A tycoon moves early on phosphate

Veteran resources investor and tycoon farmer John Kahlbetzer is making big bets in a small phosphate stock.

PORTFOLIO POINT: Veteran resources investor John Kahlbetzer's move to boost his stake in UCL suggests there's more to the mining minnow than meets the eye.

To John Kahlbetzer, an investment of $248,918.52 is small beer. To anyone worth less than his estimated $772 million, it’s a useful pointer to an interesting takeover situation which has escaped most observers – except Eureka Report’s in-house Speculator, David Haselhurst.

Kahlbetzer, who made his fortune in agriculture and his name in yachting and polo, has been busy topping up his holding in UCL Resources, a stock priced at little more than a penny dreadful.

Over the past two weeks, Kahlbetzer has quietly boosted his stake in UCL from 31.46% to 32.92%, adding to interest in UCL and the company which has made a share-swap takeover bid, Minemakers.

What Kahlbetzer’s buying also flags is that the project shared by UCL and Minemakers – a phosphate dredging proposal off the coast of the southern African country of Namibia – might have more potential than most Australian investors appreciate.

There is nothing new about the Sandpiper phosphate beds in the South Atlantic Ocean. South African researchers first explored them more than 30 years ago. However, at water depths of more than 100 metres, and with phosphate prices low, “mining” the marine sediments was uneconomic.

Technology and prices change, however, which is why Kahlbetzer – with vast farming interests in Australia and Argentina, and an understanding of phosphate as an essential fertiliser – acquired his initial stake in UCL, and is now spending more money to prevent Minemakers, which already owns 13.1% of its target, succeeding with its bid for full ownership of UCL.

Haselhurst has also been tracking Minemakers and UCL, which own equal 42.5% stakes in Sandpiper and have other separate assets, the most interesting being Minemakers’ Wonarah phosphate project in the Northern Territory.

Three weeks ago, Minemakers proposed a share swap takeover “priced” at nine of its shares for 10 UCL shares. At the time of the bid, Minemakers said it valued UCL shares at 30.2c, a substantial premium on UCL’s price at the time of 19c.

Since the bid was launched, with Minemakers saying that the estimated $200 million development cost of Sandpiper would be easier to fund if majority control was in a single company, not much has happened.

Minemakers’ share price has fallen from 32c to 26.5c. UCL’s share price has risen from 19c to 25c, with a peak since the takeover was announced of 27c on March 2.

At their latest share prices, Minemakers is valued on the ASX at $60 million, and UCL at $20 million. Between them, they are worth a little more than 10% of Kahlbetzer’s fortune, which has funded a lifestyle that includes ownership of Sydney-to-Hobart yacht race winner, Bumblebee, plus homes in Sydney and Buenos Aires.

Small beer though they may be, Minemakers and UCL obviously contain a prize that Kahlbetzer wants, because he has said he will not accept the share-swap takeover offer, nor will he accept a revised bid.

For investors, the question therefore becomes how much is Kahlbetzer prepared to pay to prevent Minemakers from acquiring UCL, and what price does he put on the asset they share, the Sandpiper phosphate project?

On the market, the most significant event in the tussle between the two mining minnows has been the intervention of Kahlbetzer, who filed two reports on the ASX on Friday about his share-buying, which started on February 23, 10 days after Minemakers launched its offer.

Over the next two weeks, companies associated with Kahlbetzer accumulated an additional 995,868 shares in UCL for the $248,918.52 mentioned earlier, with the buying occurring on most trading days.

Despite his buying, the share price of UCL has done little since the bid was launched, with some of his recent purchases possibly at more than the current UCL price. In other words, he is prepared to accept a short-term loss on share trading for a bigger future prize – Sandpiper.

From an investment perspective, Kahlbetzer’s buying sends two signals, both of which spell 'buy’.

Either he believes Minemakers will be forced to increase its offer for UCL and possibly include a cash component, which it is believed he would prefer.

Or he believes that Sandpiper is sufficiently valuable to trigger a bidding war for both companies from a third party, such as an international fertiliser maker.

There are multiple questions for investors interested in following Kahlbetzer (and Haselhurst) into UCL and Minemakers.

The first question is, how much will Kahlbetzer spend to amass an already substantial blocking stake?

The second is whether Sandpiper is as good as the players in the game seem to believe.

The third question is which stock to buy? Haselhurst has both in his Speculator column. My feeling is, follow Kahlbetzer’s money into UCL. Copying what the rich do with their money is never a bad policy.

However, Minemakers too has moved into buying territory, thanks to its price decline since launching its bid for UCL.

Whichever route is chosen, all the players in this game are worth following, as is Sandpiper – whoever ends up with ownership.