Analyst Actions: Credit Suisse On Lundin Mining - "Tenke Cobalt JV Opens New Markets, Brings Some Operating Synergies"


Event: "LUN, together with its JV partner, Freeport-McMoRan Copper & Gold (FCX, US$33.64, RESTRICTED), in a newly formed entity, has entered into an agreement with OM Group Inc. (OMG, not rated) to acquire a cobalt chemical refinery in Kokkola (Finland), and the related sales/marketing business, for initial consideration of $325Mln, plus an additional $110Mln payable over 3 years contingent on revenue-based performance targets."

Impact: "Positive. The deal provides direct end-market access for the cobalt-hydroxide production from the Tenke Fungurume copper/cobalt project ( TFM ). Kokkola processes unrefined cobalt and related metals and manufactures advanced inorganic products for use in a variety of applications in various end use markets, including batteries, chemicals, and tooling industries. TFM currently produces ~12Kt of cobalt annually, expanding to 20Kt by 2020. We estimate the transaction (through increase in payables factor on TFM's cobalt sales) increases our LUN NAVPS by 6.1% to $6.62 (from $6.06)."

New Cobalt JV structure similar to that of TFM. "LUN will hold an effective 24% interest in the new JV, with FCX holding a 56% interest (operator) and Gecamines a 20% interest. LUN and FCX will together fund the initial acquisition costs on a 30/70% basis, resulting in LUN providing $97.5Mln towards the initial purchase price and up to $33Mln over a three year period in contingent payments. The acquisition is subject to customary closing conditions, including required regulatory approvals, and is expected to close in 2Q13."

Valuation: "Our TP of C$6 is based on a 50/50 weighting of 1x our NAVPS (C$6.62/share) and 5x FY13/14 EV/EBITDA (adjusted for Tenke). LUN reports 4Q12 earnings Thursday February 21st after market close. We expect 4Q12 copper, lead and zinc production of 24.6Kt (incl TFM), and 8.5Kt, and 25.5Kt, respectively, at an average cash cost of $1.84/lb of copper (Neves Corvo)."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing , Commodities

Referenced Stocks: TFM

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