BOYD ERMAN
RTGAM



With the market deciding that, one way or another, the merger of Inmet Mining and Lundin Mining is likely dead, the focus now turns to what comes next.

Some of the options on the table for Lundin would be a sale to rival bidder Equinox Minerals or an outright auction for Lundin that throws open the doors to all potential bidders. A third option that bankers are said to be pitching to Lundin is a breakup of the company.

The original Inmet-Lundin merger proposal, announced in January, is in trouble because Inmet's big Panamanian mine development faces a new hurdle after the government there said no to a coal-fired power plant to generate electricity. The mine could just get higher-cost power from the grid, but as analysts at BMO Nesbitt Burns lay out, that reduces the value of the project by as much as 11 per cent.

That's likely to spell the end of the deal, RBC Dominion Securities analyst Geoff Breen said in a report.

The market agrees. The gap between Lundin's rising share price and the falling value of Inmet again widened on Friday. Lundin stock is now trading almost 22 per cent above the value of the merger with Inmet, up from 19 per cent Thursday.

"We believe that Inmet and Lundin are unlikely to proceed with the delayed merger votes on April 4 and Lundin may use the material changes in Panama as the reason for opting out," Mr. Breen said. "We are unsure if the [$120-million] break fee will apply in this case."

He believes that the odds favour a successful takeover by Equinox Minerals, though it may have to raise its bid.

"We retain our initial views that Equinox will in time successfully acquire Lundin, albeit there may be a need for a modest scrip sweetener," Mr. Breen, who covers Equinox, wrote. "We believe the next move is up to Lundin/Inmet and Lundin has indicated it will provide further information well ahead of April 4. Meanwhile, we would expect Equinox to stand aside and await developments."

Lundin has rejected the Equinox bid already, citing its conditionality. Lundin's management is said to be very unhappy with the amount of debt behind the Equinox offer, something that a bit more stock in a sweetened offer is not going to fundamentally change. And given management's substantial ownership in Lundin Mining, getting a deal done without their support won't be easy.

If Lundin's management is determined that they want to get full value for Lundin at this point in the copper cycle, that argues for a wider auction.

A breakup could be a backup plan, with a potentially logical split being one buyer for Lundin's 25 per cent stake in the Tenke-Fungurume mine in Africa, perhaps that could be majority owner Freeport-McMoran, and another for the company's European operations.