First Quantum bids big to land Kevitsa

First Quantum Minerals (FM-T, FQM-L) is offering a hefty premium in a cash-and-share deal worth about $281 million in a bid to acquire Scandinavian Minerals (SGL-T, SCANF-O) and its giant Kevitsa nickel deposit in northern Finland.

The Kevitsa nickel-copper-platinum group elements project, about 130 km north of the Arctic Circle, is wholly owned by Scandinavian Minerals and is thought to be one of the world’s major undeveloped sulphide nickel deposits. It’s also one of the largest mineral discoveries in Finland’s history.

Under the proposed friendly deal, a First Quantum subsidiary will receive all of the shares of Scandinavian Minerals for $9 in cash plus 0.01 common shares of First Quantum for each common share of Scandinavian Minerals.

That values Scandinavian Minerals at $9.89 per share — a 41.3% premium over its April 18 closing price of $7 per share — and a 53.8% premium to its 20-day volume-weighted average trading price of $6.43.

“It’s a pretty valuable project and Finland is actually a net importer of nickel — they bring it in from Western Australia,” says a Toronto-based analyst who requested anonymity. “For a project that hasn’t quite finished its feasibility study and is also not fully funded for development, paying two-thirds of the net asset value I would consider fair.”

Investors seemed delighted with the news. Shares in Scandinavian Minerals jumped $2.98 apiece, or 42.6%, to $9.98 on a trading volume of 3.1 million.

Scandinavian Minerals has 26.8 million shares outstanding with a 52-week trading range of $5.50- 10.90.

First Quantum’s shares climbed 64 on the news to $90 per share on a trading volume of 464,000. First Quantum has a 52-week trading window of $65.82-114.18.

“It’s an excellent fit for First Quantum because it diversifies them out of the central part of Africa where they are having some difficulties and it diversifies them out of copper, which I think is a prudent strategy,” says the analyst.

First Quantum has operations in Zambia (the Kansanshi open-pit copper-gold deposit and the Bwana Mkubwa facility), the Democratic Republic of the Congo (Lonshi open-pit copper mine and Frontier copper mine) and Mauritania (the Kolwezi copper- cobalt tailings project and the Guelb Moghrein copper-gold mine).

Kevitsa is an enormous, low-grade deposit that was first discovered in 1987 about 142 km north of Rovaniemi, the capital of Finnish Lapland.

“It’s low-grade but it’s an open pit and so it’s a bit unique in that respect,” John Kearney, chairman of Scandinavian Minerals, told The Northern Miner. “You don’t normally see too many open-pit nickel sulphide deposits.”

The project is so attractive, the analyst notes, that it could become a target for other companies operating in northern Europe.

Both Russia’s Norilsk Nickel (NILSY-O, MNOD-L) and Xstrata (XSRAF-O, XTA-L) could offer competing bids, he says. From Norilsk’s point of view, Kevitsa is close to Russia where it has been acquiring nickel sulphide assets and Kevitsa is not unlike some of the assets held by LionOre Mining International, which Norilsk acquired last year.

At the same time, he notes, Xstrata owns a refinery in Norway, which has a reputation for getting some of the highest recoveries for platinum group metals and the concentrate easily could be shipped by rail from Kevitsa through Rovaniemi.

“You could make the case that either of these guys would have pretty significant interest in stepping up and writing a cheque that is a lot bigger than anything First Quantum could come up with,” says the analyst.

“My gut feeling is that it wouldn’t happen, but if anybody were to come along they are the people, and if they did, it wouldn’t shock me. But it’s probably a little bit smaller of an asset than most of the kinds of things those companies would be looking at in a serious way.”

Kearney says the company has agreed not to solicit any other proposals but if it did receive an unsolicited offer it could terminate its agreement with First Quantum for an $8-million break fee.

Scandinavian Minerals kicked off a bankable feasibility study on the Kevitsa project in April 2007 based on an open-pit operation that would mine about 5 million short tons of ore per year with the production of nickel and copper concentrates being sold in Finland or overseas.

The operation would produce nickel and copper concentrates for sale to local and overseas smelters. The study is expected to be finished in the second quarter of this year. If all goes according to plan, Kevitsa is targeted to start production in 2010.

In 2000, when Scandinavian Minerals bought Kevitsa, it also inherited a database with exploration and metallurgical results.

A prefeasibility study Scandinavian Minerals completed in July 2006 showed attractive economics at conservative long-term metal prices. The prefeasibility study envisaged annual production of 19 million lbs. copper, 31 million lbs. copper, 906,000 lbs. cobalt, 15,542 oz. platinum, 9,474 oz. palladium, and 7,916 oz. gold.

The positive study was based on an initial open-pit mining scenario producing 4.5 million tons of ore per year.

Current mine planning is based on proven and probable reserves grading 0.295% nickel, 0.427% copper, 0.014% cobalt, 0.141 gram gold per tonne, 0.196 gram palladium and 0.303 gram platinum, using a cutoff grade of 0.18% nickel. Reserves are defined to a depth of about 400 metres and indicate a 15-year mine life and a strip ratio of 2.34.

Kevitsa has a measured and indicated resource of 141 million metric tonnes and an inferred resource of 291 million tonnes (both at a 0.2% nickel cutoff ). That would yield contained metal of 930 million lbs. nickel and 1.3 billion lbs. copper in the measured and indicated category, and 1.9 billion lbs. nickel and 2.9 billion lbs. copper in the inferred category.

The deposit is accessible by road and has access to nearby water and hydroelectric power.

“It’s lucky in that it is very close to very good infrastructure,” the analyst says. “A major north-south highway that puts most of the highways in Ontario to shame is within 5 km of the actual deposit. And as you drive towards the project right now, you have to drive past a hydroelectric power plant.”

The board of Scandinavian Minerals has unanimously approved the offer from First Quantum, which is expected to close in the second quarter of this year, pending shareholder and regulatory approvals.

In October, Scandinavian Minerals placed an order for grinding mills, which will be delivered in the first quarter of 2010. They will be designed to process about 5 million short tons of ore per year. It has also applied for both the mining concession (expected in the second quarter of 2008) and the environmental permit (expected in the third quarter).

In December, Scandinavian Minerals completed a $40-million private placement financing with leading Finnish investment institutions. It also raised $35 million in a bought-deal financing in June 2007.

Last year, the company completed an 11,450-metre infill drilling program and a successful pilot plant program on a 575-ton bulk sample of Kevitsa ore. The results are being incorporated in the ongoing feasibility study.