Resources scramble is on

There will probably a lot more takeover activity in the coal and iron ore sector in the next 12 months or so. For all the talk of carbon trading and cutting emissions, coal is still the world’s primary source of cheap energy and Australia is one of the world’s best sources of both coking coal, which is used to make steel, and thermal coal, which is used to make electricity.

There was talk today (July 21) that some of the New South Wales generators have to re-sign new power contracts with the coal companies and that coal is going to be significantly more expensive. What this does to electricity prices, we’ll have to wait and see, but Australians are going to get used to paying a world price for their electricity, and it’s the same with iron ore.

There’s no shortage of coal in the world but it’s often in places where it’s hard to extract, whereas our coal is all situated near the coast and there are good ports. If you believe the world will still be using coal to generate electricity and make steel, then we should see further activity, so it will be interesting to keep an eye on companies like Gloucester Coal, Centennial Coal Company and Macarthur Coal. Similarly, in iron ore we’ve already seen action at Midwest, Murchison Metals and Cape Lambert.

In the resource sector, a lot is going to depend on the government’s carbon trading policy. There’s a lot of uncertainty at the moment. If I was looking at making a big investment, I’d be unsure whether I was going to be given free carbon credits or not. Aluminium smelters are a perfect example: we don’t know whether the government is going to compensate them or if the Australian ones will, over the next few years, just find life is too hard and aluminium production might shift to China or Canada, for example.

Cape Lambert. A potential new deal this week is Cape Lambert, with all sorts of rumours swirling around this stock. The price has gone from about 70¢ cents to 86¢, and there’s a fair chance it will go higher this week.

The only thing about the rumours is they keep changing about what’s happening. The rumour last week was that Roman Abramovich, the Russian billionaire who owns the Chelsea Football Club, is trying to buy a controlling stake in Cape Lambert, and it was reported over the weekend that three shareholders, owning collectively 20% of the company, were offered 90¢ a share for their stake. The rumour today is that a bid is going to be made at $1.10.

Cape Lambert is a medium-sized iron ore company and we’ve seen so much activity in this sector, that it is no surprise another iron ore company might be a target. Everybody’s very interested in Australian iron ore, so we’ll see what happens.

Indophil Resources. Another resource company that I think is a very interesting situation at the moment is Indophil Resources. Now Indophil has had three takeover bids. The first was by Xstrata at $1 and the stock was trading at $1.09–1.10 at the time, so I was a bit nervous about buying it because it was trading at 9–10% above the bid. Lo and behold, the Crosby Consortium – which includes Indophil chief executive and managing director Richard Laufmann, Hong Kong investment company Crosby Capital Asset Management and the Alsons Group – launched a $1.28 a share bid, so Xstrata lifted its bid to $1.28. So what you’ve got is two bids at $1.28.

The stock is trading around $1.31–1.32, just over 3% above the bid. You’ve got a large shareholder called Wellington Capital that's selling and it’s keeping the share price down. Now this often happens in bids. You get perhaps a shareholder that’s been in this thing forever; perhaps it’s lost a mandate, we don’t know. Even though the situation looks very prospective they’re just selling their shares in the market. I see this happen a lot and that’s usually a good time to buy.

Xstrata, one of the world's biggest mining companies, could pay heaps more for this and Crosby has plenty of money as well to back the management team. You’ve got a shareholder that for whatever reason is selling out on market and you can buy it knowing that the most you’ll lose is 3% so this is a very interesting situation.

* Indophil released a target’s statement on Monday afternoon (July 22) urging shareholders to reject the Xstrata offer.

Alumina/Alcoa. Alumina must be market's oldest takeover target. On the plus side, it would make sense for its joint venture partner Alcoa to take out the part of Alumina it doesn’t own.

After all, Alcoa has a head office and a board and all it does is sit there and receive the dividends. ASX-listed Alumina owns 40% of the joint venture and Alcoa the other 60%. On the negative side, Alcoa doesn’t need to take out the 40% it doesn’t own because it controls the business already. And the other thing is that one of Alcoa’s big assets here in Australia is the Portland aluminium smelter. It’s not the only one it’s got but it’s a big one and that is one, again, that depending on how the government’s carbon trading emissions scheme goes may or may not be viable.

