Lundin Mining Corp. and Inmet Mining Corp. were dealt another setback for their planned merger after a shareholder advisory firm dropped its support of the once-friendly deal.
Proxy advisory firm Institutional Shareholder Services Inc. (ISS), which had originally recommended Lundin shareholders accept the deal, now suggests they vote against the "merger of equals" which would create a $9-billion copper powerhouse.
ISS cited shifting plans for a power plant at Inmet's flagship Cobre Panama project as one of the reasons behind its change of view. It also pointed to the significant premium Lundin shares are trading at relative to Inmet. That suggests investors expect a separate, hostile $4.8-billion cash-and-shares bid for Lundin from Equinox Minerals Ltd. has better prospects for success.
The ISS reversal comes alongside its recommendation that Equinox shareholders approve the company's offer for Lundin. ISS has not weighed in on how Lundin shareholders should react to the Equinox bid.
ISS, an influential advisory firm, helps shape the outcome of takeover battles and other events that call for a shareholder vote. The firm's opinion escalates the three-way battle that centres around Lundin. The takeover war heated up last week when Lundin began signalling trouble with the Inmet agreement.
And Tuesday morning, Equinox said another proxy advisory firm has recommended Equinox shareholders vote in favour of the bid. Equinox said independent analysis firm Glass Lewis and Co. has recommended shareholders support the deal.
Mining companies are consolidating as they race to secure long-term reserves of copper and other widely used metals while demand remains strong from China and other fast-growing countries building their infrastructure.
Lundin and Inmet are believed to be in intense talks over what Lundin has called a "material departure" from the original merger agreement, stemming from changes to plan for power supply at Inmet's flagship Cobre Panama project. The Panamanian government wants Inmet to switch from planned coal-fired power to natural gas, which analysts say could mean delays and higher costs.
Lundin could try to back out of the deal, invoking a "material adverse change" clause or could leave the decision to shareholders at a vote scheduled for next week. The two companies could also agree to revise the agreement, including possibly amending the share-exchange ratio, to reflect what Lundin sees as a major change to the deal. Or, the two companies could agree to end the deal.
ISS said the "uncertainty" around the Cobre Panama project, coupled with comments Lundin chief executive officer Phil Wright made last week, suggest "an increased likelihood that the merger will be renegotiated or called off."
Inmet has said the change is not material to the timing or economics of the 250,000 tonne-per-year project set to begin production in 2016. Officials at both companies could not be reached for comment on Monday.
ISS also cited Lundin's higher share price as a reason it changed its recommendation on the merger with Inmet. Lundin shares have been trading closer to the Equinox cash-and-share offer than the implied value of the Inmet deal, signalling that investors see a greater chance the Equinox will succeed.
That's despite Lundin's vehement rejection of the Equinox bid as being too heavily leveraged with $3.2-billion (U.S.) of debt, which Lundin argues would put the company at risk in the event of a substantial downturn in metal prices. Lundin also said the deal is fraught with geopolitical risk and criticized Equinox management as too inexperienced to run a larger company.
Equinox has shot back, saying it has a plan to repay the debt based on worst-case copper scenarios, and defended its management team.
Lundin and Inmet shareholders are set to vote on the merger on April 4, while Equinox shareholders are scheduled to vote on the hostile takeover for Lundin on April 11.
ISS says the Equinox bid for Lundin "is warranted," calling the risks "manageable."
If Lundin's deal with Inmet fails and Lundin rejects the hostile bid from Equinox, the company could choose to go it alone, seek other buyers through an auction, or sell off parts of the company, which include copper, nickel and zinc assets in Europe and a coveted 25-per-cent stake in the Tenke Fungurume copper and cobalt project in the Democratic Republic of the Congo.
Lundin's Mr. Wright told the Swedish daily Dagens Industri that an auction is "an alternative at a certain point" if the Inmet merger falls through.
Now that Lundin is "in play" as a result of the Equinox bid, Lundin chairman Lukas Lundin told the newspaper that more bidders might turn up.
With a file from Dow Jones