Nyrstar offers $409M for Farallon

VANCOUVER — Emerging producer Farallon Mining (FAN-T) has agreed to a friendly takeover bid by zinc giant Nyrstar in an all-cash deal valued at $409 million fully diluted.

Belgian-listed Nyrstar is offering 80¢ per share, representing a 32% premium on the 20-day volume-weighted average share price, and a 23% premium to the closing price on the last day of trading before the deal was announced.

“We believe this offer represents a meaningful and fair premium to the current share price,” stated Farallon president and CEO Richard Whittington.

While still subject to shareholder approval, Farallon’s board of directors has fully endorsed the deal, as has the company’s largest shareholder, Acuity Investment Management with 16.3% of shares.

If the deal goes through, Nyrstar will gain control of Farallon’s producing G-9 polymetallic mine in southwest Mexico, as well as significant exploration potential on the surrounding Campo Morado property. G-9 currently hosts reserves of 1.95 million tonnes grading 10% zinc, 1.34% copper, 211 grams silver per tonne and 3.03 grams gold per tonne. There are four other deposits identified on the property.

Third quarter results from the mine, which Farallon announced along with the Nyrstar deal, showed G-9 producing 18.9 million lbs. zinc and 2 million lbs. copper in concentrate from roughly 133,000 tonnes, with an average throughput of 1,441 tonnes per day. Farallon realized a net income of US$1 million on gross sales of US$28.5 million during the quarter.

Whittington explained in a conference call that Farallon had been considering a merger for some time, in part to reduce the risks inherent from operating a single mine. Whittington said the company had looked at mergers with similar-sized operators, but the ultimate goal was to boost the stock price by roughly 30%, a metric which the Nyrstar deal meets.

“It is important that it is the metric that decides the nature of the transaction, not management,” said Whittington of the move to a full takeover, adding that the deal is very much a friendly transaction.

Whittington, however, declined to divulge specifics as to how many other companies had signed confidentiality agreements or expressed interest in the company.

Stefan Ioannou, an analyst at Haywood Securities, said in a phone interview that while the deal pays fair value for the current asset, he wouldn’t necessarily call it a premium bid, and questions how much future potential was factored into the price.

“What the Nyrstar offer doesn’t give any credit for is the exploration upside potential at Campo Morado, which is arguably pretty significant,” says Ioannou. He notes that this year saw the first real exploration effort on the 120-sq.-km property and it yielded several discoveries. Nyrstar also emphasized the exploration potential of the project in its press release on the deal.

Farallon put the G-9 mine into production in early 2009, only four years after discovering it. The company forewent extensive exploration, as well as a full feasibility study, in favour of achieving production.

The mine was first beset by metallurgical issues, and then a lack of mine production, but Farallon looked to be finally tackling both issues this past quarter.

Commenting on the quarter, Whittington said “Q3 was a period of reinvestment in the mining operations, during which I think the company made strides in catching up.” Ioannou agrees with that sentiment.

“The writing was on the wall,” says Ioannou of the mine’s potential. “On a 2011 forward basis, this mine was going to be off to the races in terms of demonstrating its full potential, which is 120 million lbs. of zinc a year.”

Ioannou says that with the upside potential, there is room for a higher bid.

“Just the way the market is; I wouldn’t be surprised to see a slightly higher bid emerge. . . I’m not sure that it will, but there is room for it.”

For Nyrstar’s part, the deal furthers its aim of producing more of its own concentrate. The G-9 mine is expected to boost its capacity to produce zinc concentrate in-house by 6% to 31%, while also cutting overall mining costs.

Along with the Farallon acquisition, Nyrstar has in the past two years acquired the Mid-Tennessee zinc mine in the United States, the Coricancha mine in Peru and a 31% stake in Ironbark Zinc (IBG-A), with a zinc operation in Greenland.

Nyrstar will be paying for the Farallon deal through existing funds and credit facilities. The company also, announced on the same day plans for an unrelated 500-million rights offering, to be approved at a future shareholder meeting.

Farallon’s share price was up 13¢ on the bid news to close at a 52-week high of 78¢ on 77.6 million shares traded. The company was trading at a 52-week low of 32¢ in July.

Nyrstar’s share price on the Brussels Stock Exchange fell 12.86% to 10.03. The company has a 52-week share price range between 6.90 and 11.84.