So would it want to pay a whole lot of money to get complete control of an asset like the Portland aluminium smelter? I don’t know. The Portland aluminium smelter could be out of business in a couple of years because it consumes 25% of the state’s electricity and pays about a quarter of the price that everybody else pays and that seems to be at odds with policy towards these things. So I think Alcoa would wait for certainty over the regulatory outcome over these sorts of assets before it decided to buy out the alumina or the 40% of the Alumina joint venture that it doesn’t own.

St George/Westpac. Westpac/St George is entering an interesting phase because the share prices of both companies have been hammered so much. What is unusual is that St George chief executive Paul Fegan is going around telling people that the deal’s not actually done, which is in complete contradiction to his board. Whether this that means he’s out there trying to get a higher bid I just don’t know, but St George shares are now trading half a percent above and below the bid. So if you think that there’s someone else who might have a look at St George, you can do it at a much cheaper price now, because earlier it was trading at a massive premium to the bid, and now it’s just trading in line with it. However, if the bid’s seen to be under some threat it will trade at a discount.

Commonwealth Bank has said that it isn’t interested, I don’t think ANZ’s interested because ANZ has made it clear publicly that it sees its growth in Asia, so the only one really left is NAB. Will NAB make a bid? Personally, I really doubt it. I really, really doubt it, but you never know. I would put the chance of the St George getting a higher bid as a very low probability because I think foreign banks are all trading at a discount to the Australian banks so for them to buy an Australian bank it would cost them a lot of money.

Origin Energy/BG Group. Origin, which is under offer from London-based BG, has slipped to about $16. At $16 you’re paying 3% over a hostile cash bid at $15.50, so really that’s your downside; but if Origin is successful in getting a joint venture partner or indeed getting a counter-bid then the stock will go considerably higher.

It’s one of those situations where if nothing more happens, 3% is the worst loss you’ll suffer. Some people say Origin is worth anywhere between $20 and $24 a share, so there is considerable upside, but not too much downside. They’re the sort of situations you look for in the current environment.

Funtastic. Funtastic is an interesting one. Private equity firm Archer Capital has offered 80¢ a share for the group, but the bid is subject to due diligence and financing and so the stock’s been trading down. You’ve got the possibility of making 60% on your money but losing 10–15% if the deal doesn’t go ahead. The stock jumped at the end of last week. I don’t know if this indicates people think the bid is about to be launched, but it’s suddenly gone from 48–49¢ to 56–57¢. It is a high risk play but the fact that it’s jumped might mean a private equity bid is about to be launched. It’s a risky one.

Paladin Energy. Paladin’s been talked about as a target for some years. Two years ago the uranium sector was running very hot. The thing about uranium is that it’s not actually a very rare element. And in Australia, most uranium companies aren’t legally allowed to mine the uranium and export it so you’ve got a big government regulatory risk.

Paladin is different because it has a big asset outside Australia in Namibia, south-west Africa, but its production figures weren’t all that good. Maybe it is a takeover target, but I’m a bit sceptical on the Australian uranium sector and there are plenty of uranium companies out there with assets outside Australia so it’s very hard to pick just one out as a potential target.

