Zinifex proposing Wolfden takeover

Australian zinc producer Zinifex (ZFX-A, ZFEXF-O) has put a cash offer of $3.90 per share on the table for Wolfden Resources (WLF-T, WLFFF-O) that values the Arctic base metal developer at about $345 million.

Wolfden said in an announcement that Zinifex had made a non-binding proposal for the takeover and that the two companies had agreed on a period of exclusive negotiations that would last until March 7. Zinifex would investigate Wolfden’s assets during the period, and Wolfden would not solicit other offers for the business.

The negotiation period can be extended to March 16, and Wolfden can respond to unsolicited offers in circumstances where there is a fiduciary duty to respond. Zinifex also has the right to match another unsolicited offer and would get a break fee of 3% of the offer if the deal does not go through.

There is no definite offer as yet; negotiation of an acceptable transaction, probably structured as a cash takeover, is one of the conditions of the agreement. The agreement envisions some of Wolfden’s management continuing with Zinifex.

Wolfden has three principal projects, all in the Nunavut territory. A preliminary economic study on the Izok Lake and High Lake base metal deposits, and the Ulu gold deposit, (T.N.M., July 14-20/06) concluded the three projects could share a mill and a road down to Gray’s Bay, on the Arctic coast. Capital costs for the project, including the road and port, were estimated at $933 million; Izok, at $539 million, accounted for the bulk of that cost.

In September Wolfden decided to make Izok, with an indicated resource of 14.4 million tonnes grading 12.94% zinc, 2.52% copper, 1.28% lead, and 71 grams silver per tonne, the priority for development. Capital costs were revised down to $504 million if infrastructure was shared, or $537 million if Izok were brought into production on its own.

Zinifex, a zinc producer created out of the assets of failed mining company Pasminco, made an announcement to the market that implied it would be looking at putting Izok into production in 2014 with High Lake following in 2015.

The Wolfden deal would complement three other acquisitions Zinifex made in the last quarter of 2006. Australian junior Albidon (ABIDF-O, ALD-L, ALB-A) optioned its Nefza exploration licence in northwestern Tunisia to Zinifex, in a deal where the company can earn 70% for US$11 million in exploration spending. In Mexico, private Mexican firm Minera Mariposa dealt a 100% interest in two zinc prospects in Morelos state to Zinifex for US$1 million and a US$1.4-million work commitment.

Another Australian junior, Drake Resources (DRK-A), has a standing arrangement allowing Zinifex to earn a 70% interest in four Swedish zinc properties by funding exploration.

Zinifex recently worked out a deal with Belgian smelter and refiner Umicore (UMICF-O) to combine downstream assets in a new public company. Under that deal, Zinifex would contribute its Port Pirie smelter and Hobart refinery in Australia, and two other zinc smelters, at Clarksville, Tenn., and Budel, Netherlands.

Umicore’s main zinc smelters are at Balen in Belgium and Auby in France, and it has partial interests in the Padaeng zinc smelter in Thailand (47%) and the Yunnan Zinc operation in China (60%). Umicore would also contribute some downstream alloying and galvanizing operations in Europe and Asia.

The combination would be the largest single producer of zinc metal, with a capacity around 1.1 million tonnes annually. It would also be the largest primary lead metal producer in the world.

The new company, while legally domiciled in Belgium, would have a main office in London and would draw its management from both Zinifex and Umicore. A definitive agreement is scheduled to come in the first quarter of 2007, to be presented to Zinifex shareholders in the second quarter. Zinifex plans to use proceeds from the public offering of shares in the new smelting company for development of the Dugald River zinc deposit in Queensland, currently the subject of a prefeasibility study.

Zinifex earned A$1.1 billion (A$2.20 per share) on revenue of A$3.1 billion in fiscal 2006, which ended last June. That was up from an A$231-million profit on A$1.9 billion in revenue in fiscal 2005. At the end of June 2006, the company had A$602 million in cash.

Its zinc mines, Century in Queensland and Rosebery in Tasmania, produced about 280,000 tonnes zinc and 33,000 tonnes lead in concentrate during the last six months of 2006. The downstream operations produced 318,000 tonnes zinc metal and 92,000 tonnes lead metal during the same period.