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Zijin's C$1.86B bid for Nevsun may be tough to top

Zijin Mining Group Co. Ltd. may prove a hard bidder to crack with a C$1.86 billion all-cash offer for Nevsun Resources Ltd., pairing a strong premium and larger designs for development in Serbia.

Zijin's offer of C$6 per share trumped a hostile attempt by Lundin Mining Corp., which had bid C$4.75 per share in cash.

In reaction to the offer, analysts cast doubt that Lundin Mining would top Zijin, which has the right to match subsequent offers. They noted Zijin's obvious thirst for Nevsun's assets and Lundin's reticence to pay more than what it sees as fair value.

"Lundin has been pretty vocal that they believe C$4.75 was more than enough," said Stefan Ioannou, a Cormark Securities analyst. "And to come back and trump Zijin at C$6 is going to be a tough sell to Lundin shareholders; to have that change of heart towards the valuation."

RBC Dominion Securities analyst Sam Crittenden took a similar view, saying the chances Lundin plays bidding war with Zijin are "unlikely" in a note to clients as quoted by The Globe and Mail.

For one thing, Zijin already has investment designs in Serbia, which may raise the stakes for it to secure Nevsun's assets. Zijin recently committed to spend US$1.26 billion in the country through an investment in RTB Bor Group, which owns mining and smelting assets.

Ioannou said Zijin could have plans to draw synergies from RTB Bor and Nevsun's undeveloped Timok copper project. "My guess is the whole strategy behind acquiring Bor probably included the anticipation that they would also have Timok along for the ride," he said.

Timok includes an eye-catching high-grade Upper Zone, 100% owned by Nevsun, that hosts 27.1 million tonnes in reserves grading 3.3% copper and 2.1 g/t of gold within a high-arsenic deposit. The deposit also includes the much larger Lower Zone deposit, 60.4% owned by Nevsun with the balance held by a subsidiary of Freeport-McMoRan Inc.

Highly motivated

Nevsun President and CEO Peter Kukielski underlined Zijin's commitment to getting a deal done and the premium on offer during a Sept. 5 conference call. "Zijin is highly motivated and focused on completing this transaction," he said.

As for price, he noted that after reviewing recent mergers and acquisitions in the base metals sector, Zijin was clearly paying a "significant control premium." The offer was a 57% premium to Nevsun's share price before Lundin proposed to take it over.

Both parties agreed to a US$50 million break fee under certain circumstances and Kukielski said that the reverse break fee, in Nevsun's favor, was in escrow in Canada.

In a further sign of deal strength, the bid came without financing conditions and Nevsun described ample funding available to Zijin in a follow-up email.

A spokesperson said Zijin had about US$1.6 billion in cash as of the end of June, more than that available on an undrawn credit facility and other funding sources in the works. "Zijin has banking support for additional credit and will likely secure additional capital in the very near term," the spokesperson said.

The deal still requires regulatory approvals in Canada and China, but Kukielski said he did not foresee bottlenecks that might slow down the deal's close.