Make a Christmas wish, Alex-a resource Co is for sale .....Who is moving on merger expectations?
Resources ride a rollercoster
By Bruce Hextall
On a mild September night at a private party at Sydney's Maritime Museum in Darling Harbour this year, a cocktail waiter mixed drinks with exotic names as the team from Project Agnetha enjoyed a victory party.
It could have been the mid-80s. A combination of brash young merchant bankers and tough-minded mining professionals were toasting their success in knocking off one of Australia's oldest and most conservative mining companies – Aberfoyle Ltd.
Rod Webster, managing director of Perth-based Western Metals – the company which mounted the successful raid on Aberfoyle – was the host.
He was joined by Mark Johnston and Jim Craig from Macquarie Corporate Finance which engineered the takeover. The 40 gathered also included lawyers, public relations people and a scattering from the broking community.
Webster's company had just moved to compulsory acquisition of the last shares of Aberfoyle. The Macquarie men were in a buoyant mood. Their firm had pocketed a multimillion-dollar fee for putting together the deal which allowed Western Metals to swallowed a company slightly larger than itself.
In contrast to the borrow-and-buy-at-any-price deals of the '80s, the Western offer was finely pitched, imaginatively financed and made at a time when mining stocks were on the nose.
Although Aberfoyle shareholders were offered $288 million in cash, it was equity driven, funded by a converting preference share issue arranged by Macquarie.
"You might call it a textbook case of how deals are being done. It was opportunistic but could only have been done because of the quality of the management," Craig says.
Aberfoyle's share price had been weakened by falling commodity prices. Western Metals' price wasn't faring any better but Webster had the support of the Macquarie team which believed Western Metals' management could add value to a merged group. It was time to strike.
The market weakness pervading the resources sector means other companies are destined to share a fate similar to Aberfoyle.
From BHP down to the tiniest of explorers, expectations of an ownership shakeout are rising.
Two years ago the Asian economic miracle promised a golden age for the resources sector, encouraging new projects.
That promise has evaporated. It is now a matter of survival of the fittest at a time when prices for oil, gold, lead, zinc and copper have sunk to new lows. Economic upheaval in Asia and Russia has cast a shadow of uncertainty across world financial markets.
While Aberfoyle fell victim to one of its peers, others face the likelihood of being taken over by overseas groups keen to gain exposure to Australia's mining sector at a time when the impact of weak commodity prices on share prices has made most of the sector ridiculously cheap. The decline in value of the Australian dollar has increased their attractiveness to overseas bidders.
Blue-chip gold miner Plutonic Resources was gobbled up by US gold major Homestake Mining Co earlier this year.
South African-backed and London-listed Billiton plc has admitted low metal prices, the Australian dollar's depreciation and a weak share price are the reasons behind its bid to mop up the outstanding shares in Queensland nickel producer, QNI Ltd, it did not already own.
Billiton's move highlights the possibility that other potential buyers – those foreign companies already holding a stake in the Australian resources industry – will also make a move.
Broking firm Johnson Taylor says likely bidders include Rio Tinto with its stake in Comalco and Shell with is stake in Woodside Petroleum.
Savage Resources has been tipped as another target because of its exposure to the zinc refining business in the US. The world's largest zinc producer, Canada's Cominco, is at the top of the list of likely bidders.
Merchant bankers across the country have been burning the midnight oil looking at ways to bring fresh funds to the resources sector, kick-start mergers and acquisitions and find buyers for assets put up for sale by those finding it tough going.
Robert Champion de Crespigny, the executive chairman of Australia's gold mining group, Normandy Mining Ltd, admits that the pressure on share prices has "made every mining company in the country vulnerable".
"All companies at these levels are targets. As a target Normandy is no different – it just takes more money if a company is capitalised at $10 million doesn't it? More organisation you know."
De Crespigny believes most North American gold majors have cast an eye over the Australian gold mining industry even though there has only been limited action so far.
"The other day an analyst said to me – why are we not seeing more takeovers from North America. I think there are two reasons. One is it actually takes time to organise a takeover. The second is the nature of Australian business. Australians tend to be far more defensive of their assets and more emotionally tied to them. That slows foreigners down."
But Normandy is as much a predator as a likely target. It has the balance sheet strength and the funding arrangements in place to grab opportunities when they arise. This year it has built up a 25 per cent stake in Joseph Gutnick's main gold company Great Central Mines and plans to add to this later this year under the share creep provisions.
"It goes without saying we're always looking," de Crespigny says.
Long-time mining analyst Rex Adams of Sydney broking firm PG Intercapital agrees with de Crespigny that although companies are undervalued there's a general reluctance to make hostile bids.
Adams says recent experiences of bidders paying too much for assets have tainted the market's view. He cites BHP's $3.2 billion takeover of the US-based Magma Copper group as an example.
Within 18 months of winning ownership of Magma, BHP was forced to write more than $1 billion off the value of the Magma assets it acquired. It had bought at the top of the market only to see the copper price plunge by one-third.
"There's plenty of wheeling and dealing around the edges. I've heard the takeover talk but I think there will be more acquisitions of assets than corporate activity."
Adams believes asset rationalisation is creating major opportunities for those who have the management track record to attract bank backing. "There's plenty of assets being cast off by the majors. To get them it is just a matter of being bankrolled."
Resources industry player Peter Prentice knows all about it.
Sydney-based Prentice has been on both sides of the fence – raising money in the market when the resources sector has been running and looking for alternatives when it hasn't.
At the moment Prentice is out bidding for assets being shed by major resources groups which they believe are too small to have a significant impact on bottomline earnings.
Groups such as BHP, WMC and RGC have all been seeking to improve returns on capital and reposition their business in an attempt to restore market faith in their ability to add value for shareholders.
BHP has been shedding assets across the world, including exploration ground, big hunks of its petroleum division's portfolio, non-strategic steel division assets and smaller mining projects.
WMC has also been a seller to the benefit of smaller companies such as Hill 50 NL which picked up the Hill 50 gold mine in Western Australia. Straits Resources is paying WMC $50 million for the Nifty copper mine also in the West.
RGC has hung up a for sale sign over most of its non-mineral sands assets, including its 56 per cent stake in Goldfields Ltd, following its decision to merge with Perth-based Westralian Sands. The first asset to go was its Renison Bell tin mine in Tasmania.
For Prentice the shedding process represents an opportunity for him to build a new mining company in the form of Copper Mines and Metals. But his attempts have been frustrated.
Competitors have managed to sneak in ahead of him, grabbing assets such as the famous CSA copper mine at Cobar NSW and the Renison Bell tin mine.
Prentice thought he had the CSA mine in the bag but lost out when the owner, Golden Shamrock went into liquidation at the start of the year. The mine now looks like being restarted when the copper market recovers under a salvage proposal put forward by another copper junior, Mt Lyell Mining Co – the owner of Tasmania's century old Mt Lyell copper mine – in partnership with Swiss-based commodities group, Glencore International.
RGC, which is aiming to become a pure minerals sands company through the planned $633 million merger with Westralian Sands, accepted $40 million from low-profile Queensland copper producer, Murchinson United, ahead of a $41 million offer from Prentice's company.
Still, Prentice remains optimistic, saying that the banks are overflowing with cash which they are willing to lend to fund acquisitions and even toss in working capital provided the assets stack up.
"It is a parallel to the early 1980s. It was pretty tough then but then gold picked up ahead of the market's recovery. The companies that acquire assets now will be setup to gain the full benefit of a market recovery in a couple of years," Prentice said.
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