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First Quantum defends default allegations; Citi cuts stock to sell

Last updated: 12:46 27 Nov 2013 EST, First published: 13:46 27 Nov 2013 EST

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First Quantum Minerals (TSE:FM) (LON:FQM) said it "strongly disputes" accusations from noteholders of a default related to notes from its acquisition of Inmet Mining.

A group that includes CI Investments, Barometer Capital and funds managed by Capital Group allege that Inmet, which First Quantum acquired in a hostile takeover earlier this year, violated the terms of its indentures of its 8.75% senior notes due in 2020 and 7.5% senior notes due in 2021. The noteholders say the infraction occurred when Inmet amalgamated with First Quantum subsidiary Akubra and the combined company repaid the acquisition financing.

In a statement released Wednesday morning, First Quantum said that even if the transaction caused a breach of the indentures, the noteholders would only be able to speed up the debt repayment at par, leading to a significant discount to current trading prices. The copper and nickel miner said it has been advised on the matter by two New York-based law firms.

"These claims are without legal foundation, highly opportunistic, and run the risk of destroying value for all Inmet noteholders," said First Quantum chairman and chief executive Philip Pascall. "We remain very confident in the strength of our legal position and we intent to take immediate legal action to enforce it. We will also remain open to reaching an amicable resolution."

Shares rebounded late morning in Toronto, but still remained in negative territory, after a 7.9% slide in early Wednesday trading.

The clash with noteholders follows a "sell" rating from Citi Research, which classified First Quantum as "one of the most financially high-risk companies" within its European coverage.

"FMQ's leveraged acquisition of Inmet has introduced a dimension of balance sheet risk previously absent from the stock," Citi wrote in a note released today. 

Although its contrarian, bearish outlook on copper prices is also weighed into its position on First Quantum, Citi said the company's balance sheet is flawed and threatens to take a bite as high as $675 million out of its cash position.

Citi said if the Inmet deal resulted in a breach of debt terms, cash compensation could fall into a range between $200 and $600 million, leading to a net present value loss as high as $710 million. A Covenant Review report in June said Inmet bonds carried restricted-payments covenants limiting the amount of cash an issuer may use for distributions to shareholders such as stock repurchases or dividends. 

First Quantum had used a bridge loan backed by Inmet's assets to fund the $5 billion acquisition and paid off the short-term debt with cash. 

Citi calculates that First Quantum will need to inject $1.4 billion in cash into Cobre Panama, which it took control of in the Inmet deal, with the assumption of $2.1 billion in financing out of a $6.2 billion budget, leaving it "little limited secured lending headroom." Citi believes the unsecured lending route is likely, but incremental interest could result in a $305 million NPV hit. 

If First Quantum were to delay the project a year, it would free up cash flow, Citi said, but would also result in a $380 million cut to its NPV target. If the company were to raise money through equity markets, it would lead to a stock dilution of about 12% by Citi's estimates. 

Citi has a £9.50 target on First Quantum.

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