Mining magnate Nathan Tinkler will stand by his bid for Whitehaven Coal Ltd., which values the target at A$5.3 billion ($5.6 billion), saying holders would be unlikely to accept a lower offer.
“I don’t think the board would accept,” Tinkler, 36, said in an interview in Sydney. “There comes a line where you’re buying things at value and one where you’re not going to get a deal done.”
Whitehaven, owner of seven coal mine assets in Australia, was trading about 30 percent below the offer of A$5.20 a share before the interview. Tinkler, Whitehaven’s biggest shareholder, was considering lowering the price after its shares slumped and coal prices weakened, two people with knowledge of the matter said last month.
The electrician-turned-miner made the bid after Whitehaven disclosed an initial approach on June 13. The Tinkler Group Pty offer is subject to a monthlong study of Whitehaven’s books. Planned debt funding for the deal, with letters of support from UBS AG, JPMorgan Chase & Co. and Barclays Plc, is also dependent on successful due diligence.
Whitehaven ended the day 3.1 percent higher at A$3.66 for the biggest gain since July 19. Its shares have slumped 31 percent since the start of the year.
“The market is valuing assets very differently to how long-term investors value them,” Tinkler said. “The market is probably valuing things at half of what they’re really worth, in particular when you have a suite of assets that are in development.”
Tinkler’s group has advised Whitehaven that about 48.3 percent of the company’s shareholders had expressed interest in becoming stakeholders in the new company, subject to a satisfactory due diligence process, Whitehaven said July 13. Another 16.7 percent of shareholders may also join, equating to 65 percent.
Tinkler has two main hurdles to overcome to get the deal done, Paul McTaggart, a resources analyst with Credit Suisse, wrote in an Aug. 2 note. The first is to convince 65 percent of shareholders to transfer their Whitehaven shares into a company that isn’t publicly traded and contribute further equity, he said. The second is to raise an estimated A$1.85 billion to buy out the remaining 35 percent of shareholders,
Assuming additional debt of A$1.85 billion, the company’s gearing will rise to 70 percent, a level the company would find “challenging” to support, McTaggart said.
Bank representatives traveled to mine sites last week and will determine how much they’ll lend, Tinkler said. The loan will probably be somewhat lower than an amount of A$2.5 billion, specified by two people familiar with the situation on June 18, according to Tinkler.
“I’d be comfortable with a gearing level of about 40 percent to 50 percent,” he said. The new company would consider selling stakes in its coal assets to help with funding, including the key Narrabri and Maules Creek mines with potential stake sales of an additional 10 percent, he said.
Benchmark Asian thermal coal prices have tumbled 28 percent this year because of weaker demand in India and China as economic growth slows. Prices have also been pressured by U.S. producers increasing exports as plunging domestic gas prices prompt utilities to switch to gas.
About 69 percent of Whitehaven’s production was thermal coal in the year ended June 30.
Tinkler, who said he plans to take a board seat and control 40 percent to 60 percent in the new company, declined to comment on which existing shareholders and potential new investors are supporting the bid.
Commodities trader Noble Group Ltd., Farallon Capital Partners, Credit Suisse AG and Kuok Group may be part of a group making an offer, the Australian Financial Review reported June 14. Noble Chairman Richard Elman July 27 declined to comment on his company’s involvement in the bid.
At A$5.20 a share, Tinkler’s offer is priced at 3.69 times the assets, according to data compiled by Bloomberg. That compares with the median of 2.27 times for 10 comparable deals.
Softening prices for coal used in electricity generation may crimp Whitehaven’s profit margins, Nomura Holdings Inc. analysts David Cotterell and David Radclyffe said in a July 11 note.
Potential cost overruns on building the A$766 million Maules Creek mine may also put pressure on the company, the analysts said. The cost of building Maules Creek has risen by 6 percent, Whitehaven said last month.
Whitehaven’s independent board committee appointed to examine bids after Tinkler’s initial approach is being advised by Grant Samuel Corporate Finance and Corrs Chambers Westgarth. UBS is advising Tinkler Group.
Tinkler’s business journey began when he sold his house in 2006 to help buy the A$30 million Middlemount coal lease in Australia’s Queensland state before selling it a year later to Macarthur Coal Ltd. for about A$465 million in cash and shares.
In May 2008, Tinkler sold his Macarthur stake to ArcelorMittal, the world’s largest steelmaker, at a profit of about A$445 million. He then bought Maules Creek from Rio Tinto Group for A$480 million in August 2010. Seeking funds to develop the project, Tinkler listed Aston Resources, containing Maules Creek, in August 2010, raising A$400 million.
Tinkler and his companies also own coal and metals mining projects, infrastructure investments, a horse-breeding operation, and the Newcastle Knights, a rugby league team in the Australian coal port of Newcastle.