Westmin snubs attempted takeover by Boliden — Vancouver company may exercise shareholder rights protection plan

The board of directors of Westmin Resources (WMI-T) has determined that an unsolicited $593-million takeover bid by Boliden (BOL.IR-T) is “inadequate and not in the shareholders’ best interests.”

Boliden, a largely Swedish-owned mining and smelting firm now based in Toronto, offered to buy all the common shares of Westmin at $5.40 each, payable in either cash or a combination of stock and cash. Boliden has arranged financing to complete an all-cash bid and is set to issue between one and 10 million shares to Westmin shareholders. Boliden currently has 99.6 million shares outstanding.

The bid represents a 37% premium over the closing price prior to the announcement. Boliden has requested Westmin’s shareholder list and expects to mail a formal takeover bid circular on, or before, Dec. 2. The bid will remain open for a period of 21 days. Newcrest Capital and CIBC Wood Gundy Securities have been retained by Boliden to act as its financial advisors.

Boliden recently acquired 3.3 million shares of Westmin and has entered into a lockup agreement with an institutional shareholder, which will tender another 5.5 million shares. Together, these represent a 9.3% of Westmin’s 95 million shares outstanding.

James Borland, vice-president of investor relations for Boliden, says Westmin’s platform of North American assets fits in well with his company’s overall strategy.

“Overall, it is large enough to have an impact and small enough to digest,” he says.

The offer of $5.40 is fair, Borland adds, and is based on a long-term copper price of US$1 per lb. and a zinc price of US57 per lb., as well as a smooth startup at the Lomas Bayas copper mine in northern Chile. Borland noted that once Lomas Bayas is complete, Westmin will be carrying a $500-million debt.

Westmin’s president, Walter Segsworth, describes the offer as “woefully opportunistic” given the current low prices for copper.

Terry Lyons, the company’s chairman, agrees: “The proposal was very low in light of our past share price performance, current street estimates of share price targets, the underlying value of the company’s assets and the [future] opportunities.”

Westmin’s 52-week high is $7.65 per share.

Westmin has retained RBC Dominion Securities as its financial advisor, which has begun evaluating the company’s worth.

“The only way we will see the true value for the corporation is if there is a true competition for the assets,” says Segsworth. Westmin has begun to draw up a list of likely candidates who might make competing bids. The list currently consists of 15 names.

“We expect that there will be a great deal of interest in our assets and we therefore expect that we will have a healthy auction and be able to realize significantly greater value for shareholders than would be represented by the Boliden offer,” the president adds.

Westmin argues that Boliden’s offer, coming as it does so near Christmas, does not give it sufficient time to maximize shareholder value. The company is prepared to use a shareholder rights protection plan that would allow a permitted bid to be extended through a period of 60 days, giving it ample time to find other bidders. The plan could come into effect once Boliden mails out its offer to all Westmin shareholders.

Besides Lomas Bayas, Westmin’s principal assets include Myra Falls, an underground polymetallic zinc, copper and precious metals mine on Vancouver Island, and Gibraltar, a hight-cost open-pit copper mine in south-central British Columbia.

Myra Falls produces zinc and copper concentrates that contain significant gold and silver credits. In the third quarter, the operation processed 303,408 tonnes of ore grading 5.74% zinc and 1.37% copper, resulting in 30.3 million lbs. payable zinc and 7.7 million lbs. payable copper at a unit operating cost of $51.30 per tonne. Production over the first nine months of the year amounted to 89.7 million lbs. payable zinc and 26.4 million lbs.

payable copper.

Improved zinc prices and higher zinc production boosted operating cash flow at Myra Falls during the third quarter to $6.5 million, compared with $1.7 million in the corresponding period in 1996.

Minable reserves at the end of 1996 stood at 9.1 million tonnes grading 6.6% zinc and 1.5% copper, plus 1.4 grams gold and 28.6 grams silver.

The Gibraltar mine is a large-scale, 37,000-tonne-per-day open pit that cranks out copper concentrate, molybdenum concentrate and cathode copper.

During the third quarter, 3.2 million tonnes of ore grading 0.31% copper was processed, yielding 17.8 million lbs. payable copper-in-concentrate and 2.2 million lbs. payable cathode copper at an operating cost of US92 per lb.

For the 9-month period, Gibraltar produced 51.5 million lbs. payable copper-in-concentrate and 4.3 million lbs. payable cathode copper. About half of the this year’s remaining production has been sold forward at US$1.04 per lb., and between 30 and 40 per cent of next year’s production is sold forward at US98 per lb.

