You might have seen the news … BHP has just made its next major copper grab.
This time, it’s for the prized Filo del Sol project, owned by Filo Corp [TSX:FIL], located in Argentina.
In partnership with Lundin Mining, BHP has agreed to a 50/50 joint venture to develop this world-class deposit.
Filo has been a core stock for my paid readership group at Diggers and Drillers. And I recommended topping up holdings during last year’s brutal junior mining sell-off.
This is from a D&D update to readers in August 2023:
‘While we haven’t seen the strength flow into the junior sector (yet) it’s important to understand that producers lead the charge in an emerging bull market.
‘Copper-producing giants like Southern Copper, Freeport, Ivanhoe, and Antofagasta are all within reach of all-time highs.
‘This remains a bullish set-up for copper.
‘But when sentiment builds and speculation returns, it’s the stocks holding major underdeveloped copper projects that surge.
‘One of those is our Canadian explorer Filo Mining [TSX:FIL]…this is perhaps the most exciting copper project anywhere at the moment.
‘In the midst of the China panic two weeks ago, the company announced a breathtaking result at its Filo del Sol Project in Argentina…
‘1,406m at 1.13% (copper equivalent).’
And this:
‘Yet, despite the bullish update, Filo’s share price is down almost 15% over August.
‘This is a clear example of the deep underappreciation for world-class deposits…investors remain in the dark about the looming copper supply problem.
‘Filo currently sits in the D&D portfolio as a BUY.
‘If you haven’t already, I suggest you take full advantage of the ongoing weakness in junior mining stocks and add this prized asset to your portfolio.’
D&D readers have done well with this recommendation.
But as this story approaches its finale amid a Lundin/BHP takeover, is this how I envisioned the opportunity?
Under the terms of the deal, Filo shareholders will receive a total consideration of approximately C$4.1 billion, representing C$33.00 per Filo Share.
On paper, that looks impressive…after all this, it is still an exploration project.
Yet, the offer is just 32% above Filo’s ‘unaffected’ 30-day average stock price.
In other words, the premium offered on the share price BEFORE rumours of a takeover leaked.
But it begs the question…does this modest premium really offer much for Filo shareholders? What’s the opportunity loss here?
The BHP/Lundin board is ecstatic
It’s telling when you read comments from the powerbroker behind this deal, Lundin’s Mining President and CEO, Jack Lundin (emphasis added):
‘This strategic transaction is the key to unlocking the enormous value that the Vicuña District represents.
‘As we partner to acquire Filo del Sol, one of the world’s largest undeveloped copper-gold-silver deposits, with its true size yet to be defined, we are very excited about the future of the Company and our role in developing this region.
‘Combined with the Josemaria project, we are now positioned to create a multi-generational mining district with significant synergies and cost savings on a scale that has the potential to become one of the largest of its kind.
‘Importantly, we gain a valued partner in BHP and together we aim to generate long-term value through combining complementary skills and experiences, foundational to our near-term goal of becoming a top-tier copper producer.’
I ask the question again… What are Filo shareholders giving up here?
According to Lundin, this is set to become a “multi-generational mining district.”
The “largest of its kind.”
Does a 32.2% premium adequately compensate Filo shareholders?
Well, according to Filo’s CEO, Jamie Beck, it does (emphasis added):
‘I’m very happy to announce this transaction today, which delivers compelling value to Filo’s shareholders.
‘The Transaction delivers a 17.4% premium to the unaffected all-time high for Filo’s shareholders while offering exposure to the future development of Filo del Sol in addition to Lundin Mining’s high-quality operating portfolio.
‘The total consideration represents approximately C$924 million in value above Filo’s unaffected market capitalization on July 11, 2024.’
Does Jamie Beck truly believe a ‘17.4% premium to the unaffected all-time high for Filo’s shareholders’ is ‘compelling value’, or is he just following the script relayed by his former employer…Lundin Mining?
Filo shareholders are entitled to ask whether this offer is in their best interests.
Past all the smiles, handshakes and back-slapping, there’s a clear lack of tactical deal-making on behalf of the Filo board.
That’s a disservice to the quality of the Filo del Sol deposit and the shareholders who have backed Filo from its roots.
Giving up a “multi-generational” copper asset
Filo del Sol has a resource of 644.2 million tonnes of ore, containing an estimated 4.5 billion pounds of copper resources, 6.7 million ounces of gold resources, and 210.7 million ounces of silver resources.
Even without its primary copper base, this would be a significant standalone gold or silver project.
