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Investors question 'cheap' takeover offer for Quadra FNX

Quadra FNX chief executive officer Paul Blythe

Tim Fraser

Quadra FNX Mining Ltd. has agreed to a $3-billion takeover by Polish copper producer KGHM Polska Miedz SA, triggering criticism the company is accepting a low-ball offer due to an overly cautious view of the metal's prospects.

The $15-a-share, all-cash bid offers a 40-per-cent premium to Quadra's recent stock price. But some investors believe it's a stingy offer that undervalues the company's assets, which include the promising Sierra Gorda copper project in Chile and operations in Sudbury, Ont.

"Unless the operations are running much weaker than expected, we do not see why one of the most bullish copper companies is selling out so cheap," said Cormark Securities analyst Cliff Hale-Sanders. ."

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Toronto-based hedge fund West Face Capital Inc., which said Tuesday that it owns a 6-per-cent stake in Quadra, called the bid opportunistic. "Given the fact that the shares were trading at $16 a few months ago, it is puzzling that the board did not attempt to contact any other purchasers or run a process," said chief executive officer Greg Boland.

Quadra, however, said the offer was too rich to refuse, citing a downward shift in the copper market in recent months, while at the same time structuring a deal that leaves room for a competing offer.

Shares of Vancouver-based Quadra closed up 39.9 per cent on the Toronto Stock Exchange on Tuesday, which suggests investors anticipate a rival bid. Quadra shares dropped to a 52-week low of $7.69 in October, as copper prices dived to about $3 (U.S.) a pound amid worries a global economic slowdown, including softening demand in China, will decrease demand for the widely used metal.

Still, the share price is down from a high of $17.55 reached in January, just before copper surged to an all-time high of $4.62 per pound, when the economy appeared more stable. Quadra shares traded at a record of just over $26 in 2008, prior to the global financial crisis.

Quadra chief executive officer Paul Blythe said the company wasn't looking to sell, but the KGHM bid was too good not to put to shareholders, particularly given the dip in copper prices to about $3.50 today.

"Our view is that basically the market's view of long-term copper has shifted downwards," Mr. Blythe said in an interview, citing debt problems in the United States and Europe, and concerns about slowing growth in China.

The risk, he said, was turning away the KGHM offer and holding an auction, then having no bid on the table.

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"We are not a company that's ever sat there and said, 'No, we aren't for sale. Go away,'" he said. "People haven't been lining up at the door to do that. Having said that, the dynamics always change when companies are in play."

Warsaw Stock Exchange-listed KGHM, the world's ninth-largest producer of copper and third-largest producer of silver, said the deal will help it reach a goal to produce up to 700,000 tonnes of copper by 2018, up from about 425,000 last year.

Jaroslaw Romanowski, KGHM's executive director for trading and hedging, said its valuation of Quadra is strong, and pointed to a slowing market for copper in key nations including China.

"There is definitely a medium-term slowdown in China," Mr. Romanowski said. "We are very bullish about long-term copper prices ... but we cannot exclude the situation in which we will find a very volatile market in the coming months, or even in two years time."

KGHM, which is 32-per-cent owned by the Polish government, said it will maintain a Canadian headquarters for the combined company that will oversee mining operations throughout the Americas. The total transaction value is approximately $3.5-billion, including $500-million (U.S.) of outstanding gross debt. KGHM will finance the acquisition using existing cash.

The deal needs approval from two-thirds of Quadra shareholders and must pass Investment Canada's net benefit test. The vote is not scheduled until late February and the low 2.5-per-cent break fee of $75-million (Canadian), compared with the industry standard of 3 to 3.5 per cent, gives Quadra room to entertain other potential offers. KGHM has a right to match rival bids.

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Analysts say counterbids could come from such companies as Vale SA and Xstrata PLC, already operating in Sudbury, as well as copper producers Teck Resources Ltd., and BHP Billiton Ltd. along with Japanese metals player Sumitomo, which has a joint venture with Quadra for its Sierra Gorda project.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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