Profitability during the third quarter was affected by a writedown of receivables and inventories. The writedown was caused by a sharp decline in the copper price during July. Gibraltar recorded a deficit of $2.5 million in cash flow during the quarter, while cash flow for the 9-month period was $7.3 million.

At the end of 1996, sulphide ore reserves at Gibraltar totalled 142.5 million tonnes grading 0.303% copper and 0.009% molybdenum, while oxide ore reserves stood at 3 million tonnes grading 0.273% copper.

Construction at the US$244-million Lomas Bayas porphyry copper project is said to be 65% complete and under budget, with startup scheduled for June 1998. The mine will use solvent extraction-electrowinning to produce 60,000 tonnes of cathode copper, or 132 million lbs. per year, in the first seven years. The annual mining rate is expected to average 57,000 tonnes over the life of the mine at a cash cost of US50 per lb.

Minable reserves, as determined under the feasibility study, were estimated at 289.6 million tonnes grading 0.355% copper, equivalent to 2.27 billion contained pounds of copper. The stripping ratio is expected to be 0.4-to-1.

Westmin has contributed its US$104 million equity investment in Lomas Bayas and begun to draw against the US$140-million project loan.

Concurrent with development at Lomas Bayas, Westmin has been examining the feasibility of expanding the annual production rate by 50% to 90,000 tonnes, or 195 million lbs. A 30,000-metre infill drilling program, completed earlier this year, increased the proven and probable geological reserves to 479.1 million tonnes grading 0.332% copper, equivalent to 3.5 billion pounds of contained copper.

Meanwhile, on the neighboring Fortuna de Cobre property, metallurgical tests have indicated a 75-to-90-per-cent recovery rate for uncrushed ore, with little acid consumption. A 40,000-metre drill program is under way to confirm existing resource estimates, and these will be incorporated into the scope of the expansion plan for Lomas Bayas.

Fortuna contains a preliminary resource estimate of 322.4 million tonnes grading 0.37% copper.

Segsworth does not believe the company is getting any credibility in the market, or from Boliden’s offer, for the potential upside of Fortuna.

Westmin recently acquired an option to earn a 51% interest from General Minerals (GNM-T) in the Vizcachitas copper project of central Chile. Limited drilling had previously established a geological resource of 310 million tonnes grading 0.52% copper and 0.013% moly, including a higher-grade, near-surface zone of 24 million tonnes grading 1.01% copper.

The company is currently drill testing the partially defined higher-grade core with a target of 60 million tonnes grading 1% copper.

Closer to home, Westmin also holds a 60% interest in the joint-ventured Wolverine volcanogenic massive sulphide deposit in the southeastern Yukon.

Atna Resources (ATN-T) holds the remainder.

Prior to the 1997 drilling program, the deposit was estimated to contain 5.3 million tonnes grading 12.96% zinc, 1.41% copper and 1.53% lead, plus 1.81 grams gold an
d 359 grams silver per tonne. A revised reserve estimate is expected to add about 1 million tonnes.

Westmin recently revealed that high levels of selenium posed a serious marketing concern. It is interesting to note that Boliden has the capacity to treat selenium at its Ronnskar smelter and refinery plant in Sweden, which produces 20 tonnes annually.

“The inherent value of the company significantly exceeds the offer that has been made, and we’re conducting an aggressive campaign to find those other bidders who will recognize that value,” Segsworth says.

During the recent third quarter, Westmin posted a loss of $4.8 million (or 7 per share) on revenue of $37 million, compared with a loss of $6.2 million (12 per share) on $19.5 million in the corresponding period last year. Earnings during the first nine months totalled $5.6 million, compared with a loss of $20.7 million in the year-ago period.

Cash flow in the recent 9-month period rose sharply to $29.3 million from a deficit of $3.3 million a year ago.

Boliden, which is controlled 44.9% by Trelleborg of Sweden, was incorporated last April. Two months later, it was spun off as a publicly listed company.

Primarily a zinc and copper producer, the company has mining and milling operations in Sweden and Spain, as well as refining facilities in Norway.

Boliden also operates a small gold mine in Saudi Arabia.

During the third quarter, Boliden earned US$27.2 million (US27 per share) on revenue of US$313 million, whereas earnings for the first nine months reached US$65.1 million (US65 per share).

Cash flow from operations in the third quarter amounted to US$54.6 million (US55 per share). For the 9-month period, the figure totalled US$134.7 million (US$1.35 per share).