Nevsun Resources Ltd. (NSU) CEO Peter Kukielski on Zijin Mining Group Company Limited Mergers & Acquisitions Call (Transcript)

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About: Nevsun Resources Ltd. (NSU)
by: SA Transcripts

Nevsun Resources Ltd. (NYSEMKT:NSU) Zijin Mining Group Company Limited Mergers & Acquisitions Call September 5, 2018 8:30 AM ET

Executives

David Jan - Manager, Investor Relations

Peter Kukielski - President and Chief Executive Officer

Ryan MacWilliam - Chief Financial Officer

Scott Trebilcock - Chief Development Officer

Joe Giuffre - Chief Legal Officer

Analysts

Stefan Ioannou - Cormark Securities

Operator

Good morning, ladies and gentlemen. Welcome to today’s Conference Call and Webcast hosted by Nevsun Resources to outline its recent announced transaction with Zijin.

I would now like to turn the call over to David Jan, Investor Relations Manager. Please go ahead, David.

David Jan

Thank you, operator. Good morning, everyone, and welcome to today’s conference call and webcast. News release was issued earlier today announcing a friendly, all-cash bid by Zijin Mining to acquire all of the outstanding shares of Nevsun Resources. News release is available on our website at Nevsun.com and has been filed on SEDAR.

Before we get started, please be advised that the information discussed today is current as of September 5, 2018, unless otherwise indicated, and that comments made on today’s call may contain forward-looking information.

Forward-looking statements are by their nature, uncertain and frequently, but not always, are identified by words such as expects, anticipates, believes and similar expressions or statements that events, conditions or results will, could or should occur or be achieved.

Actual achievements or future events or conditions may differ materially from what is projected due to a variety of risks, uncertainties and factors. We encourage all listeners to thoroughly read today’s news release. All the financial numbers referred to today are in Canadian dollars unless otherwise stated.

Our presenters today is Peter Kukielski, Nevsun’s President and Chief Executive Officer. Following the conclusion of formal remarks by Peter, he will be joined for a Q&A session by Ryan MacWilliam, Chief Financial Officer, Scott Trebilcock, Chief Development Officer and Joe Giuffre, Chief Legal Officer.

I would now like to turn the call over to Peter. Peter?

Peter Kukielski

Thanks, David, and thanks to everyone for joining us on today’s call. Let me start by saying, we are very excited by what is clearly an excellent outcome for Nevsun’s shareholders. The friendly, all-cash bid we secured from Zijin and announced last night is for $6 per share, which values Nevsun at $1.86 billion. This is 26% more than the unsolicited bid from Lundin Mining.

This bid is also 57% more than the unaffected trading price prior to Lundin’s first announcement in May. Most importantly, this outcome and transaction are the result of a comprehensive, competitive and global review process that was carried out by Nevsun management and a special committee of our Board of Directors.

It should also be noted that this transaction with Zijin is not subject to any financing conditions providing an important element of certainty to our shareholders. From a value creation perspective, Zijin’s offer is extremely attractive relative to multiples observed in precedent transactions. When compared to recent historic transactions, the Zijin offer delivered superior value when benchmarked against a variety of metrics.

Whether it is the premium for a base metal developer or producer, or we look at all-cash bids or in the context of other Canadian hostile transactions, the premium offered by Zijin delivers superior value on a relative basis. This speaks to the quality and strategic value of Nevsun’s asset base. Most importantly, for Nevsun shareholders, it shows that Zijin is paying a significant controlled premium to acquire these assets.

When compared to Lundin Mining’s inadequate bids, it is clear the offer from Zijin delivers significantly more value. On an aggregate basis, Zijin is offering approximately $1.86 billion for Nevsun, compared to just $1.47 billion from Lundin. This represents approximately $385 million of additional value for Nevsun shareholders.

In addition to the compelling financial reasons just outlined, there are a number of other reasons our Board is unanimously recommending Nevsun shareholders accept the Zijin offer. First, this all-cash bid provides certainty and immediate liquidity to our shareholders. Second, Zijin is clearly committed to a successful transaction and this is underpinned by its willingness to agree to a US$50 million reverse break fee which is already held in Escrow in Canada.

First, after a thorough and competitive process, the Nevsun Board and a special committee have considered a variety of strategic alternatives and in so doing, they have determined the Zijin offer is currently the most attractive alternative available to Nevsun and its shareholders.

