Hanlong Group's bid for Sundance Resources comes as no surprise

July 19, 2011 12:00AM
By Bryan Frith, The Australian

IT comes as no surprise that Sichuan Hanlong Group has made a takeover proposal for Sundance Resources, as the Chinese company probably regarded itself as already having a foot on that company's proposed $US4.6 billion ($4.3bn) iron ore project in Central Africa.

It got that foothold in March this year when its offshoot Hanlong Mining acquired an 18.6 per cent shareholding, of which 16 per cent came from the estate of the late mining magnate and Sundance director Ken Talbot, who died, along with other Sundance directors, in a plane crash following a visit to the company's Mbalam iron project in Cameron and Congo. Hanlong paid $190 million, or 44c a share, for the Talbot stake.

Sundance chairman George Jones said at the time the investment was friendly and was regarded positively by Sundance.

It was, and was seen as, a further indication of Chinese interest in and recognition of the company's strategy of bringing in a strategic partner for the development of the Mbalam iron ore project.

Hanlong said at the time it was a financial investor and would be a supportive shareholder "assisting the company to fast track its infrastructure and mine development plans".

Sundance said earlier this year that it had held numerous discussions with a wide range of international steel mills, including Korea's Posco, about Mbalam, but its has also talked about strong interest from Chinese investment groups and Chinese bankers.

Late last year, Sundance appointed China's largest investment bank Citic as its financial adviser in China, to assist in securing debt and equity funding for the iron ore project and associated infrastructure.

Late last month, Sundance advised that potential partners and a number of Chinese banks had visited the operations in Central Africa to finalise due diligence and follow up discussions that had been held in China and Africa.

The Cameroon and Congo governments were said to be eager for completion of talks so that construction could start as soon as possible.

Moreover, Sundance said it had shortlisted the preferred potential partners and had entered into commercial negotiations.

All of this no doubt bemused Hanlong as it would be well aware that the Chinese authorities frown on Chinese entities competing over the same investments.

If a Chinese group already has a foothold in a company or project, there is an unofficial hands-off.

That approach would extend to Hanlong, even though it is not a state-owned enterprise. Instead, it is a privately owned conglomerate with interests in mining, energy, pharmaceuticals, industrial chemicals and technology.

In April, Sundance reported that it had competed a definitive feasibility study on the Mbalam project, which showed it would support production of 35 million tonnes of high grade iron sinter fines in stage one and production of 4 million tonnes of iron ore pellets a year in stage two.

Development of neighbouring iron ore deposits could boost production in the region to 100 million tonnes a year, which Sundance claimed would "change the global iron ore landscape".

The capital cost of stage one was put at $US4.6bn and would require the construction of a 500km railway to the Cameroon coast and the development of a deepwater port. The capital cost of stage two was put at a further $US3.1bn, and would include a pellet plant.

It was always clear that the scale of the proposal was beyond Sundance and that it would require a partner with deep pockets, but as yet a partner has not surfaced. It may be that Hanlong's strategic stake has had something to do with that.

It is believed that in recent times there have been discussions between Sundance and Hanlong on further co-operation and participation by the Chinese group, so Hanlong's move did not come as a complete surprise.

Sundance advised the ASX yesterday morning, before the start of trading, that it had received a written proposal from Hanlong at 7pm on Friday advising of on an intention to make conditional cash offer for 100 per cent of Sundance at 50c a share, which would put a price tag on the company of $1.4bn.

The proposed offer would be by way of a scheme of arrangement and would therefore be conditional on majority Sundance board support and execution of a scheme implementation agreement.

Sundance indicated there were other conditions but did not provide any detail. As the company has seen fit to disclose the proposal it should be required to also reveal the other conditions.

The proposed offer price represents a premium of 45 per cent to the one month volume-weighted average price for Sundance shares of 27.5c, but a premium of only 25 per cent to Friday's close of 40c.

That's because the Sundance share price rose from 33.5c a share on Tuesday to 40c by Friday, a gain of 16.5 per cent. ASIC should make inquiries as to whether the proposal had leaked and resulted in insider trading.

Sundance says the terms of the proposed offer do not provide "adequate value or certainty" and it intends to engage in discussion about the terms of the proposal.

At the same time, Sundance claims it will continue its advanced discussions with potential strategic partners in relation to possible joint venture, financing and offtake arrangements to develop the Mbalam iron ore project.

The market reacted by pushing the Sundance share price up 9c, or 22.5 per cent, to 49c -- marginally below the proposed offer price.

That suggests the market does not consider there is much prospect of a higher rival offer, but there may be some scope for obtaining a sweetener from Hanlong as the price of a board recommendation.

It should also be noted that this is the second corporate move by Hanlong in the past week. Last Monday uranium hopeful Bannerman Resources revealed that Hanlong was proposing a scheme at 61.2c -- a premium of 59 per cent to the previous closing share price of 38.4c.

Bannerman's main asset is the 80 per cent owned Etango uranium project in Namibia, close to Rio Tinto's Rossing uranium mine, for which Bannerman has been seeking a joint venture partner.

Bannerman refused a request for a three-month exclusivity period in which to conduct due diligence and said the proposal had been timed to take advantage of the company's low share price, which had been affected by the Fukushima nuclear crisis in Japan and weak global equity markets.

Bannerman said it would hold discussions with Hanlong, but would also advance its joint-venture discussions.

Hanlong responded by revealing it had held discussions with Bannerman on a number of occasions since August and that it was assessing other opportunities.

It now appears that Sundance was one of those opportunities.