Analysts Cheer Xstrata Decision Not To Up LionOre Bid

Mining company Xstrata was right to balk at matching the high price Norilsk Nickel Mining & Metallurgical is offering for Canada’s LionOre Mining International, industry analysts said.

Xstrata said it won’t raise its offer of 25.00 Canadian dollars a share - a total of $5.6 billion - for LionOre to match Norilsk’s bid of C$27.50 a share, or $6.28 billion, leaving the Russian company in pole position to acquire its rival.

If Norilsk does win, then Xstrata will be due a C$305 million break fee because its earlier offer had the support of LionOre, but the move will also leave intact its reputation for not overpaying for acquisitions and protecting value for shareholders, analysts said.

Simon Toyne of London-based Numis Securities said it is crucial for a company to show discipline when involved in a bidding contest. Xstrata has proved that, “once the price becomes excessive, they walk away,” he said.

“This will further enhance the company’s reputation in mergers and acquisitions,” said another mining analyst who asked not to be named. Xstrata has shown that it isn’t willing to sacrifice shareholder value to win a bidding contest, which further underlines the company’s outperform rating, he added.

Toyne said the decision to stop pursuing LionOre was unlikely to be the sole reason for the rally in Xstrata’s share price.

“The whole sector has been really strong over past few days, led by a recovery in copper prices, helped by Shanghai (metals) stocks falling after having increased for most of the year,” he said.

Xstrata made its first move on LionOre just over three weeks ago, and upped its offer when Norilsk entered the fray. On Wednesday, the Russian miner raised its bid again, this time to C$27.50 a share, a 10% premium to Xstrata’s latest offer. Xstrata’s current offer will expire on June 15, an extension from the initial June 7 deadline.