Diversified Brazilian miner
CVRD is offering $17.50 per share for Canico, a bid that values the company at $725 million. CVRD compared its bid with the 30-day average of Canico shares, $13.56, noting that the bid represented a 29% premium.
Canico’s principal asset is Ona-Puma, although it has “legacy” properties — which had been held by a predecessor company, Oliver Gold — in the British Columbia interior. Ona-Puma is an advanced nickel-laterite project that was the subject of a final feasibility study released in August (T.N.M., Aug. 12-18/05).
The day following CVRD’s announcement, Canico released a statement saying the company could not respond to the bid until it had received a formal offer. Chief financial officer Paul Sweeney of Canico did not have any comments to add beyond that.
It is clear, however, that Canico has had several companies kicking tires at Ona-Puma, including CVRD, with whom it had concluded a confidentiality agreement. Canico’s board already has a formed committee of outside directors, with its own legal advisors, to examine bids. The company also has two financial advisors, Barclays Capital and Canadian Imperial Bank of Commerce, engaged.
Last week, Canico announced poison-pill measures that were to be put before the company’s shareholders at the next annual meeting in December. The plan, a standard rights issue allowing a two-for-the-price-of-one share purchase, had provisions for a “permitted bid” open for 60 days, conditional on a majority of outstanding shares being tendered. CVRD is making its bid conform to Canico’s rules and said it had consent from Canico’s board to make the offer.
In Canico’s prepared statement, company President Michael Kenyon said the board had agreed to release CVRD from standstill provisions in the agreement between the two companies, but that the board could not yet endorse the bid. Still, the board did not want “to deny our shareholders the opportunity to consider” the CVRD bid.
Kenyon suggested in later interviews that there would be other bidders for the company. The market evidently agreed, with Canico vaulting past the bid price to $19.75 on the day of the bid, and touching an all-time high of $20.15 the following day.
CVRD’s management made the right noises to counter the speculation, with chief executive Roger Agnelli characterizing the company’s bid as “quite aggressive as it is.”
The most obvious bidder is
Ona-Puma was an Inco discovery in 1973 and permits to mine had been applied for when the Brazilian government established the Xigrin Indigenous Land Reserve over parts of the project area. Inco dealt Ona-Puma to Canico in 2002 and traded its interest for an 18% shareholding in Canico in 2003. That has since been diluted to 13.8%.
Ona-Puma’s feasibility study, authored by principal consulting firm Hatch, was delivered in August. The planned development is an open pit exploiting a proven and probable reserve of 77.7 million tonnes at average grades of 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.
That reserve comes out of a measured and indicated resource at Ona of 80 million tonnes grading 1.12% nickel, and one at Puma of 115 million tonnes at 1.18% 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%.
That economic analysis rests on a long-term nickel price of US$8,250 per tonne (US$3.75 per lb.) and on cash operating costs that average US$4,230 per tonne (US$1.92 per lb.) over the 34-year mine life.
A higher nickel price significantly increases the net present value, to US$970 million at US$11,000 per tonne (US$5 per lb.). Current prices are around US$13,500 per tonne with 27-month forward contracts around US$11,000.
Canico’s Brazilian subsidiary, Mineraao Ona-Puma, has also just received its Installation Licence from Par state environmental regulators, essentially indicating government approval of the mining plan and feasibility study. A final Operating Licence, needed to go into commercial production, would be granted based on an inspection of the project as built.
Applications for mining concessions are in the hands of the federal mining department and Canico said it expects to see them in about three months, following a review period.
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