Lundin Mining Corp. (LUN), which lost almost half its value after spurning two takeover bids, now needs an acquirer willing to pay the biggest premium for a diversified minerals deal to make shareholders whole again.
The copper producer’s market capitalization has plunged C$2.2 billion ($2.2 billion), or 42 percent, in about four months since rejecting a C$4.8 billion bid from Equinox Minerals Ltd. and abandoning plans to sell itself after deeming offers to be inadequate. To recover the losses, Lundin would now have to find a buyer willing to pay a 71 percent takeover premium, making it the most expensive diversified-minerals deal greater than $500 million, according to data compiled by Bloomberg.
While bidders may still be lured by Lundin’s stake in a copper mine in the Democratic Republic of Congo and a valuation cheaper than 97 percent of the Toronto-based company’s rivals, Chairman Lukas Lundin may insist on a price exceeding Equinox’s prior offer, according to Stifel Nicolaus & Co. Potential suitors now must weigh a 17 percent slump in copper prices and increasing signs the U.S. may fall back into a recession as stocks suffer the worst slump since the financial crisis.
“It was a complete debacle when they rejected the Equinox bid and failed to find any alternative bids,” George Topping, a Toronto-based analyst at Stifel, said in a phone interview. “With the hindsight of the current market and current share prices, they should’ve done that one and moved on.”
Sophia Shane, a spokeswoman for Lundin, declined to comment on takeover speculation and said company executives were not available.
Inmet vs. Equinox
Inmet Mining Corp. (IMN)’s all-stock agreement in January valued Lundin’s equity at C$4.2 billion, or a 2.2 percent premium, according to data compiled by Bloomberg. Equinox, the owner of Africa’s largest copper mine, countered a month later with an unsolicited cash-or-stock offer of C$8.10 a share, a 14 percent premium, the data show.
In March, Lundin rejected Equinox’s bid, later saying the Perth, Australia-based company’s offer was “low ball,” “risky” and required too much debt financing. Lundin then mutually terminated its deal with Toronto-based Inmet and adopted a poison pill to thwart hostile bids while it considered options.
“Lundin actually decided to put itself for sale and explore strategic alternatives to fight off the Equinox bid,” Yemi Oshodi, a managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC, said in a phone interview. “That higher bid obviously never materialized. Lundin was left with nothing. They have cost shareholders a decent amount of money.”
Destroying Shareholder Value
Equinox withdrew its bid April 25 when it agreed to be bought by Toronto-based Barrick Gold Corp. (ABX) Lundin abandoned sale plans in May after offers came in too low.
Before today, Lundin had plunged 42 percent since April, wiping out C$2.24 billion in market value. The stock reached C$9.26, or a market capitalization of C$5.39 billion, April 29 as traders who profit from mergers and acquisitions bet on a higher offer.
The copper and zinc producer traded at a 6 percent discount to its book value as of yesterday. Only two of 34 diversified- minerals companies greater than $1 billion are valued below their assets minus liabilities, data compiled by Bloomberg show.
While copper was trading near a record when Inmet and Equinox made their bids, the metal has since retreated as America’s economy expanded less than economists estimated in the second quarter. Copper for delivery in three months on the London Metal Exchange closed yesterday at $8,881 a ton after dropping as much as 17 percent from its Feb. 15 intraday peak.
The metal used in electric wire, roofing and plumbing will average $9,918 next year before dropping to $8,762 in 2013, the median of analysts’ estimates compiled by Bloomberg showed.
The Standard & Poor’s 500 Index plunged 14 percent through yesterday from its 2011 high as Europe’s debt crisis worsened, S&P downgraded the U.S.’s AAA credit rating for the first time and reports on manufacturing and consumer spending showed the world’s largest economy is slowing.
Given the decline in global equity valuations, it would be “tough” for Lundin management to turn down a bid around C$8 a share, WallachBeth’s Oshodi said. Lundin may be interested in about C$8.50 a share, Normand Lamarche, a fund manager at Front Street Capital in Toronto, said in a phone interview. The firm has $3 billion under management and owned more than 600,000 shares of Lundin as of May 31.
“People had a lot of faith in Lukas Lundin, that he was a deal guy,” John Stephenson, a portfolio manager at First Asset Investment Management Inc. in Toronto, which has $2.5 billion under management and owns Lundin shares, said in a phone interview. “The end result was he didn’t get the price he thought it was worth. I would hope that if he got an offer for C$9 at this point he’d take it and run.”
To reach the April high of C$9.26, Lundin would have to be purchased at a 71 percent premium to yesterday’s closing price of C$5.40. The highest announced premium ever offered in the diversified minerals industry for takeovers greater than $500 million was 64 percent, data compiled by Bloomberg show. Matching Equinox’s C$8.10-a-share bid would mean a 50 percent premium to yesterday’s close.
Lundin rose 3.9 percent to C$5.61 at 11:21 a.m. today in Toronto, giving it a market value of about C$3.25 billion.
BHP Billiton Ltd. (BHP), the world’s biggest mining company, and Nyrstar (NYR) NV failed to reach an agreement on a joint bid for Lundin, and talks ended last week, two people familiar with the matter, who asked not to be identified because the discussions weren’t public, said this week.
Tenke Copper Mine
While Nyrstar, the world’s largest refined zinc producer, is still interested in some of Lundin’s assets, it can’t afford to buy the company on its own, one of the people said. Geert Lambrechts, a spokesman for Balen, Belgium-based Nyrstar, declined to comment on takeover speculation regarding Lundin.
Lundin owns 24 percent of Tenke Fungurume, a copper and cobalt mine in the south of the Congo. Freeport-McMoRan Copper & Gold Inc. (FCX) holds a 56 percent stake in the $2 billion project, and Gecamines, Congo’s state-owned mining company, owns the remaining 20 percent. Lundin also owns the zinc mines of Zinkgruvan in Sweden and Galmoy in Ireland and the Neves-Corvo copper and zinc mine in Portugal.
The company’s copper mines, which accounted for 66 percent of revenue last year, and zinc production that contributed 13 percent of sales may attract separate buyers, said Stifel’s Topping.
Freeport, the world’s largest publicly traded copper producer, may bid for Lundin’s copper assets to consolidate its ownership in the Tenke mine, WallachBeth’s Oshodi said. Eric Kinneberg, a spokesman for Phoenix-based Freeport, didn’t respond to a voicemail or e-mail requesting comment.
A merger with HudBay Minerals Inc., a Canadian zinc and copper miner, may also be an option for Lundin, said Topping. In 2009, HudBay scrapped a bid to acquire the 80 percent of Lundin that it didn’t already own for about C$684 million, data compiled by Bloomberg show.
“We’re not looking to do large-scale M&A,” said John Vincic, a spokesman for Toronto-based HudBay. “Our focus is on earlier stage assets at this point. Our hands are full with two large-scale construction projects.”
“With regards to a specific acquisition of Lundin, we never comment on market speculation,” he said in a phone interview.
The possibility that economic growth will slow further as Europe’s sovereign debt crisis worsens means Lundin may have missed the chance to sell itself at the best price, First Asset’s Stephenson said in a phone interview.
“The sentiment is overwhelmingly negative, and there’s very much a feeling in the market that these guys missed it,” Stephenson said. “They should’ve sold when there was some interest in the name.”