Tenke Mining: Lundin Merger Offer Could Spike Bidding War

It's all happening so fast. On April 4th, Lundin Mining (LMC) announced an all cash offer at CAD 5.0 per share of Rio Narcea (RNO) for all shares outstanding; it is now only a couple weeks later and we have news of a new deal to buy out Tenke Mining (OTC:TNKDF), with their major asset of 24.75% in Tenke Fungurume copper/cobalt mine in Congo.

As per the announcement, all shareholders of Tenke Mining are being offered 1.73 shares of Lundin Mining for each Tenke share, but I will be surprised if Lundin will get Tenke at the first price offer. Lundin's motivation is clear: such an asset is still under the radar of the investment crowd with almost no one following it. With construction of the mine at full speed, and expected first production in 2008, the price for Tenke will increase dramatically as soon as the story hits newsletters and analysts start to follow the stock. The Lundin family definitely would like to keep the Tenke Congo assets inside the family line of business for as long as it is possible.

Now, the Lundin family holds around 14% in their mining company and almost 20% in Tenke. It will be much harder to buy out Lundin Mining than Tenke Mining, even at the recent price, due to much higher capitalization. After the merger, Lundin Mining will have approximately 389.9 million shares. Based on a 20 day average price before the deal announcement on April 15th, the Lundin mining market cap will be CAD 5.3 billion after the merger, not a change even for industry heavyweights like BHP (BHP), RIO Tinto (RTP) or Companhia Vale do Rio Doce (RIO).)

But what is the fair price for Tenke shareholders? Tenke Fungurume's 24.75% stake was valued at CAD 1.4 billion at the moment of announcement. Since the conference call there are many questions that Tenke Mining's management and board members need to address. Tenke Fungurume was always portrayed as one of the largest copper deposits in the world with only half of the concessions being explored. An assessment of price was done only on "flat" production of 115000 t of Cu per year, without any consideration for premium for increase to 200000 t, and later for 400000 annual production. A new resource estimate is supposed to be published by mid 2007, which will incorporate all drilling done by Phelps Dodge in 2006. A feasibility study was never published in full details and the total price assessment process does not look transparent. Also, the companies have Directors sitting on the boards of both companies and conflicts of interest must definitely be addressed.

Now, a Freeport-McMoRan Copper & Gold Inc (FCX) move will be very interesting. From Phelps Dodge's (company was acquired recently by FCX) perspective, it will be much cheaper now to bid for the outstanding 24.75% of Tenke Fungurume. Who could better know the value than the operator of the property? Will they allow the Lundins to keep it or will they try to bid now? In the end, the shareholders of Tenke mining will be in good hands with the Lundins, but as a Tenke shareholder I would prefer a better price, and if more bidders will come we can easily get a ratio of 2.5 - 3.0 of Lundin share for one Tenke share. With a proposed 73/27 ratio for Lundin Mining and Tenke Mining shareholders respectively, the Lundins will have 14%*73%+20%*27%=15.62%. This is not enough to defend against an unfriendly offer, but the size of the company will help to prevent losing assets before their full pricing potential.

I think that the following scenario will be the best for Tenke shareholders:

1. A clear explanation by the Tenke board on the price decision on the Tenke mining side. Conflicts of interest must be addressed by the Lundins because of their integrity, for which they are highly respected in mining industry.

2. A bidding war with FCX or a newcomer will help to get a higher premium for a world class asset in their copper/cobalt mine, but in the end it will be better to stay with the Lundins at a higher rate of exchange.

3. Fast development of Russian wild card - Ozernoe zinc deposit. With Tenke Fungurume in production it could quickly bring Lundin mining to a 10 billion market cap.

4. South American projects spin off is very positive. It will allow the ability to concentrate on exploration and acquisition of promising gold prospects. With the Lundins as back-up, financing will be not a problem and Paul Conibear's management grip will help to make a second success like Tenke in grass root exploration projects.

Disclosure: Author is long Tenke Mining shares

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