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ISS flip-flops on Lundin, Inmet merger

Advisory firm now recommends Lundin shareholders vote against the deal; cites problems around changes to Inmet project in Panama

Brenda Bouw

Globe and Mail Update

12:27 EDT Monday, March 28, 2011

Vancouver — A shareholder advisory firm has reversed its recommendation on the proposed merger of Lundin Mining Corp. and Inmet Mining Corp. , citing problems around changes to Inmet’s flagship project in Panama that is central to the deal.

Proxy advisory firm Institutional Shareholder Services Inc. now recommends Lundin shareholders vote against the “merger of equals” announced in January, a change from its previous decision in favour of the deal to create a copper powerhouse named Symterra Corp., with a market capitalization of about $9-billion.

ISS also pointed out the increased spread between the shares prices of the two mining companies, in particular that Lundin is trading at a higher premium since the change at Inmet’s Cobre Panama project was revealed a week ago, and since a competing $4.8-billion hostile bid surfaced from Equinox Minerals Ltd. a month ago.

“ [Lundin] has traded at a significant premium to the offer price implied by the merger exchange ratio since [Equinox’s] bid was announced,” ISS said.

ISS also cited “uncertainty” around approval of a planned coal-fired power plant at Inmet’s flagship Cobre Panama project and comments Lundin chief executive officer Phil Wright made last week suggesting “an increased likelihood that the merger will be renegotiated or called off.”

Inmet revealed last week that the Panamanian government wants the plan to use coal-fired power plan at its $4.3-billion Cobra Panama project changed to natural gas. Lundin has characterized the revised power plan as a “material departure” from the original merger agreement, and is reviewing the impact.

Analysts say the changes to the power plant could mean delays at the 250,000 tonne-per-year project set to start production in 2016, and higher costs.

Inmet maintains the change is not material to the timing or economics of the project.

Lundin said last week it was still recommending the merger, but the two sides are currently in discussions. Shareholders from both companies are set to vote on the merger on April 4. The stock-swap deal requires approval by two-thirds of the shareholders of both companies.

Meantime, Lundin has a few options to consider. It could try to back out of the deal, invoking a “material adverse change” clause, which could mean avoiding a $120-million break fee. However, such a move could result in legal action from Inmet. Lundin could also leave the decision to shareholders, which recent market activity shows could result in the deal being voted down. The two companies could also agree to revise the agreement, including possibly changing the share-exchange ratio, to reflect what Lundin sees as a major change to the deal. Alternatively, the two companies could agree to end the deal.

A decision is expected in the coming days. Executives at both Lundin and Inmet could not immediately be reached for comment Monday.

If the Lundin-Inmet merger dies, Lundin is expected to continue to fight the Equinox bid, which Lundin views as too heavily leveraged, with $3.2-billion (U.S.) of debt. Lundin investors could press the company to accept Equinox's offer. Equinox has offered $8.10 per Lundin share in cash or 1.2903 Equinox shares plus a penny for each share. The amount of cash is limited to $2.4 billion, while the number of shares offered is capped at 380 million.

ISS has recommended Equinox shareholders support the company's hostile takeover bid to buy Lundin. It has not made a recommendation on Lundin shareholders should vote on the Equinox offer.

If Lundin’s deal with Inmet fails and it rejects the hostile bid from Equinox, the company could choose to go it alone, seek other buyers through an auction, or sell off parts of the company, which include copper, nickel and zinc assets in Europe and a coveted 25-per-cent stake in the Tenke Fungurume copper and cobalt project in the Democratic Republic of the Congo.