A Canadian Mining Stock in Play

01/17/2012 11:30 am EST


The takeover play at work for this miner is encouraging, but don’t move until we see if any more offers come in, says Marc Johnson of The Investment Reporter.

Quadra FNX Mining (Toronto: QUX) is one of the mining stocks that we regularly examine, and we formerly rated it a buy.

Now, however, we rate Quadra a hold. That’s because it has agreed to its takeover by Poland-based KGHM Polska Miedz for $15 a share. Quadra says that in January it will mail a management information circular with all the details of the proposed transaction.

Quadra now trades a little above $15 a share. This mean that it’s still possible that a higher competing offer could emerge between now and the special meeting of Quadra shareholders scheduled for late February.

If a better offer does come along, KGHM will have five business days to match it. If KGHM chooses not to match a higher bid and Quadra accepts the higher competing offer, then KGHM can collect a $75 million break-up fee.

KGHM is the world’s ninth-largest producer of copper and the world’s third-largest producer of silver. As a result, it’s attracted to Quadra’s copper, nickel, and precious metals mines and projects in Canada, the United States, and Chile. That’s why it’s willing to pay 41.3% more than Quadra’s pre-bid share price.

The Premium Is Attractive
All of Quadra’s senior officers and directors plan to support the proposed takeover. One condition is that KGHM requires that at least two-thirds of the votes cast at the special meeting support the proposed takeover. Management owns only 1% of the shares. Still, the percentage of support is likely to exceed the threshold.

If the proposed takeover is approved by shareholders, the transaction is expected to close between late February and the end of March 2012. At that point you’ll have cash to reinvest or spend.

Hold Quadra FNX Mining in case a higher competing offer comes along. Even if no better offer emerges, tendering to KGHM’s offer could save you money. You would avoid paying brokerage fees and losing to the bid-ask spread.

Where Management Stands
Quadra FNX Mining hired BMO Capital Markets and GMP Securities to assess KGHM’s takeover bid of $15 a share. Naturally, both firms came up with the opinion that Quadra’s management wanted to hear: that “the consideration to be received by Quadra FNX shareholders is fair, from a financial point of view”.

Based on these opinions, management advises you to vote in favor of the proposed transaction at a special meeting of the shareholders in late February.

We usually advise you to do what management’s doing. After all, managements know their companies better than anyone else. In Quadra’s case, “All senior officers and directors of the Company intend to vote their common shares in support of the Arrangement.”

Since the offer is for “all” the shares, management will tender to the offer. So you probably should too. But first wait to see if a better offer comes along.

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