By IAN ROSS
After the mining mega-mergers of 2006, it was believed 2007 was the year many promising juniors would be takeover targets.
Sudbury’s FNX Mining was on that list.
The successful $2.8 billion junior-turned-mid-tier miner has to make a decision this winter whether to put itself up for auction.
New York hedge fund, York Capital Management, owners of the largest shareholder of FNX at 19.2 per cent was demanding FNX management launch a formal strategic review and seek “strategic buyers.”
In a Nov. 19 letter to board chairman Terry MacGibbon, York Capital was “frustrated” with the market’s indifference with FNX shares despite the optimistic future outlined by the miner.
“Based on our knowledge of the industry and our contacts with industry players, we believe that there may be significant corporate interest in FNX and any evaluation of strategic alternatives would attract multiple suitors,” wrote York’s investment officer Daniel Schwartz and managing director Michael Weinberger.
As operators of Sudbury’s McCreedy West Mine, FNX had not made a decision by early December on how to deal with the letter.
David Constable, FNX vice-president of investor relations, says the FNX board isn’t adverse to listening to the advice of any shareholder, but the directors will decide what’s in the best interests of all.
York Capital had requested a meeting with the board, but FNX directors wanted to seek advice from their financial and legal advisors before taking any action.
Constable says the board regularly examines their options, “not just because York sends us a letter.”
He was expected a decision to be made by mid to late December.
Constable says FNX’s long view has always been to build value in Sudbury and look for growth opportunities within the mining camp or elsewhere.
The company wants to double production in the next three years with two new mines in the queue, and expects to triple revenues in Sudbury.
They’ve targeted production of 12.7 million pounds of nickel and 10 million pounds of copper this year.
All of their ore is delivered to Vale Inco (formerly CVRD Inco) under an "off-take agreement" where the senior miner processes and sells the finished nickel and copper.
York Capital has bought heavily into FNX within the last two quarters after occupying a small position two years ago.
“This is not an entrenched management and board. We will obviously be the beck and call of the shareholders' votes.”
Though not sure what kind of return York was expecting, Constable says many hedge funds have made money out of holding major miners like Inco, Falconbridge and LionOre Mining bought out at a premium.
But those companies are mature, says Constable. “We’re still a growth story.”
In December, RBC Capital Markets upgraded FNX stock to a "top pick" from "outperform." Although he was not expectant to an imminent sale, analyst Adam Schatzker believes FNX could attract an offer of $41.25 to $51 per share.
FNX shares were hovering around $33 in early December.
An "X" factor in any acquisition is FNX’s ‘off-take agreement’ with Vale Inco.
Constable says the way the agreement is structured, it’s impractical for another miner to make an offer if they can’t get access to the metal.
“Mining companies don’t buy another company for cash stream, they buy it for metal.”
Though it’s not written in stone, Constable says “York or anyone that puts us on the auction block as a shareholder has got to deal with that as part of FNX.”
CVRD Inco is an obvious acquisition player because of their access to the ore.
Should a take-over situation occur, Constable says it is always better to entertain multiple suitors.
FNX management has game-planned various scenarios if Inco were to reduce or cut milling capacity of FNX ore with 12 months notice, or if a new Sudbury joint venture would lead to an improved processing facility.
Any such changes would allow FNX the freedom to make a new milling arrangement for its ore with another major miner or build their own stand-alone mill.
The company gets high marks on the market for their operating and advanced exploration properties located in the heart of a booming Sudbury mining camp near Vale Inco and Xstrata Nickel.
At its Podolsky high grade copper project, pre-production ore is being shipped with commercial production starting sometime in the first quarter of 2008.
Levack Footwall is another copper-nickel deposit that the market is following with interest. With advanced exploration starting from Xstrata’s neighbouring Craig Mine, the company expects to drive through a big 200 to 300-foot envelope of high grade veins sometime in the new year.
Many mining analysts are expecting a production forecast early in the new year.
