Zijin Mining Group has agreed to pay C$6 a share for Nevsun Resources Ltd (TSX:NSU), a substantial premium to Lundin Mining’s hostile bid
SmallCapPower | September 5, 2018: Nevsun Resources Ltd. (TSX:NSU) Wednesday announced that it has agreed to be acquired by Zijin Mining Group Co. (SEHK:2899) for C$6.00/share in cash. The offer is a 21% premium to yesterday’s closing price. Importantly, the offer decisively pushes away Lundin Mining’s latest hostile bid for C$4.75/share in cash, which was made in late July 2018. The break fee is $50M to Zijin. Nevsun requires more than 66.66% of shareholder approval.
Expensive acquisition but worth it. The offer implies a value of 1.8x P/NAV and 13.7x 2019 P/CF, which is a significant premium to intermediate base metals producers, which trade at an average of 1.0x and 7.1x, respectively, however, we believe the premium was warranted given the high-quality of the Timok project in Serbia. Interestingly, Serbia used to receive a regulatory discount, but it appears this trend is ending. Importantly, we believe this takeout price could have been much higher had the price of copper, zinc, and gold not collapsed beginning in June 2018. For instance, since June 1, 2018, the price of copper and gold are down 16% and 8%, respectively. Intermediate base metals producers have taken a greater hit, down an average of 31% YTD.
Could Zijin’s acquisition reinvigorate the space? Given the lack of consolidation in the mining space this year, in our view, Zijin’s takeout was very opportune to take advantage of what appears to us as a market fire sale. For future take outs in Europe, we would focus on early-stage explorers such as Tethyan Resources (Serbia) and junior to mid-tier producers like Dundee Precious Metals (Bulgaria, Serbia). Like Zijin, we believe investing in discounted base metal/gold companies today could be very fortuitous in the near to mid-term should there be a reversal in the mining markets. To us, mining appears to be nearing the bottom of the cycle. For further ideas for base metals developer plays, please refer to the diagram below.
Market Cap vs. Project StageSource: Tethyan Presentation
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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