Sandfire hots up

PORTFOLIO POINT: Its shares have jumped since the start of the month, and with some big names on the register the story just gets more interesting.

Sandfire Resources (SFR). The Sandfire Resources story just keeps getting more interesting with the news that a Korean firm, LS-Nikko, has bought a 12.5% stake at $5.02 a share. The shares were newly issued by Sandfire and, as a result, they dilute holdings from the other two big players on the register: OZ Minerals, which had a 19.9% stake and now has 17%; and the South Korean steel giant POSCO, which did have a 17% stake and now has 15.2%.

The Sandfire share price has responded sharply in response to all the interest: at the start of this month Sandfire shares were trading for $3.21; today they closed at $5.10.

These developments don’t actually prevent OZ from making a takeover bid; it might be that OZ is happy to be a substantial shareholder without being on the threshold of having to launch a takeover bid. If you remember that when OZ acquired its stake at $3.87 it had to pay well above market price, although that is looking like quite an astute buy right now.

At the same time, it shows that Sandfire’s reserves are very, very interesting to a number of parties. Sandfire has been one of those great success stories in Australian mining. It is run by the guys who were involved with Jubilee Mines, which, strangely enough, Xstrata bought for about $3 billion back in 2007. About two years ago it was just a microcap and today its worth over half a billion dollars.

Sandfire has got a good pedigree and the feeling is that OZ might now eventually look to take the whole thing. OZ considers this a strategic investment as it provides exposure to Sandfire's high-quality Doolgunna project in Western Australia. This saga is definitely one to keep an eye on over the coming weeks as OZ could look to buy in further and bolster its position, which would indicate it is interested in a full takeover at some point. Whenever there are two substantial shareholders on the register – and both in the industry – it usually indicates that something will flow on from it in the longer-term.

Foster’s Group (FGL). A big rumour during the rounds last week related to Foster’s, which is said to have had interest from several investment banks poking around in favour of their unnamed clients. On the back of the news, shares hit a high of $5.97, a price the stock hasn’t been anywhere near since November 2008.

However, I’m wary a bit wary of this because investment bankers like talking up deals because that’s their bread and butter. What they want to do, what they’re trying to say to the market, is: “We are the people you need advising you when this bid happens, whether you’re the buyer or whether you’re the board”. So all of a sudden these banks are doing their homework on Foster’s. It doesn’t mean a deal is imminent; it’s just them advertising themselves. Having said that, I do think that Foster’s will be taken over eventually – it’s just a question of whether it is before or after the demerger of the wine and beer business.

My strategy would be to buy the stock before the demerger, although, there is a feeling out there that any big beer company would just rather wait for the demerger to occur rather than buy into a struggling wine business they would then be responsible for selling. Foster’s has probably run a bit hard, and if a bid doesn’t occur soon, the shares will probably drift back because the fundamentals are starting to look pretty ordinary. On last year’s figures it’s on a price/earnings multiple of almost 30, which is very pricey.

Linc Energy (LNC). Underground coal gas company Linc Energy has said that it has found buyers for three assets it has been seeking to divest since 2008. It has received written offers for each asset and is working to take them to a formal binding sales agreement. This has set the share price of this company alight: two weeks ago it was trading for as little as $1 and today its put on another 6.5% to close at $1.63.

Linc has been talking about the possible sale of its three coal assets – the Galilee, Emerald and Pentland deposits – for some time and the sales, no matter how far along and certain they look to be, have never come off so I’m still a bit wary of this one and the fact that its rallied 63% in just two weeks makes me even more wary.

Linc is putting a lot of its money into new technologies, which is why it needs to sell some assets. It needs the cash to help fund its research and development. The company has now said it is in talks with Indian miner Adani, which recently raised $850 million in a share sale. However, last week Adani said it had no intentions to spend the money in Australia.

But it now appears that Adani has changed its mind and is expected to conclude a deal for a coal mine in Queensland by the end of the week. A successful deal here would be great news for shareholders but with a long history of deals like this being touted and never actually being completed, you would need to tolerate a considerable amount of risk.

Centennial Coal (CEY). Banpu has submitted its formal Bidder’s Statement for its $2.5 billion bid for Centennial Coal this morning. There has been a slight delay with this deal due to the federal election, and now Banpu is going to resubmit its application to the Foreign Investment Review Board.

There’s no real issue here as the application like this is a relatively common occurrence. It looks like the deal is going to go ahead. The only thing we don’t know with this one is that whether or not the company has the ability to pay a special dividend of up to 4¢ a share on top of the offer price. Banpu is offering $6.20, but shareholders might get as much as $6.24.

Centennial received the bid from Banpu at the beginning of July, the day after the revised mining tax – the mining resources rent tax – was announced by the Gillard government. With the stock at $5.99, I don’t think there’ll be any FIRB issues because Banpu is a Thai company and Australia has a Free Trade Agreement with Thailand. Centennial does supply almost half of the thermal coal in New South Wales, but there are plenty of other coal suppliers who could easily take up that slack.

AWE Limited (AWE). There is a reasonable chance that both AGL Energy and Origin will need to either buy or discover gas supplies over the next few years, and AWE has some great reserves that make it an attractive takeover target. AWE has not had much in the way of investor support over the past few years, falling from a high of $4.50 in May 2008 to $1.61 at the close of business today. AWE has some great producing assets, so there’s a real possibility that one of these companies will pick up these assets at a great price.

