Norilsk ups the ante for LionOre

Moscow-based Norilsk Nickel (NILSY-O, MNODL-L) has proven itself undeterred by a high break fee and raised its bid for Toronto-based LionOre Mining International (LIM-T, LMGGF-O).

The move raises the stakes to a level where bidding-war rival Xstrata (XSRAF-O, XTA-L) may be content to take the $305 million break fee and walk away. The break fee is the amount Xstrata gets paid if LionOre is acquired by another company.

The new $27.50 a share offer tops Xstratas last offer of $25 by 10%, and its own original offer from May 3 of $21.50, by 28%. It values LionOre at $6.82 billion.

Norilsk publicly complained that the break fee attached to Xstratas last bid was unusually high and as such was bad for LionOre shareholders as it would either discourage a higher bid or at least temper the dollar value of a new bid.

Norilsk says its new bid did take into account the added cost of the break fee.

LionOre’s board had recommended the lower Xstrata offer of US$6.2 billion to its shareholders last week.

In Toronto on May 23 LionOre shares were up roughly 4% or $1.10 to $28.35 on 8.3 million shares traded. Its shares have risen 47% since Xstrata first got the bidding process going back in late March.

While Norilsk is the world’s biggest nickel producer, the company has been hampered by low to stagnant growth and is looking to re-ignite production levels by expanding into more global operations.

Norilsk says the increased offer reflects the quality and strategic value it sees in LionOre, as it looks for a greater scale in nickel, more geographic diversification and a strong pipeline of projects. LionOre has operations in Australia, Botswana and South Africa.

Unfettered Chinese demand for stainless steel has caused the price of nickel to more than double in the last year. In London on May 23, the metal was trading for US$24.37 per lb.

News of the higher bid put Norilsk shares off 4.1% to 185 rubles in Moscow while Xstrata’s shares were roughly 1% higher at 2,810 pence.

Xstrata is believed to want the acquisition as a way to propel itself into the super-heavy weight ranks with likes of BHP Billiton (BHP-N, BLT-L) and Anglo American (AAL-L, AAUK-Q).

Its acquisition of Falconbridge last year made it the world’s fourth-largest nickel producer.

LionOre is slated to turn out roughly 45,000 tonnes of nickel this year and anticipates producing 80,000 tonnes by 2012. The company reported first quarter earnings of $148.3 million, compared with $13.2 million in 2006. In the same quarter it produced close to 10,000 tonnes at a cash cost of $5.61 per lb.

Norilsk produced roughly 225,000 tonnes in last year.