Xstrata offers $4.6B for LionOre

Nickel prices may not have hit the roof yet, but LionOre Mining International (LIM-T, LMGGF-O, LOR-L) is urging its shareholders to agree to a $4.6-billion friendly takeover bid by Xstrata (XTA-L, XSRAF-O), partly because it believes the direction of the current market to be unsustainable over the long term.

Xstrata, the Zug, Switzerland-based company that bought Falconbridge last year for $24.8 billion, has made a cash offer of $18.50 per LionOre share, a premium of 16.5% over the 30-day volume-weighted average price on the TSX but only a 5.8% premium over the March 23 closing price of $17.49.

On the announcement, LionOre shares closed at $19.29 in Toronto on trading volume of 35.3 million shares. On the same day, spot nickel closed at US$20.79 per lb. on the London Metals Exchange. The price of nickel was about US$3 per lb. in 2002 and was sitting at US$15 per lb. in January.

LionOre president and CEO Colin Steyn said that if nickel prices continue to rise, there is a chance there will be value destruction in the stainless steel industry going forward, affecting demand for nickel.

“Yes, there’s an upside potential in the nickel price, but the fundamentals we’ve always expended about the nickel industry really relate to the long-term value,” Steyn said at a media conference at the TSX Gallery. “These prices are sustainable for the short term, but we’ve advocated they are not sustainable in the long term.”

Steyn said the certainty of receiving cash at a premium removes the risk LionOre would face should nickel prices drop, while giving full, immediate value to its shareholders.

Xstrata has already acquired 19% of LionOre through lock-up agreements from several unnamed shareholders, who hold 16% to 17% of shares, and management, who hold the remainder.

Xstrata needs 66.66% of LionOre shareholders to accept the deal before it can take steps to acquire any outstanding shares.

LionOre can accept a better offer, but would have to pay Xstrata a break fee of $130 million. Xstrata also has the right to match competing offers.

With the acquisition, Xstrata would have access to new markets in Australia, Botswana and South Africa and increase its nickel production by 36%. LionOre is an 85% owner of Tati Nickel in Botswana, which produced 13,700 tonnes of nickel in 2006 and a 50% owner of the Nkomati nickel project in South Africa, which produced 4,800 tonnes of nickel in 2006. The company’s Western Australia projects include: the 100%-owned Lake Johnston, which produced 9,700 tonnes of nickel in 2006; an 80% interest in the Black Swan project, which produced 7,200 tonnes of nickel last year; the 100%-owned Thunderbox gold mine, which produced 112,000 oz. gold in 2006; the 80%-owned Honeymoon Well, not yet in production; and the 100%-owned underground Waterloo nickel mine.

Xstrata Nickel president and CEO Ian Pearce pointed out that it was LionOre that identified the “industrial logic” of the two companies with its losing bid to buy Falconbridge’s high-grade Nikkelverk nickel refinery in Norway last year, which is now owned by Xstrata. Based in Toronto, Xstrata Nickel is a business unit created after the Falconbridge takeover.

“It’s a natural strategic fit,” Pearce said. “It supports our strategy to grow our global nickel business.”

Xstrata Nickel currently has five mines, plus processing facilities in Ontario and Quebec, a ferronickel mine and processing facility in the Dominican Republic and exploration properties in Canada, Tanzania and New Caledonia.

Pearce said Xstrata would integrate LionOre employees into the company. He also discussed employing LionOre’s trademark Activox technology — whereby a chemical solution is used to extract metals from finely ground ore at a low temperature and moderate pressure, removing the smelting step — at some Xstrata operations.

Kerry Smith, an analyst at Haywood Securities in Toronto, says he doesn’t see Xstrata’s bid going much higher because there aren’t many companies that can compete with the cash offer, aside from Teck Cominco (TCK.B-T, TCK-N), BHP Billiton (BHP-N, BLT-L, BHP-A) and Companhia Vale do Rio Doce (RIO-N).

But Smith says that knowing Xstrata has already secured 19% of LionOre puts the company in the driver’s seat.

He says Xstrata will likely have to increase its bid to entice the hedge fund holders to tender their shares.

“Xstrata’s probably got a little bit more in their back pocket to raise the bid a little bit,” Smith says.

Smith also believes the nickel market may soon peak and that the real question is how long prices will stay at these levels.