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Mining giant to take over Duluth Metals

Deal leaves Antofagasta subsidiary as sole owner of Ely’s Twin Metals project

Marshall Helmberger
Posted 11/5/14

REGIONAL— Faced with severe financial constraints, the board of directors of Duluth Metals has agreed to be acquired by Chilean mining giant Antofagasta, which has been the major partner with …

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Mining giant to take over Duluth Metals

Deal leaves Antofagasta subsidiary as sole owner of Ely’s Twin Metals project

Posted

REGIONAL— Faced with severe financial constraints, the board of directors of Duluth Metals has agreed to be acquired by Chilean mining giant Antofagasta, which has been the major partner with Duluth Metals in their Twin Metals joint venture, near Ely.

The deal was signed shortly after midnight on Monday, and will leave an Antofagasta subsidiary as the 100-percent owner of Duluth Metals, Twin Metals and the substantial mineral reserves under control of the company and joint venture.

Under the agreement, which is still subject to shareholder approval, Antofagasta would pay 45 cents Canadian, or approximately 40 cents U.S. at the current exchange rate, for outstanding shares in the company. Duluth Metals officials expect a shareholder vote in early January, with completion of the deal shortly thereafter.

Meanwhile, Anto-fagasta has already entered into a lockup agreement with all of Duluth’s directors and officers and with Wallbridge Mining Company Limited who collectively own approximately 10.9% of Duluth’s currently outstanding common shares. In addition, Antofagasta, through its subsidiary, owns approximately 10.4% of Duluth’s common shares.

Publicly-traded Duluth Metals has approximately 138 million outstanding shares, and Antofagasta will need to acquire at least two-thirds under the agreement. That would put the acquisition price at roughly $84 million U.S, according to a statement issued by Antofagasta. As recently as August, Duluth Metals’ pre-feasibility study had pegged the company’s pre-tax net present value at $1.36 billion.

The acquisition demonstrates how far Duluth Metals’ fortunes have fallen since Antofagasta announced in July that it would not exercise its option to purchase a larger share of the company. Since then, the company’s share price has fallen from 56 cents per share to just 7 cents as of close of trading on Friday, Oct. 31. The company’s stock peaked in early 2010 at $3.32 a share.

Under the original joint venture between Duluth Metals and Antofagasta, the Chilean firm had the option to acquire an additional 25-percent stake in Twin Metals for the net present value at the time of release of a bankable feasibility study. By not exercising its option, Antofagasta now appears poised to acquire all of the Twin Metals venture for literally pennies on the dollar.

Duluth Metals chairman Christopher Dundas, in an investor call on Monday morning, attempted to put the best face on the news. “These are very challenging times,” he said. “The Duluth Metals board has weighed all the alternatives and believe this is in the best interests of shareholders in the context of world markets.”

Dundas noted that the acquisition price represents a significant premium over the stock’s latest close, although it’s still far less than the average price over the past four years.

In the end, it appears Duluth Metals simply ran out of options. Under its joint venture agreement, the company was required to repay approximately $12 million in a bridge loan and interest to Antofagasta by the end of the year. But the company had been unable, to date, to raise the funds to do so.

Impact unknown

The dramatic announcement appears to rescue a project that had appeared close to financial collapse and provides the operation with a limited infusion of much-needed cash. Under the acquisition, Antofagasta will provide approximately $2 million U.S. in working capital and will defer repayment of the bridge loan for another 12 months.

Dundas said he doesn’t expect any drastic changes in the current operations of the Twin Metals venture, which includes the field office in Ely, but he acknowledged that such decisions will be up to Antofagasta in the future. Antofagasta, for its part, issued a short statement on Monday about the long-term potential of the venture. “The acquisition of Duluth provides Antofagasta with a long-term option to develop a large polymetallic resource in a stable and proven mining region. We believe that the Duluth Complex is an attractive deposit and upon closing of the offer we will commence the process of re-evaluating the project’s design while also continuing with the permitting activities.”

The Twin Metals project had been suffering in recent weeks from a lack of investor confidence in the ability of Duluth Metals to advance the project given the lack of a major partner willing to fund ongoing operations. Dundas acknowledged those questions, but said the acquisition by Antofagasta should help alleviate those concerns. “This removes a certain amount of uncertainty,” he said, given that Antofagasta represents “a substantial company in strong financial condition… the short answer is that the deal is probably positive.”

Still, the acquisition raises new questions about the venture’s timeframe. In comments earlier this summer, Antofagasta officials made it clear they are currently focused on the redevelopment or expansion of existing mines for the foreseeable future. Unlike Duluth Metals, which was focused entirely on a single project, the Twin Metals venture represents one of more than a dozen longer-term prospects currently being overseen by Antofagasta. Some industry analysts noted this year that the recent ramp-up of copper production around the world has the metal poised to go into surplus, at least in the mid-term outlook. By locking up a large potential copper resource at a very attractive price, Antofagasta is in a much stronger position to develop, or to withhold from the market due to price considerations, the resources associated with the Twin Metals venture.

Local reaction

Officials in the region reacted mostly positively to the news of Antofagasta’s acquisition. “It sounds encouraging to me,” said state Rep. David Dill, DFL-Crane Lake, on Monday. “Antofagasta is a big company with adequate reserves for research and development. They’ll obviously have the resources to pursue the project, if feasible,” he added.

Ely Mayor-elect Chuck Novak said he remains optimistic about the prospect for new jobs, but acknowledged the project remains a long way out. “We’re probably looking at a decade out, at least,” he said. Like many people, Novak sees Antofagasta’s move as a strategic play that essentially forced out a junior partner. “I think Antofagasta strategized themselves into a position to do this,” he said.

Local opponents of the proposed mine say their views haven’t changed despite the announcement. “We haven’t let up in our efforts one bit,” said local wilderness outfitter Steve Piragis, even though opponents had been watching Duluth Metals’ declining fortunes with interest. While Piragis said he expects Antofagasta may have a longer timeline for developing the area’s mineral resources, he doesn’t see any other real change to the fundamental arguments of both sides. “The mine would still in the Kawishiwi River watershed, so it doesn’t change our belief that it needs to be stopped. The Boundary Waters is still there and it still needs protection.”