China's Minmetals Resources bowed out of the battle for copper miner Equinox Minerals on Tuesday, saying Barrick Gold Corp's C$7.3 billion ($7.7 billion) bid was too rich to justify a counter-offer.
Canada's Barrick, the world's largest gold miner, announced its agreed deal for Equinox on Monday, seeking to tap surging demand from China and other developing economies that has pushed copper prices up more than sevenfold in the past eight years.
Minmetals, a government-backed unit of China's largest metals trader, said in a statement it would not top Barrick's offer and would seek other opportunities.
While China's outbound acquisition machine has gained in strength, Beijing follows a strict and price sensitive policy when it comes to doing deals.
Competing with Barrick at these prices would, in our view, be value destructive for (our) shareholders, Andrew Michelmore, Minmetals' chief executive, said in a statement.
Investors punished Minmetals' cautious approach. It shares plunged as much as 13 percent in Hong Kong on concerns it had missed out on rare, sizeable copper deal -- albeit at a high price.
Barrick's offer values Equinox at a hefty 14 times its 2010 earnings before interest, tax, depreciation and amortization of $523 million.
Equinox, a global miner listed in Canada and Australia, owns the Lumwana mine in Africa's rich Zambian copper belt and most of the Jabal Sayid project in Saudi Arabia.
An unrelated, weaker-than-expected capital raising by Minmetals in Hong Kong last week was hardly encouraging to the Chinese company, which would need hefting funding in place for the unsolicited C$6.3 billion Equinox offer it announced earlier this month.
The market capitalization of Minmetals, which has a 4.2 percent stake in Equinox, is only around $2.7 billion after the latest fund raising. But because the company is majority controlled by state-owned China Minmetals Non-Ferrous Metals Co Ltd, it could have afforded a counter-bid.
If it was just a matter of paying whatever it took, they could conceivably have bid for Riversdale in Mozambique, and so on. I don't think they are in that sort of business, said Tom Gidley-Kitchin, analyst at Charles Stanley in London.
Rio Tinto this month won control of coking coal play Riversdale Mining with a $4 billion bid.
Gidley-Kitchin pointed out that Minmetals will remain on the hunt as the Chinese have made clear their intention to acquire rights to minerals, with Africa an area of strong interest across the industry.
I would definitely say it is not the end of the story, he said, referring to Minmetals' M&A aspirations.
Barrick offered to buy Equinox for C$8.15 a share, an 8.7 percent premium over its Thursday closing price. The all-cash bid is 16 percent higher than Minmetals' initial offer.
Resources are scarce and when you have an asset of this size that is producing, it is rare that these types of opportunities come onto the market place, Barrick Chief Executive Aaron Regent told reporters on a conference call before Minmetals pulled out.
Equinox shares jumped 11.6 percent in Toronto on Monday and closed at C$8.37, only about 2.6 percent higher than Barrick's offer, indicating investors were split of a higher offer emerging.
Barrick shares dropped more than 6 percent as investors questioned whether it was overpaying and whether a big move into the industrial metal would make the stock less attractive to those seeking exposure to gold prices.
Australian markets were closed for a public holiday.
Equinox had previously called Minmetals' original C$7-a-share offer a low-ball bid. On Monday, it said it believed the Barrick bid was superior in terms of price and its likelihood of completion.
Minmetals raised about $500 million last week, selling fewer shares at a lower price than planned.
Barrick would use about half of the $4 billion in cash they have on their balance sheet to fund the deal, Regent said. The balance would be funded with debt, revolving credit facilities and new bonds.
Regent, who has a background in base metals, sees the takeover bid as an opportunity to gain access to the Zambian copper belt at a time when copper prices are expected to keep climbing to fresh records. London copper hit an all-time high above $10,000 a tonne in February and traded near $9,700 on Tuesday.
Barrick will double its position in copper with the acquisition while reducing its exposure to gold to 80 percent from a current 90 percent.
Regent said the company's focus remained on copper and gold and that it was not planning on expanding into other commodities at this stage.
Equinox's Lumwana mine is Africa's third-largest copper operation, producing almost 147,000 tonnes of copper in concentrate in 2010. The Jabal Sayid development is due to start production next year. ($1 = 0.954 Canadian Dollars)
(Additional reporting by Alison Leung in HONG KONG and Clara Marques-Ferreira in LONDON; Editing by Lincoln Feast)