Nyrstar makes $663M bid for Breakwater

Toronto-based zinc miner Breakwater Resources (BWR-T) has agreed to a $663-million takeover bid by European smelting giant Nyrstar. 

Under the agreement Nyrstar is offering $7 per share, or $619 million in cash. Breakwater would pay its shareholders a special dividend of 50¢ per share, or $44 million, a day before Nyrstar acquires its shares. 

This puts the total value of the transaction at $663 million, or $7.50 per share, which translates to a 44% premium over Breakwater’s closing share price on June 14.  

 “The offer made by Nyrstar represents an attractive and fair premium to the current share price,” said Breakwater’s CEO David Petroff in a prepared statement.

The company notes the offer is a 41% premium to the 20-day volume-weighted trading average.

Canaccord Genuity analyst Orest Wowkodaw wrote in a research note that he believes the offer is fair, “given that it is friendly, is all cash, and represents a premium to our NPV (net present value) valuation, along with a significant premium to the current share price in the context of what we believe to be a relatively weak, near-to-medium-term zinc price environment.”

Similarly, Raymond James analyst Adam Low noted the offer represents a fair price to Breakwater shareholders. 

Both analysts point out that the company was the last sizable pure zinc producer in North America not associated with a smelter or trading house, and add that the acquisition underscores the scarcity value of pure zinc producers and of zinc concentrate. This explains why many zinc smelters acquire mines to secure feed. 

Recently, Nyrstar has been seeking zinc assets to feed its smelters, setting a mine supply integration goal of 50%. 

Nyrstar will get near its integration target with the Breakwater acquisition. It would acquire four zinc-polymetallic mines from Breakwater, including El Toqui in Chile, El Mochito in Honduras, Myra Falls in British Columbia and Langlois in Quebec. The Langlois mine is expected to resume production in early 2012. 

Combined, the mines would have an annual production capacity of 140,000 tonnes zinc concentrate, 14,000 tonnes lead concentrate, 6,000 tonnes copper concentrate, 2.3 million oz. silver and 40,000 oz. gold. 

This would push Nyrstar’s mine supply integration from 31% to 43%.

“The acquisition will provide immediate production and cash flows, and will reinforce and further diversify our multi-metals profile whilst maintaining our competitive cash cost position,” stated Nyrstar CEO Roland Junck in a press release. 

As Breakwater’s directors and officers, and its largest shareholder, Dundee Corporation (DC.A-T), enter into lock-up agreements, the miner advises shareholders to accept the bid. 

“Nyrstar’s offer provides Breakwater’s shareholders with immediate liquidity, and accordingly, we are recommending shareholders tender their shares to the Nyrstar offer,” said Petroff. 

If the deal goes through, Ned Goodman’s Dundee, which owns 22.1% of Breakwater, would walk away with about $147 million in cash. 

The transaction requires at least two-thirds acceptance, regulatory approvals and no material change in the miner’s business. 

The deal has a $20-million break fee if Breakwater accepts another offer. However, Nyrstar can match superior bids. 

The analysts noted that the chances of a competing offer or a bid sweetener by Nyrstar are slim. 

Wowkodaw of Canaccord reduced his rating on Breakwater to hold from buy, and lowered the target price to $7.50 per share from $7.75. 

Raymond James’ Low also recommends holding Breakwater’s shares, and has a target price of $7.50 – up from $6.75 – to reflect the takeover bid of $7 per share plus the 50¢ special dividend.