Lundin’s board gives thumbs down to Equinox (March 28, 2011)

Lundin Mining (LUN-T) is urging its shareholders to reject a hostile takeover bid from Equinox Minerals (EQN-T, EQN-A) worth about $4.8 billion, arguing it is too low and that the Australian mining company would have to take on too much debt (a $3.2-billion bridge loan) to pay for it.

“We are rejecting it on the grounds that it’s grossly insufficient and is highly conditional, burdens our company with an enormous amount of debt, and is highly unlikely to close,” Phil Wright, Lundin’s chief executive and a director, told analysts and investors on a conference call on March 21.

“There’s no doubt in my mind that this transaction sees an enormous transfer of economic benefits from shareholders to lenders and maybe that’s not so surprising when you think of who thought up the deal in the first instance,” he continued, referring to Equinox’s lenders Goldman Sachs (GS-N) and Credit Suisse (CS-N). “Mr. Craig Williams (Equinox’s chief executive) is being quite open that this unsolicited bid was not their initiative. They were approached a few weeks before their bid with an offer that was too good to refuse.”

Wright argued that under the proposed deal “the lenders grab the cash,” as substantially all of Equinox’s and Lundin’s existing cash balances and projected near-term cash flow would be used to pay for: lenders’ fees; interest charges; and the principal repayments of the debt incurred to fund the cash portion of the offer.

The proposed transaction would also expose Lundin shareholders to increased exposure to geopolitical risks due to the location of Equinox assets in Zambia and Saudi Arabia, Wright said. 

“Lundin has more than 60% of its NAV (net asset value) and all of our cash flow coming from Europe,” he explained. “The combination proposed would see over 70% of our NAV in Africa and the Middle East… I just don’t like the combination, it doesn’t make any sense to me… I can see the benefit for Equinox, that’s crystal clear. It gives them some diversification and it also gives them some underground mining expertise.”

Lundin’s board was advised against the deal by its financial advisors, Haywood Securities and Scotia Capital. Among other things, the premium offered – which as of March 18 was 6% to Lundin’s 20-day volume-weighted average share price – is “inadequate” and is “substantially below premiums paid in other unsolicited metals and mining transactions, which have averaged 64% since 2004 on completed transactions over $100 million,” the board noted in a press release issued on March 20. 

Under the terms of Equinox’s offer, each Lundin shareholder has the right to either $8.10 in cash or 1.2903 Equinox shares plus 1¢ for each Lundin share. The maximum cash and share outlays would be $2.4 billion and 380 million, respectively.

Given that the offer consists of a substantial amount of stock, Lundin’s board also argued that a decline in the combined company’s valuation multiples could result in a reduction in the value of the offer. Lundin noted that risk factors in Equinox’s operations could adversely affect Equinox’s share price in the future.  

The combination might also lead to asset sales “at distressed levels” to repay the bridge debt financing, it reasoned. “If Lundin chose to break up the company, I’m sure Lundin could do a much better job of doing so and retain all the benefits for Lundin shareholders rather than distribute them to Goldman Sachs, Credit Suisse and possibly to Equinox shareholders,” Wright said. “I guess in summary we feel the debt situation is poorly explained, material issues have been blacked out in the filings so that they can’t be read, and I’m concerned, really, what’s so secret about the fact that shareholders should not know the basis of this arrangement, except, you know, perhaps Equinox is a bit embarrassed about what they signed.”

In addition, Wright called the offer opportunistic, as it was announced after Equinox announced an expansion strategy at its Lumwana project and its share price was “inflated.” Equally important, however, Equinox’s proposed expansion plan is not supported by mineral reserves or resources and is not based on prefeasibility or feasibility studies, he noted. “The timing of their (news) release is quite interesting,” Wright said. “Our view is their projections lack credibility.”

In its response on March 22, Equinox reiterated in a press release that its offer “reflects a superior value proposition as well as the choice to participate in a company with one of the most attractive and lower risk growth profiles in the industry.”

“Lundin fails to recognize that without Equinox’s offer supporting Lundin’s current share price, the value of Lundin shares is likely to fall materially.”

It also repeated that its offer represents a 26% premium to Lundin’s closing share price on Feb. 25 – the last trading day before the offer was announced – and that Lundin shares have not traded above the Equinox offer price on the Toronto Stock Exchange since before June 2008.

As for its $3.2-billion bridge loan, Equinox says the debt package has been structured so that there are no short-term payments (“there is a minimum of six years before Equinox is obligated to repay any of the principal”) and that it “remains serviceable in downside copper price scenarios.”

Equinox “stress tested the bridge facility and senior secured notes utilizing US$3.50 per lb. copper in 2011 moving down to a longer term price of US$1.75 per lb. copper by 2014.”

“In contrast, based on current analyst consensus copper prices, Equinox would expect to return to a net cash position within four years after incurring planned capital expenditure for expansions within the combined company and including any incremental debt service costs.”