Confronted by the choice of more than $400 million of cash and the development of a project he’s devoted an enormous amount of time and energy to, or else continuing control of a project that might never be developed, Aquila Resources’ Tony Poli came to the inescapable conclusion.
He got there arguably a little later, and a little more reluctantly, than the logic of his position might have suggested but he does have a reputation for being a tough negotiator. No doubt he was looking to see whether there was any way to prise something more from China’s Baosteel and Aurizon than the $1.4 billion they already have on the table.
Once the bidders announced on Friday that their offer of $3.40 a share was final and would not be increased, and once it became clear that Mineral Resources’ attempt to force its way into the development of the West Pilbara Iron Ore Project was built on flimsy and unattractive foundations, Poli and his board had no sensible option but to endorse the Baosteel and Aurizon offer.
Poli himself who, with 28.9 per cent of Aquila stands to receive more than $400 million from the bid, "currently intends" to accept the offer in the absence of a higher offer, but has reserved the right to revisit his position.
If he were to accept, because Baosteel already owns 19.8 per cent of Aquila the takeover would effectively have succeeded. The co-founder of Aquila, Charles Bass, with about 11 per cent of the company, is thought to be inclined to sell into the bid.
The logic underpinning Poli’s conditional surrender is compelling, particularly in an environment of tumbling iron ore prices and a shift into what could be a prolonged structural surplus in the commodity.
Aquila’s share of the cost of developing the West Pilbara project (its other partners are Korea’s Posco and US commodity trader ACMI Group) is estimated at about $3.7 billion. It also has a Bowen Basin coking coal project where its share of development costs is about $815 million.
The only obvious financiers of the mine and the associated rail and port infrastructure for the West Pilbara project in the current environment are parties that have long-term strategic motives for opening up the region. Without deep-pocketed financiers and committed customers the project may never be developed.
Baosteel, one of China’s biggest state-owned steel groups, and Aurizon, which has long made clear its ambition of operating rail and port infrastructure in Western Australia, are the most obvious financiers.
Baosteel wants direct access to its own source of ore – and to introduce a new source of competition to the Pilbara producers -- as one of the sector’s biggest customers and both Baosteel and Aurizon want to open up the entire region with open-access infrastructure.
So the choice for Poli and his board was really either to recommend the bid and take the money or risk being left with a project that would never go ahead.
The intervention of Mineral Resources, which spent close to $200 million to grab a 13 per cent stake in Aquila, provided a distracting moment for Aquila.
Mineral Resources wanted to get a role in developing the mine and a capital-light approach to the infrastructure needed to get it to port but Baosteel shut down that prospect immediately.
Mineral Resources then proposed a highly conditional scrip-only merger with Aquila, ostensibly worth $3.75 a share, but it isn’t apparent how that would have resolved the financing issues. Alienating Baosteel also jeopardised access to the Chinese customers needed to underwrite the project.
Ultimately, a paper-swap merger of two relatively small companies wasn’t ever going to be able to compete with the $1.4 billion of actual cash that Baosteel and Aurizon have put on the table. Mineral Resources is now facing a meaningful loss on its shareholding.
In the circumstances, the decision of Poli and his committee of independent directors to recommend the current offer, unless something better emerges from left field, is a sensible and rational one.
While he might have preferred to have retained control of the company he founded and seen the project through its development, Poli will at least have the probable satisfaction of seeing it developed as well as walking away with a rather large pile of cash.