London-listed Xstrata's ability to launch a takeover bid for MIM Holdings has been hit by a falling share price following a series of downgrades in stockbroking analysts' recommendations this week.
The downgrades came as speculation intensified that Xstrata was about to launch a scrip and cash offer pitched around $1.86 a share, valuing MIM at $3.7 billion.
The Swiss-backed company's managing director, Brian Davis, is expected to shore up market support in London next week after a lightning visit to Sydney where he discussed Xstrata's intentions with key MIM institutional shareholders.
Analysts said on Friday that Xstrata's biggest obstacle was the current weakness in its share price at a time when MIM's price had strengthened to $1.63, buoyed by the prospect of a bid.
Other mining groups, including South Africa's Anglo American and Rio Tinto, are also believed to have run the ruler over MIM, largely because the group holds the last prime independent coking coal mines in Queensland, Oaky Creek and Collinsville.
Mr Davis, Billiton's former chief financial officer and right hand man of BHP Billiton's recently departed chief executive officer Brian Gilbertson, told MIM's shareholders that Xstrata would be a transformed company with the Brisbane group in its portfolio.
A successful offer is expected to remove market concerns about Xstrata's exposure to South Africa, where it has coal and ferro alloy operations. It would also address its lack of commodity diversity which put pressure on earnings. Credit Suisse First Boston was the latest to downgrade the stock this week, cutting its recommendation from out-perform to neutral, because of the impact of a strengthening South African rand and Australian dollar on earnings.
Analyst Damien Hackett noted that all global miners would be affected by the appreciation of the two currencies against the US dollar, but he claimed Xstrata was the most vulnerable.
Earlier, Merrill Lynch placed a sell recommendation on Xstrata.
The firm, which is advising MIM, questioned Davis' plans to enlarge the company through acquisition, arguing that the risk was inherently higher to minority shareholders rather than with internal growth.
By the end of the week, Xstrata's shares had fallen 36p (98¢) to 585p. MIM's immediate earnings prospects might be seen as good reason to sell the stock.
MIM's chairman Leo Tutt warned at the company's October 31 annual general meeting, that the company would struggle to make a profit in the December half.
In fact a bottom-line loss of close to $200 million is likely following a one-time charge of $190 million flowing from the $76 million loss on the sale of the Duisberg zinc smelter in Germany and a further $121 million write-off on the Avonsmouth smelter, about to close, in the UK.
Yet the disposal of the smelters was viewed as positive for MIM removing the blemishes, apart from a difficult hedge book.
Even the hedge book is not such an issue. At June 30, the face value of hedge contracts is expected to be half that at June 30, 2001.
Brokers valuations vary from as low as $1.41 up to $2.52, with the lowest valuations not taking into account the planned expansions and other initiatives in the pipeline.
Recent transactions in the coal industry, plus this week's sale of Rio Tinto's 25 per cent stake in the 50 per cent MIM owned and operated Alumbrera copper/gold mine, suggest there is extra value in MIM that the market is yet to recognise.
---------------- While I hope the bid goes ahead the London shareprice is clearly an issue. At the close here in Lon the price is GBP5.57 - gives XTA a mkt cap of GBP 1.4b. At AUD 2.74 to the pound an AUD3.7b bid = GBP 1.35b - thats a big purchase for XTA to digest.
