Victory Nickel bids for Independent Nickel

Victory Nickel (NI-T) hopes to expand its nickel holdings in Manitoba and has made an unsolicited, all-share takeover bid for Sudbury-based Independent Nickel (INI-V, INIFF-O).

Independent Nickel owns 100% of the past-producing Lynn Lake nickel mine, which has been dormant since 1976 when Sherritt-Gordon, now Sherritt International (S-T, SHERF-O), abandoned the mine due to low nickel prices.

Under the proposed deal, Independent Nickel shareholders would receive one Victory Nickel share for each Independent Nickel share they hold. The offer represents a 32% premium over the closing price of Independent Nickel shares on August 18, and a 38% premium over its 20-day volume weighted average trading price.

But the offer is conditional upon Independent Nickel’s shareholders rejecting Hunter Dickinson’s recent attempt to acquire between 40% and 57% of the company.

The Vancouver-based mining development company agreed on July 31 to purchase 40 million shares of Independent Nickel for C$14 million (35 per share.) Hunter Dickinson would also have the option of buying 40 million more shares over the following two years at a price of 45 a share in the first year and 50 in the second. The deal has yet to be approved by Independent Nickel’s shareholders and the Toronto Stock Exchange.

“When they agreed to do the Dickinson deal they established the price,” Rene Galipeau, Victory Nickel’s president and chief executive said in an interview. “It does put cash into the kitty, which is good these days. But it doesn’t give the shareholders the opportunity to realize on their premium today. I can only assume the market didn’t like the transaction because their stock went down and we are giving them an alternative.”

Galipeau noted that Victory Nickel’s offer would eliminate Independent Nickel’s royalty interest in Victory Nickel’s Minago nickel project in Manitoba’s Thompson nickel belt. Independent Nickel owns a net smelter return royalty on the Minago property. The NSR pays Independent Nickel 3% of the mineral product value when nickel prices exceed US$6 per lb.

“From our point of view there are a lot of good projects that have been ruined by net smelter royalties, so this is a natural first step for us,” Galipeau added. “It’s time for consolidation It’s a logical step for us right now. If we’re going to grow this company we need to rationalize our assets and this is what the offer is doing.”

At the same time, Independent Nickel’s shareholders will have the opportunity to benefit from 100% of Minago’s nickel production in addition to the potential for near-term cash flow through the sale of frac sand to the oil and gas industry and three additional sulphide nickel projects, Galipeau noted.

Frac sand, used to enhance recoveries in the oil and gas industry, forms part of the overburden that has to be removed before mining nickel from the Minago open pit.

As part of the definitive feasibility study on Minago, Wardrop Engineering concluded earlier this year that Victory Nickel could sell 824,000 tonnes of sand a year to markets in North America for potential annual revenue, net of freight, of about C$44 million.

Richard Murphy, president and chief executive of Independent Nickel, could not be reached for comment.

As for Lynn Lake, during the 23 years Sherritt operated the mine, it produced 22.2 million tonnes of nickel-copper ore at a grade of 1.0% nickel and 0.5% copper, making it the third-largest nickel producer in North America, after only the Sudbury and Thompson mining camps.

While Lynn Lake has much lower grades than deposits in other magmatic nickel camps in Canada, such as Sudbury and Thompson, where grades average 1.8% to 2% nickel, Independent Nickel and Victory Nickel obviously believe there’s still much money to be made.

A prefeasibility study released in late 2007 on the Lynn Lake mine forecast a pre-tax net present value (NPV) of C$131 million using an 8% discount rate. Pre-tax profits over an initial 11-year mine life would be in the neighborhood of C$296 million with pre-production capital costs of an estimated C$148 million and a payback on mine costs of three years. The study also estimated a production rate of 3,000 tonnes per day with average annual nickel production of 11.2 million lbs

As part of the pre-feasibility study, 10.7 million tonnes of ore have been classified as a probable reserve at a diluted grade of 0.65% nickel and 0.36% copper.

Victory Nickel already has over 660 million lbs of in-situ nickel in National Instrument 43-101-compliant measured (154 million lbs) and indicated (511 million lbs) resources in three sulphide nickel projects. Its Minago and Mel projects are on Manitoba’s Thompson nickel belt, while its Lac Rocher deposit sits in northwestern Quebec.

The Toronto-based company also holds an additional 530 million lbs. of in-situ nickel in inferred resources. Victory was created from the assets of Nuinsco Resources.

News of the offer failed to make a big splash in the market. Victory Nickel’s shares remained unchanged at 35 apiece. The company has a 52-week trading range of 26.5 to 74 with 194.9 million shares outstanding.

As for Independent Nickel, 6,000 shares traded hands and the stock moved up 4.5 a share to close at 29.5. The stock has a 52-week trading range of 20-64 with 60.6 million shares outstanding.