Equinox makes surprise bid for Lundin (March 11, 2011)

A hostile bid by Equinox Minerals (EQN-T, EQN-A) for Lundin Mining (LUN-T) worth about $4.8 billion in cash and shares could derail a friendly merger proposed between Lundin and Inmet Mining (IMN-T, IEMMF-O) that is scheduled for a shareholder vote on March 14.

“We see a high probability of success as Inmet appears to have a limited ability to exercise its right-to-match Equinox’s offer for Lundin,” Unno Rutten, a mining analyst at UBS Research, wrote in a research note to clients. “Equinox’s higher valuation multiples and larger market cap, relative to Inmet’s, provide it with a bidding advantage.”

Under the terms of Equinox’s offer, each Lundin shareholder has the right to either $8.10 in cash or 1.2903 Equinox shares plus 1¢ for each Lundin share. The offer represents a 26% premium to the closing share price of Lundin on Feb. 25 of $6.45 per share, and a 13% premium to Lundin’s 30-day volume-weighted average price of $7.18 per share.

“We’re creating a far superior cash-and-share offer for Lundin,” Craig Williams, Equinox’s president and chief executive, explained on a conference call. “Twenty-six percent against zero is a pretty simple calculation, but I think it’s a lot more than just that. It’s a lot more than just the metrics. It’s the strong fit between the assets, the mix between the teams and the synergies we can develop here.”

Williams added that Equinox believes the strong cash component of the deal is the most attractive route for Equinox shareholders because it limits dilution while maximizing accretion. For Lundin shareholders, it provides “a good choice between staying with the story and sharing in the upside of Equinox shares post-merger or alternatively taking the cash.”

Equinox says the combined group would have a targeted compound annual growth rate of 23% over the next six years, culminating in planned production of about 500,000 tonnes of copper per year by 2016.

Equinox, based in Perth, Australia, plans to pay for the cash portion of its offer through a US$3.2-billion bridge facility led by Goldman Sachs Lending Partners and Credit Suisse Securities.

Equinox expects the combined company will enable it to return to a net cash position within four years, based on current analyst consensus copper price forecasts, and the company intends to refinance the bridge facility through a combination of medium- and long-term debt instruments and has no plans to raise equity as part of the bridge financing.

Tom Meyer of Raymond James expressed reservations about the bid, however, and reduced his rating to underperform from market perform, at the same time lowering his target price on Equinox’s stock to $6.50 per share from his previous target of $7.

“Although we agree with Equinox’s use of the premium valuation on its shares to pursue an acquisition strategy, in this particular case, we anticipate a lower relative trading multiple may likely ensue should the proposed transaction proceed,” Meyer wrote in a note to clients. “We believe the higher risk profile from the additional debt is not necessarily fully offset by the greater geographical and metal diversification with Lundin’s assets.”

Lundin’s assets include the Tenke Fungurume copper mine (24%) in the Democratic Republic of the Congo (DRC), Neves-Corvo in Portugal (100%) and Zinkgruvan in Sweden (100%). 

Equinox operates the Lumwana mine in Zambia (100%) and is building the Jabal Sayid project in Saudi Arabia (100%).     

When asked whether Equinox felt comfortable that the Tenke Fungurume project would receive a mining licence, Williams replied in the affirmative.

“We can just go on what Freeport and Lundin have disclosed and they certainly appear very confident that they will get the licence renewed and we have every confidence in that,” he said. “I think the other thing that gives us comfort in the project is having a very strong operating partner and manager of the project in Freeport. I think we’re very comfortable in having a minority interest driven by Freeport in the DRC.”

As far as potential risk is concerned with Equinox’s Jabal Sayid project, Williams noted that Saudi Arabia ranked thirteenth globally in a survey by the United Nations and the World Bank in terms of the “ease of doing business.” He also pointed out that Saudi Arabia is unlike many other countries in the Middle East, where popular uprisings against incumbent governments are taking place.

“With regard to the latest problems in the Middle East, certainly there has been no issue to date in Saudi and our advice is that it’s unlikely to occur,” he said. “Saudi is unlike most of the other countries. The Kingdom has been very fair and reasonable in sharing the wealth of the population and I think you just don’t have those extreme ends of poverty as you have in some of the other parts of the Middle East.”

When asked why Equinox chose to bid for Lundin rather than Inmet, Williams said Lundin’s assets fit best but also pointed to what he said were the financial and technical risks of Inmet’s Cobre Panama project, a large open-pit copper development project in Panama. 

“About 75% of the growth of (the) Inmet profile is based on the Cobre Panama project, which is a very good project but it’s very large and very low grade and in a sovereign risk environment that is untested,” he said.

“There’s never been a mine of any significance in Panama and they have yet to face the technical challenges, and not least of their challenges will be to fund the $5.5 billion to build the operation. And so from our point of view, that operation is going to be a long way out and what that would mean is that the profile is very volatile with that one operation.

“In the meantime, if you look at the intervening period between now and then, and when Cobre Panama will be coming in according to Inmet’s projections, an Equinox-Lundin (combination) would have made an additional 500,000 tonnes of copper metal… and that’s a lot of money in today’s market so that’s our rationale and we’re very focused on Lundin’s assets.”

 Williams added that the combination of Equinox and Lundin was “compelling” and would create one of the world’s largest pure-play copper producers with “outstanding exploration potential.”

“Tenke Fungurume is an outstanding series of deposits and resources with phenomenal exploration potential and very much expandable as Freeport and Lundin have indicated,” he said. “That’s a tremendous asset.”

Neves-Corvo “also appeals,” he continued. “Lundin has done a tremendous job on that one. I visited it a few years ago and it’s a very well-run operation; one of the world’s best underground base-metal mines, a classic VMS (volcanogenic massive sulphide), with lots of exploration potential… These VMS deposits typically come in clusters and I think there’s opportunity to find more of these.”

In a press release Feb. 28, Lundin said its board is reviewing Equinox’s offer and would communicate a recommendation to Lundin Mining shareholders as soon as possible. Inmet has not responded publicly.