One of the things I really do believe about gas is that it is a classic interim fuel. If we do decide to turn away from coal we will need to source other alternative technologies or turn to nuclear, which is still relatively unpalatable in most parts of the world. Gas is probably going to be the middle ground for the next couple of decades and that bodes well for AWE shareholders.

Arrow Energy (AOE). Just while we are on energy stocks, Arrow Energy’s DART Energy (DTE) spinoff debuted on the ASX last week and is now trading around 84¢ a share, following Arrow’s takeover by Royal Dutch Shell and PetroChina for $3.5 billion. Arrow will cease trading on the ASX at the end of this month and the stock is now trading at $4.68. Shareholders have been given one Dart share for every two Arrow shares and the spinoff has so far proved to be a good, profitable spin-off for people who bought into it.

Sigma (SIP). The Sigma board is still deliberating on whether to accept the 55¢ a share bid from Aspen. At the same time, they’re pursuing an asset sale program; they want to try and sell Herron Pharmaceuticals and they’ve got a couple of other brands. The board probably doesn’t want to accept the 55¢ offer. They’ve got a new CEO and I think if he accepts the bid, then he’s out of a job again. My thinking is that the board will try and tough it out, which makes it difficult for shareholders to know what to do with their stock. As I’ve said before, I would be pursuing the takeover. To reject the bid and try and sell assets and got it alone is always risky as I explained in a recent column (see Wrong answer).

Ramsay Healthcare (RHC). There was speculation last week that Kohlberg Kravis & Roberts (KKR) could be eyeing up Ramsay Healthcare for a takeover bid. The rumours started following the successful bid Healthscope received from TPG and Carlyle for about $2 billion. A lot of people are saying that a takeover of Ramsay is the next big healthcare stock to look attractive to bidders. While it is true that sometimes there are a series of takeovers in the same industry sector, my feeling with Ramsay is that just because and its joint venture partners – or its co-investors – missed out on Healthscope they won’t necessarily be pursuing another similar takeover. Ramsay Healthcare founder Paul Ramsay owns almost 40% of the business, and so far he’s shown no indication of wanting to sell his stake and nothing will happen here until he does.

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

-Takeover action, July 19-23, 2010
Date	Target	ASX	Bidder	(%)	Notes
06/07/10	Ammtec	AEC	Campbell Brothers	9.99
16/07/10	Aurium Resources	AGU	Dourado Resources	0.00	Off-market proposal.
14/07/10	CBH Resources	CBH	Toho Zinc	92.15	Unconditional.
05/04/10	Centennial Coal	CEY	Banpu Public Company	19.90
22/07/10	Corporate Express Australia	CXP	Staples	96.91
21/07/10	Dexion	DEX	GUD	38.05
07/07/10	Gloucester Coal	GCL	Noble Group	92.54
12/07/10	Mesa Minerals	MAS	Mineral Resources	59.72
21/07/10	NGM Resources	NGM	Paladin Energy	22.50
03/06/10	North Queensland Metals	NQM	Conquest Mining	19.90
05/07/10	North Queensland Metals	NQM	Heernskirik Consolidated	0.00
08/07/10	Padbury Mining	PDY	Fe Ltd	0.00	Seeks to replace board.
19/07/10	Rey Resources	REY	Gujarat NRE Minerals	12.00	Bid lapsed.
22/07/10	Shield Mining	SHX	Gryphon Minerals	33.00
07/07/10	Sigma Pharmaceuticals	SIP	Aspen Pharmacare	0.00
20/07/10	Wallace Absolute	WAB	Armidale Investment Company	16.20
13/07/10	Wallace Absolute	WAB	E-quest Capital	0.00
25/06/10	Vesture	VES	Prudential Investment Company of Australia	0.00
Scheme of Arrangement
09/06/10	Aurox Resources	AXO	Atlas Iron	0.00	Vote August.
14/12/09	AXA Asia Pacific Holdings	AXA	AMP and AXA SA	53.93	Revised scheme rejected.
04/06/10	AXA Asia Pacific Holdings	AXA	National Australia Bank	0.00	Considers part divestment to satisfy ACCC.
22/07/10	BCD Resources	BCD	Bendigo Mining	19.92	Vote November.
19/07/10	Healthscope	HSP	Carlyle Group, TPG Capital	0.00
12/05/10	Jetset Travelworld	JET	Stella Travel Services Holdings	0.00	Stella to hold 50%. Vote August
04/05/10	Lihir Gold	LGL	Newcrest Mining	0.00	Vote July
03/05/10	MacarthurCook Industrial Property	MIF	HRPT Properties	24.42	Vote July
01/07/10	Mosaic Oil	MOS	AGL Energy	12.80	Vote October.
19/07/10	Ross Human Directions	RHD	Peoplebank Holdings	0.00	Vote October.
06/07/10	Sylvastate	SYL	Whitefield	0.00	Same CEO.
28/06/10	Wattyl	WYL	The Valspar Corporation	0.00
21/07/10	Westpac Office Trust	WOT	Mirvac Group	0.00	Approved.
Foreshadowed Offers
03/06/10	BOOM Logistics	BOL	Archer Capital, McAleese Group	10.47	Indicative scheme proposal.
03/05/10	Centrebet	CIL	Unnamed party	0.00	Discussions continue.
31/05/10	Healthscope	HSP	Unnamed party	0.00	Indicative proposal.
15/07/10	Intoll	ITO	Canada Pension Plan Investment Board	0.00	Scheme proposal.
09/06/10	Redflex Holdings	RDF	Macquarie Group	0.00	Indicative proposal.

Source: News Bites