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Lundin and Inmet abandon proposed merger

March 30, 2011

“Lundin Mining Corporation and Inmet Mining Corporation jointly announced today that they have terminated the arrangement agreement dated January 12, 2011 between them in accordance with its terms.

As a result, the formerly announced Special Meetings of Shareholders of both Inmet and Lundin Mining, scheduled for April 4, 2011, are cancelled. The parties have agreed that Inmet’s right to a break fee of $120 million, in accordance with the arrangement agreement, will be preserved in connection with the unsolicited offer of Equinox Minerals Limited to acquire Lundin Mining.”

Source: Inmet Press Release, March 30 2011

Observations:

  • Continuation of the merger became highly unlikely after the government of Panama did not give permission to coal-fire the power plant for Inmet’s flagship Cobre Panama project. Any alternative source of power will reduce project value by over 10%, causing a material change to the proposed merger agreement. Still Inmet will receive $120mln because the breakup is attributed to the Equinox offer.
  • Lundin advised its shareholders to reject the competing offer by Equinox last week. Key arguments mentioned in the explaining circular are: inadequate pricing; high leverage of resulting company; potential shortage of cash for investments; and increased geo-political risk. However, mr. Lundin commented that he would be willing to sell a an adequate price.

Implications:

  • Equinox refers in its circular to a 64% premium paid since 2004 in large mining takeovers. This reference could be seen as a counterbid to the 26% pre-announcement premium of Equinox’ offer. Increasing the premium to approx. 40% (to $9.00/share) will convince most shareholders to tender their shares if the financial risk can be sufficiently covered.
  • No competing bidders for Lundin have emerged and Lundin does not report looking for alternatives at this moment. As Equinox is stretching its financial capacity with this deal, a competing bidder might be able to take over Lundin by offering only slightly more than a potential sweetened Equinox bid.

©2011 | Wilfred Visser | thebusinessofmining.com

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