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CANADIAN MINING PERSPECTIVES: Xstrata hunts LionOre

Torontos XSTRATA NICKEL is on the hunt for another Canadian acquisition since Xstrata won the battle for Falconbri...


Torontos XSTRATA NICKEL is on the hunt for another Canadian acquisition since Xstrata won the battle for Falconbridge just eight months ago. It has offered $18.50 for each share of LIONORE MINING INTERNATIONAL of Toronto and London, U.K. The deal is worth $4.6 billion.

Both LionOre and Xstrata are patting themselves on the back. Amazingly, the merger is described as friendly. That adjective is far different from the ones used to describe the hard-won battle for control of Falconbridge last year. Before that was settled, proposals from several suitors were met with repeated resistance and counter-offers.

LionOre, for the most part, has gone quietly about the business of producing nickel in Western Australia, South Africa and Botswana. The company estimates that its share of nickel contained in concentrates will be almost 40,000 t during 2007. That figure is about half of Xstratas nickel capacity and roughly 15% of CVRD INCOs output. LionOre also operates a 140,000-oz/y gold mine in Western Australia.

What LionOre has that Xstrata wants, besides a substantial production boost, is the patented Activox technology, a hydrometallurgical method of treating sulphide ores. The key to Activox is ultra-fine grinding followed by leaching at only 110C and one atmosphere of pressure.

At the March 26 press conference announcing the deal, Xstrata Nickel CEO Ian Pearce waffled when asked to put a dollar value on the Activox process. He lapsed into corp-speak, citing optionality, flexibility and leveraging certain orebodies. He refused outright to reveal a dollar figure.

LionOre is ready to build the first commercial Activox refinery at its Tati nickel project in Botswana. The company has raised $250 million to build the facility, and the remaining $100 million will come from cash on hand and from Tati operating income.

Observers believe that acquiring LionOre and its Activox process will be a money-maker for Xstrata. Xstrata has expertise in ultra-fine grinding technology, and it acquired the Nikkelverk refinery in Norway as part of the Falconbridge deal. That plant is due for a phased expansion to 250,000 t/y of refined nickel from the current nameplate capacity of 86,000 t/y. Could this be the site of the second Activox plant?

Xstratas $18.50 offer represents a 16.5% premium on the price of LionOre shares over the 30-day TSX trading price prior to the announcement. However, $18.50 is only 5.8% higher than the closing LionOre price on March 23, 2007.

Questions were raised at the press conference regarding the $18.50 value placed on LionOre shares since it represents such a small premium over the previous Fridays closing price. Indeed the share price early on the morning of March 27 was over $19.25 per share. Someone, factoring in a sustained record high nickel price, must think Xstratas offer is low.

What started out as a friendly business combination is beginning to show signs of attracting higher offers from third parties. Stay tuned for further developments.


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