Nevsun’s board recommends shareholders reject Lundin takeover bid

VANCOUVER — Nevsun Resources’ (TSX: NSU; NYSE-AM: NSU) board is unanimously recommending shareholders reject Lundin Mining’s (TSX: LUN; US-OTC: LUNMF) bid to buy all of Nevsun’s shares at $4.75 per share, the company reported on Aug. 9. The formal recommendation made on Aug. 9 is the company’s latest attempt to fend off a hostile takeover by Lundin.

In May, Nevsun rejected an unsolicited bid by Lundin and its former bidding partner Euro Sun Mining (TSX: ESM; US-OTC: CPNFF) for all of Nevsun’s shares, citing inadequate value and a problematic deal structure. That deal was reportedly Lundin’s fourth attempt at buying Nevsun or its Timok project.

On July 17, Lundin took its fifth proposal straight to Nevsun’s shareholders.

In a conference call explaining the proposal a week later, Lundin president and CEO Paul Conibear said that “since October 2017, we have been trying to constructively engage and progress a deal with the management and board of directors of Nevsun. Each of five successive proposals made since early February were rejected by Nevsun despite multiple moves by us to address their concerns regarding structure, bidding partner and price. Each time we presented a proposal, the goalpost changed … we formally took our premium $4.75 all-cash offer for Nevsun directly to its shareholders.”

Nevsun CEO Peter Kukielski reacted by saying Lundin’s latest proposal “continues to ignore the fundamental value of Nevsun and its assets.”

The Nevsun board bases its latest recommendation on its belief that Lundin’s proposal undervalues Nevsun’s Timok copper-gold development project in Serbia.

Nevsun has reported numerous milestones at Timok over the past six months.

In March, Nevsun released a prefeasibility study on the wholly owned Timok Upper Zone showing an after-tax net present value of US$1.82 billion.

In May, the company started construction on its recently permitted Upper Zone exploration decline.

In June, it completed an initial inferred resource estimate on the Timok Lower Zone, a joint venture with Freeport-McMoRan (NYSE: FCX). The resource tallies 1.7 billion tonnes grading 0.86% copper and 0.18 gram gold per tonne.

The next steps for Nevsun at Timok includes finishing a drilling program aimed at identifying more high-grade Upper Zone-style mineralization.

Nevsun will also release a technical report with an initial resource estimate for the Lower Zone in the third quarter of 2018.

Nevsun chairman Ian Pearce pointed out that Nevsun’s stock trades above Lundin’s offer price, and said this is evidence the Lundin offer undervalues Nevsun’s assets. Nevsun’s shares were trading 4% above Lundin’s offer as of Aug. 10.

Nevsun said its financial advisors, BMO Nesbitt Burns and Citigroup Global Markets, both submitted opinions to Nevsun’s board that the deal fails to reflect Nevsun’s fundamental value.

Nevsun’s board also said they expect more favourable deals to come through, releasing information on the other proposals it has received for the first time.

The company said it has signed non-disclosure agreements with 18 parties since March 2017.

That process culminated on Aug. 7, with four proposals from major and mid-tier mining and smelting companies to help develop the Timok project. Those proposals included offers to buy up to a 19.9% equity interest in Nevsun. Three of those proposals to acquire a non-controlling interest are at a premium to the price offered by Lundin for all of Nevsun’s shares. 

For its part, Lundin has rejected the counter claim.

Lundin Mining CEO Paul Conibear, who retires this year.

“Our most recent offer represents full value for Nevsun and its assets. The offer takes into account and reflects the most recent results reported by Nevsun, including the latest disclosure on the Timok upper zone, the Timok lower zone, Timok concession exploration potential and the Bisha mine,” Conibear said on the company’s second-quarter conference call on July 25.

Lundin noted its $1.4-billion (US$1.1-billion) offer for Nevsun represents an 82% premium to Nevsun’s $2.61 closing price on Feb. 6 (the date of its first offer to Nevsun related to its interest in acquiring Timok), and a 33% premium to Nevsun’s $3.58-per-share closing price on April 30 (the date of Lundin Mining’s prior proposal to Nevsun).

Lundin implored Nevsun shareholders to accept the offer, arguing it is better positioned — financially and operationally — to develop Timok and Bisha.

“There is a risk of substantial Nevsun shareholder dilution if our offer is not accepted, as Nevsun needs significant financing in the near-term in the form of equity, stream royalty and/or debt. Further, there is a notable risk that both Timok and Bisha are not developed optimally due to the lack in Nevsun’s financial capability, not only now, but in the years ahead,” said Conibear, who will retire by year-end and be succeeded by current chief financial officer Marie Inkster.

Lundin Mining’s chief financial officer and soon-to-be CEO Marie Inkster.

Lundin’s original offer excluded the Bisha mine in Eritrea. Explaining its inclusion in the company’s most recent proposal, Conibear said, “Our prime interest is Timok. We do have background in Eritrea, but as currently stated [Bisha] has a four-year mine life … we realized we need to come in over the top, keep this deal as simple as possible, and that’s what we’ve done.”

Lundin made no mention of any potential contingent liabilities it would assume as a result of Nevsun’s ongoing legal troubles. The company is being sued in British Columbia’s Supreme Court alleging it was complicit in the use of forced labour by local contractors at Bisha. The three plaintiffs — Gize Yebeyo Araya, Kesete Tekle Fshazion and Mihretab Yemane Tekle — allege they were held against their will and subjected to physical abuse and torture at the mine.

The plaintiffs were employed through the same military national service program the United Nations has described as “mass enslavement.”

Nevsun has denied the plaintiffs’ claims and argued it isn’t legally liable for their treatment anyway, since it was not their direct employer. Its bid to block the lawsuit — which centred on the claim that Eritrean courts should have jurisdiction over the case — was rejected by the British Columbia Court of Appeal in 2017.

This June, however, the Supreme Court of Canada agreed to hear Nevsun’s appeal. That hearing is tentatively scheduled for Jan. 23, 2019.

Lundin’s current bid is open until Nov. 9, 2018.