Analysts question Iberian’s move

Iberian Minerals (IZN-V) has agreed to allow Trafigura Beheer, its largest shareholder, to acquire all of its shares that it doesn’t already own for $1.10 apiece in cash, causing some analysts to question the bid.

The offer represents a 39% premium to Iberian’s Nov. 16 close. The company’s board and its financial adviser, Cormark Securities, view the bid as “fair” from a financial standpoint and are urging shareholders to accept the offer.

The company notes that the all-cash bid will provide shareholders a “definite liquidity of their holdings in Iberian and certainty of return.”

To show that they unanimously support the offer, Iberian’s directors, key officers and significant shareholders – Hedgehog Capital and Drakanea Management – each entered lock-up agreements representing 17% of all Iberian shares.

That number increases to 59% when added to Trafigura’s current 42% stake in Iberian on a fully diluted basis.

Orest Wowkodaw, an analyst at Canaccord Genuity, wrote in a Nov. 18 note that he views the offer by Trafigura as “opportunistic and insufficient compensation to minority shareholders.”

“Based on publicly disclosed information, we struggle to see how management, the board and the company’s independent financial advisor determined that an offer of $1.10 per share represents fair value for the company.”

He adds while the 39% premium is noteworthy, the actual offer undervalues Iberian on both net present value and near-term enterprise value to earnings before interest, taxes, depreciation and amortization metrics. But given the lock-up agreements, Wowkodaw says the possibility of another bidder is slim. 

Wowkodaw recommends that minority shareholders shake off the offer and ask for a better price, or retain their shares for a re-rating based on the roll-off of the low-priced hedge book at year-end. He also notes that Cormark didn’t incorporate the company’s Sotiel copper-zinc mine in its fairness valuation. Iberian aims to rehabilitate the old mine in Spain, which closed during 2002’s low metal prices.

The large international commodities trader will mail the offer’s takeover bid circular before Dec. 30.

For the offer to go through, it will need approval from two-thirds of non-Trafigura shareholders. The lock-ups already represent 29% of non-Trafigura shareholders on a fully diluted basis.

As part of the pre-acquisition agreement Iberian cannot solicit other offers, but can consider a third-party’s takeover proposal. If Iberian calls off the agreement it will need to pay Trafigura $10 million. And if Trafigura walks away, it will pay a $3-million reverse break fee.

On Nov. 17, along with announcing the bid, the company updated shareholders on its 2012 production and capital expenditure (capex) guidance for its Condestable copper mine in Peru and Aguas Tenidas copper-zinc-lead mine in Spain.

It expects total contained copper, zinc and lead production of 109.5 million lbs., 78 million lbs. and 11 million lbs., and contained gold and silver production of 14,200 oz. and 1.1 million oz.

Capex for next year is forecast at US$75 million, with the lion’s share going to Aguas Tenidas.

At Aguas Tenidas, the company approved a US$53-million capex to further develop the mine and cover costs of mine equipment, a water treatment facility and exploration.

At Condestable, Iberian approved  US$9 million in capex, mostly to replace the mine and plant equipment and for exploration. It anticipates US$13 million in further mine-development costs, and consolidated cash costs of US$1.40 per lb. copper in 2012.

On Nov. 17, the day of the bid, Iberian’s shares gained 38% to $1.09 on 56.8 million shares traded. Wowkodaw has lowered his “buy” rating on the stock to “hold” and cut the target price to $1.10 per share, from $1.40.