Zemex takes run at Inmet Mining — Takeover offer of $5 a share “chintzy” says James

Fresh from the successful conclusion of negotiations to sell its interest in the Antamina copper project in Peru, Inmet Mining (IMN-T) now finds itself the quarry in a takeover bid.

The offer comes from industrial minerals producer Zemex (ZMX-N), a public company controlled by Dundee Bancorp. Zemex is offering a cash bid of $5 a share, thereby valuing Inmet at $517 million.

Inmet shares, which had closed at $4.40 on the afternoon before the bid, jumped to $5.10 on the news. Inmet traded as high as $11.75 in 1997. Zemex, which had recently been acquiring Inmet shares on the market, currently holds 4 million shares, or 3.9%.

At the last annual meeting, Inmet shareholders renewed a shareholder rights plan that entitles existing shareholders to purchase additional shares in the event of a takeover bid.

William James, Inmet’s president, found the $5 offer much too low. “The feldspar business is a lot tougher than I figured, that they’d only come up with a chintzy offer like that . . . It seemed way low.”

Zemex made its offer conditional on receiving 90% of the shares, and has also delayed making a formal offer until June 5, when the sale of Inmet’s share in Antamina is scheduled to close.

Inmet announced on May 11 that it had reached an agreement with Teck (TEK-T) and Noranda (NOR-T) to take up its 50% interest in Antamina for $70 million.

Inmet’s Antamina partner, Rio Algom (ROM-T), agreed to a dilution of its 50% share to 33.3% in exchange for work commitments from Teck and Noranda, and Inmet retained a 3.3% net smelter return royalty.

Inmet’s latest quarterly report shows a book value of $587 million, or roughly $5.70 per share. The holding in Antamina represented about $50 million of that amount.

About $352 million is in cash, and with another $70 million expected from the Antamina deal, the company’s cash position makes it an attractive target.

Zemex has been negotiating with its bank for financing, though terms of the arrangement are not yet final. Zemex’s chief financial officer, Allen Palmiere, agreed that if the takeover offer were accepted, some of Inmet’s cash would be used to finance the bid and some would be retained for working capital. “We would not strip the company in order to fund the acquisition,” he said.

Inmet’s assets include a $40-million block of shares in Teck, which would have to be offered to Keevil Holding, a private company that shares control of Teck with Inmet, in the event of a takeover. At Inmet’s annual meeting in April, James announced that a buyer had approached the company with a tentative offer for the Teck shares and that the company expected to receive a formal offer within weeks. James said the offer would not affect the negotiations to sell the shares. “This isn’t an offer, it’s an intention to make an offer on a condition,” said James. “It doesn’t affect a damned thing so far.”

Inmet also holds an 18% interest in the Ok Tedi copper-gold mine in Papua New Guinea, which historically has earned $20 million to $54 million a year for the company, but had a disastrous 1997 as a result of drought in the East Indies. The mine resumed production in March of this year after a 6-month suspension.

Inmet’s other assets include the Cayeli copper-zinc mine in Turkey, the Troilus gold mine in northern Quebec and the Winston Lake copper-zinc mine in northern Ontario. Inmet also owns Wolfram Bergbau und Hutten (WBH), an integrated tungsten mine and conversion plant in Austria, and has a 35% interest in Norddeutsche Affinerie, a copper and precious metals refining complex in Hamburg, Germany.

Of these assets, Cayeli, WBH and Norddeutsche Affinerie turned operating profits in 1997. During the first quarter of 1998, those three operations stayed profitable and Cayeli’s cash production cost was a miserly 53cents per lb. copper.

Troilus and Winston Lake both lost money in 1997, but broke even in the first quarter of this year.

Inmet also is carrying $124 million in provisions for environmental liabilities on its books. James said the actual rehabilitation costs were likely to come in below $100 million.

Zemex would likely sell a number of Inmet’s holdings. “It’s got some assets that are long-term keepers, and some that aren’t,” said Palmiere. “From our point of view, it’s a company that would benefit from some fairly serious rationalization . . . . It’s the sort of challenge that we welcome, but I’m not sure that, typically, the mining industry embraces.”

Palmiere mentioned Ok Tedi and Norddeutsche shareholdings as reliable performers and said the WBH mine and conversion plant was “a perfect fit for us,” given the similar technology employed in Zemex’s metal powder plants.

Palmiere said Zemex had previously talked to Inmet about acquiring WBH on its own. James told the annual meeting last month that WBH had been shopped around, but that Inmet did not get the price it wanted.

Palmiere described Troilus as “struggling,” and noted that Winston Lake had limited reserves. He said Zemex would likely sell certain Inmet assets to pay down existing debt, although he declined to specify to which assets he was referring.

Zemex’s parent company, Dundee Bancorp, also holds 36% of base metal producer Breakwater Resources (bwr-t) and a controlling interest in gold miner Kinross Gold (k-t). Palmiere said Zemex had not discussed possible sales of base metal projects to Breakwater, and suggested that while Troilus did not fit the Kinross mold, some of Inmet’s gold exploration projects might.

In an interview, James joked that Inmet should take the offer as a compliment, since Zemex is a major producer of industrial minerals, and the press release announcing the offer described it as “the dominant worldwide producer of phlogopite mica.”

“It’s really something, to get the dominant producer to come around,” said James.