Gindalbie Metals has estimated that shares in its part-owned Karara iron ore project have a negative value in excess of $3.5 billion, as it seeks to convince shareholders to accept a takeover offer.
Gindalbie Metals has estimated that shares in its part-owned Karara iron ore project have a negative value in excess of $3.5 billion, as it seeks to convince shareholders to accept a takeover offer.
It has also disclosed that Karara’s total cost of production, including the cost of servicing its large debt (i.e. all-in-costs), was $A150.26 per tonne in 2018 – above prevailing market prices
Chinese steel producer Ansteel, which already has a majority stake in Karara, is planning to move to full ownership by acquiring Gindalbie.
Under a scheme of arrangement, Gindalbie shareholders would end up with shares in a new company, Coda Minerals, which owns the Mt Gunson copper cobalt project.
In a statement, Gindalbie chairman Keith Jones said Karara was making large annual losses and continued to incur negative cashflow at the operational level.
“According to Gindalbie’s internal financial models, Karara shares have a negative value of more than -$3.5 billion,” Mr Jones said.
The statement said Karara is currently carrying over US$3.1 billion of secured debt.
“The independent directors consider it is highly unlikely that Karara will ever generate sufficient free cashflow, or profits, to allow any return to shareholders under the current financial and operating model,” Mr Jones added.
“The consistent operating loss-making position resulted in the level of debt and shareholder loans in Karara increasing to $4.4 billion in 2017.”
Karara has been able to continue operating because it gets additional funding from Ansteel, which has primarily funded the operation through loans guaranteed by its parent in China.
Gindalbie said its board and management has been preparing scheme booklets that will contain a thorough rationale for the transaction as well as detailed reports by an independent expert on whether the acquisition scheme and demerger scheme are in the best interests of shareholders.
The acquisition scheme booklet will include a valuation of Karara by the independent expert.
Earlier this month, the Australian Foreign Investment Review Board approved the proposed acquisition by Ansteel of all the ordinary shares in Gindalbie that it does not already own.
Gindalbie’s statement also asserted that expanding Karara’s production from 8 mtpa to 16 mtpa, as originally envisaged when the project was developed, would not be beneficial.
“Some of the initial infrastructure at Karara was constructed to facilitate the potential expansion of the operation to 16 million tonnes per annum, however, this expansion would require the duplication of the processing plant as well as significant capital upgrades and expansion works on train loading, rail transport and other related transport infrastructure.
Increasing production does not provide significant scale advantages due to the nature of the processing and operations.
“Moving from 8 million tonnes per annum to 16 million tonnes per annum is not expected to materially improve unit costs of production as efficiencies in scale will be offset by increased haulage distances and process water constraints.
“There is no economic justification to expand an already loss-making operation as the expansion would not result in positive economic returns (based on current iron ore forecasts) and require significant additional capital required for expansion.
“The board has no desire, and Gindalbie has no capacity, to fund or contribute capital to a project where the investment will increase losses and does not increase shareholder value.”
