Independence Group makes opportune play for Panoramic Resources as nickel LME levels continue eroding

As nickel inventory on the London Metal Exchange reaches critical levels, nickel miner Independence Group (ASX: IGO) has hurled an unsolicited off-market all scrip takeover bid for Panoramic Resources (ASX: PAN) – valuing Panoramic at $312 million.

The primary target behind the offer is Panoramic’s Savannah nickel sulphide mine, which is located in Western Australia’s Kimberley.

In response the unsolicited bid, Panoramic’s board issued a “take no action” statement, claiming it would evaluate the offer and provide shareholders with a recommendation in due course.

Independence Group managing director and chief executive officer Peter Bradford told media this morning, the company had taken the offer directly to Panoramic shareholders after “a number of unsuccessful attempts” in engaging Panoramic’s board.

Commenting on the proposed amalgamation, Mr Bradford said it created a “win-win scenario” for shareholders of both companies.

He added shareholders would benefit from a diversified portfolio with increased nickel production arising out of camps in both WA’s Kimberley and Fraser Range regions.

Offer terms

The all-scrip offer values Panoramic at $0.476 per share, which is a 42% premium to its closing price of $0.335 on 1 November 2019.

The bid also represents a 51% premium to Panoramic’s one-month volume weighted average price.

Independence Group currently holds a 3.8% stake in Panoramic and under the proposal, Panoramic shareholders will receive one Independence Group share for every 13 Panoramic securities held.

Independence Group claims this gives Panoramic an equity value of about $312 million.

Rationale behind bid

The rationale behind Independence Group’s takeover bid is to unlock the operational and exploration potential of Panoramic’s assets.

“The offer represents a rare instance of genuine and mutual benefit for both Panoramic and Independence Group shareholders,” Mr Bradford re-iterated.

“Fundamentally the acquisition of Panoramic is strongly aligned to Independence Group’s strategy, which is focused on metals critical to clean energy – specifically nickel, copper and cobalt.”

“Independence Group’s strategy reflects the growing global demand for clean energy generation, storage and distribution – and the electrification of transport.”

“A combined Independence Group/Panoramic would be aligned to, and would benefit from, this increasing demand for nickel.”

Mr Bradford said Independence Group has a demonstrated track record of operating commercially successful mining operations and developing projects on-time and to budget.

He explained the company’s nickel knowledge and capability would unlock more value from Savannah.

If the acquisition is completed, Mr Bradford said a highly capable nickel sulphide team would be deployed at Savannah to undertake optimisation work.

According to Mr Bradford the other benefit to the tie-up would be to consolidate both companies’ nickel projects in Kimberley region under single ownership.

He noted Independence Group has about $321 million in cash, giving it the financial capacity to unlock value at Savannah and untapped regional exploration at the project, adding the company had the latest nickel sulphide exploration technologies and expertise.

Savannah nickel sulphide operation

Panoramic’s Savannah asset is an underground nickel sulphide mine and is designed to produce about 11,000 tonnes per annum of nickel concentrate, which Mr Bradford claims is about one-third of what Independence Group generates at its Nova nickel mine.

During the September quarter, Panoramic revealed contained nickel produced at Savannah had fallen over 20% from the June quarter to 1,480 dry metric tonnes.

This was attributed to a 16% decline in mined ore and lower nickel grade. The company is also facing challenges with production impacted by a seismic event in a key area.

Shoring up the operation is 110,000t of contained nickel in reserve with 217,000t of nickel in resource.

The mine also has a 1Mt per annum processing plant and 200-person accommodation village.

“The offer is subject to a number of conditions, arising from the lack of constructive engagement from the Panoramic board and from the recent performance at Savannah,” Mr Bradford noted.

However, he said if the acquisition went through the combined operating costs for the group would come in under A$2.50 per payable pound of nickel.

Total payable operating cash costs at Savannah for the September quarter were A$9.99/lb – with life of mine operating costs estimated at A$3.10/lb.

“The acquisition will enhance production and earnings potential for Independence Group, with the combination of Savannah, Nova, and Tropicana delivering a pro-forma 60,300t of nickel equivalent production based on Independence Group and Panoramic’s guidance for the current financial year.”

Nickel market

Commenting on the current nickel market, Mr Bradford said the combined entity would be leveraged to take advantage of the sector’s tight conditions, with the market in deficit for the last three years.

He reiterated that demand for nickel was mounting due to global uptake of clean energy including storage and electric vehicles.

“Nowhere do we see the demand for clean energy growing more rapidly than in the electric vehicle sector. Sales are forecast to grow rapidly over the next decade as battery costs become cheaper, emissions legislation becomes more stringent and electric vehicles deliver increased range, higher build quality and improved functionality.”

“A critical part of this growth story is nickel, which is a key component of the cathode of modern lithium-ion battery technology.”

“Not only are electric vehicles growing in sales, but the batteries that propel them are becoming more and more nickel-rich as manufacturers increase the proportion of nickel in the battery cathode to increase vehicle range,” he explained.

Adding to the scenario is a dry nickel project pipeline and ageing mines.

The situation wasn’t helped when LME nickel inventories almost halved between the end of September and mid-October when levels plunged from 152,000t to below 90,000t.

LME nickel has now eroded to 66,306t representing less than one month’s supply.

The scenario has spectators watching in anticipation for the eventual crunch that has been forecast for the last few years, with a resultant price surge on the cards as the commodity becomes even more scarce and in further demand.

Mr Bradford pointed out a combined Independence Group and Panoramic would be well-place to take advantage of the forecast situation.