The logic underpinning the $1.4 billion joint bid for Aquila Resources by Aurizon and China’s Baosteel is obvious. The tactics, however, aren’t quite as clear.
The bidders released a letter to Aquila’s board today outlining their interest in making an offer and asking for an opportunity to discuss the bid with the board "with a view to announcing an Aquila board-recommended offer prior to market open on Monday 5 May 2014."
Aquila, in responding to the bid today, said it received that letter on Saturday, which really only left Sunday for discussions if the bidders’ planned announcement was to occur as envisaged. With no Baosteel representative in the country it perhaps isn’t surprising that the discussions didn’t take place and the bid was launched essentially as a hostile offer today.
The offer isn’t conditional on either Chinese regulatory approvals or funding, which suggests that those have already been obtained and which is at odds with the very tight timelines the bidders gave Aquila before launching the offer.
The haste with which the bidders moved is even more curious because Baosteel has been a shareholder in Aquila since 2009, when Aquila made a placement to China’s biggest steelmaker, and has had numerous discussions since then with Aquila and its joint venture partners in Western Australia’s West Pilbara Iron Ore Project about taking up a direct interest in the $7bn-plus project.
Aquila has a 50 per cent interest in the project, with US commodity investor and trader ACMI Group owning 25.5 per cent and Korea’s Posco 24.5 per cent. Baosteel’s previously envisaged entry to the project had been through a buyout of Aquila’s partners or an investment that diluted the existing interest holders.
Either it wasn’t able to convince them to sell or be diluted, or it came to the conclusion that it would be cheaper to get its desired 50 per cent interest in the project by simply buying Aquila itself.
While the bid values Aquila at $1.4bn the group has about $500 million of cash which was earmarked for Aquila’s share of the funding of another joint venture, the Eagle Downs coking-coal joint venture with Brazil’s Vale in the Bowen Basin. In the presentation the bidders issued today that project, which has a capital cost of about $1.3bn, received scant attention.
The odd aspect of the decision to effectively make a hostile bid for Aquila is that the target company is about 40 per cent owned by Aquila’s founders, Tony Poli and Charles Bass. Poli, the group’s chairman, owns about 29 per cent of the company and Bass around 11 per cent.
While Baosteel has a launch pad of 19.8 per cent of Aquila, even with a 50 per cent minimum acceptance condition it would be difficult, if not impossible, for the bid to succeed without their support.
The rationale for the bid is straightforward. Baosteel wants to secure direct access to iron ore supplies and to reduce its reliance on Rio Tinto, BHP Billiton and Vale. The bid is, in a sense, a vote of confidence by China in future iron ore prices as well as an attempt to bring a major new iron ore province into the market (which in turn would help discipline those prices).
Its partner, Aurizon (formerly QR National) has made no secret of its ambition to enter the WA market and create open access rail-and-port infrastructure for the West Pilbara Iron Ore Project -- regarded as the next big project behind the Pilbara’s majors’ resources -- which would open up access to the entire region’s iron ore deposits.
Under the arrangements struck by Baosteel and Aurizon, if the bid were successful Aurizon would own 15 per cent of Aquila (at a cost of $211m) and have 12 months of exclusivity to agree the terms of an infrastructure deal with Baosteel and Aquila’s two existing joint venture partners.
If it can achieve an agreement, Aurizon would develop and have majority ownership of the rail and port infrastructure. Once the railway line and port were developed, it would sell its shareholding in Aquila.
The overall cost of the West Pilbara project is about $7.5bn, with the infrastructure investment of about $6bn by far the largest component.
The scale of the investment needed, Baosteel’s shareholding and the weak iron-ore price probably means the likelihood of a rival bidder or alternate financiers of the mine and infrastructure required to develop the project emerging is low.
The bidders’ tactics therefore could be to send Tony Poli a message that he can either take the 39 per cent offered premium to the pre-bid share price, or face an indefinite but inevitably prolonged wait before the West Pilbara project is developed -- if indeed it is ever developed given the emerging surplus of supply over demand in the iron ore market.