Analysts clamour for higher LionOre bid
ANDY HOFFMAN
Globe and Mail Update
Xstrata PLC may have to sweeten its all-cash $4.6-billion bid for LionOre Mining International Ltd. after a chorus of analysts said the offer undervalues the nickel miner, giving ammunition to shareholders disparaging the friendly agreement.
On Monday, the companies unfurled a friendly deal that would see Xstrata, an emerging Swiss-based metals giant, purchase Toronto's LionOre for $18.50 per share. The bid price, which represents a 5.8-per-cent premium to LionOre's share price on the day before the deal was announced, was roundly criticized by institutional shareholders hoping for more cash.
Onno Rutten, an analyst at Scotia Capital said the offer fails to account for the cost savings that Xstrata hopes to wring from the acquisition and assigns little value to “Activox,” LionOre's proprietary nickel concentrate leaching technology which it hopes to have ready soon for commercial use.
“We believe that the offer fundamentally undervalues the company,” Mr. Rutten said in a report to clients. The analyst said that the “low bid market premium” and the low estimated 2007 pre-tax earnings multiple relative to his 2007 nickel price assumption of $13.75 (U.S.) per pound, “offer support to this observation.”
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Mr. Rutten is maintaining his $21 (Canadian) target price for LionOre and recommending “shareholders await further developments. Our upside scenario is supported by the ability and likely willingness of Xstrata to pay to secure control over an important feed of nickel to its operations.”
RBC Dominion Securities analyst Fraser Phillips kept his $23 target price and “outperform” rating on LionOre. “Xstrata is not paying anything for either Activox or the synergies in its bid. The numbers therefore suggest that there is room for a higher bid,” he said in a note.
Ian Hamilton, a spokesman for Xstrata's Toronto-based nickel subsidiary Xstrata Nickel, said the company has no current plans to increase the bid price.
“We did our homework on this, obviously, and we believe the offer that we put out there is full, fair and compelling,” he said.
Led by its burly chief executive officer Mick Davis, Xstrata raised its bid for Falconbridge Ltd. twice before winning control of the Canadian nickel stalwart, the victor in a heated bidding war over partners Inco Ltd. and Phelps Dodge Corp.
Toronto's Inco was eventually snapped up by Brazil's Companhia Vale Do Rio Doce (CVRD) for $19.4-billion and Arizona copper producer Phelps Dodge agreed to a friendly merger with Freeport-McMoRan Copper & Gold Inc.
LionOre's board is recommending the bid and Xstrata has already secured lock-up agreements with shareholders representing 19 per cent of Lionore's 247 million fully diluted shares. Xstrata is also entitled to a 3-per-cent break fee of $130-million if LionOre accepts another bid, and has the right to match competing offers.
After the bid was announced, Lionore waived its shareholder rights plan, a move that would allow Xstrata or other possible bidders to acquire more than 20 per cent of the company's shares.
There have been rumours that more shares have been locked up, but Lionore spokeswoman Freda Colbourne said the company is not aware of any other lock-up agreements.
The likelihood of a competing bid appears slight. Well placed Teck Cominco Ltd. sources said the Vancouver miner has no interest in bidding for LionOre.
Meanwhile, speculation has centred on the world's largest mining company, BHP Billiton Ltd. of Australia, which has operations near LionOre's Honeymoon Well development project in Western Australia, as a potential bidder. “BHP is the only other logical bidder for Lionore for strategic reasons,” said CIBC World Markets analyst Cliff Hale Saunders in a note to clients.
A BHP spokeswoman wouldn't comment.
Desjardins Securities analyst John Hughes believes the Xstrata bid amounts to 4.1 times LionOre's operating cash flow and 6.4 times his forecast earnings. “We note that Inco, albeit the Western World's largest nickel producer, was sold for ... nine times cash flow per share and 12 times earnings per share,” he said in a report.
Mr. Hughes said the “possibility exists for a small bump-up by Xstrata to the existing bid.”
Mr. Hale-Sanders said “there is a good chance that LionOre's shareholders could and perhaps should hold out for a higher bid from Xstrata.” However, the analyst report recommended that shareholders sell their shares, because the increase is likely to be small relative to Lionore's current share price.
Lionore shares fell 15 cents to close at $19.14 on the Toronto Stock Exchange Tuesday, 64 cents above the bid price.
BMO Capital Markets analyst Victor Lazarovici lowered his rating on LionOre to “market perform” from “outperform,” but maintained his $20 target price.
“I think the stock would get to $20 without a bid. Therefore I don't see any logic in selling at $18.50,” he said in an interview.
LIM
lionore mining international limited.
