|Summary: Moves by hedge funds to pressure US companies into selling their offshore assets could free up investment opportunities here. Potentially on the block are an iron ore mine and infrastructure, a stake in a major LNG project, and other key energy assets.|
|Key take-out: The rise of the activist funds, and their demands that assets be sold to boost returns for US-based shareholders, is effectively a form of asset stripping which might work in the short-term but is unlikely to yield long-term gains.|
|Key beneficiaries: General investors. Category: Mining Stocks.|
They call it ‘re-homing’ and it’s a strong trend just now, where US multinationals sell overseas assets and re-invest the money in a newly emboldened American economy.
In the resources sector the trend comes with a twist where hedge funds often aggressively target US multinational resource companies, forcing them to accelerate their wider plans.
For Australian resource investors it’s a trend worth keeping an eye on, because this global hunt for higher returns on investments could be creating an unusual opportunity for local investors, with US boardroom revolts likely to be followed by the sale of Australian mining and oil assets.
What’s happening is a combination of factors that include:
- Australia suffering from a bruised reputation as a low-profit investment destination, courtesy of its high internal labour and construction costs and a high currency relative to the US dollar.
- Rich investors turning to activist hedge funds in the hope of generating a higher yield on their cash at a time of ultra-low interest rates and what looks like a fully-priced equity market.
- The hedge funds doing whatever is required to generate profits, no matter harm is caused in the process to a target company, or country.
- The US reclaiming its title as the world’s premier investment destination with economic growth accelerating, and
- Soaring US oil and gas production thanks to governments (state and federal) embracing the new technologies such as “fraccing”.
The cost factor alone, when combined with lower commodity prices, has seen a number of foreign investors quit their Australian assets without investment-fund pressure.
Peabody Energy has mothballed coal assets in Queensland after failing to sell them, with the most recent attempt to offload the Wilkie Creek mine to serial coal-asset trader, Nathan Tinkler. This came unstuck last month when Tinkler was unable to complete the deal.
Royal Dutch Shell, one of the world’s biggest oil companies, has sold refining assets in Australia because it can land fuels produced at its Asian refineries cheaper than they can be made here.
Shell has also sold down its big shareholding in Woodside Petroleum because it failed several years ago to win control of the Australian company and because it can generate higher returns from its own international opportunities. But both Peabody and Shell have made their decisions based solely on internal management assessment.
Elsewhere, major US resource companies including Cliffs Natural Resources, Apache Corporation and Hess Corporation are being pushed into their foreign asset sale programs by activist US hedge funds seeking to squeeze value out of their investments. Cliffs is not only the latest US company to be attacked by an aggressive hedge fund, but control appears to have passed to interests associated with Casablanca Capital, which has made the same demands as other hedge funds – sell all foreign assets and focus on US opportunities.
Cliffs Natural Resources
Cleveland-based Cliffs owns the Koolyanobbing iron ore mine in WA, a project originally developed by BHP Billiton. While old and with a short life expectancy, Koolyanobbing still ranks as the fifth-biggest source of Australian iron ore. Despite being more than 50-years-old, and the original source of ore for a BHP Billiton blast furnace at Kwinana, near Perth, the Koolyanobbing project is connected to a railway which links the mines to an export facility at the port of Esperance.
Other mining companies with iron ore assets in the region north of Koolyanobbing have been trying for years to find a way to get their ore to market, but whether they can afford the estimated $US1 billion the new hedge-fund led management at Cliffs would want for the mine and its associated infrastructure is uncertain.
Houston-based Apache owns a 13% stake in the $30 billion Wheatstone LNG project in WA, which has just passed the 30% completion mark, along with a number of old oil and gas assets on the north-west coast.
Apache is the second target of the hedge funds likely to throw off an opportunity for local investors, with the plum assets being its 13% stake in Wheatstone and its highly-rated exploration tenements which cover some of the best acreage off the north-west coast. Older assets, including the Varanus Island gas processing centre, are likely to be of lesser appeal, but could attract a junior oil stock.
The Wheatstone stake has a notional value of $US3.9 billion (13% of $US30 billion) but because the LNG project is only partially built it could be offloaded for much less because of completion-risk issues.
Potential buyers include Santos, which has shown a willingness to be a minority investor in LNG projects, and Oil Search which could use the cash flow from its stake in the recently completed Papua New Guinea LNG project to broaden its interests outside high-risk PNG.
Apache is under attack from Jana Partners for the same reason as Hess, a demand that foreign assets be sold and all future exploration and production take place in the US.
Hess owns an undeveloped gas deposit off the WA coast, along with a number of highly-rated exploration targets. Last year the company was the first to be attacked by a hedge fund, when Elliott Management demanded, and won, internal changes at the company, along with a promise to focus on US oil and gas assets which Elliott described as “one of the premier pure-play US resource companies”.
Elliott’s aggressive approach to maximising the return on investments has made its founder, Paul Singer, a billionaire, and put his firm in the headlines as the hold-out hedge fund responsible for Argentina defaulting for the second time in 13 years on its international debts.
M&A burst on the cards
The rise of the activist funds, and their demands that assets be sold to boost returns for US-based shareholders, is effectively a form of asset stripping which might work in the short-term but is unlikely to yield long-term gains.
The key point for local investment banks is that a fresh source of deal-making opportunities is being created by what’s happening with the rise of activist investment funds in the US.
None of the assets inside the three US companies that have come under hedge-fund attack has yet been put up for sale, but given the determination of the funds to create their own opportunities at a time of low yields from traditional investments and the growing appetite for mergers and acquisitions that is just a question of timing.
When combined with the promised, but overdue, sale of surplus assets by BHP Billiton and Rio Tinto, the likelihood of hedge-fund forced asset disposals has set the scene for a burst of M&A activity in the local resources sector.