CBH Resources Limited 02 Jun 10

The A$0.24 cash offer from Toho is at risk

It is not surprising that the company’s share price is hovering near Toho’s cash offer. However, this could change quickly because there has been another buyer to prevent Toho from being successful in its bid for CBH.


Turning to the technicals, CBH Resources found firm support at the 200 day SMA (red line) at 10 cents in early March to surge higher, reaching a recent high of 24 in May. This move higher was on an increase in volume which is a sign of bullish accumulation. CBH is currently range bound in between support at 22.5 cents and resistance at 24 cents. This consolidation has been in place for the past 7 weeks. The relative strength index (RSI) has come off overbought territory and is weakening, coupled with a decrease in volume suggests of a correction in the near term.

The weekly chart depicts the bearish moving average cross indicating momentum over the longer term to favour the downside. Any move higher will be slow coming from here which could potentially last for months.

There is a potential party pooper. Deutsche Bank announced that it became a substantial shareholder on 11 May 2010 after acquiring 6.62% of the company. The shares are being held under Pan Australian Nominees Pty Ltd. Deutsche Bank has continued to buy shares and the holding has increased to 13.89%. This effectively blocks Toho’s takeover attempt.

Acceptances are trickling in and Toho Zinc owns 399.6 million shares or 36.5% of the company. This is still far from the finishing line of reaching 90% acceptances which triggers compulsory acquisition. Reaching the 90% level is also a condition of Toho’s offer. With the resource equity market in disarray we anticipate a wall of acceptances as 7 July draws nearer but it will be impossible for Toho to get to the 90% threshold.

As Members would be aware, the CBH Independent Committee has unanimously recommended that shareholders accept Toho’s offer of A$0.24 for each ordinary share and A$1,000 per CBH convertible note.

We do not know who is behind the Deutsche Bank nominee company or for what purpose the shares are being held. The recent debacle with the takeover for Macarthur Coal shows what can happen when a takeover offer falls through. From $0.23 today, the risk to reward ratio is not attractive and low metal prices have potential to result in a sharp fall in the company’s share price without a firm offer on the table.


Most commodities have come under heavy selling pressure because investors are fleeing high risk assets. To-date it would seem that fear and loathing is based on worries about what might happen, rather than what appears to be the case.

Metal markets have been upset by the May fall in China’s Purchasing Managers Index (PMI) from 55.7 to 53.9. This seems to be a trend because the pace of manufacturing activity also slowed in Australia, Taiwan and South Korea. Nevertheless, period to period fluctuations are not particularly important, as long as the readings remain above 50, indicating continued expansion.

It was a different story in India where the PMI increased from 57.2 in April to 59.0 in May.

The Canadian economy has shown a sharp rebound and the central bank has seen fit to lift interest rates. Construction is booming in Canada and it is noteworthy that US construction in April exhibited the biggest monthly increase in a decade.

When developed Europe is excluded, industrial production seems robust. The tussle between opposing forces in the commodity markets will continue until there is undeniable trend one way or another. Rising inventories of lead and zinc are not particularly encouraging in the short to medium term.

The fundamentals of the lead and zinc markets have deteriorated with rising inventories on the London Metal Exchange. Since 1 April 2010, rising inventories have trimmed the price of zinc by 20.4% to US$0.86 per pound, and lead by 16.2% to US$0.83 per pound. The recent weakness in the AUD has buffered the falls in AUD terms to 9.3% and 4.5% respectively.

Since 1 April 2010, LME lead inventories have risen from 176,435 tonnes to 192,675 tonnes. Metal stocks are back to 2000 levels and have shown a relentless rise over the past 12 months. The International Lead Zinc Study Group is forecasting a 100,000 tonne surplus of lead in 2010. There are fears that dozens of small producers in China are set to increase production which would further exacerbate the current over supply.

It seems that lead smelters have expanded production around the world. We assume that they have done so in response to a global surge in the production of new cars that is being led by China. Clearly there is excess production and the outlook is made gloomier with a poor outlook for European car sales in 2H10 and the seasonal impact of the northern hemisphere summer holiday period that is nearly upon us.

Over the same period the zinc inventory held in LME warehouses has risen from 542,100 tonnes to 620,200 tonnes. Over the past 12 months there have been regular step increases in stocks. There were notable upward spikes in April and May. Zinc will also be negatively impacted by the summer slowdown with further downward pressure on price as stocks keep building.

The lead and zinc markets will bounce back but in the current market, exactly when is very uncertain.

The company’s share price was $A0.23 at the time of writing. From this level the reward does not justify the risk, especially if the takeover offer from Toho fails, and at the moment it looks like it will given that a third party has built a blocking stake.

We are changing our recommendation from HOLD to SELL because we think the stock is very close to fair value, fundamentals have turned against it and the share price will fall sharply if there is no bid on the table.


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