What a difference a day makes – thank you Zijin.
There is no need for the company to worry about finance now. Zijin Mining Group Company Limited has lodged a substantial shareholder notice and is launching a full takeover bid for the company. Zijin’s $1.28 share offer has full support of both the Board and the company’s major shareholder Xstrata Queensland Limited. The bid values the company at around $550m on a fully diluted basis.
Zijin has hit hard offering an 18% premium to the last closing price and an 83% premium to the six month VWAP. The offer hiked the company’s share price 10% to $A1.19, some 7% below the offer price.
Fat Prophets initially recommended IRN at 20 cents in the Australasian report in May 2002 (FAT-MIN-080). Our last review of the stock was in the Mining and Resources report in October (FAT-MIN-197).
At the time of our last review, Indophil was trading at $0.94, since then the price has reached a high of $1.22. Over the past month the stock has exhibited an increase of 30.50%.
Overhead resistance is evident at $1.26 which is close to the $1.28 offer price. The bid for the company has pushed Indophil into an overbrought situation which is suggested by the ‘relative strength index – RSI’.
If there are no higher alternative higher offers, Zijin will own 37.5% of Tampakan. The bid puts a value of around $A1.7bn for 100% of Tampakan.
The major sticking point for Indophil was always going to be the CAPEX required for an initial Stage-1 project of US$5.2bn. Xstrata has a market capitalisation of around US$47bn and will easily fund its share of US$3.25bn capital expenditure.
For Indophil the situation is very different. Funding development expenditure of nearly US$2bn for Stage-1 would have been a significant challenge. The Board has solved this problem by recommending Zijin’s $A1.28 share offer.
An alternative offer for the company would have to be a good one for as things stand today the offer looks like fait accompli.
Zijin is expected to lodge its bidder statement by 18 December 2009. If there are no other more attractive offers, Xstrata will have a very strong partner in Zijin to help develop Tampakan. Zijin is one of the largest non-ferrous metals companies in China.
Zijin is rated by the Financial Times as a Top 500 Global Company. Zijin can easily mange its share of CAPEX for Tampakan.
Because of its agreement with Xstrata, Zijin has a relevant interest of 19.99% in Indophil. The Takeover Implementation Agreement with Zijin restrains Indophil from seeking alternative offers. In certain circumstances, a break fee of $A5.45m is payable to Zijin.
The offer is subject to the following key conditions:
A) Minimum acceptance before the end of the offer period of 90%.
B) Approval by Chinese Regulatory Authorities.
C) Approval by the Foreign Investment Review Board (FIRB).
D) No Australian regulatory actions before the end of the offer period.
E) The cash balance in Indophil must reflect a normal course of business.
F) Indophil can not engage in capital transactions or corporate actions.
G) There must not be a material change threatening the FTAA.
H) No change in the control rights to the Tampakan project.
At the time of writing Indophil was trading at a 7% discount to the $A1.28 per share offer. The settlement date is unknown so until that time shareholders are exposed to market risk. On a risk return basis, selling at a 7% discount to the offer price is almost irrelevant.
Although the medium-to long-term outlook for copper is excellent, the LME price of the red metal keeps climbing and the price keeps rising instep with the increase in inventory. This is a most unusual situation. In the case of nickel, the price has fallen significantly as stocks have increased – this is what would normally be expected.
The price of copper could unravel at anytime and this is another reason to quit Indophil, taking advantage of Zijin’s offer.
It is time to cut and run, and lock in any profits from investing in Indophil. Members should consider switching into Rio Tinto for exposure to copper and other key raw materials. For Members that are underweight the gold sector, perhaps a switch into Lihir Gold makes sense.
Accordingly we recommend a SELL for all Members. The Fat Prophets Mining and Resources Portfolio is selling out and locking in a handsome profit.
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