Lundin's agonizing Congo decision

Top publicly-held copper producer Freeport-McMoRan Copper & Gold (NYSE:FCX) in May announced the sale of its largest African copper mine to China Molybdenum (CMOC) for up to $2.65 billion.

The Democratic Republic of Congo's state-owned Gecamines controls 20% of the high-grade Tenke Fungurume copper and cobalt mine.

Lundin Mining (TSX:LUN) indirectly owns 24% which includes a right of first offer provision to pick up Freeport's stake.

Toronto-based  Lundin first received a notice from Freeport offering the company the right to acquire its effective share of 56% back in May and last week Phoenix-based Freeport granted the Canadian miner a second extension to make a decision on the purchase to September 29.

If such a project would go ahead Tenke would be in the top five copper mines in the world and one of the lowest cost producers

In a new note Stefan Ioannou, analyst at Haywood Securities, says the independent investment dealer would consider Lundin’s sale of its Tenke interest favourably "if the company could garner metrics similar to the Freeport-China Molybdenum transaction." The CMOC transaction translates into a roughly $1.2 billion value for Lundin's 24% stake.

The fact that the deal would also decrease the Lundin's overall political risk profile is a positive says Ioannou, but does not take into account a contemplated expansion of the project, which would likely boost copper cathode production capacity towards the region of 500,000 tonnes copper per year, almost double current maximum output.

If such a project would go ahead Tenke would be in the top five copper mines in the world in terms of size and also one of the lowest cost producers anywhere in the world.

Haywood views Tenke as a major-size project in a challenging jurisdiction and does not anticipate that Lundin will exercise it first offer rights:

"[Lundin] will look either to continued passive participation through its existing 24% project interest or to divestiture (at fair value), reflecting/maintaining the company’s diversification strategy."

Gecamines have expressed their displeasure with the Freeport-CMOC deal and said it would consider a separate bid after receiving "several" offers from other partners to facilitate Freeport's exit.

Haywood says it's possible that the extension of Lundin's right of first offer is "to provide time for China Molybdenum to advance discussions with Gécamines and whether Lundin is part of these negotiations is unclear.

Freeport reported consolidated Tenke sales for 2015 totaling 467 million pounds of copper (215,000 tonnes) and 35 million pounds of cobalt (16,000 tonnes) at a net unit cash cost of $1.21 per pound of copper.