The little-known takeover bid for a money-losing Australian mining company by a Hong Kong limousine operator shows all the signs of a peaking commodities boom.
Brockman Resources Ltd., which controls an iron-ore project in Australia’s Pilbara region, is trading 8.8 percent below the all-stock offer from luxury-taxi provider Wah Nam International Holdings Ltd., the biggest gap for any deal in Asia greater than $500 million, according to data compiled by Bloomberg. Wah Nam’s simultaneous bid for Ferraus Ltd. has speculators more convinced than ever that the industry’s highest premium in the past year won’t be enough to close the deal, the data show.
Wah Nam, which like Brockman hasn’t made a profit since the 2006 fiscal year, is bidding for access to mines in Australia’s biggest iron-ore producing region as it seeks to transform itself into a raw-material supplier to China. While iron-ore demand in China is projected by Rio Tinto Group to double by 2020, Goldman Sachs Group Inc. said last week that the current risks of investing in commodities outweigh potential gains.
“There’s a bit of froth that’s definitely found its way into the commodities space,” said Peter Sorrentino, who helps oversee $14.4 billion at Huntington Asset Advisors in Cincinnati. Wah Nam’s bids are “symptomatic of the fact that it’s gotten a little overheated. It’s not even somebody that would really benefit from controlling their source of input,” he said.
Carmen Ng, Wah Nam’s corporate affairs manager, declined to comment, citing legal obligations. Kate Bell, an outside spokeswoman for Brockman, said Managing Director Wayne Richards was not available for comment. Mitchell Hume, an outside spokesman for Ferraus, said he was unable to reach company executives for comment.
Shares of Wah Nam slipped 2.9 percent to HK$1.67 today in Hong Kong. Brockman advanced 0.4 percent to A$5.57 in Sydney, while Ferraus gained 0.7 percent to 71 cents.
Wah Nam, incorporated in Bermuda, made a A$626.8 million ($630 million) offer, including net debt, in November for the 77 percent of Brockman it didn’t already own. The all-stock deal represented a 57 percent premium to Brockman’s 20-day trading average prior to the bid, data compiled by Bloomberg show.
The takeover is now worth about A$6.11 a share, a 9.7 percent premium to Brockman’s current stock price. That’s the widest gap of any pending acquisition larger than $500 million in the Asia-Pacific region’s developed markets, indicating traders believe the deal is the least likely to be completed, data compiled by Bloomberg show.
“The market is pricing in a low probability of success,” said Gregory Lafitte, head of Asian merger arbitrage at Louis Capital Markets in Hong Kong. “Wah Nam has very limited experience in mining.”
On the same day the Brockman bid was announced, Wah Nam also offered A$182.3 million including net debt for South Perth-based Ferraus, in which it already had a 20 percent stake, according to data compiled by Bloomberg.
The announced premium of 66 percent was the highest in the diversified-minerals industry in the past 12 months, data compiled by Bloomberg show. It increased to 78 percent last week, the biggest gap since the bid was announced. Both offers were extended to May 16, Wah Nam said on April 7.
There have been 232 diversified mineral deals announced in the past year at an average premium of 14 percent, according to data compiled by Bloomberg. The $8 billion worth of takeovers in the industry in the first quarter was the most since the same period in 2001, the data show.
Toll Road Operator
Wah Nam is trying to convert itself into a mining company after previous incarnations as a plastic and electrical manufacturer, brokerage, and toll-road operator. The company has focused primarily on transportation since buying Perryville Group Ltd., a limousine rental and airport-shuttle services company, in 2007 for HK$170 million ($21.9 million).
The acquisition of its first mining asset, the Damajianshan copper mine in China’s Yunnan province, for HK$650 million in 2008 signified that Wah Nam had refocused itself as a “mining resources company,” according to its website.
“Everybody and their brother seems to be running to try to get that kind of diversification,” said Richard Weiss, Mountain View, California-based senior portfolio manager at American Century Investments, which manages more than $100 billion. Still, “why would they diversify into something they arguably have little or no expertise in?” he said.
A leap from one business into another is not unusual in Hong Kong, and many smaller companies use the move to drum up more investor interest, according to Castor Pang, a research director with Cinda International Holdings Ltd. in Hong Kong.
Demand for raw materials will likely continue to outpace supply, fueled by growth in emerging markets, said Keith Wirtz, who helps manage $18 billion as chief investment officer for Fifth Third Asset Management in Cincinnati. Iron-ore consumption in China will double by 2020 from 2008 levels, according to London-based Rio Tinto.
Wah Nam has “enough confidence that this is for real -- it’s not temporary,” said Wirtz. “Emerging market growth and consumption of real resources has been pronounced.”
Citigroup Inc. of New York this month raised its 2014 iron-ore price forecast by 15 percent to $115 a metric ton and the 2015 estimate by 38 percent to $110 a ton.
This year’s 18 percent advance in the S&P GSCI Index of 24 commodities through last week also helped fuel inflation, spurring central banks to consider higher interest rates that may curb growth.
Bank of China
The People’s Bank of China yesterday said it would raise banks’ reserve requirements after inflation accelerated at the fastest pace since 2008 last month, adding to pressure to slow the economy.
Higher energy costs mean “near-term headwinds” for metals such as copper, according to Goldman Sachs. The New York-based firm last week dropped its recommendation to buy a basket of raw materials that included a 20 percent weighting in copper. Prices of the metal have slid for five days on the Comex in New York.
“This environment is the absolute peak of an industry,” said Dennison Hambling, chief investment officer of Melbourne-based First Samuel Ltd., which holds Ferraus shares. “You look at the cost of developing iron ore now, and the cycle has pushed the cost up so much to crazy levels, that for a single site to develop by themselves they’d have to be bloody good.”
Wah Nam has posted combined losses of HK$591.5 million in the past four years, and 87 percent of its HK$132 million in revenue last year came from limousine rentals and airport shuttles, data compiled by Bloomberg show. The mining operations had an operating loss of HK$161 million in 2010 as copper output was “relatively low” in the last two years, the company said.
‘A Long Shot’
Brockman’s Marillana project in the Pilbara region is scheduled to start output in 2014, according to its website. Combining the operations of Brockman and Ferraus, which explores for iron ore in the region, would reduce costs, Wah Nam has said.
“Occasionally you hear stories of companies successfully changing direction, but it’s more the exception than the rule by a long shot,” said Ben Potter, a market analyst at IG Markets in Melbourne. “If you started to see a lot of these things happening, like people in China who had no experience whatsoever in mining stocks and were just looking to buy miners, then it sounds a bit like a tech boom.”
Overall, there have been 7,150 deals announced globally this year, totaling $707.4 billion, a 30 percent increase from the $545.8 billion in the same period in 2010, according to data compiled by Bloomberg.