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Equinox's takeover battle is a bet copper has room to run

The battle for Lundin Mining Corp. intensified as Equinox Minerals Ltd. launched a $4.8-billion hostile bid for the copper miner, which lashed out at the offer as fraught with debt and geopolitical risk.

Equinox, incorporated in Canada but largely based in Australia, is offering a rich premium of 26 per cent to Lundin's shareholders to win control of the Vancouver-based company and thwart its planned merger with Toronto-based Inmet Mining Corp. Equinox is betting on strong long-term demand for copper , which has soared in price as China and other fast-growing economies spend heavily amid a construction and infrastructure boom.

"Our view on copper is obviously pretty positive and I think we need to take advantage of that," Equinox chief executive officer Craig Williams said in an interview on Monday. As for Lundin's proposed tie-up with Inmet, "we didn't see the logic in that merger of equals so we decided we needed to act," Mr. Williams said. "We like the Lundin assets," he said, citing in particular Lundin's 24.75-per-cent stake in the Tenke Fungurume copper and cobalt project in the Democratic Republic of Congo.

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But Lundin executives criticized Equinox's cash-and-shares offer as risky. Lundin chief executive officer Phil Wright cited the $3.2-billion (U.S.) bridge loan Equinox would take on to do the deal, sharply increasing its debt load.

"Do you want to be in the hands of your lenders? Have we learned really nothing out of the past three years?" Mr. Wright told investors at the BMO Nesbitt Burns global mining conference in Florida on Monday. "I have to tell you, from my point of view it's been an uncomfortable experience from 2008 and it's not something that I would like to see our assets be subjected to."

Mr. Wright said the company and its advisers are still reviewing Equinox's offer, but he has considered such a deal in the past and "I don't like the combination." Mr. Wright also cited concerns about the combination of Equinox's copper mine in Zambia and Lundin's stake in a project in the Democratic Republic of Congo.

"Do we want to recommend to shareholders the fact that we want to bulk up on Central African risk? It's not something that has been a driving force for me," Mr. Wright said. As for any strategic operational benefits from the deal, "I've looked and I see zero. If they are there, they are eluding me at this stage."

Lundin shareholders, however, appear more interested in the offer, which valued Lundin shares at $8.10 apiece when launched. Shares of Lundin jumped $1.20 or nearly 19 per cent to $7.65 on the Toronto Stock Exchange on Monday.

Equinox said buying Lundin would help it create one of the world's top 10 copper companies with a projected compounded annual growth rate of 23 per cent, which would give it 500,000 tonnes of production each year by 2016.

"That is the technical fit between the two groups," Mr. Williams said. "The blindingly obvious one is that we are offering a 26-per-cent premium to Lundin shareholders, whereas the merger of equals is a zero premium."

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In addition to its Zambia project, Equinox is nearing production at a copper project in Saudi Arabia picked up in its recent $1.26-billion purchase of Citadel Resource Group Ltd.

Equinox officials dismissed concerns about high debt levels from the deal. The company said industry forecasts for average annual copper prices of between $3 (U.S.) and $4 per pound until 2015 should help it pay off the debt within four years. Copper is currently trading around $4.50, just shy of a recent record $4.65, as demand for the widely used metal soars amid constrained supply.

If its bid for Lundin is successful, Equinox said it plans to refinance the bridge facility through a combination of medium and long-term debt instruments, without raising equity. There deal makes financial sense even if copper prices decline, the company said.

"We are confident that even if there is a downturn in the copper market we are not putting ourselves under undue risk," Carl Hallion, Equinox's vice-president business development told investors Monday.

Tenke is one of the world's richest copper projects and the biggest foreign investment in the history of the war-torn African country. However, it has suffered delays as a result of contract disputes with the government, which were resolved last fall. Foreign government involvement in mining projects can be risky, but that's a chance more miners are willing to take as they move into more far-flung regions as part of a constant hunt for new resources. Operating partner Freeport- McMoRan Copper & Gold Inc. has a 57.75-per-cent stake in the Tenke project, while the rest is owned by a Congolese state mining company.

The Equinox takeover battle is part of a growing list of mergers and acquisitions in the mining sector over the past several months. Mining companies are armed with big cash holdings from surging commodity prices and are pushing to expand their operations to find future growth.

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The hostile bid has put both Lundin and Inmet in play, and could result in a flurry of proposed deals, possibly for all three companies. If that happens, it would be reminiscent of the frenzied fight that broke apart the proposed deal between Canadian nickel producer Inco and Falconbridge in 2005.

Before Equinox made its offer official on Monday, some analysts suggested the merged Lundin-Inmet could be attractive to even larger copper producers such as Freeport, the world's largest publicly traded copper company.

Freeport CEO Richard Adkerson said on Monday that the company is only interested in larger deals.

"For a company our size, the opportunities are limited," he told investors at the BMO Nesbitt Burns global mining conference. "If an opportunity comes to us it is going to have to be a big, big opportunity. It won't be a smaller deal."

Lundin has copper, nickel, lead and zinc mines in Portugal, Spain and Sweden as well as expansion projects at its Zinkgruvan operation in Sweden and its Neves Corvo mine in Portugal.

The Equinox offer allows Lundin shareholders to receive either $8.10 in cash or 1.2903 Equinox shares plus one cent for each Lundin share. The share option is subject to a pro-ration, based on a maximum cash consideration of about $2.4-billion and maximum 380 million Equinox shares. Equinox said cash consideration of its offer will be financed through the bridge facility.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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