CIMIC walks from Macmahon

CIMIC's bid for Macmahon has failed and ended with the suitor holding less than 24% of its target. The share price has risen and fallen with the changing prospects of the bid but now sits at 15c, 3% above our previous sell price.

CIMIC is, for now, out of the contest. We can't know whether they will make another bid for the business. 

Macmahon itself has sought an alternative arrangement, announcing a deal with Indonesian miner AMNT to acquire mining equipment and a long-term contract in exchange for between 40-50% equity in the business.

If the deal goes ahead, Macmahon will issue fresh equity to AMNT at 20cps, a 33% premium to the current price but, given where the share price is, the market appears sceptical.

We concur. The potential new contract, worth $2.7bn in revenue over its life, is several times Macmahon's largest existing contact. It would be a large revenue earner for the business and allow it work on one of the biggest gold mines in the world. It would also introduce an unknown Indonesian business as a major shareholder and a new set of risks.

Indonesia is a graveyard for miners. The Grasberg mine on West Papua – the single largest gold deposit in the world – has been more a headache than a mint for its operator, Freeport.

Several promising miners – Intrepid Mines and Kingsrose among them – have failed in Indonesia despite excellent geology. This is not an easy place to do business and we can't find many examples of partnerships working.

The timing of the AMNT deal is also noteworthy. In an industry swamped by overcapacity and competition, it's likely that this deal was put together with defence rather than profits in mind and we question how profitable it will ultimately be.

The Indonesian firm would hold enormous bargaining power and is incentivised to capture higher production margins rather than service margins. As Macmahon itself has learnt (as well as several peers in the sector) customer concentration is something to sweat not something to crow about.

CIMIC is out of the picture for now and we won't speculate on its next move. With billions of dollars' worth of new work, Macmahon could be cheap but that cheapness comes at considerable risk.

We've always viewed fair value at around the net tangible asset backing of 16–17c. Although we are slightly below that, there isn't enough upside to change our recommendation. SELL. 

Disclosure: The author owns shares in Macmahon.