anxious wait for sundance

Anxious wait for Sundance as China runs the ruler over Africa

by: Bryan Frith
From:The Australian
December 21, 201212:00AM

FEDERAL Court confirmation of February 1 as the new date for shareholders of iron ore hopeful Sundance Resources to vote on a merger with China's Hanlong Mining has done nothing to alleviate investors' apparent pessimism as to whether the deal will go ahead.

Sundance's share price continues to retreat, edging down a further 0.5c yesterday to 31.5c, which is a whacking 13.5c, or 30 per cent, below the offer price of 45c a share.

It's not surprising that investors are unsure as to whether the merger will proceed as it is already one of the most protracted commercial transactions seen in Australia, and has been subject to revisions of the proposal and regulatory delays, which breed uncertainty.

The privately owned Hanlong, which is controlled by billionaire Yong Yu, first popped up in March last year with the acquisition of 19 per cent of Sundance, 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 ore project, which straddles the Cameroon-Republic of Congo border in central west Africa.

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The stake was diluted soon after to 17 per cent by a $60 million share placement.

Mbalam is part of an emerging iron province. It's a $US4.7 billion project to develop a major mining operation, producing 35 million tonnes of direct shipping ore initially, with the potential to go to 50 million tonnes a year.

In July last year, Hanlong proposed a scheme of arrangement at 50c but Sundance rejected it as inadequate. In October, Sundance recommended an increased offer of 57c a share, which valued the company at $1.65bn.

A two-phase process was envisaged. Phase one involved concluding a mining convention with Cameroon and a mining permit from the Congo government, and phase two the scheme documentation and scheme meeting to obtain shareholder approval.

It also needed approval by FIRB and Chinese regulatory bodies, notably the NDRC (National Development Reform Commission). The acquisition was to be funded by China Development Bank.

It was recognised this could take some time so the scheme had an end date of May 24 -- almost 10 months out. However, on the eve of that deadline the end date was moved out to December 31 and Hanlong committed to securing preliminary approval from the NDRC by June 30 and to obtain a credit approval sheet from CDB by August 31.

The scheme was then expected to be completed in mid-November.

But in early August, as the iron ore price began to tumble, the NDRC advised that in order to obtain its final approval the transaction would have to be at "a reasonable acquisition price". Without NDRC approval the transaction would be unable to proceed.

On August 24 Sundance agreed to recommend a reduced offer price of 45c a share, which Hanlong warranted was a reasonable acquisition price for NDRC and CDB purposes. The end date was extended once more, this time to January 13, and it was expected that the scheme would now be completed by mid-December.

One of the conditions of the scheme was that Hanlong provide a credit-approved term sheet from CDB by December 13, the day before the scheduled meeting of Sundance shareholders to approve the scheme.

On November 30, Sundance announced the Cameroon government had signed the Mbalam convention, which satisfied one of the conditions precedent of the scheme. The mining permit from the Congo government was still to come through, although it was suggested the process was at an advanced stage.

However, on December 3 Sundance obtained a trading halt and revealed that it had received a letter from Hanlong advising that CDB now required a review of the just-signed Cameroon convention and of the "anticipated" Congo mining permit before it would provide the term sheet and, as a result, Hanlong would be unable to meet the December 13 deadline.

So the scheme meeting has been adjourned to February 1 and the term sheet from CDB is now required by January 31, again the eve of the scheme meeting.

Chinese regulatory approvals and the Congo mining permit are now required by February 8 and the end date of the scheme has been moved out again, to March 1.

Moreover, Hanlong has agreed to provide Sundance with a $15m convertible note facility, which can be drawn down to meet the company's working capital requirements and be converted into fully paid shares at either party's option under certain circumstances.

Hanlong shares were selling at 39c before CDB suddenly changed its requirements for approval of the term sheet. The shares came back on at 34.5c after the trading halt was lifted but have continued to drift to the current price, demonstrating investor concern that the deal may yet fall through.

It was also recently revealed that Hanlong's shareholding has dropped to 14.15 per cent. It turns out that 2.84 per cent of its stake was held in call options over Sundance shares, which were due to expire on December 31, and that, because of the timetable delay and "regulatory considerations" Hanlong could not physically settle on the expiry date and was unable to negotiate an extension or alternative arrangements on satisfactory terms, which meant that closing out the options was the only viable option.

But Hanlong maintains it is committed to the merger and points to the commitment to provide the $15m funding on attractive terms as evidence of that commitment.

And that's no doubt the case. China will be the end customer for the Mbalam iron ore and it's probable that it will want to see a Chinese company in control of what will be a major project in an emerging and strategically important region.

It's probably also the case that China may have preferred it to be a state-owned entity rather than the privately owned and probably less well connected Hanlong, which may be a factor in the elongated approval process.

However, Hanlong stole a march by purchasing the late Ken Talbot's stake.

It may therefore be that China wants to see agreements with developing African countries, such as Cameroon and the Republic of Congo, settled on all details before it will allow any funding to flow, and that the latest delay is designed to ensure that it can achieve that outcome.

But it's very unsettling for Sundance and investors.

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