[miningmx.com] — SHARES in Exxaro Resources, the R55bn diversified mining firm, wobbled somewhat earlier this week after it unveiled a A$123m bid for Australian-based iron ore producer, Territory Resources, an indication the move offshore took investors by surprise, and left them wondering about the value.
At first glance, Territory is nothing to write home about. For a 64% premium to its Monday night close, an offer equal to A$0.46 per Territory share, Exxaro is hoping to buy a 1.6 million tonnes/year iron ore producer with a relatively short three to five years life, while costs sit in the 93rd percentile. “On the face of it, this is not a great fit with the quality of Exxaro’s asset base,” one stockbroker said.
Yet investors expect some kind of bidding war for the asset nonetheless. In contrast to the 3% decline in Exxaro’s share price on Tuesday, shares in Territory gained 59% by Tuesday, closing a couple of Australian cents below Exxaro’s offer price.
“We’re still in a contest so we can’t speak,” said Sipho Nkosi, Exxaro CEO in an interview with Miningmx on Wednesday. “The market may punish us, but we wouldn’t have ventured here if there wasn’t value,” he added.
The market expectation, however, is that there’s much more to Territory than meets the eye. In fact, in addition to iron ore production, Territory offers certain tailings retreatment opportunities, the kind of relatively low-grade beneficiation in which Exxaro is skilled at treating.
There’s also Blackwood Corporation, an under-capitalised coking coal junior drilling in Australia’s Queensland in which Territory Resources has a one fifth stake, and which would give Exxaro a broader geographic base to its coal assets.
Nkosi declined to comment on the prospects Blackwood holds for his company, but he’s clearly aware that in Noble Group, a Hong Kong-listed metals trader which owns shares in both Territory and Blackwood, he has a potential obstacle. In fact, Noble Group has a direct and indirect stake of 43.7% stake in Blackwood.
More than that, it’s likely Exxaro has disturbed Noble Group’s strategy of exerting total control over Territory.
Noble Group was hoping to build on its 20% stake by converting debt to equity to effectively secure cheap life of mine supply of iron ore from which it then makes a massive profit from a third party marketing agreement, a la Glencore.
Noble has the option of competing with Exxaro but the feeling within the South African company is that as long as Noble is guaranteed third party marketing, it may support Exxaro’s bid. There’s also the prospect of a longer term relationship between Exxaro and Noble Group.
Nkosi confirmed Exxaro had already opened the lines of communication with Noble. “Noble’s main business is trading,” said Nkosi. “If you look at the trend, they are securing feedstock by taking positions in various companies. This is what has happened with Territory.”
Nkosi was at pains to stress the offer for Territory was principally an iron ore deal. “We said we’d be looking at more iron ore deals in Australia, Africa and South America. Territory is therefore a stepping stone for us,” he said.
“Now that we’ve shown our hand, a lot of people are going to be interested in Territory. Our bid of 46 cents/share could be a bid for nothing (in terms of value for money).”
Exxaro said recently it hoped to build iron ore production of some 10 million tonnes/year. Nkosi, whose company has a stake in Kumba Iron Ore, had not decided to expand offshore at the expense of local iron ore developments. “We are looking at expanding in South Africa,” he said.