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

nTakeover Action July 14-18, 2008
Date	Target	ASX	Bidder	(%)		Notes
09/07/08	Abra Mining	AII	Hunan Nonferrous Metals	71.12		Started with 17.8%. Seeks 70% of shares not owned. Ext to August 1.
16/06/08	Anzon Australia	AZA	Roc Oil	0.00		Concurrent with and dependent on Anzon Energy UK scheme offer.
10/07/08	Ausdrill	ASL	Macmahon Holdings	0.00		Extended to August 15.
29/05/08	Bellamel Mining	BMM	Norton Gold Fields	0.00
17/07/08	Bemax Resources	BMX	National Titanium Dioxide (Cristal)	96.85
11/03/08	Challenger Infrastructure Group	CIF	Consensus Business Group	0.00
18/06/08	GoldLink IncomePlus	GLI	Emerald Capital	0.00		Seeks 35%.
17/07/08	Herald Resources	HER	Bumi Resources	64.50		Extended to July 30.
04/06/08	Herald Resources	HER	Antam and Shenzhen	19.39		Recommended offer. Extended to June 5. FIRB approval received.
17/07/08	Indophil Resources	IRN	Xstrata	2.16		19.99% pre-bid acceptance withdrawn.
20/06/08	Indophil Resources	IRN	Crosby Capital, Alsons Group, CEO Laufmann	0.00
16/07/08	Intermet Resources	ITT	Hillgrove Resources	37.23		Has 29.1% fully diluted.
17/07/08	Jetset Travelworld	JET	Qantas	58.00		Shareholders approve offer.
14/07/08	Just Group	JST	Premier Investments	24.76		Extended to August 15.
16/07/08	Midwest Corporation	MIS	Sinosteel	54.01		Offer formalised.
17/07/08	Mineral Securities	MXX	CopperCo	72.71
11/07/08	Olympia Resources	OLY	Territory Resources	73.53
24/06/08	Origin Energy	ORG	BG Group	0.00
16/05/08	Ridley Corp	RIC	GrainCorp	19.00
03/07/08	Rio Tinto	RIO	BHP Billiton	0.00		Early termination of Hart-Scott-Rodino anti-trust waiting period.
17/07/08	Roma Petroleum	RPM	Queensland Gas	31.55		Incl 19.2% pre-bid acceptance.
26/06/08	Tower	TWR	Guinness Peat Group	35.00		Started with 19.7%, seeking further 15.3% to reach 35%. Received 36.37% acceptances.
nScheme of Arrangement
01/07/08	Arc Energy	ARQ	Australian Worldwide Exploration	0.00		Vote 5 August.
14/07/08	Avonlea Minerals	AVZ	Sino Gas & Energy	0.00		Terminated.
05/05/08	Bravura Solutions	BVA	Ironbridge Capital	0.00		No vote date set.
24/06/08	CBH Resources	CBH	Perilya	0.00		No vote date set. Perilya says unlikely to proceed.
16/07/08	Great Artesian Oil & Gas	GOG	Drillsearch Energy	0.00		Vote July 28. Shareholders with 32% support scheme.
11/06/08	Independent Practitioner Network	IPN	Sonic Healthcare	71.50		Proposed move to 100%. Independent directors recommend scheme.
17/07/08	Macquarie Capital Alliance Group	MCQ	Macquarie Advanced Investment Co	0.00		Vote August 28.
12/06/08	Macquarie Private Capital	MPG	Bear Stearns Private	0.00		Delisted.
09/07/08	Sapex	SXP	Linc Energy	19.42		No vote date set.
26/05/08	St George Bank	SGB	Westpac Banking Corp	0.00		Vote November 6.
24/06/08	Uranium King	UKL	Monaro Mining	0.00		Court approval hearing adjourned to July 24.
nBackdoor Listing
18/07/08	Hawk Resources	HFC	New Standard Energy	0.00		Hawk shareholders approve acquisition of NSE.
23/06/08	Mark Sensing	MPI	TMA Group	82.00		No vote date set. TMA would have 82% on completion.
nForeshadowed Offers
14/07/08	BC Iron	BCI	Consolidated Metals	0.00		Takeover talks denied.
01/07/08	Espreon	EON	Vectis Group	19.80		Proposed scheme acquisition. Due diligence starts.
11/07/08	Funtastic	FUN	Archer Capital consortium	18.80		Due diligence exclusivity extended.
01/04/08	Mount Gibson Iron	MGX	Shougang Concord	0.49		Takeovers Panel reverses 19.73% acquisition.
19/06/08	Pelorus Property	PPI	Pelorus unlisted funds	0.00		Group merger planned.
24/06/08	Perilya	PEM	CBH Resources	0.00		Alternative proposal. Also rejected by Perilya.
11/07/08	Roma Petroleum	RPM	Bow Petroleum	10.20
16/06/08	Staging Connections	STG	Several parties	0.00		Non-binding proposals. Due diligence proceeding.
01/05/08	Warehouse Group	WHS	Woolworths	0.00		Offer clearance stayed until 48 hours after appeal judgement.
01/05/08	Warehouse Group	WHS	Foodstuffs Co-operatives	0.00		Offer clearance stayed until 48 hours after appeal judgement.

Source: NewsBites