Territory Resources Ltd 13 Jul 11

Accept Jonesville Ltd takeover offer

In FAT-MIN-277 we advised Members of the two takeover proposals that were on the table regarding Territory Resources Ltd. The first offer was made by Exxaro Resources and the second offer by Jonesville Ltd. Jonesville Ltd is a wholly owned subsidiary of Territory Resources major shareholder The Noble Group Ltd.

Having broken out to the upside from a descending triangle in May at the 30 cents region is bullish. We have since seen Territory Resources continue to charge on higher, printing a recent high of 52.5 cents in mid June. The rapid increase in price has resulted in the RSI to move into overbought levels, and now pointing lower.

In the near term, we believe a short term retracement is at hand. The pullback is likely to reach the 43 cents level, being the 50 day moving average.

We have reviewed the two bids and in our opinion the superior bid is the one made by Jonesville Ltd.

Jonesville Ltd has made an on-market cash offer of A50 cents per share for all the shares of Territory Resources that it or its parent company, The Noble Group, do not already own.

The offer represented a 79% premium on the pre bid price for Territory Resources at the close of trade on 20 May 2011 and 83% on the five day volume weighted average price on 19 April 2011.

Being an on-market offer, it is therefore free of any conditions. Members will receive the Jonesville consideration within the Trade date plus three day ASX settlement rule.

The offer is now open and will close on 21 July 2011 unless extended.

We base our recommendation on accepting the Jonesville offer on a number of factors.

The Jonesville offer of A50 cents is set at an 8.7% premium to the Exxaro Resources bid of A46 cents. Members will incur a brokerage charge in accepting the Jonesville offer as it is an on-market offer only. Net of a one percent brokerage fee (likely full service broker fee), the premium in the Jonesville offer is 7.7%. The premium received by Members in the Jonesville offer price will differ dependent on the brokerage fee charged by the Member’s servicing broker.

The Jonesville offer is free of any conditions and once accepted the bidder cannot withdraw the offer. Conversely, acceptance eliminates a shareholder’s ability to benefit from any further participation in events. We view the likelihood of a superior offer being made as minor. Jonesville and its parent The Noble Group have an 84% interest in Territory Resources.

The Independent Expert has determined a current value on the operations of Territory Resources to be in the range A34.3 cents to A45.7 cents per share. The Jonesville offer of A50 cents is a premium of 9.4% to the top value of this range and is therefore considered to be “fair and reasonable.” We have reviewed the Independent Expert’s findings and agree with the conclusions.

By not accepting the Jonesville bid, Members could be locked into a minority position and thinly traded share, in the event Jonesville does not reach the 90% compulsory acquisition threshold. As a consequence the share price may fall post the closure of the Jonesville offer.

We view the short to medium-term market fundamentals for iron is very strong, with both supply and demand factors having a positive influence on the outlook. The following chart shows the spot price for iron.

China’s economy is currently growing at 9.7% per annum. A considerable portion of the current economic growth is coming from a robust construction industry. The strong drive in the construction sector is a result of a vast portion of China’s population moving into urbanised living. The population trend we consider will continue for some time to come and have a resultant continued positive impact on construction and ultimately on the iron price going forward.

A risk to our China construction scenario is the actions of the Chinese Government to slow the country’s pace of economic growth. Chinese Authorities have used interest rate and credit controls to slow economic growth. Both policy tools have a detrimental effect on construction. Investment markets are concerned China may engineer “a hard economic landing.”

The major producers of iron ore, Rio Tinto, BHP and Vale, are all moving ahead with developments to increase the production of iron ore over the coming years. Current iron ore production is at mine nameplate levels and would therefore be constrained in meeting increasing future iron ore requirements. The risk is that new iron ore capacity may lead to oversupply conditions in the future.

The Jonesville offer has not been made during a period of price weakness in iron and we consider the current offer price of A50 cents also reflects the future risks in the iron price.

We consider the premium paid to the post announcement share price for Territory Resources is adequate reward given the current status of its operations.

Exxaro has allowed its bid for Territory Resources to lapse.

The Board of Territory Resources has unanimously recommended the Jonesville proposal in the absences of any higher bid.

We recommend Members sell their share holding in Territory Resources through their broker for A50 cents per share. We suggest Members take this action at a date much closer to the close date of the Jonesville offer being 21 July 2011.

Coverage of Territory Resources by Fat Prophets will cease with the publishing of this report recommending acceptance of the Jonesville Ltd offer.


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