The sell down of Fortescue Metals Group shares by US-based Leucadia National Corporation marks a realisation of one of the resources boom’s most profitable punts - but by no means heralds its exit as major investor in Andrew Forrest’s miner.
The sell down of Fortescue Metals Group shares by US-based Leucadia National Corporation marks the realisation of one of the resources boom’s most profitable punts - but by no means heralds its exit as major investor in Andrew Forrest’s miner.
The company has generated around US$1 billion from its FMG interests in just over a year, with the US$615 million sale this week adding to US$350 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 US$1 billion at today’s prices, and its loan notes, valued at around US$160 million in Leucadia's books, should keep generating cash – marking a substantial return on the investment house’s US$400 million commitment five years ago.
But it 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.
It also coincides with 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.
FMG welcomed the sale, suggesting it freed up the register.
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.
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 Leucadia invested US$300 million to buy 10 per cent of the company's shares and US$100 million in the loan note. It topped that stake up a year later with a US$44 million investment, to maintain its 10 per cent of FMG during another capital raising.
This week’s US$615 million sell down to take Leucadia just below 5 per cent, represents almost US$1 billion in funds that it has “harvested” from the investment – and still has a shareholding worth almost $1 billion on today’s price.
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 US$200 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 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 more than 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 by the investor to protect its interest after FMG sought to dilute its share of the revenue with a proposed new debt agreement.
If the litigation is ultimately determined adversely to the Company and additional notes are issued, the company’s future cash flows from the FMG Note and future results of operations would be materially and adversely affected to the extent of the dilution resulting from the issuance of such additional notes,” Leucadia said in its annual report for the year ending December 31st.
“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.
“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 US$3.4 billion.
