Xstrata tops Norilsk’s bid for LionOre

Russia’s Norilsk Nickel (NILSY-O, MNODL-L) has until May 25 to outbid Xstrata (XSRAF-O, XTA-L) a second time in its attempt to take over LionOre Mining International (LIM-T, LMGGF-O).

Xstrata, based in Switzerland, upped its initial cash bid on May 15 by 35% to $6.2 billion after Norilsk made a $5.3-billion surprise counter-offer for the Toronto company earlier this month.

Xstrata’s friendly bid, now at $25.00 per LionOre share, started out at $18.50 and beats Norilsk’s $21.50-per-share offer by more than 16%.

Canaccord Adams analyst Orest Wowkodaw says that although Xstrata’s latest offer is strong, Norilsk likely hasn’t given up.

“I actually anticipate Norilsk to counter-offer,” Wowkodaw says. “I don’t think it’s a done deal and they don’t have that much time to come back.”

Wowkodaw says Xstrata’s first offer was too low.

“But at the time I didn’t foresee a second bidder entering the race and Norilsk has certainly been a surprise.”

LionOre has increased its break fee — the amount it will pay Xstrata if it recommends a competing proposal to shareholders — to $305 million from $131 million, but Wowkodaw doesn’t think that’s high enough to deter Norilsk.

LionOre’s board has recommended that shareholders tender their shares and reject Norilsk’s offer.

Xstrata has received regulatory approval in both Canada and Europe for the acquisition and expects that all conditions of the offer will be met by the expiry date, May 25. In that case, LionOre shareholders will receive $25.00 for each LionOre share by May 30.

LionOre shares were up 13% in Toronto on the day of Xstrata’s second offer to $26.86 on trading volume of more than 22 million shares.

With LionOre’s assets, located in Australia, Botswana and South Africa, Xstrata would increase its nickel production by 36%. The company expects to produce 44,300 tonnes of nickel this year — 39,896 tonnes attributable to LionOre.

Xstrata has five mines, as well as processing facilities in Ontario and Quebec, a ferronickel mine and processing facility in the Dominican Republic and exploration properties in Canada, Tanzania and New Caledonia.

On May 14, LionOre reported earnings of $148.3 million during the first quarter, compared with $13.2 million in 2006.

The company produced 9,783 tonnes of payable nickel at a cash cost of $5.61 per lb., during which time the average nickel price was $18.80 per lb. The average nickel price during the first quarter last year was $6.72 per lb.

LionOre also reported an “abnormally high” level of nickel in inventory, at 5,603 tonnes with an embedded after-tax profit of $104 million.

Should Norilsk decide to look for a similar nickel sulphide takeover target, FNX Mining (FNX-T, FNXMF-O) or Jubilee Mines (jbmnf-o, jbm-a) could be the next best options after LionOre.

Jubilee, which operates in Australia, reported earnings of A$103.4 million for the year ended June 30, 2006, and produced more than 58,000 tonnes of nickel concentrate.

FNX is the majority owner of five mineral properties near Sudbury, Ont., as well as a coalbed-methane project in West Virginia. FNX aims to produce 12.7 million lbs. of nickel this year, rising to 19.3 million lbs. in 2008.