Nevsun holds out on $1.5B Lundin-Euro offer as miners pursue M&As to capitalize on rising prices
Nevsun Resources Ltd. has spurned a $1.5 billion hostile offer from Lundin Mining Corp. and Euro Sun Mining Inc. on Tuesday, stating the price offered “isn’t good enough.”
In the latest sign that rising commodity prices could lead to a wave of consolidation in the mining sector, the two companies are proposing to split Nevsun’s assets: Lundin would acquire its share of a massive, though undeveloped copper-gold deposit in Serbia, known as Timok; while Euro Sun would acquire its already productive copper-zinc mine in Eritrea, known as Bisha.
“In conversations with shareholders today, they indicated the price isn’t good enough,” Peter Kukielski, chief executive of Nevsun told the Financial Post.
Kukielski described Timok, which has initial probable mineral reserves of 27 million tonnes, as the perfect size and located in a “super safe jurisdiction.”
“We continue to get a lot of interest from other parties,” he said, adding that it was up to Lundin to come back with the right price.
The $1.5 billion bid would provide Nevsun shareholders with about $5 per share including $2 cash per share, and the remainder in a mix of shares in both Lundin and Euro Sun. Nevsun has a market cap of $1.34 billion.
Lundin and Euro sent a short statement by email, saying the two companies “are committed to negotiating a transaction with Nevsun on the attractive terms of the latest proposal.”
“There should be no need to proceed on anything but a friendly basis,” wrote Mark Turner, director of investor relations at Lundin.
Analysts say the deal proposal — the second hostile bid since U.K.-based Chaarat Gold Holdings Ltd. emerged in April, offering what it claims amounts to US$800 million to purchase Centerra Gold’s Kumtor mine — comes at a key moment for the mining sector: various commodities are showing a rise in price, which means mining companies are once again generating cash.
But their stock prices haven’t always kept up, which is putting pressure on mining executives to pursue growth through acquisitions.
“All the big mining companies for a couple of years have been trimming their balance sheets,” said Ola Sodermark, an analyst with Kepler Chevreux, who covers Lundin. “Now the (commodity) prices have recovered, and their focus is on growth again.”
Because the lead times to build a mine can run into the years, most mining companies want to buy assets rather than seek to develop their own, said Sodermark.
Toronto-based Lundin, a diversified base metals company, briefly traded above $10 last year, but has only closed above $9 three times so far in 2018. Meanwhile, it holds more than $1.6 billion of cash on its balance sheet according to its most recent financial disclosures in March.
It first tried to buy a stake in the Timok deposit in 2016. But Nevsun outmaneuvered it and has been developing the asset ever since in partnership with Freeport-McMoran Exploration Co.
In the interim, Lundin approached Nevsun again with new proposals, all of which the company said it rejected because they failed to adequately value its asset.
Timok, located in eastern Serbia, is composed of two zones: An upper high grade copper-gold zone wholely owned by Nevsun and a lower zone, in which Freeport-McMoran is set to become a 54 per cent owner.
Nevsun’s stock was trading above $4 at midday Tuesday, a 17 per cent increase, Lundin fell 2.4 per cent to $8.04, while Euro Mining was unchanged at $1.37 per share.
Nevsun listed a number of reasons for its rejection, saying the price undervalues Timok, and leaves its shareholders with a $100 million tax bill, apart from other shortcomings.
“Timok Upper Zone is widely considered to be one of the highest quality copper projects in the world and deserves a premium valuation reflecting its value and potential,” Vancouver-based Nevsun said in a statement released Monday.
The company currently has a market capitalization of $1.05 billion, about a sixth of Lundin’s $5.9 billion market cap, while Euro Sun is the smallest, at $78.7 million.
Nevsun’s Bisha mine in Eritrea produced 218 million pounds of zinc plus 18 million pounds of copper last year, but it has not been without controversy. In 2014, three refugees sued the company in British Columbia for negligence, claiming they were forced to work at the mine under threat of physical abuse, including torture. Last November, a B.C. Appeals Court rejected Nevsun’s motion to transfer the case to Eritrea.
In explaining why it rejected Euro Sun’s proposal for Bisha, Nevsun said the junior mining company has no relationship with the Eritrean government, which owns 40 per cent of the mine, and that could “compromise” the asset.
However, Nevsun’s second largest shareholder says Nevsun should engage more fully with Lundin and Euro, and run a full sales process, said Jamie Horvat, director of global equities for M&G Investment Management, which owns 9.5 per cent of Nevsun.
“We feel this is a pretty fair offer,” Horvat said, adding that Lundin’s management has a strong track record.
With files from Thomson Reuters