Inova’s board supports Chinese takeover bid

VANCOUVER — Inova Resources (TSX: IVA; ASX: IVA) — the Australian junior formerly named Ivanhoe Australia that is still majority owned by  Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ) — looks set to be acquired by China’s Shanxi Donghui Coal Coking & Chemicals Group.

Shanxi Donghui launched its bid for Inova on Aug. 21, offering A22¢ per share. The price represented a 55% premium to Inova’s three-month weighted-average price of A14.2¢, and a 29% premium to its closing price the day before the bid. The offer values the small, Australian-based copper-gold producer at A$160 million.

Concurrent with the offer, Shanxi Donghui announced that Turquoise Hill, which owns 56% of Inova’s outstanding shares, had entered into a pre-bid acceptance agreement to submit a third of its holdings — representing 14.9% of Inova — to the offer as soon as all conditions had been met, aside from the 51% minimum tender requirement.

Inova’s board held off on commenting on the offer for more than a month. In that time the other offer conditions were met, which triggered the pre-bid agreement. Once that transpired Turquoise Hill announced it intended to tender the rest of its shares to the offer.

Finally, on Sept. 26, Inova’s independent board committee recommended that shareholders tender to Shanxi Donghui’s offer. The committee explained that once Shanxi Donghui owned Turquoise Hill’s 56% stake, the Chinese firm would have control of the company, especially if some other shareholders also tendered to the offer. For Inova shareholders, such a scenario would mean dramatically reduced liquidity and control.

The committee noted that two of Inova’s key assets — the Merlin molybdenum-rhenium project and the Mount Elliott copper-gold project — are nearly ready for ­development. Inova would need major capital to build either one into a mine, which may not be attainable in the current markets.

Finally, Inova’s committee said they had run an “extensive process to find potential investors and partners” for its projects last year that did not yield a result. Meanwhile Turquoise Hill had searched for a way to divest its Inova holdings, and Shanxi Donghui’s offer was the only formal and binding proposal to come of that search.

Inova has three main projects: the operating Osborne copper-gold mine, where ore from three underground operations feed a central mill and flotation facility; the construction-ready Merlin molybdenum-rhenium project; and the feasibility-stage Mount Elliott copper-gold project. All three are in northwest Queensland, near the town of Cloncurry in Australia.

Inova was originally a wholly owned subsidiary of Ivanhoe Mines, charged with exploring and advancing Ivanhoe’s Australian assets. In 2008 the company completed an initial public offering. Ivanhoe, which changed its name to Turquoise Hill, maintained 80% control. Over the next three years subsequent offerings reduced Turquoise Hill’s stake to 56%.

Inova’s only producing asset is the Osborne operation, which it acquired from Barrick Gold (TSX: ABX; NYSE: ABX) in 2010. Within months Inova recommenced underground development at the project, where work had been suspended, and by early 2012 the Osborne and Kulthor underground mines were feeding ore to the Osborne mill and flotation facility. A year later Inova restarted the nearby Starra Line underground mine, which feeds the Osborne facility.

In the second quarter the three mines fed 393,000 tonnes of ore into the Osborne facility to produce 12 million lb. copper in concentrate and 6,459 oz. gold.

Since Shanxi Donghui tabled its offer Inova released news of a revised reserve and resource estimate for Starra Line. In reflecting an improved understanding of the deposit’s spatial complexity, the new estimate slashed Starra Line’s reserve from 1.5 million tonnes grading 1.24% copper and 0.81 gram gold to 854,000 tonnes grading 1.52% copper and 0.87 gram gold. The reduction means Starra Line has 14% less mill feed to offer.

Following that news Inova embarked on a life-of-mine evaluation of the entire Osborne operation. The results of the assessment are expected in November, but Inova has already warned there could be “an impairment of the carrying value of the Osborne copper-gold business in the range of between A$10 million and A$20 million.”

Fifty kilometres north of the Osborne operation sits Inova’s Merlin project, which hosts the world’s highest-grade molybdenum and rhenium deposit. In 2010 Inova drove a decline to access the project’s two main zones, known as “Merlin” and “Little Wizard.” With the decline in place Inova has drill tested both zones from underground, which has helped it understand the deposits.

The project now awaits permits. Inova’s development plan would see ore from Merlin trucked 50 km to a processing facility built next to the Osborne plant, where power, water, accommodation and access are all in place. While the permitting process advances, Inova has worked to improve the project’s economics, which recently resulted in an improved metallurgical flow sheet and lower anticipated operating costs.

Inova’s other development-ready project is Mount Elliott, an iron-oxide, copper-gold deposit located 20 km north of the Merlin project. In August Inova updated the resource estimate for Mount Elliot, using results of recent drilling and boosting the copper equivalent cut-off grade to 0.5% from 0.3% to reflect likely mining methods.

In the new estimate the tonnage and grade of the indicated resource increased to 157 million tonnes grading 0.67% copper and 0.4 gram gold per tonne, while the inferred resource declined slightly to 107 million tonnes averaging 0.54% copper and 0.31 gram gold. The resource comprises mostly fresh sulphide mineralization, though 8.9 million indicated tonnes and 1.5 million inferred tonnes are classified as a leachable oxide resource.

Shanxi Donghui is a large coking coal, coke and chemical producer based in Shanxi province. It is a private company. Shanxi says it has more than $160 million in the bank. Shanxi Hongdui’s chairman Zhang Yaping said in a release that his company “looks forward to progressing the development of Inova’s mines and growth projects, and managing the inherent risks involved.”

Inova’s thinly traded shares have ranged between 16¢ and 24¢ in recent months, after falling from a 52-week high of 60¢ in January. Since Shanxi Donghui tabled its offer Inova shares have held near 20¢, reflecting the Canadian dollar value of the offer. The company has 719 million shares outstanding.