Bloomberg News

Best Mining Deal Seen With Sundance China-Africa Ties: Real M&A

October 13, 2011

Oct. 13 (Bloomberg) -- No mining takeover in the world is offering arbitragers a bigger potential windfall than Australia’s Sundance Resources Ltd.

Sundance, owner of the $4.7 billion Mbalam iron ore project in Africa, agreed to sell itself to Sichuan Hanlong Group after the Chinese conglomerate boosted its offer last week. While the agreement was struck at the biggest premium for a metals or mining company in five years, Sundance has given up most of its share gain since Hanlong’s proposal was first announced in July.

By betting the acquisition will succeed, traders now stand to reap a 31 percent profit, according to data compiled by Bloomberg. While Sundance has retreated on speculation that the deal may face delays as both Sundance and Hanlong seek approvals from Australia, Cameroon and the Republic of Congo, CLSA Asia- Pacific Markets says the Chinese government’s economic ties with the two African nations will help bolster support for the A$1.36 billion ($1.4 billion) takeover.

“The deal will be completed,” said Michael Evans, Sydney- based analyst at CLSA. The negotiations between the companies and the governments involved are “more advanced than the market or the share price is suggesting,” he said.

Paul Armstrong, a spokesman for Perth, Australia-based Sundance, and Ilse Schache, a spokeswoman for Hanlong in Sydney, both declined to comment on the drop in Sundance’s share price.

Hanlong, located in Chengdu in China’s southwestern province of Sichuan, has investments in highway and power projects and said last year it will spend as much as $5 billion on resource assets to feed China’s demand for commodities.

Acquisition Detail

The company acquired 16 percent of Sundance in March from Talbot Group after millionaire mining magnate Ken Talbot was among the Sundance board members killed in a plane crash in the Congolese jungle in June 2010.

After becoming Sundance’s largest shareholder, Hanlong made an unsolicited bid of A$1.2 billion, or 50 cents a share in cash, in July. Hanlong then increased its proposal to 57 cents a share, 43 percent higher than Sundance’s price of 40 cents prior to the initial offer and a 68 percent premium to its 20-day average, data compiled by Bloomberg show.

While Sundance climbed as high as 54 cents, the stock ended at 43.5 cents today after declining almost 20 percent since July. The gap is now the widest for any mining takeover in percentage terms and second-largest of any billion-dollar acquisition in the world, the data show.

Buying Sundance will give Hanlong control of the Mbalam rail, port and mine project straddling Cameroon and Congo.

510-Kilometer Railroad

Sundance said in April that it intended to build a 510- kilometer (320-mile) heavy-haulage railroad through Cameroon and a deep water port for bulk iron ore carriers and aimed to start shipping iron ore by 2014. Once completed, the mine will produce 35 million metric tons a year, data compiled by Bloomberg show.

Before Hanlong can start work and begin building out the rail and port capacity, the companies must obtain a mining permit from Congo, while Cameroon needs to adopt laws covering taxation and royalty payments that will provide an investment framework for the project, according to CLSA’s Evans.

Concern the deal will unravel because of the regulatory approval process may be misplaced. The company has already received drafts of the mining concession and terms of the mining permit from both governments, said Evans, who cited an investor call on Oct. 5 with Sundance Chairman George Jones and Chief Executive Officer Giulio Casello.

Loans and Timber

Having a Chinese buyer for the mining project in western Africa may also help expedite the approvals because Cameroon has received “substantial” interest-free loans from China, while the world’s fastest-growing major economy is also the biggest purchaser of Congolese timber, Evans said.

“It’s a Chinese buyer, it’s an underdeveloped western African asset with large capital requirements,” said Chris Weston, a dealer at IG Markets in Melbourne. “If you looked long and hard at the situation, and you really thought the deal was going to go through, there’s great upside.”

Roddy Barclay, an analyst on the Africa desk at Control Risks in London, said the re-election of Paul Biya, who has ruled for almost three decades as president of Cameroon, will also bolster confidence that the government’s policies for the mining industry won’t be undermined by political upheaval.

“The likely re-election of Biya will signal a continuation of the status quo with regards to the government’s interactions with businesses,” he said. “There is unlikely to be a radical shift in government policy toward the mining sector in the immediate term.”

The results of the Oct. 9 elections aren’t known yet.

Welcome Mat

While an investigation in Australia of Hanlong employees suspected of insider trading in relation to Sundance may delay the Foreign Investment Review Board’s ruling on the takeover, Michael McCarthy, chief market strategist at CMC Markets Asia Pacific Pty, said the deal will likely to be approved because Sundance’s mine isn’t a strategic asset to Australia.

Hanlong said in an e-mailed statement that the company wasn’t under investigation over the insider trading allegations and that it is cooperating with all the relevant government and regulatory bodies. Peter Arden, an analyst with Ord Minnett Ltd. in Melbourne, didn’t consider the investigation a “serious impediment” to the success of the acquisition.

“I don’t see these resources as being considered strategic,” CMC Markets’ McCarthy said. “There’s a much higher level of eagerness to welcome Chinese groups in Africa than possibly what we’ve seen in Australia so far.”

--With assistance from Jana Marais in Johannesburg and Tara Lachapelle in New York. Editors: Mohammed Hadi, Michael Tsang

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Angus Whitley in Sydney at awhitley1@bloomberg.net

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Rebecca Keenan at rkeenan5@bloomberg.net; Philip Lagerkranser at lagerkranser@bloomberg.net


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