Local Mergers Written In Scrip

Sydney Morning Herald

Monday March 24, 2008

Jamie Freed jfreed@smh.com.au

LOOKING at the mergers and acquisitions in the resources sector, it's easy to forget there is a global credit crunch.

Scrip acquisitions look to be the preferred method when local miners combine, whether the bid is friendly or hostile. Cash offers have tended to emanate from overseas miners such as Xstrata, China's Sinosteel or Indonesian miners PT Bumi and PT Antam, which are not listed in Australia.

The biggest scrip deal going is BHP Billiton's $US147 billion ($163 billion) hostile tilt at Rio Tinto. But two other scrip deals - Lihir Gold's $1.1 billion friendly bid for Equigold and a potential $500 million tie-up between zinc miners CBH Resources and Perilya - were in focus last week.

If the so-called "Canadian nickel wars" of 2006 that led to the demise of Inco and Falconbridge as independent companies taught the mining industry anything, it was that "cash is king" for short-term investors like hedge funds.

But Swiss commodities trader Glencore's willingness to accept scrip from Brazil's Vale for its stake in Xstrata shows that long-term investors believing in the "stronger for longer" theory about the demand for resources would prefer to remain exposed to mining stocks.

This week, The Drum has looked at a few other recent deals - or ones potentially in the offing - mostly involving scrip.

Made equal

The biggest scrip resources deal in Australia outside BHP's bid for Rio is the $12 billion friendly tie-up from Zinifex and Oxiana. The mid-tier base metals miners have viewed the transaction as a "merger of equals" and have taken the concept so far that each will own 50 per cent of the merged company, which will take on a new name.

When the deal was announced, there were a few quibbles from investors over the make-up of the merged company. Some Oxiana holders thought it deserved more of the pie due to its stronger growth prospects. And some Zinifex holders argued its huge cash balance and the room for a turnaround in the zinc market should make it the senior partner.

But now the dust has settled, the market appears to be supportive of the deal's structure. RBC Capital Markets analyst Geoff Breen last week said the deal made sense and was likely to proceed, barring the possible intervention of a rival bidder for one of the companies.

Roar at the Lion

Melbourne companies Indophil Resources and Lion Selection held takeover talks, but a breakdown in the conversation led Indophil to make a $315 million hostile move on Wednesday. On Thursday morning Lion implied it was likely to reject the all-scrip bid.

Indophil and Lion could both be deemed mining investment companies rather than miners, given they are not the operators of their respective projects.

Indophil was an active exploration and development company until Xstrata last year exercised its right to take control - and operatorship - of the Tampakan copper project in the Philippines. It has since been looking for other places to invest its $105 million of cash.

Lion is a listed investment vehicle with stakes in various mining and exploration companies and a 30 per cent, non-operating stake in Newcrest Mining's Cracow goldmine in Queensland. Unlike Indophil, it is forced to release the value of its net tangible assets every month due to its status as a fund. It was attempting to change its status to that of a miner by buying Newcrest's 70 per cent stake in Cracow, which is believed to be worth about $200 million.

Indophil said its offer is around the price of Lion's net tangible assets, and Goldman Sachs JBWere analyst Ian Preston noted Lion had not been able to bridge the gap between its share price and the value of its assets. "We see (and agree with) the rationale of this merger," he said.

In a smaller field

Before Indophil launched its hostile bid, Lion was busy considering how it would fund the purchase of Newcrest's Cracow stake. The Drum understands several companies had approached Lion, expressing interest in its 22 per cent stake in the Zambian nickel developer Albidon, which is worth about $145 million. When added to Lion's recent $48.5 million in proceeds from accepting Zinifex's bid for its stake in Tasmanian nickel miner Allegiance Mining, it looked like Lion might be able to buy the Cracow stake without raising equity.

The Albidon stake would be attractive to a number of players, but depending on the timing, it could be a great get for a cashed-up smaller nickel miner such as Sally Malay.

Zinifex has been named as a possible bidder for Albidon, but it's tied up with its own merger with Oxiana. Zinifex and Oxiana said they would be interested in nickel acquisitions after the merger, but that won't be completed for a few months.

Xstrata recently said it was unable to make bolt-on nickel acquisitions until it determined whether it would merge with Vale, since the combined Xstrata-Vale is likely to raise competition concerns in the nickel market. BHP is distracted by its bid for Rio and probably wouldn't look at Albidon anyway, meaning the field could be wide open to smaller players.

© 2008 Sydney Morning Herald

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