Shares in coal, iron ore and freight group Aurizon (AZJ) got spanked yesterday after it and Chinese steel giant Baosteel launched an odd $1.42 billion offer for WA iron ore hopeful Aquila Resources (AQA).
Aurizon shares were sold down close to 5% to a three month low of $4.92 as investors gave the surprise offer the thumbs down.
Aurizon and Baosteel are offering $3.40 a share for Aquila, well above the last sale on Friday of last week of $2.45.
That sent Aquila shares soaring 36% higher at the close at $3.34. Aquila yesterday told shareholders not to do anything for the moment.
The last time Aquila shares were at this level was two years ago, in early 2012.
As Baosteel already owns a 19.8% stake in Aquila, that means around $1.13 billion in cash will be spent buying shares in the offer.
If the offer succeeds, Aurizon will end up with a 15% stake in Aquila. That would mean spending more between $140 to $200 million.
If successful, the deal would see the two companies acquire Aquila and its 50% stake in the West Pilbara Iron Ore Project.
AQA 1Y – Aquila shares surge on takeover bid
Aurizon chief executive Lance Hockridge said the plan was to split the project’s operations into a mining company and an infrastructure company to be operated by Aurizon.
He claimed the proposed deal was of national significance.
"If successful I believe that this bid would represent a major Australian-Chinese nation building project, one that would deliver infrastructure of national significance with significant job creation and significant royalty flows," he told the media yesterday.
He said the joint bid fits with Aurizon’s plan to expand its interests in the Pilbara and would provide iron ore to Baosteel’s Chinese steel factories.
"This is a continuation of Aurizon’s strategy but it is very different in the sense that it is a bid and ultimately a project uniquely underpinned by the involvement of the end user," Mr Hockridge said at the media conference.
"In Baosteel we have a world class customer and partner who need the product, particularly from the West Pilbara iron ore project but also from Eagle Downs for their own growth and development."
Aquila said it would consider the proposal and update shareholders in due course.
"At this time, Aquila shareholders do not need to take any action in relation to the proposal," Aquila said in a statement.
The West Pilbara Iron Ore Project is a long iron ore project with an estimated cost of $5.5 billion, which hasn’t got to the starting line, despite the boom in iron ore prices which has now faded.
According to analysts, Aurizon’s motivation in joining Baosteel is securing exclusive negotiation rights for a $5.5 billion port and rail network that would also be open to owners of other “stranded” iron-ore deposits in the region.
The project is based on a 2.2 billion tonne deposit, which Aquila has talked about mining in two stages, totalling production of 40 million tonnes a year. That would be worth around $A4.1 billion at current iron ore prices.
But compared with Fortescue, the smallest of the big three, which will be producing at an annual rate of 155 million tonnes a year by the end of the year, West Pilbara is small.
Compared with the massive tonnage BHP Billiton and Rio Tinto mine and export, it’s a tiddler. For example BHP has just brought on line a new mine called Jumbelar which is producing at the rate of 35 million tonnes a year, and is designed to go to 55 million.
From what was said yesterday, Aurizon would not hold its Aquila stake in the long term, but would emerge with a majority stake in a separate infrastructure company, if the project and the other parts all fall into place.
But the project has a longway to go – Aquila’s existing partners in West Pilbara are Chinese group AMCI and Korean steel maker Posco (which is a bitter global rival to Baosteel). It is doubtful if they will give this bid the tick at the moment.
The deal carries all sorts of pitfalls for Aurizon. Iron ore and coal companies are already complaining about the excessive take or pay contracts they signed with the rail giant at the height of the resources boom, and which are now hurting profit margins because world prices have fallen.
Some iron ore operators wonder if Aurizon will give them the same sort of deal that it will offer Aquila/Baosteel and others to cart ore in WA.
Some investment analysts wonder if it is a good use for Aurizon’s capital and debt – and if the company should really be helping finance a big takeover when it has a huge capex plan on its rail businesses, especially in NSW and Qld.
Aurizon is priced on a forward price earnings ratio of 18 times next year’s expected earnings a share. Remember from the Macquarie story, it’s considered to be pretty pricey on 15 times forward earnings.
