What next for Lundin Mining

Rumours have been circulating for weeks that cash-rich BHP Billiton (BHP-N) might be interested in making a bid for Lundin Mining (LUN-T), but a late-night post on The Telegraph’s website on Monday added more fuel to the fire.

The British newspaper’s business journalist Ben Harrington wrote that “the chatter” among traders was that “BHP Billiton has teamed up with Nyrstar, a zinc producer, to submit a joint-offer for Lundin.”

Shares of Lundin jumped 64¢ or 14.51% to close at $5.05 per share with 20.5 million shares trading hands on Tuesday–bucking the downward trend on the worst day on the markets in more than two years.

“It wouldn’t surprise me to have BHP take a run at Lundin,” says a Toronto-based mining executive who requested anonymity. “The price has become compelling, [there is] big copper upside, and political risk is better absorbed in a company the size of BHP.”

Others dismiss the rumours. Some argue the Australian mining giant already has a vast development portfolio and will be spending substantial capex on expanding Olympic Dam. Others say many of Lundin’s assets are too small for the likes of BHP and that a takeover wouldn’t get it a controlling stake in Tenke Fungurume, its most attractive copper asset.   

Rumours of a joint bid faltered on Wednesday, when Bloomberg, citing “people familiar with the matter,” reported that the Belgian zinc producer failed to reach an agreement in talks last week.

Nyrstar “is still interested in some of Lundin’s assets,” Bloomberg wrote, but “it can’t afford to buy the Canadian copper and zinc producer on its own.”

That could be true. Nyrstar has to put some of its cash aside for its pending $663 million acquisition of Breakwater Resources (BWR-T), which was recently extended to Aug. 25.

“Nyrstar is cashed up but a lot of that cash will be going to the Breakwater acquisition so they’ve already got their hands full,” says Adam Low, a mining analyst at Raymond James in Toronto. “I’m not sure how willing they would be to take on another.”

That still leaves the possibility of a solitary bid for Lundin by BHP or perhaps a joint bid with another zinc producer like Minerals and Metals Group (MMG), the Australian subsidiary of China Minmetals.

Lundin Mining’s most coveted asset is its 24.75% stake in the Tenke Fungurume copper mine in the Democratic Republic of the Congo. Its other, 100%-owned assets, are the Neves-Corvo copper-zinc mine in Portugal; the Zinkgruvan zinc-lead-silver mine in Sweden; the Aguablanca nickel-copper mine in Spain and the Galmoy zinc mine in Ireland.

“MMG would make sense because they are one of the larger zinc producers out there and they did acquire most of OZ Minerals’ assets,” says Low. “MMG went after Equinox Minerals themselves until they were outbid by Barrick, so clearly they have an appetite for complex acquisitions in Sub-Saharan Africa.”

While Tenke is potentially a very lucrative new copper mine, however, Low says he isn’t sure whether acquiring Lundin makes sense for BHP, which typically likes to be a majority operator. “Lundin’s flagship asset is Tenke (24.75%) so I don’t see that as the most attractive option for them,” he says, adding that “if they can scoop them on the cheap maybe they’d go for it.”

But that is unlikely. Low notes that Lundin has been shopped many times over the last few years at prices far more compelling than Lundin’s current share price-and each effort ended in failure.

The first time was in the depth of the last financial crash when HudBay Minerals (HBM-T, HBM-N) proposed a deal, which never went through. Earlier this year Inmet Mining (IMN-T, IEMF-O) proposed a “merger of equals” and the formation of a new company to be called Symterra, which also failed. And then there was the unsuccessful hostile takeover bid by Equinox Minerals (EQN-T, EQN-A).

A strategic review Lundin completed in May concluded that the offers it had received simply weren’t high enough.

“If Lundin didn’t see any proposals it liked at $7-$8 per share I don’t see why they would have any motivation to agree to a deal at the current prices,” says Low. “So in my mind if BHP or Nyrstar or anyone else does anything it would have to be a hostile bid. There’s no way it’s going to be friendly.”

It’s hard to say what price BHP would be willing to pay for Lundin. But the miner has a reputation for being fairly disciplined in its shopping and typically is “unwilling to go beyond a certain price line they have drawn in the sand,” says a Singapore-based journalist who covers mining in Asia and Australia. “They are willing to walk away.”

And as commodity prices fall and stocks crash, he adds, “BHP will probably find a lot more bargains at better valuations than Lundin.”

At presstime Lundin was trading at $4.90 per share. Over the last year the stock has ranged between a low of $3.72 per share (Aug. 16 2010) and a high of $9.31 per share (April 29 2011).

In a note to clients from Canaccord Wealth Management, the firm said its mining analyst Orest Wowkodaw “views the recent sell-off as well overdone and that it represents an attractive entry point for investors,” adding that he views the shares “as a relatively compelling risk/reward tradeoff at current valuation levels.”