Lundin Poison Pill Proves Perfume to Deal Arbitragers: Real M&A
After Lundin Mining Corp. (LUN) rejected two takeovers last month and adopted a poison pill, traders are betting more than ever the copper producer may get a bid that hands its owners a windfall of more than half a billion dollars.
Lundin, a Toronto-based copper and zinc miner, climbed 3.9 percent above Equinox Minerals Ltd. (EQN)’s unsolicited bid of C$7.75 a share through yesterday after rejecting the offer on March 20 and terminating an agreement with Inmet Mining Corp. (IMN) this week. The amount that Lundin is trading over the Equinox offer is the largest of any Canadian deal of more than $500 million, according to data compiled by Bloomberg, even after it enacted a shareholder rights plan to thwart hostile acquirers.
Mining companies are competing to secure assets around the world after a dearth of new projects and demand from China drove copper prices to a record this year. Lundin, which owns a stake in one of the largest copper mines in Africa, would cost $5.4 billion using the average premium in diversified mining deals in the past five years and reward shareholders with a $558 million profit, the data show. Freeport-McMoRan Copper & Gold Inc. (FCX), which owns the copper mine with Lundin, may be one of the bidders willing to pay up, according to Austock Securities Ltd.
“I can see a bidding war emerging,” said Anna Kassianos, an analyst at Austock Securities in Sydney. “There will be potential bigger players with higher offers for Lundin. A large miner or one aspiring to be a larger miner could pay that much and it still wouldn’t be considered expensive.”
Lundin’s shares advanced 3.5 percent to C$8.33 in Toronto. Equinox slipped 0.5 percent to C$5.71.
Lukas Lundin, the company’s chairman, wasn’t available to comment, according to spokeswoman Sophia Shane. Lundin’s Chief Executive Officer Phil Wright didn’t respond to an e-mail requesting comment.
Lundin’s shares climbed 6.1 percent, closing at the highest level since June 2008 yesterday, since the company terminated its proposed takeover by Inmet on March 29 and put a shareholder rights plan into place. That left Lundin valued at C$4.68 billion ($4.83 billion) based on its share price of C$8.05, data compiled by Bloomberg show.
That was 13 percent higher than its average price before Toronto-based Inmet announced its all-share offer on Jan. 12 at a 2.2 percent premium. Lundin is now also worth more than Equinox’s cash or stock offer, announced on Feb. 28, which values Lundin’s equity at about C$4.5 billion, the data show.
On March 20, Lundin rejected Equinox’s offer and said the Perth-based company would take on too much debt to finance the acquisition.
‘Sweeten Our Bid’
“Why would we sweeten our bid when there is no other competing bid out there?” Williams said. “If there is a competing offer from somewhere else, then we will consider our position. We’re not going to bid against ourselves.”
Lundin on March 29 adopted a so-called poison pill that allows the company to issue shares if a hostile bidder gains a stake of more than 20 percent. Lundin said the moves give it time to “identify, develop and negotiate alternatives.” Chairman Lundin also said the company will pursue new options to improve shareholder value and get a “proper premium.”
Using the 20-day average for Lundin’s shares prior to Inmet’s offer in January, the average takeover premium of 26 percent that acquirers have historically paid in the mining industry would value the stock at C$8.98, the data show.
That would give Lundin a market capitalization of about C$5.22 billion, or C$541 million more than yesterday.
“Lundin shareholders should hold fort,” said John Goldsmith, a Toronto-based fund manager at Montrusco Bolton Investments Inc., which oversees about C$4.9 billion, including Lundin shares. A 20 percent to 25 percent premium is “a lot closer to what Lundin management was expecting,” he said.
Lundin may attract more offers as copper prices increase. The metal, used in everything from electric cables to plumbing and lightning rods, climbed 21 percent in the past year through yesterday after demand rose in China, the world’s largest user. Global demand exceeded production by 51,973 tons in January, according to data compiled by Bloomberg.
Copper for delivery in three months on the London Metal Exchange traded at a record $10,190 a ton on Feb. 15. The metal will average $9,750 this year and $10,150 in 2012, according to the median of analysts’ estimates compiled by Bloomberg. Mining companies haven’t kept pace with demand because reserves are becoming harder to find and the quality of ore is declining, meaning less copper is extracted from each ton of rock.
Lundin, which reported a loss of $957 million in 2008, may post a record $491 million in net income this year, according to analysts’ estimates compiled by Bloomberg.
Potential bidders are eyeing Lundin’s stake in the Tenke Fungurume copper and cobalt project in the southern region of the Democratic Republic of Congo, according to Keith Moore, an event-driven strategist at MKM Partners LP in Stamford, Connecticut.
Lundin owns about a quarter of the mine. It was completed in 2009 and is scheduled to produce 290 million pounds of copper this year. The project has an expected mine-life of more than 40 years, Lundin’s website said, longer than projections for its other operations, including the Neves-Corvo copper and zinc mine in Portugal and mines in Sweden, Spain and Ireland.
“The crown jewel is the Tenke asset,” said Rick de los Reyes, a money manager at T. Rowe Price Group Inc. in Baltimore, which oversees $482 billion.
‘If Opportunities Come’
Freeport owns a 56 percent stake, while Gecamines, Congo’s state-owned mining company, holds the remainder. Phoenix-based Freeport said Jan. 20 it’s evaluating expanding copper output in Congo by as much as 200 million pounds within three years.
The company “is prepared to make acquisitions if opportunities come to us,” though it’s not part of Freeport’s strategy, CEO Richard Adkerson said at a mining analyst conference Feb. 28 in Hollywood, Florida.
“Freeport is probably the most logical buyer,” MKM’s Moore said. “This looks like it’s going to be a very successful project so that would give them an increased percentage of any profits that come out of the mine.”
Freeport spokesman Eric Kinneberg declined to comment. The company’s shares slipped 0.9 percent to $55.08 on the New York Stock Exchange.
Roger Agnelli, Vale’s CEO, said on its Feb. 25 earnings conference call with analysts that it is seeking additional copper reserves in Congo and Zambia to help reach a production goal of 1 million tons by 2015.
Vale spokeswoman Fatima Cristina declined to comment. The company’s shares fell 0.6 percent to 47.13 reais in Sao Paolo.
“Equinox has successfully ended up putting the company in play,” said Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC. “Freeport has the wherewithal and the synergies to pay more. I’m not sure that Equinox really has the firepower to pull off this transaction.”
Overall, there have been 6,080 deals announced globally this year, totaling $591.1 billion, a 17 percent increase from the $503.7 billion in the same period in 2010, according to data compiled by Bloomberg.
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