Quadra FNX chief executive officer Paul BlytheTim Fraser
Canadian mid-tier players Quadra Mining Ltd. and FNX Mining Company Inc. have announced a surprise $1.5-billion (U.S.) all-stock deal to create a joint company they say will become a "leading industry consolidator" in the years to come.
The proposed new company, Quadra FNX Mining Ltd., will have a market capitalization of $3.5-billion and assets in Canada, the United States and Chile.
The merged company will produce about 300 million pounds of copper and 150,000 ounces of precious metals in 2011, as well as various by-product metals.
Its estimated revenues will be $1.5-billion in 2011, with about $580-million in cash and investments and $50-million in bank debt.
"This merger of equals will result in the establishment of a new, mid-cap, Canadian mining company with existing mining operations ... and the opportunity to grow into a leading mining company," said FNX chairman Terry MacGibbon, who will become non-executive chairman of the new company.
Quadra CEO Paul Blythe will be the CEO of the new company.
"The merger of Quadra and FNX is a springboard transaction that creates a leading intermediate copper producer with financial strength, a solid asset base, and an experienced and entrepreneurial management team," Mr. Blythe said.
The announcement comes two weeks after Vancouver-based Quadra struck a $1-billion joint-venture deal with a Chinese state-owned utility company to develop its Sierra Gorda project and Franke mine in Chile.
Quadra's other assets include the Robinson copper-gold mine in Nevada, the Carlota copper mine in Arizona and the Malmbjerg molybdenum development project in Greenland. Toronto-based FNX is a diversified metals producer in the Sudbury mining camp in Ontario.
"The combination of the two companies will provide the critical mass to be a leading industry consolidator," the companies said in announcing the merger agreement on Tuesday.
"We don't think anyone saw this coming," TD Newcrest analyst Greg Barnes said in a note to clients.
The deal sees each FNX share exchanged for 0.87 Quadra shares.
Mr. Barnes said FNX shareholders could be disappointed with that ratio, which is a 1.8-per-cent premium to its closing price on Monday.
FNX has also been gaining momentum on its Levack Footwall Deposit (LFD) development project, which is on the verge of production.
"That being said, the merged company is expected to be a more copper-focused company with a copper growth profile based on production from both LFD and longer-term from Sierra Gorda," Mr. Barnes said.
If approved, Quadra shareholders will own about 52 per cent of the new company's shares, with FNX shareholders holding the remaining 48 per cent.
The merger needs the approval of 66.6 per cent of FNX shareholders and 51 per cent of Quadra shareholders, along with regulatory approvals. Shareholder voting is expected to take place at separate meetings in May. The deal is expected to close soon after that.
The deal includes a $40-million (Canadian) break fee, and the right for either company to match a competing offer.
TD's Mr. Barnes said while another bidder is unlikely, there could be interest in FNX from HudBay Mining. However, "with no CEO in place this seems like a low probability," he said.
"In fact there is the possibility that the new Quadra FNX could be seen as a possible acquirer of HudBay (although that may be getting ahead of ourselves at this point)."
Majors such as Vale and Xstrata have no impetus to buy FNX, Mr. Barnes noted.
The company will continue to operate offices in both Vancouver and Toronto. Quadra FNX's new board of directors will include five directors from both companies.
CIBC World Markets Inc. acted for Quadra, while BMO Capital Markets worked for FNX to complete the deal.