COMMENT: Hanlong’s bid for Sundance needs a rethink

When Australian iron ore junior Sundance Resources first received a takeover offer from Chinese private miner Hanlong Mining Group in July 2011, iron ore prices were high and demand in China was booming. Now things look less rosy

When Australian iron ore junior Sundance Resources first received a takeover offer from Chinese private miner Hanlong Mining Group in July 2011, iron ore prices were high and demand in China was booming. Now things look less rosy.

What a difference a year makes.

When Australian iron ore junior Sundance Resources first received a takeover offer from Chinese private miner Hanlong Mining Group in July 2011, iron ore prices were high, demand in China was booming and Sundance was being courted by a string of suitors.

In a seller’s market, with Sundance reported to have fielded interest from at least five Chinese companies, its flagship 35 million-tpy Mbalam iron ore project – straddling the border between Cameroon and Congo – proved attractive enough for Hanlong to increase its initial offer to A$1.65 billion ($1.74 billion). By October, an acquisition agreement had been reached.

Fast-forward to August 2012 and all is not as rosy.

Spot cfr China iron ore prices have dropped by more than $70 from highs in excess of $180 per tonne last year, and are expected to continue to fall. And Sundance shares, listed on the Australian Stock Exchange, are down 30% on April’s levels to A$0.34.

Less alluring
Even the company’s treasured Mbalam project in West Africa looks less alluring. With the high capital expenditure involved, other companies in the resource-rich region that are already producing ore look much more interesting to potential buyers.

“As there is no initial transport line for this project, it looks pretty ambitious,” one analyst said.

The anticipated large bill for a yet-to-be-built railway and a deep-water port means Sundance will not be able to go it alone and, with credit markets being tight, banks are very unlikely to offer a loan.

Realistic suitors
This strengthens Hanlong’s position. A long-term, high-capex project will not appeal to most market participants in the current economic environment. Market sources said that only Chinese mills that intend to become fully integrated are likely to show a realistic interest now.

Luckily for Sundance, most people Metal Bulletin spoke to expect China to stand to gain significantly from a potential investment. Chinese demand for steel is stronger than in Europe, while the country has a huge deficit in high-grade iron ore and must continue to import.

For Chinese investors, the cyclical nature of iron ore prices is more important than current depressed spot prices. Analysts expect the Mbalam project to produce iron ore for decades, making it a good long-term investment. However, the trade-off for a long-life iron ore operation is that it is expensive in the short term.

“In order to get a long-life project, you have to look at deposits that are not necessarily close to the coast,” another analyst said.

Once the infrastructure is in place, however, the region will open up for more iron ore projects, estimated by one analyst to be able to supply China with 100-200 million tpy.

Pick a price
No matter how you look at it, Hanlong’s agreed offer for Sundance of A$1.65 billion, representing a value of A$0.57 per share, looks high in today’s market. With no rival bids on the table, analysts were not surprised to hear talk of Hanlong lowering its bid to A$0.50 per share.

Last week, both Hanlong and Sundance confirmed approval for the takeover from China’s National Development & Reform Commission (NDRC) that included a “reasonable acquisition price” among other conditions.

This left market participants wondering at what price Sundance would walk away.

Sources told Metal Bulletin that Sundance is expected to accept if Hanlong’s price remains above A$0.45 per share. A lower offer, between A$0.35 and A$0.40 per share, could succeed after some negotiation, analysts said.

However, at an offer of A$0.35 or below, the junior miner is definitely expected to run for the hills.

Losing friends
Private group Hanlong did not make any friends at home by making a bid for Sundance while the miner was still in talks with state-owned mills in 2011, and one analyst believes that is why the NDRC took so long to give the merger its blessing.

Will Hanlong risk lowering its bid substantially? If so, could those discussions lead to a more favourable iron ore pricing environment by the time a bid from a new suitor is fully agreed and approved?

Elfi Middelbeek
emiddelbeek@metalbulletin.com
Twitter: @EMiddelbeek_MB

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