Inmet's Cobre Panama project
Lundin Mining Corp. and Inmet Mining Corp. have called off a friendly merger aimed at creating a Canadian-based copper giant amid mounting concerns over changes to a flagship Inmet project in Panama that was key to the deal.
The decision opens the door for Equinox Minerals Ltd.'s $4.8-billion hostile bid for Lundin, which Lundin has rejected for being too leveraged with $3.2-billion (U.S.) in debt and fraught with increased geopolitical risk tied to mines in Africa and Saudi Arabia.
Lundin said Tuesday it will continue to fight the Equinox bid and has begun the effort to seek other potential buyers. Sources say Lundin is considering selling the company either as a whole or in parts.
"Having agreed to terminate with Inmet, we can now pursue new alternatives to significantly improve shareholder value and get a proper premium if we do a change of control transaction," Lundin chairman Lukas Lundin said in a statement. "I am not against selling if it achieves an excellent financial return to shareholders but I will not support selling at bargain prices."
Lundin has copper, nickel and zinc assets in Europe and a 25-per-cent stake in the promising Tenke Fungurume copper-cobalt project in the Democratic Republic of the Congo.
"Inmet and Lundin believe that this merger would have created a leading copper producer with benefits for both companies' shareholders," Lundin chief executive officer Phil Wright and Inmet CEO Jochen Tilk said late Tuesday.
"We have however agreed to mutually terminate the agreement on the grounds that we could not reach a position that we thought would be supported by both companies' shareholders. We continue to think very highly of each other's assets and wish each other well."
There has been a flurry of mining deals in recent months as companies consolidate in the race to secure long-term reserves of copper and other industrial metals while demand remains strong in China and other fast-growing countries building their infrastructure.
The deal breakup marks a major turn in an unusual takeover battle, where a friendly merger was upset by an unexpected setback at a key project. The market has been signalling a breakup of the merger in recent days, with Lundin shares trading at a significant premium relative to Inmet. That suggested investors expected Equinox's bid had a better chance.
While the Equinox bid has been a threat to the Inmet-Lundin deal since it was launched last month, the merger started to fall apart last week after changes were revealed for Inmet's $4.3-billion Cobre Panama project, a 250,000 tonne-per-year mine set to begin production in 2016.
Top government officials in Panama told Inmet and Lundin they wanted the mine's power source switched from coal-fired power to natural gas, which analysts predicted would mean delays and higher costs. Lundin last week characterized the change as a "material departure" from the original merger agreement and said it would conduct a review. Inmet maintains the change is not material to the timing or economics of the project.
Lundin and Inmet have been in intense discussions over the past week, and ended their agreement Tuesday without offering specifics. Inmet has a right to a break-fee of $120-million if Equinox succeeds in its bid for Lundin.
It's the second time in more than two years that Lundin has failed in its merger attempt with another Canadian-based base metals company. The last time was in early 2009 when its proposed merger with HudBay Minerals Ltd. was cancelled. The decision followed a revolt by HudBay shareholders who felt a merger with a then-cash-strapped Lundin would have diluted their stock.
Lundin and Inmet were proposing a share-swap combination to create a Canadian copper powerhouse called Symterra Corp., with a market capitalization of about $9-billion. Despite his dislike of the name Symterra, Lundin chairman Lukas Lundin told The Globe and Mail two weeks after the merger was announced that the plan was to quickly build the merged entity into a $15-billion company "in a short time" and then possibly sell it to a larger player.
In late February, Equinox came along with its unsolicited cash-and-shares offer for Lundin, touting a 26-per-cent premium and the creation of a diverse copper player with assets across Africa, Europe and Saudi Arabia. Lundin immediately criticized the potential combination as having financial and geopolitical risk, and said Equinox management didn't have the experience to run a larger mining company.
Meanwhile, Equinox criticized the Lundin-Inmet combination as having no premium for Lundin shareholders. It also warned that Inmet's Cobre Panama project would be difficult to finance in a country with untested mining laws. Equinox's concerns were bolstered by a Panamanian government move to repeal the country's mining code allowing investments from foreign governments. That raised questions about Cobre Panama's investments from sovereign wealth funds in South Korea and Singapore. Inmet maintains the changes don't impact existing projects such as Cobre Panama.