Sprott sums it up best......
If The Market Will Not Pay - Industry Will
This morning, Noranda made an all-cash bid of C$24.50 per share for Rio Algom, a 35% premium to Rio’s close yesterday. Details
of the C$1.5 billion deal will be mailed to shareholders within ten days, and the usual 21-day minimum response period will probably
apply. While we do not provide research coverage on either stock, as Noranda already owns 9% of Rio, it appears to be best
positioned to conclude a deal. This fact, coupled with the backing of Codelco (the biggest copper producer in the world, owned by
the Chilean state), make competing bids unlikely, although not impossible. Phelps Dodge and Grupo Mexico are candidates, but have
only recently completed major takeover transactions themselves. The bid is hostile and triggers the shareholder’s rights plan.
Therefore, there is good potential for a further sweetened bid, perhaps 10% to 15%, to bring Rio Algom’s management
onside.
The main point here that when the market ignores the value of a company and share prices languish, that company’s industry peers
will step in and make the investment. Key takeover candidates of the companies we cover are listed below.
GOLDS
· Goldcorp: This is a clean company that will probably have the world’s lowest-cost major gold mine (the Red Lake mine in
Ontario) by November 2000. Coincidentally, control of the Company should be in the marketplace at around the same time.
A mine of this quality is highly desirable, as it would bring any successful acquirer down the cost curve and improve cash
flow multiples. Likely candidates are Placer Dome, Anglogold, Meridian and the ubiquitous Barrick.
· Meridian: Meridian is much less likely to be taken over than Goldcorp. Similar to Goldcorp, this company has a world-class,
low-cost gold mine in Chile (El Penon mine). We expect exploration to materially increase ore reserves, making this a
takeover candidate. Control is in the market; however, management is highly competent and well regarded and is therefore
more likely to be an acquirer than an acquiree.
· Agnico-Eagle: The La Ronde orebody’s high zinc by-product and lofty valuation makes this company less attractive to
focused gold producers.
BASE METALS
· Teck Corp/Cominco: These companies trade at a massive discount to NAV. After seeing Goldcorp’s McEwen family show
the value of putting control in the market, perhaps the Keevils and Sumitomo will follow suit. Cominco is coveted, and
therefore so is Teck, although Teck has excellent projects in its own right. Key candidates would be Anglo American, Rio
Tinto or Billiton. Alternatively, and more likely, Teck may make an offer to the minority shareholders of Cominco of
at least $30 per share, but mainly with Teck paper.
· Inmet: Inmet also trades at a massive discount to its NAV, as the environmentally challenged Ok Tedi mine weighs heavily
on the stock. The Ok Tedi is held through an 18% minority interest in a limited liability company, and therefore Inmet is not
at risk. There may be potential to break up the company.
· Aur Resources/Breakwater Resources: Neither of these companies are likely candidates at this point as the mines are
relatively small and, as such, undesirable to a major producer. However, the latter has become a major zinc concentrate
producer.
· Manhattan Minerals/Tiomin Resources: Both companies are tremendously undervalued, but still have two years to
production. These are ideal purchases for major industry producers seeking long-life assets. As both companies advance their
projects, there is a greater likelihood that a major industry player will take note.