One of FMG’s earliest backers has been divesting.
Leucadia National Corporation’s decision to sell down its Fortescue Metals Group equity stake is a further indication of the stock’s maturity now it’s a major producer, but the US-based investor still has plenty invested in Andrew Forrest’s iron ore miner.
Leucadia has generated around $US1 billion from its FMG interests in just more than a year, with the $US615 million sale this week adding to $US350 million it said it had ‘harvested’ since the first quarter of calendar 2010, mostly in payments relating a special loan deal it has.
Its equity position remains worth nearly $US1 billion at today’s prices, and its loan notes, valued at around $US160 million in Leucadia’s books and estimated to be worth $US826 million last year by FMG, should keep generating cash – marking a substantial return on the investment house’s $US400 million commitment five years ago.
But Leucadia will slip below the radar as its sell-down takes it below the 5 per cent substantial shareholder level, which requires disclosure of share transactions.
The Leucadia move may signal it believes it has done its best from Australian miner from an investment it describes as “delicious”. The low-profile fund manager probably wants to find opportunities in other markets where more value can be extracted from a cashed-up investor.
But Leucadia still holds a big position in FMG. It retains a long-term loan note, which earns it significant cash from FMG’s iron sales, and it seems in no mood to get rid of that lucrative asset. In the first three months of calendar 2011, it earned $43.6 million from FMG, without any share sales.
MineLife founding director and senior resource analyst Gavin Wendt said Leucadia’s move reflected a maturity in FMG as stock that had moved from start-up to a major mining house in five years.
Mr Wendt noted that there had been another changing of the guard at FMG, namely the recent decision by Mr Forrest to step away from the day-to-day control of the company as he hands the operational reins to new generation of management.
He also highlighted FMG’s decision to pay a maiden dividend as another signal that the company was moving onto the radar of more conservative investment institutions.
“You do get turnover of shareholders and executives,” Mr Wendt said.
“You have people who are good at starting companies and managing them at the early stages, then you get people more attuned to running a more mature or established business.
“They (Leucadia) like to go into a company at the early stages.
“With Fortescue, the trainer wheels are off.”
“Perhaps they (Leucadia) have taken the strategic decision, as a lot of people in the market are at the present time, to lighten their exposure.
“It would be more significant if they were selling out entirely.”
FMG welcomed the sale, suggesting it freed up the register.
Leucadia came on board in 2006, becoming a key player in FMG’s $2 billion raising, which funded the infrastructure that has catapulted the iron ore miner into the ranks of top global producers. At the time FMG was a pariah to many Australian investors, who had been disappointed by Mr Forrest’s Anaconda Nickel venture.
Nearly five years ago, Leucadia invested $US300 million to buy 10 per cent of the company’s shares and $US100 million in the loan note. It topped that stake up a year later with a $US44 million investment, to maintain its 10 per cent of FMG during another capital raising.
This week’s $US615 million sell down to take Leucadia just below 5 per cent, take to almost $US1 billion the funds that it has harvested from the investment – and still has a shareholding worth almost $1 billion on recent prices.
Most of those funds were repatriated in the past year, a period when the Australian dollar was historically high against the greenback, which presumably made it an attractive time to cash in on the investment.
Of the funds extracted from its FMG holdings, more than $US200 million were from its loan note which formed part of the original 2006 deal. From this note, Leucadia receives 4 per cent of revenue, after royalties, earned from FMG’s Christmas Creek and Cloud Break developments.
In a recent announcement, FMG said that it expected to be producing 52 million tonnes per annum from these two projects this month, increasing to 65mtpa by June next year and 90mtpa by the year after that. In the first half of 2010-11, it shipped 20mt worth more than $2.5 billion, or about $126 per tonne.
In its annual report for the 2010 calendar year, Leucadia said it had no intention of letting that loan note investment go, stating it intended to go the full 13-year term, which means it has about eight years to run.
But the massive returns for Leucadia – and the thought of more to come from the loan note – have been soured by legal action started last year by the investor to protect its interest after FMG sought to dilute its share of the revenue with a proposed new debt agreement.
“Should we win the litigation, we expect that most of our costs will be paid by the defendant and Fortescue would be prohibited from issuing more royalty notes to others,” Leucadia said in its annual report for the year ending December 31.
“Our intention is to hold the royalty note for its full term.
“We also have a damages claim for breach of representations.”
Leucadia might also look back to the heyday of FMG’s share price when it bettered $13 in 2008, valuing its equity stake alone was worth more than $US3.4 billion.
