NewsResource-Hungry China Offers Deal Insurance
APRIL 4, 2011, 3:14 A.M. ET
China's voracious appetite for raw materials has earned it a special place in the hearts of mining company shareholders. These days, it also offers them something else: Insurance against ill-conceived deals.
Minmetals Resources' unsolicited 6.3 billion Canadian dollar (US$6.5 billion) offer for Equinox Minerals, announced Monday, emerged partly from Equinox's own boardroom. The Toronto-listed Australian miner's hostile bid for Lundin Mining has weighed on its stock since late February as shareholders fretted about Equinox taking on too much debt to enter the trouble-prone Democratic Republic of Congo. This weakness gave Minmetals, the Hong Kong-listed subsidiary of state-owned China Minmetals Corp., its chance.
Prior to the offer, Equinox's stock commanded multiples of 7 times 2012 earnings and 1.6 times 2012 book value; discounts of 20% and 11%, respectively, to the peer group average. Minmetals' C$7 bid, while at a 23% premium to Friday's closing price, merely closes those discounts. Given that, Equinox likely will hold out for more. Minmetals clearly has an appetite for copper—where Equinox is strong—and, given Chinese backing, can access deep pocketed lenders and investors.
The flipside to that, however, is that Chinese involvement could deter competitors from launching bids of their own. Back in 2009, Rio Tinto, its stock battered by another ill-conceived deal, the high-priced purchase of Alcan, struck a deal to sell bits of itself to Aluminum Corp. of China. While the proposed deal helped stabilize Rio's position—before being scrapped—investors were rightly worried Chinese involvement would remove any chance of other bidders coming in.
Equinox's shareholders can be thankful for Minmetals' entry. But there is no guarantee of a bidding war erasing fully the legacy of the miner's move on Lundin.