Inova’s board recommends accepting Chinese takeover bid

VANCOUVER – Inova Resources (TSXV: IVA; ASX: IVA), the Australian exploration arm of Ivanhoe Mines that listed publicly in 2008 and is still majority-owned by Ivanhoe successor Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ), looks set to...

VANCOUVER – Inova Resources (TSXV: IVA; ASX: IVA), the Australian exploration arm of Ivanhoe Mines that listed publicly in 2008 and is still majority-owned by Ivanhoe successor Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ), looks set to be acquired by Shanxi Donghui Coal Coking & Chemicals Group.

Shanxi Donghui launched its bid for Inova on Aug. 21, offering A22¢ per share. The price represented a 55% premium to Inova's three month weighted average price of A14.2¢ and a 29% premium to IVA's closing price the day prior to the bid. The offer values the small, Australian-based copper-gold producer at A$160 million.

Concurrent with the offer Shanxi Donghui announced that Turquoise Hill, which owns 56% of Inova's outstanding shares, had entered into a prebid acceptance agreement to submit roughly a third of its IVA holdings – representing 14.9% of the company – to the offer as soon as all offer conditions had been met aside from the 51% minimum tender requirement.

Inova's board held off on commenting on the offer for more than a month. In that time the other offer conditions were met, which triggered the prebid agreement. Once that transpired Turquoise Hill announced it intended to tender the rest of its shares to the offer.

Finally, on Sept. 26, Inova's independent board committee recommended that shareholders tender to Shanxi Donghui's offer. In explaining its recommendation the committee pointed out that once Shanxi Donghui owned Turquoise Hill's 56% stake, the Chinese firm would have control of the company, especially if some other shareholders also tendered to the offer. For continuing Inova shareholders such a scenario would mean dramatically reduced liquidity and control.

The committee also noted that two of Inova's key assets – the Merlin molybdenum-rhenium project and the Mount Elliott copper-gold project – are nearly ready for development. Building either one into a mine would require Inova to access major capital, something that may not be attainable in the current markets.

Finally, Inova's committee said they had run an "extensive process to find potential investors and partners" for its projects last year that did not yield a result. Meanwhile Turquoise Hill had searched extensively for a way to divest its Inova holdings, and Shanxi Donghui's offer was the only formal and binding proposal to come of that search.

Inova has three main projects: the operating Osborne copper-gold mine, where ore from three underground operations feed a central mill and flotation facility; the construction ready Merlin molybdenum-rhenium project; and the feasibility stage Mount Elliott copper-gold project. All three are in northwest Queensland, near the town of Cloncurry, in Australia.

Inova was originally a wholly owned subsidiary of Ivanhoe Mines, charged with exploring and advancing Ivanhoe's Australian assets. In 2008 the company completed an initial public offering; Ivanhoe, which by then was known as Turquoise Hill, maintained 80% control. Over the next three years subsequent offerings reduced Turquoise Hill's stake to 56%.

Inova's only producing asset is the Osborne operation, which it acquired from Barrick Gold (TSX: ABX; NYSE: ABX) in 2010. Within months Inova recommenced underground development work at the project, where work had been suspended, and by early 2012 the Osborne and Kulthor underground mines were feeding ore to the Osborne mill and flotation facility. A year later Inova also restarted the nearby Starra Line underground mine, which also feeds the Osborne facility.

In the second quarter the three mines fed 393,000 tonnes of ore into the Osborne facility to produce 12 million lb Cu in concentrate and 6,459 oz Au.

Interestingly, since Shanxi Donghui tabled its offer Inova released news of a revised reserve and resource estimate for Starra Line. In reflecting an improved understanding of the deposit's spatial complexity, the new estimate slashed Starra Line's reserve from 1.5 million tonnes grading 1.24% Cu and 0.81 g/t Au to 854,000 tonnes grading 1.52% Cu and 0.87 g/t Au. The reduction means Starra Line now has 14% less mill feed to offer.

Following that news Inova embarked on a life-of-mine evaluation of the entire Osborne operation. The results of that assessment are expected in November, but Inova has already warned there is "the potential for an impairment of the carrying value of the Osborne copper-gold business assets in the range of between A$10 million and A$20 million."

Fifty kilometres north of the Osborne operation sits Inova's Merlin project, which hosts the world's highest grade molybdenum and rhenium deposit. In 2010 Inova started driving a decline to access the project's two main zones, known as Merlin and Little Wizard. With the decline in place Inova has been able to drill test both zones from underground, leading to a very clear understanding of the deposits.

The project now awaits permits. Inova's development plan would see ore from Merlin trucked 50 km to a processing facility built adjacent to the Osborne plant, where power, water, accommodation, and access are all already in place. While the permitting process advances Inova has worked to improve the project's economics, an effort that recently resulted in an improved metallurgical flowsheet and reduced operating costs.

Inova's other development ready project is Mount Elliott, an iron oxide-copper-gold deposit located 20 km north of the Merlin project. In August Inova updated the resource estimate for Mount Elliot, using results of recent drilling and boosting the copper equivalent cut-off grade to 0.5% from 0.3% to better reflect likely mining methods.

In the new estimate the tonnage and grade of the indicated resource increased to 157 million tonnes grading 0.67% Cu and 0.4 g/t Au, while the inferred resource declined slightly to 107 million tonnes averaging 0.54% Cu and 0.31 g/t Au. The resource comprises primarily fresh sulphide mineralization, though 8.9 million indicated tonnes and 1.5 million inferred tonnes are classified as a leachable oxide resource.

Shanxi Donghui is a large coking coal, coke, and chemicals producers based in Shanxi province. It is a private company. Shanxi says it has more than $160 billion in the bank. In a release Shanxi Dongdui's chairman, Zhang Yaping, said his company "looks forward to progressing the development of Inova's mines and growth projects and managing the inherent risks involved."

Inova's thinly traded shares have ranged between 16¢ and 24¢ in recent months, after falling from a 52-week high of 60¢ achieved in January. Since Shanxi Donghui tabled its offer IVA shares have held near 20¢, reflecting the Canadian dollar value of the offer. The company has 719 million shares outstanding.

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