SMM Morning Review - 2011/3/14 Nickel Market

CALGARY, Alberta, Mar 11, 2011 (Dow Jones Commodities News via Comtex) -- The weakness of Equinox Minerals Ltd.'s (EQXMF, EQN.T) plan to fund its acquisitions with high levels of debt has been exposed by the recent drop in copper prices, the head of Inmet Mining Corp. (IEMMF, IMN.T) said Friday.
Equinox made a C$4.8 billion hostile offer for Lundin Mining Corp. (LUNMF, LUN.T) last week that is two-thirds financed by debt, and threatens to disrupt Lundin's planned merger-of-equals with Inmet Mining.
But copper prices have slumped nearly 10% since then due to concerns about slowing growth in the world's largest copper consumer, China, and Equinox's stock has declined even further.
&quot;It's a very volatile business,&quot; Inmet Mining Chief Executive Joachim Tilk said in an interview with Dow Jones Newswires. &quot;In that kind of volatility, if you have that much debt under the control of the banks, you're so exposed. The last seven days have demonstrated how quickly you can be in a very difficult situation.&quot;
In an emailed response, Equinox spokeman John Lute pointed to Equinox's past comments that it has stress-tested its debt levels for a downside in copper prices.
Combining with Lundin to create a company called Symterra would give Inmet the size and funding necessary to develop its massive Cobre Panama copper deposit in Panama. The deposit holds has 20 billion pounds of copper and 5 million ounces of gold in reserves and will cost more than $5 billion to develop. Inmet has been searching for a partner to help shoulder the cost of developing the prospect since it acquired it 2008.
Equinox, which owns the Lumwana copper mine in Zambia and a prospective project in Saudi Arabia, says it would grow faster than Symterra could by focusing on Lundin's and its own existing operations, becoming one of the top 10 copper producers by 2016.
But Tilk said Equinox's growth plans are based on assumptions about an expansion of its Lumwana mine that haven't been fully proven through a formal resource estimate or feasibility study.
Tilk also said the debt Equinox is borrowing from creditors, who include Goldman Sachs Group (GS) and Credit Suisse Group (CS, CSGN.VX), is likely to come with high transaction fees and risk when Equinox has to refinance its debt.
&quot;The moment Equinox assumes C$3.2 billion in debt, much of the copper is owned by the banks and it all goes to debt repayment, whereas in [Symterra] all the copper value goes to our shareholders,&quot; Tilk said.
Equinox's debt burden would also make it vulnerable to a further drop in copper prices, Tilk said, while Symterra wouldn't have any debt from the merger and would have C$2 billion in cash on its balance sheet at the end of this year.
Equinox spokesman Lute said in an email that Tilk's criticisms &quot;don't mean much,&quot; and that &quot;Lundin shareholders will decide, not him.&quot;
Analysts say Equinox's bid puts Inmet under pressure to sweeten the terms of its deal with Lundin that exchanges shares at a zero premium. Equinox's offer of C$8.10 in cash or 1.2903 Equinox shares plus a penny is a 26% premium--though some of the premium of the equity portion of the deal has eroded along with Equinox's stock price.
Inmet is likely to have to give more equity to Lundin shareholders, BMO Capital Markets analyst David Cotterell said. He estimates Inmet could offer equity that values Lundin up to C$9.50 a share without diluting its own shareholders, or a 29% premium to Lundin's recent share price.
Tilk declined to comment whether Inmet is considering offering more equity to Lundin shareholders, saying that the deal as it stands is superior to Equinox's.
Two-thirds of Lundin shareholders have to vote in favor of a merger with Inmet in order for the deal to go through. The vote is scheduled for March 28.
Copper prices dropped to their lowest point in nearly three months on Friday after an 8.9 magnitude earthquake hit Japan and triggered a tsunami. Copper prices were trading at about $4.15 a pound on the New York Mercantile Exchange, down from roughly $4.50 a pound at the start of the month.
Inmet shares rose a fraction to C$63.31 in recent trading; Equinox shares rose 2.2% to C$5.19; Lundin shares rose 1.5% to C$7.37. 
 
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