Discovery process too early to call

Cathay Fortune is yet to make its intentions known on Discovery Metals after dropping its bid.


Summary: Cathay Fortune still holds around 14% of Discovery Metals, but has abandoned its takeover bid. Would-be investors should probably wait until the dust settles.

Key take-out: Cathay Fortune’s offer was pitched at $1.70 a share, but Discovery is now trading at around 95 cents.
Key beneficiaries: General investors. Category: Portfolio management.

Discovery Metals (DML)

The latest news is that Cathay Fortune has walked away from its $830 million bid for Discovery Metals. Right now I think it’s best to hold off on this one.

As well as the problems with the commissioning process of the mine in Botswana, it’s quite clear that Cathay wanted more information and the board of Discovery was reluctant to give it to them, which I think is just madness. Given that the offer was for $1.70 and the stock is trading back around the 95 cent level, Discovery should have been helping Cathay all the way.

Would I suggest buying it at current levels on the prospect of a bid? It’s hard to say. On the basis that all the bad news is probably out, it could be a good buy. But the fact is that Cathay already owns a chunk (13.78%) of Discovery, it knows the business very well and still walked away, and this says maybe there are some real problems here.

Personally, I would hold off for now. There are always a lot of people who have arbitraged the stock, funds who have bought in and suddenly needed to sell, and that can depress the price for quite some time, especially if it’s not the most liquid of stocks.

I would also wait to see if Cathay holds onto its stake, or whether it starts flogging the shares on the market. If Cathay starts selling, I wouldn’t go near the stock. The best move in my opinion is to hold off for now and just let the dust settle.

Australian Infrastructure Fund (AIX)

Following shareholder approval for the $2 billion sale of assets to the Future Fund, there have been reports in the media that the Future Fund has put artificially high prices on its bids for airport assets that have pre-emptive rights agreements. A pre-emptive right is an exclusive contractual right to buy assets coming into existence before they are offered to other investors. Regardless, I still think it’s worth having some money in this one. See my recent article, A fund deal that stacks up any way.

Basically, it looks like the Future Fund has bid fairly low prices for the assets where there are no pre-emptive rights issues, and has bid very high prices for those that have pre-emptive rights agreements. This is obviously upsetting some of the funds that have invested in these airports.

For investors, the main concern would be if this would upset the takeover process. But it shouldn’t really. Granted, the latest drama did knock a few cents off the share price. It’s trading at about $3.10 right now, but at that price it still represents an excellent yield-to-maturity play. There is a very small risk that some of the other funds will try and sue the Future Fund and delay the process, but I very much doubt that’s going to happen.

The things with this one is investors are paying $3.10 now to get about $3.23 over the next five to 11 months, essentially making a 4-5% return. Some might say it’s not worth it, that it’s equivalent to fixed interest, but I still think it’s worth having some money in this one because there’s no way of predicting what could happen. There is a chance that one of the funds could bid higher for some of those airport assets, and that would mean a better return for unitholders overall.

Sundance Resources (SDL)

The latest news with Sundance Resources is that it has extended its trading halt until next Monday. Basically, Sundance can’t get a commitment from suitor Hanlong Mining on the financing of the deal, so it’s not looking too rosy right now. See my article No iron clad guarantee on Sundance.

The fact that the deal has been delayed time and time again, and given that the iron ore price has rallied quite dramatically and equity markets have firmed up, as well as the fact that the bid is a lot lower than where it started off, just says to me that the Chinese might be taking another look and wondering if this is the best way to spend their money.

It’s important to remember that this is a massive project. Just buying the company is the first part, then all the infrastructure has to be built in Africa. Hanlong Mining could be reassessing whether Sundance is as good a fit as initially thought.

With the shares in a trading halt, there’s nothing that investors can do now, but I suspect there’s a very good chance of more disappointment with this one.

GrainCorp (GNC)

There has been speculation in the press that Archer Daniels Midland is getting ready to sweeten its offer for GrainCorp. This wouldn’t be unreasonable given the recent stockmarket rally. As I’ve said before, I reckon this is still a good one.

I would say that GrainCorp and ADM have been talking to each other for quite some time about the offer, and if it gets close to $13, that would put it in the 10 times earnings before interest, tax, depreciation and amortisation (EBITDA) range that has seen other deals done in the last few years.

What’s helping GrainCorp’s case is the rally in both equity markets and commodity prices in the last few months. So it shouldn’t be too difficult for ADM to justify paying the higher price. I think at its current price, just a fraction above the bid, it’s a very good prospect.


Tom Elliott, a director of Beulah Capital and MM&E Capital, may have interests in any of the stocks mentioned.

Takeover Action January 21-February 1, 2013

DateTargetASXBidder(%)Notes
23/10/2012Clearview WealthCVWCrescent Capital Management62.70
1/02/2013Discovery MetalsDMLCathay Fortune13.78Unconditional. Cleared by FIRB, MOFCOM. Board rejects.
29/01/2013EngencoENGElphinstone Group41.50
18/12/2012Firestone EnergyFSERange River Gold0.00
30/11/2012Globe InternationalGLBMariner Corporation0.00Board rejects offer
29/01/2013L&M EnergyLMENew Dawn Energy91.68Incl lock-up agreements
24/01/2013LinQ Resources FundLRFIMC Resources69.87FIRB approves. Ext to Feb 18
15/10/2012MintailsMLISeager Rex Harbour40.33
17/01/2013Neptune MarineNMSMTQ Corp82.31Unconditional
29/06/2012Real Estate Capital Partners USA Property TrustRCUWoolley GAL II32.81Incl 30.99% associates' holdings
1/10/2012United OrogenUOGIron Mountain Mining78.55Unconditional
24/01/2013Wentworth HoldingsWWMAustralian Renewable Fuels40.18Incl 19.81% pre-bid
2/01/2013Wilson HTMWIGMariner Corp0.00Ext to Feb 15
Schemes of Arrangement
24/12/2012Avocet ResourcesAYELion One Metals0.00
1/02/2013EndocoalEOCChina Yima Coal/Daton Group0.00Vote Feb 28. FIRB approves
18/01/2013PMI GoldPVMKeegan Resource0.00Vote Feb 20
31/01/2013SkywestSXRVirgin Australia0.00SCI, Singapore, approves. ACCC clears offer
30/01/2013Sundance ResourcesSDLHanlong Mining Investment17.99Meeting adjourned. Date TBA
22/01/2013Texon PetroleumTXNSundance Energy Australia0.00Vote Feb 25
Foreshadowed Offers
4/12/2012GraincorpGNCArcher Daniels Midland19.90Revised indicative offer
8/01/2013Westside CorpWCLUnnamed party0.00Discussions continue
26/10/2012WHK GroupWHGSFG Australia0.00Discussions
Source: NewsBites

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