31/05/2005 - 22:00

Tim Treadgold: Briefcase - Crosby’s $100m move on Tethyan

31/05/2005 - 22:00


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What do the chaps at Crosby Partners know that eludes Australian investors? Simple really. Every morning they look at a map of the world and ask a simple question: “has China disappeared?”

What do the chaps at Crosby Partners know that eludes Australian investors?

Simple really. Every morning they look at a map of the world and ask a simple question: “has China disappeared?”

Briefcase, obviously, exaggerates. But, there is enough truth in this snapshot of life at  Crosby to understand why the London-based merchant bank has lodged a $100 million takeover bid for Perth-based Tethyan Copper.

The bid, pitched at 64c for each Tethyan share has, so far, attracted minimal attention in Australia – and that in itself is another reason to consider an even deeper question: is Australia under-estimating the strength of Asia’s rush to modernise, and selling its resource assets too cheaply?

Perhaps, is the correct answer, but to gain a better understanding take a closer look at Crosby v Tethyan because both are largely unknown to the local market.

Tethyan, the target, is a spin-off from the very successful nickel producer, Mincor. Its only asset is control of a whopping copper and gold resource in Pakistan called Reko Diq. Well, it’s actually more than just “in” Pakistan, it’s in a place which is bordered by Iran and Afghanistan – an address which summons up visions of chaps with AK47s and rocket-propelled grenades.

But, what Reko Diq lacks in location it more than makes up in size. At its last measure, and with the surface barely scratched, the resource stood at 943 million tonnes grading 0.64 per cent copper and 0.3 grams-a-tonne of gold. In time, it is possibly to see Reko Diq growing to a size to rival the great copper mines of Chile.

It is the sheer size and potential of Reko Diq which made Tethyan’s pre-bid share price of 48.5c a bit hard to understand - a point acknowledged by Crosby’s takeover offer, which introduces the second part of the equation; who is Crosby?

The easy answer from an Australian perspective is that it’s just a firm of risk-takers with office in London and Hong Kong, and an eye for a quick turn on the market.

Crosby could do precisely that, though the word reaching Briefcase is that the chaps at Crosby are “as keen as mustard” and extremely well connected to the highest decision-makers in China. It is also worth noting that they have an office in Pakistan’s commercial capital, Karachi.

This then seems to be the state of play. Australian investors have discounted Tethyan to the point of near oblivion despite its sitting on a world-class copper deposit which is, admittedly, in a very dodgy part of the world (dodgy, that is, through Australian eyes).

Crosby, doubtless after talking to its friends in China, has spotted a chance to snatch control of the resource, bring in a few partners (Chinese and Pakistani, naturally) and develop a mine valued in the billions of dollars.

Driving all this is China’s appetite for raw materials, especially copper which is a fundamental ingredient in almost everything electronic.

Tethyan’s chief executive, David Moore, is unimpressed with Crosby’s 64c bid, arguing that the company is worth much more than that. Unfortunately, he has a problem selling this line because at 64c the price is 32 per cent higher than the pre-bid value of Tethyan.

Cutting quickly now to what really interests Briefcase. Does Crosby’s raid on Tethyan represent a sell, or buy, signal on the stock?

One argument is that investors would be well rid of the company because of its deep foreign roots and primary asset in a place which will never attract bank finance.

That view, typically Australian when it comes to overseas investment, is probably wrong. The richness of Reko Diq, plus Crosby, plus Chinese support, represents an almost guaranteed funding package. In other words, the clever dicks at Crosby have almost certainly already put the next parts of the jigsaw together.

This is a point that is not lost by the smarties in the market who have already bid Tethyan up to a 12-month high of 70c a share – a price which still seems modest when the prize is a copper deposit within easy shipping (or railing, or trucking) distance of China.


On the question of resource stocks being underpriced there is an excellent case emerging in support of the small oil sector where profits are surging thanks to oil hovering around the $US50 a barrel mark - and share prices have weakened.

Stocks like Beach Petroleum, which was selling as high as 71c in March and is now down around 54c, a 24 per cent decline at a time when the oil price has dropped about 5 per cent. Stuart Petroleum is another example, falling from $1.04 in April to recent trades around 84c.

But, the energy stock which most interests Briefcase is Amadeus Energy which has recently spun-off an alternative energy business in the form of Australian Renewable Fuel, a diesel-from-tallow developer.

Since peaking at 87c on March 23, Amadeus has slipped back to around 69c. Part of the decline can be explained by most of the company’s assets being in the US, and Australians (as shown in the Tethyan example) have an investment horizon which fogs up when more than 12 miles off the coast.

Briefcase, however, has had a close look at Amadeus and can see little but steadily rising oil and gas production from a series of projects of ever-increasing size, a classic case of getting a toehold and then leveraging up with deal-on-deal.

Two of the most promising projects are at Halletsville and the delightfully-named Raccoon Bend oilfield in southern Texas. Both are close to the world’s oil capital, Houston, and represent a significant upgrade in the size of target being pursued by Amadeus and an expansion of focus away from north Texas.

Raccoon Bend, in particular, is worth a closer look because for more than 80 years it was an oilfield controlled by Mobil, yielding around 107 million barrels. Today, as Amadeus chases what the petroleum engineers class as “attic oil”,  the stuff left at the top of producing formations and above the point where old drill cores punctured the reservoir, there is an expectation of another 10 million barrels being accessible.

Briefcase may be incompetent with a calculator but 10 million barrels at $US50 a barrel seems to represent a figure of $US500 million in gross value, or $A650 million, or a value  six times greater than the current share market capitalisation of Amadeus - and that’s before adding in other assets, and the hidden value in Australian Renewable.

“What is the matter with the poor is poverty; what is the matter with the rich is uselessness.” George Bernard Shaw.


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