Finally, Nevsun’s Board has preserved the ability to respond to unsolicited proposals should they arise and while we are fully supportive of the Zijin offer, and no longer proactively seeking proposals, optionality remains for us to consider a superior bid should one emerge.

Let me now take a few moments to provide some background on the events which led us to our announcement with Zijin.

The intense interest in Nevsun and its collection of world-class assets is not a recent phenomenon. In fact, these high interest levels predates my arrival at the company. Beginning in March 2017, Nevsun started the process of evaluating various financing alternatives to support the development of the Timok Upper Zone.

Over the course of the years, including the period after I joined the company in May 2017, we received numerous inbound enquiries from a number of parties and potential strategic investors. In December 2017, we made a decision to consider the merits of a strategic investment with parties we felt would be strong potential partners and investors in Nevsun. Included in this group was Zijin.

As we moved into 2018, with the assistance of our financial advisors, Nevsun identified and approached numerous other parties to gauge their interest in a potential transaction with Nevsun. A wide net was passed and not surprisingly we got interest from parties from across the globe and in total 26 parties were sent confidentiality agreements with eight conducting extensive due diligence.

In May and June of this year, eight parties, including Zijin indicated their serious interest in acquiring up to a 19.9% equity stake in Nevsun. We then chose to proceed with an August 7th deadline for parties to provide forms of definitive agreements for such investments and final pricing.

While in the midst of this strategic investor process, Lundin Mining launched its hostile bid on July the 26th. From there, we received four proposals from major and mid-tier mining and smelting companies for a 19.9% stake in Nevsun with three of those offering higher value than Lundin Mining’s unsolicited bid of $4.75.

Ultimately, the Board of Directors chose to initiate a strategic review process to consider all value maximizing alternatives. This process went beyond their strategic investment process, which was already underway and was expanded to include a potential acquisition of Nevsun in its entirety.

As part of this, we also undertook a parallel process to solicit proposals from third-parties, potentially interested in only acquiring the Bisha mine in Eritrea. We felt this was a prudent course of action as it could potentially present us with an opportunity to pair a buyer for Bisha with parties only interested in the Timok Project. Ultimately, we felt this could generate more potential proposals for the acquisition of the entire company.

So in summary, our process was comprehensive, global and deliberately structured to consider as many value maximizing opportunities as possible. In fact, we contacted more than 50 counterparties globally and we are confident the Zijin offer as a result of this comprehensive process delivers superior value for Nevsun shareholders who are being offered an attractive premium, deal certainty and immediate liquidity in an all-cash transaction.

Now let me take a moment to provide an overview of Zijin mining. Zijin is the world's third largest publicly traded gold miner with a market capitalization of approximately US$10 billion. Listed on the Shanghai and Hong Kong Stock Exchanges, Zijin has an extensive portfolio of gold, copper, lead and zinc assets with subsidiaries in eight countries.

Since its founding in 1993, Zijin has grown to become a recognized global leader in gold and base metals production and exploration. And in recent years, Zijin has been very active and involved in a number of high-profile transactions and investments.

These include a strategic partnership with Barrick Gold related to the Porgera mine in Papua New Guinea, a strategic investment with Vancouver-based Ivanhoe Mines Limited related to the Kamoa-Kakula copper project in the Democratic Republic of Congo, the successful takeover in 2015 of Norton Gold Fields, an Australian mining company and only last week, it was announced by the Serbian Ministry of Mines and Energy that Zijin had been selected to become the strategic partner in RTB Bor copper mining and smelting complex located just six kilometers from the Timok Project.

This clearly demonstrates Zijin’s commitment to investing in Serbia and its intention to rapidly develop the Timok Upper Zone and bring it into production.

They also believe deeply in the potential of the Bisha Mine in Eritrea, where we expect they will invest capital in an effort to extend mine life well beyond 2022. Zijin is highly motivated and focused on completing this transaction.

I would now like to review at a high level some of the key elements of the transaction structure. First, this is a takeover bid with unanimous support from Nevsun's Board of Directors. The consideration is $6 per Nevsun share all in cash.

This implies an equity value of Canadian $1.86 billion for Nevsun. To complete the offer, a minimum of 66⅔% of Nevsun’s outstanding shares must be tendered including those held directly or indirectly by Zijin and its affiliates.

Nevsun currently has approximately 302.6 million shares and 7.1 million options issued and outstanding. Zijin currently owns 3.2 million shares equivalent to approximately 1.1% of the total shares issued and outstanding.

