Today’s confirmation that the coal miner, New Hope, has put itself up for sale follows yesterday’s capitulation by iron ore miner, Sundance, and begs the question: who’s next?
One name which leaps off the spread sheet of every investment banker with an eye on the WA mining scene is soon-to-be copper producer, Sandfire Resources, with OZ Minerals the likely bidder.
Since snapping up a 19% stake in Sandfire last year, OZ has been patiently waiting on the sidelines, content to see the value of its $100 million investment more than double as Sandfire’s share price soared to an all-time peak in August of $8.62.
At that record price Sandfire was valued at $1.3 billion, a jaw-stretching bite for OZ.
But, with the sharp fall in the copper price from more than $US4 a pound to just above $US3/lb the value of Sandfire has fallen to around $890 million, a 31.5% slide – which can correctly be called a crash as it has occurred over just 45 trading days.
OZ, which has also seen its share price fall sharply, has an advantage over Sandfire in the form of recurrent income from its Prominent Hill copper mine in South Australia, and a hefty cash balance which gave the company confidence to return around $600 million to shareholders earlier this year.
Raising fresh capital to buy the rest of Sandfire would be relatively easy for OZ, which could also opt to issue shares as part of a bid which might be attractive to the other big shareholder on the Sandfire share register, the Korean steel maker, Posco.
Getting the timing right is the key challenge for OZ and right now the stars are aligned thanks to the $410 million fall in the value of its prospective takeover target caused by a combination of lower copper price and the fact that Sandfire is six months away from producing first copper at its DeGrussa mine near Meekatharra.
There is another factor at work in the OZ/Sandfire situation – the time is right and if it doesn’t move soon it might be gazumped by a rival keen to acquire the rich DeGrussa discovery and promising exploration prospects.
Handsome cash flows over the past few years have filled mining company treasuries to bursting point, making management teams keen to buy something during the current stock and commodity market correction, and before any price recovery.
That’s why New Hope today announced that it was open to bids after receiving “a number of preliminary and incomplete proposals from third parties in relation to a potential change of control transaction”.
The same conditions being experienced in the Australian mining sector, fat cash balances and falling share prices, have triggered worldwide interest in resource sector takeovers, though mainly in the small to mid-tier sector.
In Europe, the moribund mining sector has been sparked to life by a $US600 million investment in European Goldfields by the sovereign wealth fund of Qatar, a gas-rich Gulf State and world’s biggest exporter of LNG.
Qatar Gold, a specialist fund, has earmarked up to $US10 billion for mining sector investments as part of diversification program, with $US5 billion earmarked for gold investments.
Richard Adkerson, chief executive of the world’s biggest listed copper miner, Freeport McMoran, told the Financial Times yesterday that “everybody is looking, everybody is analysing potential opportunities, I think there will be transactions”.
China is likely to be the leading player in the current burst of deal making, just as it was in 2009 and 2009 because it remains the country with the most money to spend. The purchase of Anvil Mining by China Minmetals last week was a sign of China’s appetite for resources.
Senior managers at BlackRock, one of the world’s biggest investment funds, have told clients that the small to medium end of the market will see most of the immediate activity with deals likely to be in cash.
Bigger deals will have to wait, says Catherine Raw, natural resources manager at BlackRock. “No-one is going to go out and blow their brains out because, in a market where getting finance is harder than it has been, you need a strong balance sheet,” she said.
For investors, the arrival of takeover season could not be more timely with many listed companies sagging to 12-month share price lows.
However, investing in the hope of a takeover is a risky strategy – though it’s also one that can deliver a quick killing as anyone with New Hope shares discovered this morning when they woke to 16% gain.
