No iron clad guarantee on Sundance

Sundance Resources (SDL)

It’s been an extremely long and protracted battle for African iron ore prospect Sundance Resources – with no clear end in sight yet – and more than a few people have been asking me what’s happening with this deal. I would still be inclined to stay away.

The good news is that its suitor, Hanlong, managed to get a few more approvals over the break and everything looks good. The share price is still well below the 45c however, closing today at 37c, and the market is sceptical.

One reason to think this takeover is much more likely to go ahead now is the dramatic rise in the iron ore price since August – it has gained almost 90%. Essentially, this bidder got to renegotiate the price when iron ore was getting smashed (it had been as high as 57c a share), and it’s certainly not renegotiating back up, so I would have thought this increases the attractiveness.

On the other hand, the bidder still does not have all of its Chinese approvals in place – and given what has happened so far with this bid it may just fall over.

It’s got one of the biggest spreads you’d ever see – you can make a return of about 16-17% in the space of a couple of months, so annualised returns are off the charts. But I think there’s a real risk it doesn’t get up – the iron ore price is not exactly stable at the moment – and if it doesn’t happen the stock will get hit again. Sundance has a massive project that needs massive financing, and if Hanlong falls through it’d likely still need to sell to someone else.

I still think this one is a bit too difficult to be worth it.

Australand Property Group (ALZ)

This is a deal that had a lot of potential, as I wrote late last year, however much of that has now been priced in.

Singapore group CapitaLand, which owns more than 50% of Australand, has announced a review of all their portfolios, assets and investments, and it’s clear that they want to sell out of Australand. Obviously that forces Australand to engage, and GPT Group (GPT) has a proposal going to buy the bulk of the company’s assets. The rumour is that Mirvac (MGR) may counter with a deal for the whole company, and I believe that’s what CapitaLand would prefer because it’s a nice clean exit.

That means on the face of it this is a good play. It’s clear that lately a number of property trusts trading at too big a discount to asset value are getting bought out, and the assets themselves, as long as they are in the less risky categories, are quite highly sought-after. Typically office and industrial property is in favour, and people are a bit nervous about retail and residential. Australand has a mixture of all those, which is why GPT’s proposal is for assets.

When I first looked at this, the stock was trading in $3.20s and the NTA was around $3.48 or thereabouts. The stock has recently traded up to about $3.48 in the past week, though it has dipped back to close at $3.38 today. Adding to all this is the expectation interest rates will continue to drop, so arguably property trusts are worth more.

What I’m getting at here is that when I originally said it was a buy, it was a good deal. And even though I think the likelihood of another deal happening is quite high, the stock is now trading at its NTA, and upside from this point is limited. I’d actually be more inclined to sell out, take some profits if you got into it at the lower price, rather than hang around for a couple more percent that might come from a Mirvac bid.

Arrium (ARI)

It’s all quiet on the Arrium front these days. The share price has kept going up – partly because of the iron ore price and partly because of the mining consumables business – but POSCO has gone very quiet on the whole thing.

I think the POSCO-Noble-consortium bid alerted the market that the whole company was woefully underpriced. I wrote previously that it was worth staying with, and that POSCO was probably still sniffing about, however the share price is well above what POSCO said it was prepared to pay and, in a sense, the market has given you an increased bid if you like. Now it’s time to think about taking profits.

I don’t really know what POSCO is doing anymore and I suspect that it’s less likely to bid now, given that the iron ore price has jumped back up. I think it was probably an opportunistic bid when iron ore prices were really hit hard, I suspect it wouldn’t be inclined to bid again with iron ore at $US140-$US150 a tonne.

GrainCorp (GNC)

There’s no sign yet of an increased bid from Archer Daniels Midland, but I think one is coming and it remains an attractive proposition.

Before Christmas I wrote that it was worth buying for the 35c dividend, and people have got that, excluded from the bid, and the share price has pretty much recovered that 35c. Effectively it was a free dividend worth 3% of what you invested.

There has been some talk rumbling that with the recent warmer weather in Australia that might be seen as a risk for the deal, but I don’t buy into that. The reason ADM wants to buy GrainCorp is to mitigate its global risk with grains. Yes, you get extreme weather in Australia, and you get extreme weather in North America, but by having assets at opposite ends of the earth you’re hopefully unlikely to get extreme weather in both at the same time.

I don’t think anything has really changed, and I think the board is doing the right thing in holding out for a higher bid. The rumoured number is $13 a share, and I think at some stage soon ADM will recommence discussions.

Australian Infrastructure Fund (AIX)

The shareholder vote for the Future Fund asset purchase is tomorrow, and my expectation is that it will go ahead and add a couple of cents to the stock tomorrow.

It went ex-dividend over the holiday period, since my last report, 5.5c, and the stock drifted back to $3.11, closing today at $3.12. At this price it represented an excellent annualised return of between 10% and 17%, and while it may be too late to get in at that price after the vote tomorrow, this is a good deal for investors in the stock.

Treasury Wine Estates (TWE)

I noticed a few articles during the silly season floating around about Treasury being one of the ‘big takeover targets’ for 2013.

I still think it is – it’s on my list of targets – but I would remind readers that this speculation put 5% on the price. The stock isn’t cheap, the high dollar isn’t doing the company’s earnings any favours, and it went up a lot based on nothing more than rumour and speculation.

Discovery Metals (DML)

The company keeps popping up with operational issues, amid the hostile $1.70 bid from Cathay Fortune. First it had a pit collapse, then a mill closure in Botswana, and the stock closed today at $1.505.

There’s no doubt that in the absence of a bid the stock would have been punished a bit for these problems, and the fact that the bidder is still there says to me it’s obviously still interested. In fact, it went hostile after the first problem was revealed. I don’t think these are real issues, and curiously they probably increased the likelihood of a bid succeeding at $1.70 because shareholders may be inclined to take the money and get out while they can.

I think the most likely scenario here is that the board and the bidder agree a compromise – maybe 10c extra.

I think it’s a pretty good deal right now, but they do say that bad news comes in threes and if another substantial problem came to light it could make me feel a bit nervous on this one.

Macmahon Holdings (MAH)

Finally, on Macmahon, at time of publication the situation regarding several proposals for the company’s construction assets remains a little unclear.

Singapore-based suitor Sembawang formally withdrew its offer this morning for some of Macmahon’s assets according to a statement released to the Australian Securities Exchange. Sembawang had released an email chain apparently making it clear it offered a higher price than Leighton (LEI). However a statement on Sembawang’s website this afternoon said a ‘part B’ of the offer was “still on foot”, offering $5 million more than the equivalent Leighton offer.

Now, Leighton is Macmahon’s biggest shareholder and has supported the company in the past, but Macmahon is a separate business and its board has a duty to do the right thing by its shareholders. Sembawang seems to have made it absolutely clear it is happy to pay a higher price. Unless the deal had already been done with Leighton and couldn’t be got out of, which I don’t think was the case, the Macmahon board may have some explaining to do.

I guess the counter argument might be that the company needs to keep Leighton on side for the longer term, but in the short term it seems like it has so far ignored what’s best for its shareholders.