take over giralia, page-65

From Macquarie Bank this morning:

Wednesday, 22 December 2010

Giralia Resources
Realising the value

--------------------------------------------------------------------------------
Volatility Index: Very high
Recommendation: Outperform

Price 21 Dec 10 $4.18
Event
Giralia Resources (GIR) received a takeover offer from Atlas Iron (AGO, $2.92, Neutral, target price (TP): A$3.30).
Impact
Initial bid commensurate with our valuation. AGO is bidding 1.5 AGO shares per GIR share, or 1.33 AGO shares per GIR share plus A$0.50 per share (ps) in cash. At the time of the bid, this was a 48% premium. At the latest closing prices, this values GIR at around $4.38ps, close to our net present value of $4.25ps. Subsequent to AGO's offer, we have upgraded our AGO target to $3.30 from $2.43. By virtue of the offer, we linked GIR's TP to AGO's.
Infrastructure risk mitigation. Our net present value of $4.25ps assumes access to port infrastructure for GIR's Daltons and McPhee Creek projects, with McPhee Creek ramping up to 5mpta in a trucking operation. AGO has a port allocation at Utah Point of up to 15mtpa and has a stake in the North West Iron Ore alliance, which has a 50mtpa port allocation, complementing GIR's resource base of around 400mt in the Pilbara.
Next steps. The offer is recommended by GIR directors. Key shareholders include directors (7.5%), who have entered acceptance agreements, and AMCI (Not rated) at around 10%. Conditions include 90% acceptances and no material adverse events. GIR has a no-shop condition, and AGO has a right to match any unsolicited bids. AGO's recent track record of successful scrip-based acquisitions includes Warwick and Aurox (both unlisted). The offer opens on 11 January and closes on 11 February.
Other potential bidders? GIR has a material resource base of around 400mt DSO, with further exploration upside potential. AGO, given its infrastructure position and relatively small resource base, provides a good strategic fit with GIR, in our view. We note that GIR's McPhee Creek is contiguous to Fortescue Metals Group's (FMG, $6.75, Outperform, TP: A$7.60) tenements, and a potential route to market could be via FMG's Christmas Creek rail siding, around 100km from McPhee Creek. However, FMG is not short resources. Hancock Prospecting (unlisted) is planning to build a rail line along a route close to both McPhee Creek and Mt Webber.
Earnings and target price revision
No change in earnings per share estimates. We raised our for GIR to A$4.89 from A$3.02, in line with our revised TP for AGO.
Price catalyst
12-month price target: $4.89.
Catalyst: Other bidders emerging.
Action and recommendation
We retain our Outperform recommendation on GIR, with a new TP of A$4.89, reflecting our updated TP of A$3.30 for AGO, which we upgraded to Neutral.