Lumina Copper Invites BHP Deal With Argentine Discount

Jun. 19 (Bloomberg) - Lumina Copper Corp. (LCC) is offering the biggest mining companies a chance to acquire one of the world's largest deposits of the metal for 26 cents on the dollar.

Lumina, owner of the Taca Taca copper project in Argentina, put itself up for sale last week after plummeting more than 50 percent from its all-time high of C$17.01 a share three months ago. As investors avoided Argentine assets after the government seized oil producer YPF SA in April, Vancouver-based Lumina's slump left it trading at a 74 percent discount to its net asset value, according to analysts' estimates compiled by Bloomberg.

While the Taca Taca mine won't start producing until 2017 and will cost $3 billion to develop, Adrian Day Asset Management says Lumina is now cheap enough to lure BHP Billiton Ltd. (BHP) or Rio Tinto Group as copper reserves are exhausted and deposits become harder to find. Lumina sells for less than 2 cents per pound of copper resources and buyers in similar deals have paid twice as much, Raymond James Financial Inc. said. Yesterday, Yamana Gold Inc. (YRI) agreed to buy Extorre Gold Mines Ltd. (XG), which ceded control of its own Argentine project after it became too costly.

Lumina has "a lot of potential," Adam Low, a Toronto- based analyst for Raymond James, said in a telephone interview. "It's part of the game of being a major natural resources company that you have to go to some areas that are less politically stable. The world's major mining companies will definitely have interest in the project."

David Strang, Lumina's chief executive officer, said in a telephone interview that the company is an attractive takeover candidate because "there's been a distinct lack of good quality projects being discovered that can help offset the growing demand" in the copper market.

Taca Taca
He declined to say whether Lumina has been approached by BHP or Rio Tinto about bidding for the company. Lumina had a market capitalization of C$376 million ($368 million) yesterday.

Lumina's Taca Taca development, comprising 25 square kilometers (9.7 square miles), is located in northwestern Argentina and contains deposits of copper, gold and molybdenum, according to the company's website. The project is 120 kilometers (75 miles) east of BHP's own Escondida mine, which is the world's largest copper mine and located in Chile.

Before Lumina said June 15 it would review options to boost returns, the stock had tumbled 54 percent from its high in March as the nationalization of YPF, Argentina's largest oil company, and measures by President Cristina Fernandez de Kirchner's administration to limit the sale of pesos for dollars prompted investors to sell assets tied the South American nation.

Relative Value
The decline was almost four times as much as the 14 percent loss for metals and mining companies in the MSCI Emerging Markets Index, data compiled by Bloomberg show.

The share slump has been "all about Argentina," George Topping, a Toronto-based analyst at Stifel Nicolaus & Co., said in a telephone interview. "The company itself has delivered."

Since announcing the review, Lumina's stock has jumped 17 percent, ending at C$9.19 a share yesterday. At that price, the company is valued at 0.26 times its net asset value per share, based on the average analyst estimate compiled by Bloomberg.

Using Raymond James' calculation for net asset value of C$60.46 a share, Lumina trades at just 0.15 times.

Lumina is an appealing takeover candidate because it controls one of the world's five biggest copper deposits that isn't already owned by a global mining company, said Adrian Day, who oversees about $155 million as president of Adrian Day Asset in Annapolis, Maryland.

The Taca Taca mine will produce about 250,000 tons of copper a year over its life, according to Stifel's estimate.

Limited Number
That's more than the 2011 production at any of BHP's own copper mines, except for Escondida, which had about 473,000 tons of output last year, according to data compiled by Bloomberg.

Global production of the metal, which is used in electric cables and plumbing, also increased by just 0.5 percent in 2011, the smallest gain in five years, the data show.

Mining companies haven't kept pace with demand because reserves are becoming harder to find and the quality of ore is declining, meaning that less copper is extracted from each ton of rock. BHP's copper output last fiscal year fell to the lowest level since at least 2004, according to data compiled by Bloomberg, while Rio Tinto's 2011 copper production slumped to the lowest in more than a decade.

"Someone somewhere is willing to put some money in" Lumina's Taca Taca development, Day of Adrian Day Asset said in a telephone interview. "There's only a limited number of mines. You can't pick up the deposit and move it somewhere else."

Financial Incentive
Kelly Quirke, a spokeswoman for Melbourne-based BHP, and Illtud Harri, a spokesman at London-based Rio Tinto, declined to say whether they would be interested in buying Lumina.

With the price of copper more than doubling since the depth of the financial crisis, Andrew Cosgrove, a metals and mining analyst for Bloomberg Industries in Skillman, New Jersey, says that the biggest mining companies also have the financial incentive to gain access to more copper deposits.

Copper futures for September delivery sold for $3.4025 a pound in New York yesterday, exceeding the cost of extracting the same amount of the metal by at least a dollar, according to data compiled by Bloomberg.

John Goldsmith, who helps manage about C$5.1 billion at Montrusco Bolton Investments, is skeptical that Lumina will ultimately be acquired. He says the cost of turning an undeveloped deposit into a copper-producing mine in Argentina is too great and that mining companies will be wary of operating in a country where their assets can be nationalized.

'Sheer Size'
"I don't think anybody is going to be knocking at the door anytime soon," Goldsmith said in a telephone interview from Toronto. Anyone who wants to purchase Lumina is "going to have to sink a boatload of money into this."

Matt O'Keefe, a Toronto-based analyst at Mackie Research Capital Corp., says that the value of the Taca Taca deposit may make Lumina too cheap to pass up.

Lumina controls 20.5 billion pounds of copper in the ground at its Taca Taca mine, valuing the company at just 1.8 cents per pound of its resources. The median for seven comparable mining takeovers is 4 cents per pound, according to Raymond James.

"The thing that makes this very attractive is just the sheer size and grade of it are both unusual and very attractive," said Mackie's O'Keefe. With the political risk in Argentina pushing down Lumina's price, "any potential buyer would rightly use this as a means to get a better deal."