Sundance rose as much as 34 percent after Sichuan Hanlong Group offered in July to buy the owner of the Mbalam iron ore project in Africa. The stock has since lost all its gain on concern the Chinese conglomerate won’t be able to pay for the $1.4 billion purchase. With Sundance cheaper than it was before Hanlong announced its bid, traders can reap a 65 percent return betting on the deal, according to data compiled by Bloomberg.
While Hanlong has yet to secure a financing commitment five months after agreeing to pay what is now the biggest premium for a mining company since 2006, the Chinese government helped Hanlong buy its initial Sundance stake, according to CLSA Asia- Pacific Markets. That helps to make it the “most significant opportunity” to profit from acquisitions in Australia’s mining industry, CLSA said. If Hanlong’s bid unravels, it could prompt companies such as Glencore International Plc, Anglo American Plc or Xstrata Plc to step in with offers, IG Markets said.
“From a risk-reward perspective, you’d definitely be looking to buy,” Chris Weston, a dealer at IG Markets in Melbourne, said in a telephone interview. “It’s got some fantastic assets and it would suit a number of companies. There would potentially be a few others running the ruler over them.”
Paul Armstrong, a spokesman for Sundance, declined to comment and referred to Chairman George Jones’ Nov. 25 speech at the Perth, Australia-based company’s annual shareholder meeting, where he said that Hanlong’s offer “continues to be in the best interest of all shareholders.”
Michael Vaughan, a Sydney-based spokesman for Hanlong, said in an e-mail that it “continues to work closely with Sundance on completing the transaction.”
Hanlong, located in Chengdu in China’s southwestern province of Sichuan, has investments in highway and power projects and said last year it will spend as much as $5 billion on resource assets to feed China’s demand for commodities.
After becoming Sundance’s largest shareholder, closely held Hanlong made an unsolicited bid of A$1.2 billion ($1.3 billion), or 50 cents a share in cash (XTA), in July. Hanlong raised its proposal in October to 57 cents a share, a 68 percent premium to its 20-day average before the initial offer, according to data compiled by Bloomberg.
The premium was the largest for any metals or mining deal over $1 billion since Xstrata paid a 110 percent premium to buy Falconbridge Ltd. in 2006, the data show.
‘Handful of Believers’
While Sundance climbed as high as 53.5 cents in July, the stock has since lost more than a third of its value and ended at 34.5 cents yesterday. When Hanlong first announced its takeover proposal, Sundance traded at 40 cents a share.
The stock climbed as much as 4.3 percent today, before closing up 2.9 percent at 35.5 cents.
The decline has accelerated in the past month, sparked by speculation that Hanlong hasn’t been able to persuade its bankers to lend it money to acquire Sundance. The mining company said on Nov. 25 that it waived a condition that required Hanlong to obtain a “highly confident letter” for financing from China Development Bank Corp. by Nov. 28.
Sundance estimates that its Mbalam rail, port and mine project straddling the Republic of Cameroon and Republic of Congo will produce 35 million metric tons a year and cost $4.7 billion to develop.
“There are a handful of believers, but there’s a large part of the market which is putting it in the ‘too hard’ basket,” Giuliano Sala Tenna, who manages $40 million at Katana Asset Management Ltd. in Perth, said in a telephone interview. “There’s a massive capital expenditure requirement.”
Sundance still expects the deal to close by the end of May, meaning that traders buying the stock now stand to gain the biggest payout of any billion-dollar deal in the world, according to data compiled by Bloomberg. On an annualized basis, the 65 percent return balloons to 149 percent, the data show.
“You can’t find an investment that can give you such an upside,” said Alick Wong, a quantitative research analyst at Louis Capital Markets in Hong Kong.
Michael Evans, a Sydney-based analyst at CLSA, says the financing concern is misplaced partly because the Chinese government assisted Hanlong in acquiring its initial holding in Sundance. Hanlong owns 18 percent of Sundance, according to data compiled by Bloomberg.
China’s interest and investments in Africa may also help Sundance secure approvals from Cameroon and the Republic of Congo. Cameroon has received “substantial” interest-free loans from China, while the world’s fastest-growing major economy is the biggest buyer of Congolese timber, CLSA said in October.
Ties That Bind
Sundance said in a regulatory filing last month that it is close to completing negotiations with both countries for clearance to start developing the mine. Leaders of both African nations have also voiced their support, it said.
“China’s substantial business interest and aid packages that already exists with both these countries and the high level of discussions that have already taken place, should give investors a high level of confidence a deal can be done,” CLSA’s Evans wrote in a report to clients dated Dec. 14.
In April, Sundance said that it intended to build a 510- kilometer (320-mile) heavy-haulage railroad through Cameroon and a deep-water port for bulk iron ore carriers and aimed to start shipping iron ore by 2014. Based on the present value of future profits, Evans estimates that Sundance could be worth A$1.95 billion, or 66 cents a share.
That’s almost double the company’s current market value.
While shares of Sundance have also depreciated on speculation an investigation into allegations of insider trading by two of Hanlong’s former employees in Australia will delay the Foreign Investment Review Board’s ruling on the takeover, Gavin Wendt, senior resource analyst at Sydney-based Mine Life Pty, said the board will probably approve the deal because Sundance’s mine isn’t a strategic asset to Australia.
The review board will “separate out whatever is going on with Hanlong’s situation from the actual deal itself,” he said in a telephone interview.
The FIRB, as the review board is commonly known, considers “the character of an investor and its corporate governance practices,” the Australian Treasury department’s media office wrote in an e-mailed response.
Vaughan, Hanlong’s spokesman, reiterated this week that the company isn’t under investigation. Sundance said on Nov. 22 it wasn’t aware of anything that might bar the approval.
Even if the agreement with Hanlong collapses, Sundance could make sense for Glencore, Anglo American (AAL) or Xstrata, according to IG Markets’ Weston.
Glencore, Anglo American
Several parties conducted extensive due diligence on the Mbalam project and were still doing so when Hanlong made its bid in July, Sundance’s Jones said at its annual meeting.
Glencore Chief Executive Officer Ivan Glasenberg said in August that the largest publicly traded commodities company is “aggressively” seeking acquisitions. Baar, Switzerland-based Glencore had $1.6 billion in cash and short-term investments at the end of June, data compiled by Bloomberg show.
Anglo American, the London-based miner of coal, platinum and diamonds with about $6.8 billion in cash, is always looking for acquisitions, Chief Executive Officer Cynthia Carroll said in September. She also said in July that it studied several potential deals in the first half of the year.
Xstrata, co-owner of the $6 billion Zanaga iron ore project in the Republic of Congo, said last year it was seeking more deals to build up its iron ore business. The Zug, Switzerland- based company has about $1.35 billion in cash on hand.
Charles Watenphul, a spokesman for Glencore, declined to comment on whether the company is interested in Sundance. Anglo American’s James Wyatt-Tilby and Alison Flynn of Xstrata also declined to comment.
“There are still some expectations that if not this deal, there will be another one shortly,” Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, which oversees $14.5 billion of assets, said in a telephone interview. “The deposits are there, they are proven. Somebody could buy these assets and be very grateful for having done so two years from now. The risk-reward ratio is pretty favorable.”
To contact the reporters on this story: Elisabeth Behrmann in Sydney at firstname.lastname@example.org; Angus Whitley in Sydney at email@example.com; Jesse Riseborough in London at firstname.lastname@example.org