Freeport investors in DRC limbo as Tenke mine sale drags on

TORONTO – Freeport-McMoran investors have been learning the difficulties of doing business in the Democratic Republic of Congo, where even trying to leave can be an exercise in frustration.

On May 9, the world’s largest publicly traded copper producer announced it would sell its 56% stake in the Tenke Fungurume copper and cobalt mine to China Molybdenum for $2.65-billion. Now, 136 days later, the deal is still up in the air.

One fifth of Tenke is owned by the DRC government through state-run Gecamines. From the beginning, it has objected to the sale, saying it wasn’t informed in advance and would investigate the deal in order to “assert its rights.”

The government rhetoric has intensified as the possibility emerged that Lundin Mining, Freeport’s partner at the site through its Bermuda-based joint venture TF Holdings, may also be looking to exit Tenke. On Friday, the chairperson of Gecamines, Albert Yuma, threatened to block any deal that would see Freeport and Lundin sell their stakes to China Molybdenum.

'STATE'S RIGHTS'
“This CMOC/Freeport/Lundin transaction will remain in a deadlock, unless Lundin and Freeport respect Gecamines’ and the State’s rights,” Yuma said in an e-mailed statement. “The obvious solution remains for Lundin and Freeport to accept Gecamines’ offer to restructure the TFM joint-venture with new partners selected by Gecamines.”

Eric Kinneberg, a spokesperson for Phoenix-based Freeport, didn’t immediately respond to a request for comment Friday. An external spokesman for China Moly, Chris Ryall, said he couldn’t immediately comment when contacted by e-mail.

Until now, Freeport investors have viewed the comments from Gecamines as “noise,” according to Matthew Korn, a New York-based analyst at Barclays. But in the absence of other significant news affecting copper markets, further delays have the potential to rattle investors, he said.
‘Sticking Point’

“The longer this goes on, this becomes more and more a sticking point,” Korn said Friday in a phone interview.

Freeport and Lundin own 80% of Tenke through TF Holdings, and Gecamines owns the rest. The deal has been further complicated by the fact that Toronto-based Lundin has a Right of First Offer (ROFO) on Freeport’s portion, meaning it could scupper the Chinese purchase by buying the stake itself. 

After Freeport announced the sale to China Moly in May, Lundin moved swiftly to hire bankers to assess what appear to be three broad options: it could sell its indirect 24% stake in Tenke to China Moly or to another buyer; it could sit pat and accept China Moly as a new partner to replace Freeport; or it could exercise its right to buy the 56% Freeport stake, increasing its holding to 80%. In the latter case, Lundin might try to sell the full 80 percent to China Moly – or someone else – at a higher price.

LUNDIN EMPIRE
When the August 8 ROFO expiration date neared, Freeport and China Moly granted Lundin an extension to September 15 – and last week Lundin got a second extension to September 29. In Friday’s e-mail, Yuma said Gecamines has expressed “doubts” about the legal basis of the ROFO.

Lundin Mining CEO Paul Conibear declined to comment Friday on the various possibilities.

In an interview last month, Lukas Lundin – who helps lead the Lundin family’s group of companies – made it clear he would support the sale of Tenke if it made financial sense.

China Moly would likely be “OK” as a partner “but it’s a different culture and they’re not very experienced miners so I’m sure it’s going to be more work for us,” Lundin said in the interview.

‘THE STAR'
Freeport declined 3.1% to $10.64 at 2:23 pm in New York, while Lundin Mining fell 4.9% in Toronto.

Earlier this month, Gecamines said it had submitted a competing bid for the project, which it insists must be considered. Gecamines has said it should have the right to match any offer for Tenke, one of the country’s most strategic mining assets. In 2015, the mine produced 203 964 t of copper and 16 014 t of cobalt, making it Congo’s biggest producer of the metals after Mutanda Mining.

In May, Freeport said China Moly is acquiring ownership via Bermuda-based TF Holdings, not the local operating entity in which Gecamines is a shareholder, and therefore it’s not subject to the state-owned miner’s approval or pre-emption.

Freeport’s deal to sell Tenke to China Moly has been considered “the star” among its asset sales so far this year, as the miner has worked to wrestle down debt, Korn said. Given there is also a chronic political risk surrounding the company’s Grasberg mine in Indonesia, where Freeport has been working to secure a new deal to operate in the country, executing the Tenke deal smoothly is important to shareholders, he said.

The longer the deal is delayed, the greater the concern that Freeport will have trouble exiting the DRC asset and pocketing the needed cash, Korn said.

“How are we sure that anything else won’t be torpedoed as well?” he said. “If you take out Chinese buyers, then your potential purchasers become a lot smaller.”