Canico rejects Brazilian bid

The board of directors of Canico Resource (CNI-T) has unanimously recommended that its shareholders reject an unsolicited takeover offer from diversified Brazilian miner Companhia Vale do Rio Doce (RIO-N).

Canico says that based on the opinion of its financial advisers, the $725 million offer “is inadequate from a financial point of view.”

While CVRD’s $17.50-per-share bid represents a 29% premium over Canico’s 30-day average share price before the offer’s announcement, Canico’s shares have recently been trading in the plus-$19 range on the Toronto Stock Exchange, with many shareholders expecting a higher competing offer.

Canico also says that CVRD, which has several projects near Ona-Puma, could expect to see significant operating synergies, and thus should pay more to Canico shareholders. CVRD has maintained that its bid will not be sweetened.

Since the offer, Canico says it has been “aggressively pursuing value-maximizing alternatives,” and has held talks with 14 of the world’s major mining companies. Still, two potential suitors may be out of the picture after the recent proposed tie-up of Inco (N-T, N-N) and Falconbridge (FAL.LV-T, FAL-N). Inco was seen as perhaps one of the most likely bidders with an existing 14% stake in Canico.

On the flip side, the Inco-Falco deal also means that Xstrata (XTA-L) could come into a healthy bit of mad money via the potential sale of its 20% stake in Falconbridge, money it could use to take out Canico.

Meanwhile, Canico has set up a data room, and has had several other interested parties in the midst of negotiating confidentiality agreements.

Canico’s key asset is the Ona-Puma nickel-laterite project in Par state, Brazil. Proven and probable reserve there total 77.7 million tonnes averaging 1.8% nickel and 18% iron, based on a cutoff grade of 1.1% nickel. Ona, to the southwest, provides 28.5 million tonnes of that reserve, grading 1.87% nickel, and Puma, 16 km to the northeast, 49.2 million tonnes averaging 1.77% nickel.

Capital costs of the mine and a conventional rotary-kiln plant to process the laterite ores are estimated at US$762 million, with the addition of a second smelter line — reaching full production in year 6 of the project — to cost a further US$352 million. At an 8% discount rate, the project has a net present value of US$315 million, and the internal rate of return is 12%.

Ona-Puma was discovered by Inco in 1973.