Canico finds new CVRD bid less hostile (November 21, 2005)

Companhia Vale do Rio Doce (RIO-N) has upped its offer for nickel developer Canico Resource (CNI-T, CNIRF-O) and Canico’s board has reversed its position against the offer.

CVRD is now offering $20.80 per share for Canico, up from the $17.50 per share it offered Sept. 15. The first bid had represented a 29% premium to the average price of Canico shares for the 30 days before the bid was made; the new bid raises that premium to 53%.

The new bid is for all shares after full dilution (about 45 million shares) putting the total value of the offer at $940 million.

CVRD now has a lock-up agreement with Canico management and the board of directors for 11.5% of Canico’s shares. Inco (N-T, N-N) owns about 13.8% of Canico and Falconbridge (fal.lv-t, fal-n) also owns shares. Another significant shareholder, Brazilian-based Centennial Asset, sold its shares recently. (Centennial was unrelated to CVRD.)

In recommending the offer to shareholders, Canico management agreed to a $32.8-million break fee. CVRD also has the right to match any competing bid.

Canico and CVRD had previously agreed that the Septem- ber CVRD offer constituted a “permitted bid” under Canico’s shareholder-rights plan.

The offer is open until Nov. 28 and CVRD is seeking a simple majority of shares to complete the bid.

Canico is essentially a one-asset company, most of its value being in the Ona-Puma nickel-laterite project in Para state, Brazil. CVRD is anxious to acquire the project as it is close to CVRD’s large operations near Carajas, which mine iron ore, manganese, and now copper.

CVRD’s Vermelho nickel project, also in Carajas, is currently under development after a production decision in July. Vermelho has reserves of 290 million tonnes grading 0.8% nickel in limonitic laterites. CVRD plans to produce 46,000 tonnes nickel cathode and 2,800 tonnes cobalt metal annually using a high-pressure acid leach process.

A pilot plant using the process showed 98% availability, with nickel recovery of 96.5% and cobalt recovery of 95%. In a recent presentation, CVRD engineer Vanessa Torres attributed the plant’s performance — which contrasts with other HPAL nickel projects in Western Australia — in part to the availability of fresh water at the site, which places the system under less stress.

Vermelho will cost CVRD US$1.2 billion to build, and is scheduled to start production in the last quarter of 2008.

CVRD set a new record for quarterly iron ore production in the third quarter of 2005; it also sold a record amount of potash and its rail lines carried a record amount of cargo in the quarter.

In the third quarter CVRD made net earnings of US$1.3 billion, or US$1.15 per share, on revenues of US$3.6 billion, leaving it with earnings of US$3.6 billion on revenues of US$9.7 billion after the first nine months of 2005. It has paid US$1.3 billion in dividends this year.

In 2004, CVRD showed a profit of US$943 million on third-quarter revenues of US$2.3 billion, and was ahead by US$1.9 billion, from revenues of US$6.1 billion, in the first three quarters of the year.

At the end of the third quarter of this year, CVRD had US$1.2 billion in cash, with working capital of US$2 billion and US$6.9 billion in long-term debt.