In These Troubled Times You Can’t Blame The Hambro Family For Closing Ranks To Protect The Aricom And Peter Hambro Operations
By Alastair Ford
minesite.com
There’s a smart round of consolidation gathering steam in the mining sector at the moment. In days gone by we might have frowned at some of the deals that are being done, given that along the way someone’s banked a fat profit, a few brokers have taken their percentages, but aside from a lot of froth in the bars of the City of London, not much else has been achieved. But all bets are off now that the world’s banks have trashed the global economy. That the Cambrian Mining team have been spinning out and reeling in companies for the best part of the past decade is no longer here nor there - the latest move in the consolidation of the Cambrian coal mining stable is simply a dash for cover before the squalls really hit. So too with the latest developments between related companies Peter Hambro Mining and Aricom. Peter Hambro spun Aricom out at a nice 15p per share back in 2003, raising £3.5 million in the process, and stating at the time that Aricom had been established “with the objective of creating an integrated mining, production and distribution group for titanium dioxide pigment and related products focused on the markets of Russia and China”.
On first dealings, Aricom was worth £14 million. Five years later and Peter Hambro now wants to buy back Aricom for roughly the same price in pence per share, or so we assume. In the flirtatious legalese that all companies are obliged to issue to each other by stock exchange regulations the talk thus far has simply been of a “significant premium” to the 10p share price that was prevailing at the time of the announcement of the potential deal on 9th January.
Who knows what mysterious meanings can be read into the phrase “significant premium” at this stage? What we can know, though, is that in the space of a couple of days the market bumped Aricom’s shares up from below 8p to their current levels of around 14.75p. So allowing for slight discounting for risk, we know what the market thinks the price will be. Of course, there have been one or two developments at Aricom since (the post credit-crunch slide to one side) the shares traded at around 15p. It was, as it happens, the day the shares listed back in 2003.
According to Aricom’s own literature, it’s now no longer focusing on titanium, but rather is “a diversified metals and mining group… with a focus on ilmenite and iron ore for the high growth markets of China”. The catch with the corporate re-brand isn’t that it isn’t true. Oh no, to the contrary: since its humble beginnings Aricom has become in some senses rather mighty – it sits on billion dollar iron ore licenses, and has a cash balance of over US$250 million in the bank. The catch lies in that subtle phrasing, which might originally almost have just been added as padding by a marketing man, the catch lies in the words “high growth markets of China”.
China’s officials may still be describing the country as in growth, but a quick reference to the Baltic Dry Index, which measures shipping activity, shows that there’s not much coming out of Asia and going west at the moment. During the boom, when China’s economy really was in “high growth mode”, fuelled, as we now know, by the credit binges of the West, Aricom was able to put dizzying NPV valuations on its key iron projects at Garinskoye and K&S. It still can, in theory, but the market thinks otherwise. Remember that US$250 million in the bank? The current market capitalization of Aricom is £183 million, which in today’s numbers equals around US$260 million. And that’s including the “significant premium” of any takeover bid, and the residual assets, which include, guess what? – a titanium business. So, not to put too fine a point on it, the market thinks that the iron ore assets are worthless in the current environment, partly because the iron ore price has dropped, but also because either collectively or separately, these projects are multi-billion dollar undertakings, and there’s just no faith whatsoever in Aricom’s ability to secure the necessary debt financing, even in spite of the august names it has signed up to arrange it.
But inside the Hambro clan, there’s very definitely still a belief that Aricom is worth a whole lot more than the cash it has in the bank. Neither father Peter nor son Jay are really allowed to talk about this situation, although for the record both gave charmingly polite and evasive answers to Minesite’s half-hearted attempt to glean some scoop or other from either or both of them. They’ve got to run a tight ship on this deal, because not only is Peter Hambro Mining still a big shareholder in Aricom, but Aricom’s chief, Jay, still shares an office with the former parent company and prevailing parent, Peter Hambro. Peter gets to sit in the august, wizened, oak-panelled and aged part of the building, just across the way from the gardens of Buckingham palace, while Jay sits in the newer, sleeker part. In short, the Chinese walls better be pretty robust, even if they are only metaphorical. Or to put it another way, the market’s just going to have to trust the Hambros on this one.
There’s no reason not to. One way or another Peter Hambro has always built value for shareholders, and although one can never be sure how things are done in Russia, the City side’s always been played straight, even if Peter has had disagreements now and again with some of the City’s pundits and analysts. He’s also been heavily, heavily targeted by short sellers, as the latest round of regulatory disclosures from investors, reporting on trading prompted by the mooted deal with Aricom, reveals. Perhaps the shorts were right, as at 375p, Peter Hambro shares are a long way off their glorious 2006 highs of over 1,700p, and are in fact slightly weaker even since the potential acquisition of Aricom was announced. But on the other hand, there may yet be a bounce, as several problems would be solved by such a tie-in. First and foremost in Minesite’s mind is the preservation of that US$250 million inside the Hambro empire. With Aricom shares trading at a discount to cash, it must have been looked awfully tempting to predators - nice way to get a lot of money very cheaply, with some free mining assets thrown in. The acquisition of Aricom by Peter Hambro does at least keep Aricom’s money local, though that brings us to a second, thornier issue.
Many analysts, including Michael Rawlinson at Liberum Capital, note that acquiring Aricom would solve Peter Hambro’s funding problems. Mr Rawlinson phrases it slightly more delicately as “a source of much needed refinancing cash”, but the meaning is clear. The market’s worries that Hambro may yet be hit by the troubles in the world’s debt markets would evaporate instantly if it had Aricom’s US$250 million to play with. But that said, it would then have to be a given that the projects for which that money was raised, namely the potential iron ore mines at Garinskoye and K&S, are either dead in the water, or at least off the agenda for now. To date, Jay Hambro has always maintained his belief that Garinskoye and K&S will be developed on or near to the original Aricom schedule. If Peter Hambro snaffles the equity component of the Garinskoye and K&S financing, that can no longer happen, which may be why some Aricom shareholders protest. Because, although Aricom listed at 15p, the really big money came in at much higher levels, and forcing these investors to crystallize their losses rather than allowing them to hold out for better times may not be easy.
But as we said at the beginning of this piece, all bets are off these days. However much local pain there is, the wider thinking has to be that inside Peter Hambro Mining the Aricom business will at least still have a chance of making progress, supported by serious operating cash flow from gold mining operations with a decent track record of production. Aricom investors will end up with Peter Hambro paper, which at 375p per share is a whole lot better than nothing. And sadly, going for “something that is better than nothing” is about as good as it’s going to get for some investors for a good while yet. |
