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Monday, March 8, 2010

China invests $1-billion into a copper venture with Canadian company

China is again turning to Canada to satisfy its voracious appetite for raw materials, striking a $1-billion deal with copper producer Quadra Mining Ltd. for its assets in Chile and a stake in the Vancouver-based company.

The joint-venture deal gives China a new copper source amid worries of a shortage in the country, while mid-tier producer Quadra receives the financing it needs to build projects and make future acquisitions.

The deal is the latest in a growing list of state-owned Chinese firms that have bought pieces of Canadian resources companies.

“We bring to the table expertise. They bring to the table money,” Quadra chief executive officer Paul Blythe said in an interview Monday. “It changes what we can and can't do.”

Quadra's deal is a memorandum of understanding with State Grid International Development Ltd., a division of State Grid Corp. of China, the country's largest utility company and one of the world's largest copper customers. The deal is expected to be made official in May and close next fall.

It's the first time State Grid has invested in a copper producer. The metal will be used to help develop power grids, and comes as China's market is expected to see a shortage of copper this year despite a massive restocking in 2009.

“We believe China's massive, import-dependent metals industry needs far more copper than most in the market realize,” UBS said in a recent report.

State Grid will put $900-million (U.S.) into the joint venture as projects are built, and pay about $152-million (Canadian) for 10 per cent of Quadra's shares.

The $900-million total is the value placed on Quadra's two projects in Chile, the Franke Mine and the Sierra Gorda project under development.

Sierra Gorda is estimated to cost more than $2-billion to build, though a feasibility study has yet to be completed. Production is expected by 2013 and has been forecast to be between 250 million and 400 million pounds of copper annually over 25 years.

The deal sees Quadra supervise the day-to-day operations, while State Grid takes the lead on financing, aiming for a 60/40 debt-to-equity ratio, or roughly $1.2-billion in debt and $800-million in equity. Each partner would own half the joint venture and split production proceeds.

The agreement is “a positive and helps resolve funding issues related to the Sierra Project,” according to BMO Nesbitt Burns Inc., which values Franke at $488-million and Sierra Gorda at $244-million.

Mr. Blythe announced the joint-venture deal while in Toronto for the annual Prospectors & Developers Association conference; coincidentally, that is where the two sides starting talking about such a deal a year ago.

Quadra also negotiated with other companies in China, as well as Japan and South Korea, before signing on with State Grid.

As part of the deal, State Grid has agreed not to further increase its stake in Quadra. Quadra's other major shareholder is Swiss-based SIA Funds AG, which also has a stake worth about 10 per cent.

Quadra and State Grid will also look for other copper assets through their joint venture, starting with operations in Chile, which is home to about 35 per cent of the world's copper production.

Quadra's other assets include the Robinson copper and gold mine in Nevada, the Carlota copper mine in Arizona and the Malmbjerg molybdenum development project in Greenland.

http://www.theglobeandmail.com/globe-investor/china-sinks-1-billion-into-venture-with-bc-miner/article1494148/

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