Hot nickel triggers Lundin’s Rio Narcea offer

Vancouver — Aiming to add nickel to its metal production mix Lundin Mining (LUN-T, LMC-X) is snapping up Rio Narcea Gold Mines (RNG-T, RNO-X) and its mainly European operations in a friendly all-cash transaction worth $993 million.

Rio Narcea is a Toronto-based company with assets in Spain, Portugal and Mauritania, northwest Africa, plus a 20% equity interest in Chariot Resources (CHD-T, CHDSF-O), which has a 70% stake in the Marcona copper project in Peru.

But the jewel in Rio’s crown is the Aguablanca nickel-copper mine in southern Spain, says Lundin spokesperson Sophia Shane.

One of the largest nickel sulphide mines in western Europe, it produced 14 million lbs. of nickel last year, at a cash cost of US$4.23 a lb., from an open pit located about 100 km north of Seville.

Lundin is proceeding with the bid in a hot nickel market, which has seen prices almost triple in the past year to US$22.67 per lb. in early April.

“It fits in beautifully with our portfolio by adding nickel to the mix,” Shane says.

Lundin likes the fact that Aguablanca is located in the vicinity of the company’s existing base metal operations in Portugal, which include the Neves-Corvo copper and Aljustrel zinc-lead mines.

There’s no better place to get into the nickel business than in our own backyard,” said Lundin vice-chairman Colin Benner, during a recent conference call to discuss the deal.

Preliminary studies show ore processing at Aguablanca could be improved before metal concentrates are shipped to nearby smelters, Benner said.

Shane says the company is acquiring Rio Narcea with the expectation that Aguablanca’s nickel output can be expanded by improving the plant and by developing underground deposits.

Since the mine is near Neves Corvo, Lundin also sees potential operating savings of 1% to 1.5%, achievable through synergies.

“This transaction is in line with our corporate goals to grow the company, increase value for shareholders and establish ourselves as the next major global mining house in the base metals sector,” says Lundin CEO Karl-Axel Waplan. “We’re a strong believer that nickel will have a deficit going forward because of a lack of investment, so it was logical for us to add nickel.”

Marking a continuation of an aggressive growth plan that Shane says will continue, Lundin is offering $5.00 cash for each of Rio Narcea’s outstanding shares and $1.04 for each of more than 22 million warrants.

The offer is a 23% premium over the 30-day weighted average trading price of Rio Narcea’s shares, and a 3.7% premium on the closing price of the shares on April 3.

Shares of Lundin rose $1.83 to $15.24 on the Toronto Stock Exchange, prior to the close of trading April 4, the day that terms of the deal were announced. Rio Narcea gained 31 to $5.13.

“The directors and management of Rio Narcea believe this is in the best interest of Rio Narcea and is a fair offer to all of our shareholders,” says Rio Narcea chairman Chris von Christierson.

The directors and officers, who together hold about 5% of Rio Narcea’s shares outstanding, have tendered their shares to the offer.

Rio Narcea has entered into a support agreement with Lundin that provides for, among other things, a non-solicitation covenant on the part of Rio Narcea.

It also gives Lundin the right to match any competing offers, and receive a break fee of $25 million from Rio Narcea under certain circumstances.

If the bid succeeds, Lundin plans to sell Rio Narcea’s gold assets to Red Back Mining (RBI-T, RBIFF-O) for US$225 million in cash and the assumption of $42.5 million in debt.

A takeover bid circular containing details of the bid is scheduled to be mailed out to shareholders and warrant holders by April 18, 2007. The offer, unless extended, will expire within 36 days.