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Lundin deal leaves nickel market thin
Friendly bid for Rio Narcea removes one of the last large nickel miners from TSX

ANDY HOFFMAN

MINING REPORTER

Marking the second major nickel sector deal in less than two weeks, Lundin Mining Corp.'s $1-billion all-cash bid for Rio Narcea Gold Mines Ltd. will also remove one of the last sizable nickel plays from the markets at a time when the metal is trading at all-time highs.

Nickel was once a key part of the Canadian resource investment sector, but with the disappearance of Inco Ltd. and Falconbridge Ltd. and last week's takeover bid for LionOre Mining International Ltd., large nickel miners have all but vanished from the Toronto Stock Exchange.

The friendly agreement with Rio Narcea will give Lundin control of the Aguablanca nickel mine in Spain. The mine, which produces roughly 14 million pounds of nickel a year and a similar amount of copper, is close to Lundin's base metal assets in Portugal.

"There's no better place to get into the nickel business than our own backyard," Lundin vice-chairman Colin Benner said on a conference call to discuss the deal.

"It adds to our commodity mix and we believe that adding nickel to a base metal mining company is easily explainable based on the fundamentals of the nickel market to date," he said.

Nickel soared to another record on the London Metal Exchange yesterday , jumping $910 (U.S.), or 1.9 per cent, to $49,500 a tonne, the highest ever. The price of the metal has more than doubled in the past year on rising demand from China, inspiring a wave of industry consolidation. Last week, Xstrata PLC bid $4.6-billion (Canadian) for Toronto's LionOre, which has nickel assets in South Africa, Botswana and Australia.

That deal followed the heated takeover battles for Canadian stalwarts Inco and Falconbridge last summer. The two nickel companies fell respectively to emerging foreign mining giants Companhia Vale do Rio Doce (CVRD) of Brazil and Xstrata of Switzerland in deals worth roughly $40-billion combined.

"There's not many places left to go," said David Whetham, who manages the Scotia Resource Fund, which owns 825,000 Rio Narcea shares.

"We're just going to have to become more international and look at buying companies like CVRD to get our nickel exposure."

The dwindling number of pure-play Canadian nickel companies left on the TSX are not only small, they're also riskier investments because they are either single asset ventures such as Skye Resources Inc., which is developing a mine in Guatemala, or ones with operations focused in a single geographic region, like FNX Mining Co. Inc. in the Sudbury Basin.

"You're exposed to the risk of something going wrong with that mine, whether it's a strike or a pit wall failure. It's always better to have a diversified base, much like Inco and Falconbridge had," Mr. Whetham said.

Vancouver-based Lundin is offering $5 a share in cash for Toronto's Rio Narcea, a mere 18 cents above the company's closing price on Tuesday.

However, the stock rose more than 17 per cent in the week leading up to the announcement.

Charles Oliver, manager of the AGF Canadian Resources Fund, whose firm owns 3.5 million Rio Narcea shares, said he's not particularly impressed with the premium.

However, AGF also owns nearly three million Lundin shares and he thinks the company is on track to achieve its goal of becoming a major force in the mining world, especially now that roughly 25 per cent of its revenue will come from nickel.

"As a Lundin shareholder, I'm quite pleased to see them make this bid. I think these guys are pretty smart," he said, adding that "[Xstrata CEO] Mick Davis and the Lundins are not foolish people."

Lundin plans to sell Rio Narcea's interest in the Tasisast gold project in the West African country of Mauritania to Red Back Mining Inc. for $225-million (U.S.) in cash and the assumption of $42.5-million in debt.

Red Back is part of the fast-growing Lundin empire, a sprawling collection of resource assets with a combined value of more than $10-billion. Chairman Lukas Lundin, who is based in Vancouver, has been an active participant in the consolidation of Canada's mining sector, recently snapping up EuroZinc Mining Corp. and Toronto-based uranium miner Denison Mines Inc.

http://www.theglobeandmail.com/servlet/story/LAC.20070405.RNICKEL05/TPStory/Business