Nevsun Resources (TSX: NSU; NYSE-AM: NSU) is rejecting an unsolicited proposal by Euro Sun Mining (TSX: ESM) and Lundin Mining (TSX: LUN) that it says lacks adequate value and has a problematic structure.
The mining company argues the cash-and-share proposal undervalues its high-grade, copper-gold Timok project in Serbia and overvalues Euro Sun’s Rovina Valley gold-copper porphyry project in Romania.
Under the joint proposal, which does not yet constitute a formal offer, Euro Sun and Lundin propose to acquire all of Nevsun’s outstanding common shares for $1.5 billion.
Shareholders of Nevsun would receive a total consideration of $5 per Nevsun share.
Nevsun would receive $2 per share in cash from Lundin and $2 per share in Lundin stock, and $1 per share in Euro Sun stock, representing a 54% premium to Nevsun’s 30-day, volume-weighted average price.
If the proposal becomes a formal offer and is approved by Nevsun shareholders, Lundin would own Nevsun’s European assets — including the Timok project — and Euro Sun would own Nevsun’s 60%-owned stake in the Bisha open-pit mine in Eritrea, in addition to Nevsun’s US$150-million, pre-tax cash balance.
The proposal, sent to Nevsun on April 30, was made public on May 7, and follows three solo attempts by Lundin to engage Nevsun earlier in another transaction involving its European assets.
After Lundin’s third attempt on April 3 was rebuffed, it found a partner to lead full acquisition of Nevsun’s assets.
Both Lundin and Euro Sun declined requests from The Northern Miner for an interview to discuss the proposed transaction.
But in a joint press release, the CEOs of the two companies say what they see as the logic behind the deal.
“The board and management of Euro Sun have a demonstrated track record of generating outstanding shareholder returns, including through their prior involvement with Avion Gold, and the purchase of Nevsun’s Tabakoto assets in Mali, which was subsequently sold at a significant premium,” Euro Sun’s president and CEO Scott Moore says. “The potential of Bisha is well beyond its current mine life, and Rovina represents an opportunity for all stakeholders to participate in the second-largest gold project in Europe.”
Nevsun’s Bisha mine, a high-grade, copper-zinc operation, has a forecasted four years of mine life left. The large volcanogenic massive sulphide deposit, 150 km west of Asmara, has been mined since 2010. Last year it produced 207.8 million lb. zinc in zinc concentrate and 18 million lb. copper in copper concentrate.
Paul Conibear, Lundin Mining’s president and CEO, described the proposal as “extremely compelling,” and said the company’s “significant experience in underground construction and mining” and its “track record of operating in Europe” underscore its ability to be “a strong and reputable developer” of the Timok project.
He also noted that Lundin’s “strong balance sheet” would come in handy for Timok’s near-term financing needs.
“Our inclusion of cash and Lundin Mining shares will allow Nevsun shareholders to both crystallize value now and continue to share in the future growth of not only the Timok project, but benefit from the success of Lundin Mining’s operations, while participating in Lundin Mining’s future dividends,” Conibear said.
In a press release on May 8, Nevsun said the proposal is deficient for a number of reasons, and didn’t offer enough value for its “world-class” Timok deposit.
“Lundin has indicated that it values Timok at $4 per share. Nevsun does not agree with that valuation,” the company stated, noting that the project consists of an Upper and Lower Zone. Nevsun owns 100% of the Upper Zone and holds the Lower Zone in a joint venture with Freeport-McMoRan (NYSE: FCX).
“With an after-tax net asset value of US$1.82 billion, internal rate of return of 80% and initial probable mineral reserve of 27 million tonnes, Timok Upper Zone is widely considered to be one of the highest-quality copper projects in the world, and deserves a premium valuation reflecting its value and potential.”
Nevsun also argued that Euro Sun was “not an attractive partner,” describing it as a “junior, non-operating company with a market capitalization less than one-tenth of Nevsun’s market capitalization.”
It noted that Euro Sun “has faced difficulty raising financing” and that its “most significant shareholder is junior mining promoter Forbes & Manhattan.”
Nevsun described Rovina as Euro Sun’s “only meaningful asset,” and characterized it as “ultra-low grade” and unpermitted.”
“Nevsun previously conducted due diligence” on Rovina, but the asset was deemed “unattractive,” Nevsun said.
In addition, the hundreds of millions of dollars Rovina would need in capital would be diverted from Nevsun’s cash-on-hand and cash generated from its operations, “instead of being deployed to generate higher shareholder value in Bisha or Timok.”
Historically, it added, Romania has been a “challenging jurisdiction for permitting mining projects.”
As for Bisha, it noted, the local government owns 40% and “has no relationship with Euro Sun.”
“A negative reaction by the government would compromise Bisha,” Nevsun said.
Other arguments against the proposal included a “misaligned shareholder base, as many investors own Nevsun for exposure to Timok,” and $100 million in capital gains that Nevsun would have to pay if it sold its assets.
“Lundin and Euro Sun do have room to ‘sweeten’ their offer for Nevsun, and still consummate a highly accretive transaction,” Mike Kozak of Cantor Fitzgerald says in a research note. “Nevsun shareholders may hold out for a slightly higher cash and stock component from Lundin and Euro Sun.
“Now that Euro Sun has emerged as a buyer of Bisha,” the analyst says, “Nevsun is effectively ‘in play’ to any or all larger, tier base metal miners,” comparable to Lundin.
“We would not be surprised if a better offer emerges for Timok than the $2 per share in cash and $2 per share in Lundin shares proposed by Lundin. This scenario would presumably not affect Euro Sun’s proposed purchase price of Bisha, but should a premium to the Lundin terms be sizeable enough, would likely be viewed favourably by Nevsun shareholders.”