BREAKFAST DEALS: BHP's rough diamonds

BHP could struggle to get much of a return for its diamond business, while Rio finds similar problems with aluminium.

Australia’s mining companies are in an unquestionably formidable position, but that doesn’t mean they always get their own way. BHP Billiton and Rio Tinto are trying to get out of diamonds and aluminium, respectively. While both will no doubt collect enough cash from iron ore, coal, copper and, increasingly, uranium to make these deals seem trivial, there are still signals that each company won’t get the prices they might have hoped for. Meanwhile, some investment banking units from Royal Bank of Scotland in the Australian-Asian region might be about to come onto the market – could some of the big four be interested? Elsewhere, Hastings Diversified Utilities Fund has given APA Group something to think about, ownership at engineering group Clough could be about to change hands and attention is still firmly on the ACCC and its decision on the Foxtel-Austar deal.

BHP Billiton

BHP Billiton could receive less than $500 million for the sale of its Ekati diamond mine in Canada, in some way underlining why the giant is doing away with the division. Investec Securities analyst Tim Gerrard has reportedly valued Ekati, which is 80 per cent owned by BHP, at between $300 million and $500 million. The reason for the relatively modest valuation – when you consider BHP does most things in the billions – is declining earnings and the limited life of the mine. By contrast, BMP Capital Markets analyst Edward Sterck has valued the stake at $US2.7 billion, but he’s a bit more bullish on diamond prices. Credit Suisse has valued the stake at $2 billion.

BHP announced in late November last year that the unit would be divested because its long-term strategy is to focus on "large, long life, upstream and expandable assets”. The review is expected to be completed sometime this month and Ekati could go the way of the miner’s 51 per cent stake in the Chidliak diamond exploration project, also in Canada, which was sold to 49 per cent stakeholder Peregrine Diamonds in December for $C9 million ($A8.5 million).

Rio Tinto, Hathor Exploration

Mining giant Rio Tinto will secure Canadian uranium company Hathor Exploration in its entirety, after its stake hit compulsory acquisition territory near 94 per cent. The mining giant’s $C654 million ($623 million) has now won the day over Canadian rival Cameco. But, in a similar fashion to rival BHP Billiton’s exit from diamonds, Rio won’t find things so easy in its quest to offload its Pacific Aluminium business. Late last week, global aluminium giant Alcoa announced it would permanently idle some smelters. This will help alleviate some of the pressure on suppliers, but just goes to underline how vulnerable sellers are in the aluminium market. The miner has already been forced to simply close the Lynemouth smelter without anything to show for it due to lack of interest.

ANZ Banking Group, Royal Bank of Scotland

Is this one of those moments ANZ Bank boss Mike Smith has been waiting for? Smith’s ‘Asian superbank’ strategy relies in some way on picking up regional assets from distressed, probably European, banks, of which there is no shortage. In 2009 Royal Bank of Scotland came through for Smith, with ANZ picking up retail, wealth and commercial units from the beleaguered European bank in Taiwan, Singapore, Indonesia, Hong Kong, the Philippines and Vietnam for $US550 million. It looks like Smith could get another hit at the RBS piata.

The Australian Financial Review understands that RBS will make an indication of asset sales this week, with expectations that investment banking units in Australia and Asia will be featured. The question is: will ANZ have a look? Investment banking isn’t really part of ANZ’s regional strategy but the Melbourne-based bank does have its own domestic investment banking units. There’s the strong counterargument that ANZ needn’t tweak its strategy when so many other European banks are likely to divest more suited units. Commonwealth Bank of Australia could also be interested, although Reuters reports that there will be some hefty competition with Bank of China and Japan’s Mizuho thought to be interested.

Hastings Diversified Utilities Fund, APA Group

APA Group has a decision to make over its $1.8 billion cash and scrip bid for Hastings Diversified Utilities Fund. The target has just paid a $30.7 million performance fee to manager Westpac and while $23.4 million has been deferred to take into account the takeover bid, it’s been paid in cash and has breached two conditions of APA’s bid. It’s anticipated that APA will let that one go through to the keeper, but it also highlights the suitor’s argument that HDF pays too much in management fees to Westpac.

Clough, Murray & Roberts

South Africa’s Murray & Roberts has thrown up the possibility of a new owner for Australian engineering firm Clough by declaring that it’s looking for a partial or complete sale of its 62 per cent stake. A spokesperson for Murray & Roberts told News Limited that selling the stake has been on its agenda for some time but, as of yet, "nothing has been formally decided on that matter.” With a market value of $515 million and a client list that includes Ichthys, BG, Arrow and Chevron, Clough could attract quite a bit of attention. The Australian Financial Review has thrown up London-listed AMEC as a potential buyer, although given the company’s enviable position, it’s unlikely to be the only interested party.

ACCC, Metcash, Foxtel, Austar United Communications

The Australian Competition and Consumer Commission has come in for a pasting over its handling of the Metcash-Franklins deal at the hands of the framers of Australia’s modern federal competition laws. All eyes are on ACCC boss Rod Sims to see what the consumer watchdog will do over Foxtel’s $2 billion bid for Austar United Communications. But for the moment, Nationals Senator Ron Boswell and former Keating minister Chris Schacht have given the ACCC the once over in The Australian for wasting $16 million in legal fees fighting the Franklins buy.

The judgement by the Federal Court that seriously questioned the consumer watchdog’s ability to use more academic or theoretical means to oppose mergers greatly increased expectations that the ACCC would give the Foxtel-Austar deal the green light. But the target’s share price is still trading well below the $1.52 offer price. The Australian Financial Review understands that Foxtel has held discussions with the regulator about content and programming issues, which implies that the ACCC will throw a few conditions on the agreement. The worry is that the consumer watchdog could put enough conditions on the deal to make the proposal unviable. New Foxtel boss Richard Freudenstein is certainly getting a baptism of fire.

Wrapping up

Asian real estate investment trusts may be achieving some success in getting Australian hospital operators interested in alternative treatment – in property, that is. The Australian Financial Review understands that Healthscope and Ramsay Health Care have been approached by Asian real estate investment trusts over possible sell-and-leaseback deals. The news isn’t exactly new, but the paper also understands that chief executives are a little warmer on the idea than previous approaches.

And finally, Qantas Airways is stepping up its efforts to win more dollars from Australia’s mining boom. According to The Australian, the national carrier will add another 14 aircraft to QantasLink and its recently acquired Network Aviation Services in an effort to pick up more flights from ‘fly in, fly out’ miners.