Canico says no to Brazil’s CVRD

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.”

Canico also says that CVRD, which has several projects near Canico’s Ona-Puma project in Par state, Brazil, 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.

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 $19-plus range on the Toronto Stock Exchange, with many shareholders expecting a higher competing offer to emerge.

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 candidates, already possessing a 14% stake in Canico.

On the flip side, the Inco-Falco deal also means that Xstrata (XTA-L) could come into a healthy wad 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 is in the midst of negotiating confidentiality agreements with several other interested parties.

Canico’s key asset is the Ona-Puma nickel-laterite project. Proven and probable reserves 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 six 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%.

Inco discovered Ona-Puma in 1973.