No white knights in Labrador and Luscar fights

In two quiet corners of the mining industry — the iron ore and coal businesses — takeover battles for income funds have enlivened the profitable, but otherwise dry, business of cashing royalty cheques.

Ownership of Iron Ore Co. of Canada (IOC), the principal producer from the iron formations of the Labrador Trough, is in the balance as Rio Tinto (RTP-N) pursues a takeover bid for the outstanding units of the Labrador Iron Ore Royalty Income Fund (LIF.UN-T). The fund, through subsidiary Labrador Mining, owns an 18.9% stake in IOC; Rio owns 56% through its takeover of Australian mining house North Ltd. in 2000; and the remainder is held by Japan’s Mitsubishi. The Labrador Fund also holds a 7% gross-revenue royalty on IOC’s production and earns a 10-per-short-ton commission on shipments from IOC pellet plants.

Rio offered $13.50 per unit for the Labrador Fund in December 2000, at a time when the fund’s price was flirting with the $12 level. It sweetened the bid to $14.25 following a valuation by CIBC World Markets that placed the fund’s fair price between $18 and $24.70 per unit. The valuation, which was required under Ontario securities laws pertaining to royalty trusts, identified the royalty and commission holdings as representing about three-quarters of the fund’s value.

As a defensive tactic, the trustees of the fund increased the cash distribution to $1.50 annually. Rio has attacked the distributions (for which Labrador Mining will have to borrow money) as a move that may reduce the value of future distributions from the fund.

Rio Tinto recently announced it had waived the minimum condition on its original bid and will be accepting 4.3 million units tendered under the offer. Rio, which will now own 14.4% of the fund, has extended the date of its offer to April 21.

Meanwhile, in the genteel world of coal, the Sherritt Coal Partnership, an alliance of nickel producer Sherritt International (S-T) and the Ontario Teachers’ Pension Plan, is offering to buy the outstanding units of Edmonton-based Luscar Coal Income Fund (LUS.UN-T), which controls Canada’s largest coal producer, Luscar.

Sherritt’s offer, which was rejected by the Luscar Fund’s board, was for $3.50 cash, or $2.38 plus 0.265 of a share in Sherritt. The fund also has $100 million in convertible debentures issued, bearing 10% interest; Sherritt has offered to redeem these for cash.

The fund units, which had traded thinly in the range of 75 to $3, have jumped to the $4 level since the offer. Sherritt’s cash-and-shares offer values the Luscar Fund at about $3.46 a share.

Luscar, in a search for a competing bid, opened a data room but denied Sherritt access. Luscar says it had entered into discussions with “a number of potential purchasers” and expects to see a competing bid emerge. Sherritt’s offer expires April 17.

Sherritt has countered that no bid has appeared, and argues that Luscar’s heavy debt ($150 million current and $406 million long-term, against total assets of $1.7 billion at year-end) makes it difficult for the company to develop other coal assets without a cash infusion. Sherritt had about $529 million in current assets, including $261 million in cash, at the end of 2000.

Luscar, which operates 11 mines in western Canada, has a single large project, the Cheviot mine, in development. Cheviot, a joint venture with U.S.-based Consolidated Coal, was the subject of a 5-year permitting battle when it became the target of court challenges by preservationist groups. The Alberta government issued a mine permit for Cheviot in December 2000, and the Canadian government recently accepted the recommendation of the Environmental Assessment Panel that the project be allowed to proceed.