Mining Profits...Investing In Industrial Metals

Mid-tier copper producer Inmet Mining Corp. is dismissing speculation that it's the target of a potential takeover by a private-equity fund, just days after reporting a three-fold increase in third-quarter profit.

Chairman and chief executive Richard Ross told shareholders Monday that such a deal would not be in their best interests — at least not right now.

“On that score, I can tell you that we have not had any serious discussions with any private-equity fund,” Ross told a conference call with analysts.

“In light of our growing production base and further growth potential, we do not believe it would be in the best interests of our shareholders to consider a transaction involving a private-equity fund at this time.”

Some analysts, however, have suggested that Inmet and rival Canadian copper producer Aur Resources Inc. are attractive targets amid the current takeover frenzy in the global metals industry.

“We believe there continues to be a compelling opportunity for private-equity investors to enter the base metals market,” Orest Wowkodaw of Canaccord Adams said in a recent note to clients.

“For illustration purposes only, we estimate that the cash required to launch a hostile bid for Inmet Mining, for example, even at a relatively rich 50 per cent premium to the current share price would be completely repaid by around the end of 2011, or in roughly five years, assuming all production is hedged at the current forward curve. The opportunity would be similar in the case of Aur Resources.”

Both companies are enticing because each has existing production and significant net cash growth, Mr. Wowkodaw added in an interview.

He estimates the companies will grow their net cash per share balance to about 60 per cent of their current share prices by the end of 2008. For its part, Inmet's cash balance totalled about $550-million at the end of September.

“We believe that the market continues to mis-price the anticipated net cash build of these three companies,” he said. “If this mis-pricing continues, we wonder how long it will take before we see a private-equity player capitalize on this opportunity.”

Inmet shares gained 2.1 per cent Monday, closing up $1.12 at $54.72 on the TSX. The stock has a 52-week high and low of $56.65 and $19.75.

Last Friday, Inmet reported that robust metal prices helped more than triple its third-quarter profit to $111.6-million or $2.31 share from a year-earlier $35.9-million or 80 cents per share.

“Copper and zinc prices continued to fluctuate around their record highs,” the company said.

“The average London Metal Exchange cash price this quarter was $3.48 (U.S.) per pound for copper, up significantly from $1.70 in 2005, and $1.52 per pound for zinc, compared with 59 cents per pound in 2005.”

Inmet's gross sales increased 69 per cent to $301.1-million. Copper production increased seven per cent to 20,700 tonnes, but zinc production fell 34 per cent to 16,500 tonnes.

“We are on target to achieve our 2006 objective of 80,000 tonnes of copper,” the miner said. “We have lowered our original 2006 objective for zinc to 74,000 tonnes because mining of some zinc rich zones at Pyhasalmi (in Finland) and Cayeli (in Turkey) has been pushed out to 2007.”

Inmet is a Toronto-based global mining company that produces copper, zinc and gold with mines in Canada, Turkey, Finland and Papua New Guinea.