Regulatory approvals will be required in both Canada and China. In Canada, the transaction will require a review and approval under the Investment Canada Act and the Competition Act. In China, approval by relevant authorities will include the National Development and Reform Commission, the Ministry of Commerce, and the State Administration of Foreign Exchange.

Zijin is highly experienced in international M&A and has expressed confidence in their ability to secure the approval in a timely manner.

Let me turn now to a discussion of the break fees related to the transaction. Zijin has agreed to pay Nevsun a US$50 million break fee under certain circumstances. Included amongst these, is a failure by Zijin to obtain the necessary approval from relevant authorities in China by January the 31st, 2019.

As noted earlier, full amount is already held in Escrow in Canada. Nevsun has already agreed to a customary break fee where it would be obliged to pay Zijin the same amount, US$50 million in certain circumstances, instances where Nevsun would be required to pay a break fee includes, Nevsun enters into an agreement with respect to a superior proposal and if Nevsun’s Board of Directors withdraws or modifies the recommendation with respect to the offer.

We think the conditions outlined around the break fee are customary and normal course for a transaction of this nature.

Now on timing, we expect the filing and mailing of the Zijin takeover bid circular and the Nevsun Directors circular to occur within 13 days and no later than September the 18th. Investors will then have 105 days to consider the offer unless the bid period is shortened by the Nevsun Board. As we reach key milestones and regulatory approvals are received, we will update the markets in a timely manner.

I would like to reiterate that our Board of Directors at Nevsun is unanimous in its belief that the proposed transaction with Zijin Mining delivers superior value to our shareholders. As such the Board of Directors at Nevsun continues to recommend that shareholders reject Lundin Mining’s undervalued and unsolicited bid.

We encourage all of Nevsun shareholders to review the offer materials in the Zijin circular and our Directors circular when they are available in short order and we encourage all Nevsun shareholders to tender their shares to accept the highly compelling offer from Zijin.

This concludes our formal remarks for today. We would be happy to answer your questions now. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Stefan Ioannou from Cormark Securities. Your line is open.

Stefan Ioannou

Great. Thanks very much. Congratulation guys on the offer from Zijin. Just curious - just looking at the regulatory approvals, just sort of your thinking and understanding so far the process on both the Canadian and Chinese side, which would you look as the bottleneck sort of side for getting those done in terms of maybe being in a position to accelerate the closing date of the deal?

Peter Kukielski

Good morning, Stefan and thanks for your kind comments. I honestly don’t believe that there are any specific bottlenecks in securing these approvals. Zijin is a major mining company which has extensive experience in obtaining these approvals, it acquired these approvals for example, for the Barrick transaction of Porgera as well as for its transaction with Ivanhoe.

The approvals in Canada have a specific timeline and that specific timeline is approximately 75 days which is exactly 75 days. On the Chinese regulatory side, there were also specific durations. We anticipate that given Zijin’s experience they should be able to get the approvals expeditiously.

Stefan Ioannou

Okay, okay, great. And just, when you went to the sort of timeline of events with Zijin and others, you mentioned, I guess, in late Q2 Zijin along with I guess seven other parties at the time expressed interest in purchasing up to a 19.9% equity stake in those and obviously that’s changed now, they are going for the entire company.

Was it the – I mean, would you say it was Lundin hostile bid that prompted their change of tone? Or was there anything in their thinking that you can comment on that changed unlike to go from just a partner to a full-on acquirer?

Peter Kukielski

If I am interpreting your question correctly, you are asking me if Zijin was a participant in the strategic investor process

Stefan Ioannou

Yes.

Peter Kukielski

Yes. So, Zijin was in fact a one of the four parties that submitted bids in the strategic investment process for 19.9% in the company. The price that they offered was, in fact higher than the price offered in – presented in Lundin hostile bid and they had expressed an interest in acquiring the entire company

Stefan Ioannou

Okay.

Peter Kukielski

As well as the opportunity arise.

Stefan Ioannou

I see, I see. So it kind of took it with a two-pronged approach. Okay, great. Great, well, thanks very much guys and congratulations again.

Peter Kukielski

Thank you.

Operator

[Operator Instructions] There are no further questions at this time. I will turn the call back over to the presenters.

Peter Kukielski

Thank you, operator, and thanks again to everyone for joining us on today’s call. We believe we have delivered a truly compelling transaction to Nevsun’s shareholders and we encourage you to tender your shares and accept the offer from Zijin. Have a wonderful day.

Operator

This concludes today’s conference call. You may now disconnect.