The project became famous in 2022 after geologists struck a 1,252-metre behemoth drill intersection, delivering 0.91% copper equivalent grade.
Since then, the company has returned numerous 1,000-metre mineralised hits, mainly around the Aurora Zone target.
And as Jack Lundin aptly puts it: “Its true size is yet to be defined.”
With all this in mind, Filo’s board has lost sight of its strong negotiation platform.
And consider this…
Mining conglomerates like BHP have been pressing hard to build their copper portfolio.
Over the last decade, the lack of organic growth (exploration or mine development) has elevated the need to build through acquisition.
BHP CEO Mike Henry said as much at the IEA Critical Minerals and Clean Energy Summit in Paris last year, warning grades across key minerals such as copper, nickel, lithium, and steelmaking were ‘falling at existing operations’.
‘This means more ore needs to be mined just to stand still’, he said.
‘Newly discovered and developed deposits are, on average, incrementally lower grade as well.
‘They’re increasingly hard to find, often deeper, and generally smaller.’
In other words, BHP and other multinational miners desperately need large-scale undeveloped projects (like Filo’s) to re-supply their ageing deposits.
Yet Filo’s board is asleep at the wheel. It has failed to utilise the strong negotiation platform its team of geologists has built over two years through highly successful exploration.
BHP following its Oz Minerals Playbook
In 2022, BHP capitalised on a pullback in copper prices and acquired the South Australian copper miner OZ Minerals.
After initially rejecting the bid, the Oz board unanimously recommended a takeover after BHP offered a revised and slightly higher offer.
At the time, Oz Minerals operated one of the world’s highest-profit-margin copper businesses.
Its operations also stood in a spectacularly desirable location, safe with virtually no geopolitical risk… Rare features for a copper mine.
The acquisition boosted BHP’s South Australian copper division, substantially improving operating margins at its ageing Olympic Dam facility.
Ultimately, shareholders received an AU$28.25 per share offer from BHP, below Oz’s high of around AU$28.88 earlier that year.
Given the quality of the company’s assets (and location), I believe Oz would be trading substantially higher today, even with copper prices pulling back over the last few weeks.
The deal from 2022 offers a timely reminder for Filo and other junior copper developers…there can be an opportunity cost to these buy-out deals.
Especially if they result from weak negotiations.
It’s important to remember that majors are scrambling for copper opportunities.
I believe a 32.2% premium fails to adequately compensate Filo shareholders, given the immensely bullish outlook on copper that Mike Henry, Jack Lundin, Robert Friedland and other mining elites envision.
Just like Oz shareholders, I suspect Filo investors will be short-changed if the prophecies of these mining powerbrokers prove correct.
Finally…
I’ve spent countless hours poring over company reports and using my experience to try and put more readers into the best resource assets globally.
I felt I achieved that with this pick.
However, a 30% premium is not what I envisioned when I first introduced readers to Filo. It falls well short of the mark.
And it brings me to this realisation…
No matter how strong your conviction on a particular opportunity, there’s no guarantee it’ll turn into a big winner.
Sometimes, the corporate elite have the odds stacked so far in their favour that it can be hard for small-time investors like you and me to realise the gains we deserve…the rewards from all the risks we take as investors.
But we do have a tool that the majors have little understanding of… Charts.
You see, I’m probably one of the only geologists who uses charts (alongside an understanding of rocks) as a key strategy in stock assessment.
I doubt any corporate dealmaker pays much attention to the finer details of technical analysis, but my colleague Murray Dawes absolutely does.
If you’re interested in building your skills and learning more about the ‘dark arts,’ of chart reading, I suggest listening to one of Australia’s most respected technical analysts.
Tune in on Saturday for a very special episode of Closing Bell for Fat Tail Daily readers. You won’t want to miss it!
Enjoy!
Regards,
 |
James Cooper,
Editor, Mining: Phase One and Diggers and Drillers
PS: Big Reminder! Don’t forget to tune into the big blockbuster 150th episode of Murray Dawes’ ‘Closing Bell’ this Saturday!
Murray believes a certain clutch of stocks are approaching a final ‘buy at a big discount’ opportunity.
Before they potentially approach new highs.
And he’s zeroing in on one play in particular. All will be revealed in Closing Bell #150.
Make sure you watch for the email subject line: Closing Bell #150: A Special Trade
You can set a Calendar Reminder by clicking here.
Or subscribe for free to the Closing Bell YouTube channel here.
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