

Northern Star has some copper but is mainly a gold miner while IGO is nickel and lithium.

And then there are the world class prospects like Chalice Mining’s Gonneville nickel, copper, cobalt and platinum, gold and palladium, and Gallileo’s smaller but world class cobalt, copper, nickel, platinum, gold and palladium deposits around Norseman.

Market reports said the Barrick approach was made a while ago and there are no talks currently being held between the two companies.

Barrick made the approach to First Quantum as part of a belated search for ways to expand in copper.

First Quantum is a global major in copper, producing 776,000 tonnes of the metal in 2022 (down from 816,000 tonnes in 2021) as well as nickel and gold. That output figure for last year was roughly half the near 1.6 million tonnes produced by BHP, the world’s biggest producer ahead of Chile’s state owned miner Codelco.

BHP snapped up OZ Minerals and its copper and gold mines in Australia and Brazil for $A9.6 billion earlier this year and Newmont grabbed Newcrest and its gold, but more for its 135,000 to 140,000 tonnes of the red metal a year (and 175,000 by 2030). Newmont produces very little copper - around 38,000 tonnes last year.

Barrick produced 4.1 million ounces of gold last year (making it Number 2 behind Newmont) and 200,000 tonnes of copper.

There is a delicious irony here because Newmont CEO, Mark Bristow has made a virtue of staying clear of bidding wars and takeovers since failing when he tried a full on hostile assault on Newmont soon after taking the top job.

Barrick was created from the merger of Randgold (a company he founded) and Barrick (in a nil premium so-called merger of equals). He grabbed the top job and since the aborted Newmont bid, has avoided contested deals and claimed to be more interested in organic growth.

BHP Group Ltd offered a 49% premium to OZ Minerals Ltd.’s undisturbed share price to seal  the $US6.6 billion. Rio Tinto Group last year bought out minority shareholders of Turquoise Hill Resources Ltd., which is developing a massive Mongolian copper project, for 67% above its last close before the bid was unveiled.

Newmont’s all paper bid for Newcrest worth A32 billion was made at a 30.4% premium, so Barrick is going to pushing it up hill if it thinks it can avoid a premium in a mega deal made with paper in particular.

“Valuation is a significant hurdle,” Citigroup analysts Alexander Hacking and Steven Stroup said in a Thursday note. “Barrick has been disciplined on M&A recently and to make such an offer would imply a very bullish outlook for copper versus gold.”

A deal with First Quantum would transform Barrick into a significant copper miner producing close to a million tonnes of the metal a year.

BHP and Rio Tinto are currently pre-occupied with bedding down their deals and BHP has inherited a nickel copper mine at West Musgrave in the WA that will boost its output of both key renewable metals by 2026.

Glencore is the wildcard it now wants to buy Teck’s steelmaking coal resources, merger it into its thermal coal business (the world’s biggest) and then spin the company off around two years after the merger happens.

That would leave Teck with its Canadian and South American copper mines and their 277,000 tonnes of metal production a year - which is what Glencore wants.

Glencore valued Teck first up at $US23 billion.

First Quantum produced 286,000 ounces of gold in 20222 as well as 22,000 tonnes of nickel as well as the 776,000 tonnes of copper.

First Quantum’s three year outlook calls for copper and nickel production to grow to between 775-865,000 tonnes and 45-60,000 tonnes respectively, by 2025.

While Barrick might be after more copper, its existing gold operations are under growing pressure. Gold output in 2022 of 4.1 million ounces was the lowest since 2000 after a multiyear strategy to cut debt and sell off assets.

First Quantum’s major asset is its massive copper mine in Panama. The operation, which accounts for about 1.5% of global copper production. The company recently ended a months-long dispute with the Panamanian government on profit sharing and royalties.

First Quantum also owns copper, gold and nickel mines in Africa, Europe, the Middle East and Australia where it bought the Ravensthorpe lateritic nickel mine from BHP for $1. In May, 2021, it sold 30% of the mine to South Korea’s POSCO, the big steelmaker and emerging minerals giant (it has a close relationship with Pilbara Minerals, Australia’s largest lithium exporter).

POSCO and First Quantum agreed to evaluate a strategic partnership to produce battery precursor materials from production at Ravensthorpe and as part of the deal, POSCO will be provided with a long-term offtake agreement for 7,500 tonnes of nickel in mixed nickel-cobalt hydroxide precipitate (MHP) per year from 2024.

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