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Allegiance Rejects Zinifex's $654 Million Offer

Allegiance Mining has rejected a takeover bid of up to $654 million from fellow Australian miner Zinifex, saying the offer was inadequate.

Allegiance is one of a number of new mining companies in Australia catching the eye of established miners looking to acquire more assets to better ride the boom in raw materials.

The company also said on Thursday it had received other approaches since Zinifex launched its offer in December.

Allegiance Chairman Tony Howland-Rose said Zinifex's all-cash bid failed to take into account the company's potential to increase production runs from its 87 square-kilometer holding beyond the initially planned 8,500 tons a year.

"We have a province of which 90 percent has not yet been explored," Howland-Rose told a media teleconference.

Zinifex Chief Executive Andrew Michelmore said in a separate statement that Allegiance was asking its shareholders to forego the offer based on "nothing more than blue-sky promises and treasure chest hyperbole."

Allegiance on Tuesday upgraded the resource at its Avebury project in the island state of Tasmania by 14,000 tons to 172,000 tons, based on new exploration work, ahead of its promise to kick off nickel production this quarter.

The additional tonnage is worth around $392 million based on London Metal Exchange nickel prices of around $28,000 a ton.

Nickel prices hit an all-time high of $51,800 a ton in May, driven by strong demand from fast-growing Asian economies led by China and India, who are making more steel than ever.

Diversify

The acquisition would help Zinifex reduce its reliance on zinc mining, following an industry-wide trend to diversify.

Allegiance, whose major shareholder and sole customer is Jinchuan Group, China's largest nickel refiner, had received other approaches, but had not acted on them, Howland-Rose said.

He declined to say who made the approaches.

"Once Allegiance becomes a producer, the company will look all the more attractive as a takeover," said Eagle mining Research analyst Keith Goode. Zinifex's all-cash offer is initially worth 90 cents a share, and would rise to $1.00 a share if it gets more than 30 percent acceptances or board approval.

At 90 cents a share the deal is worth A$697 million ($611 million) increasing to A$745 million ($654 million) at $A$1.

Zinifex has been on the prowl for acquisitions in mining since amassing a war chest of around $1.4 billion in October after rolling its sizeable zinc smelting businesses into a joint venture with Belgium's Umicore, called Nyrstar.

The Zinifex offer expires on Feb. 8.

Jinchuan, which holds large stakes in a number of Australian mining companies in early stages of production or late stages of development accompanied by exclusive supply agreements last week backed Allegiance, saying the Zinifex offer was too cheap.

Analysts have speculated that Jinchuan might increase its stake in Allegiance beyond the current 10.4 percent or even launch a bid of its own to protect its supply pact.

"We're happy with Jinchuan and they are happy with us," Howland-Rose said. "What they do is absolutely up to them."