consmin three cheers for vote no

SHAREHOLDER OPPOSITION
Gilbertson’s initial bid for ConsMin may be holed
Investor resistance and a strong share price may force Brian Gilbertson’s Pallinghurst Resources to raise its bid for Australian miner Consmin.

Author: Ross Louthean
Posted: Wednesday , 11 Apr 2007

PERTH -

Brian Gilbertson's good ship Pallinghurst Resources may be heading for the shoals in its takeover bid for the West Australian manganese, chromite and nickel miner Consolidated Minerals Ltd.

There has been mounting shareholder opposition to the bid - complete with a dedicated anti-takeover website -- and the rising share price is adding another negative.

ConsMin's share price on the Australian Stock Exchange today was $A2.63 ($US2.16) and the Pallinghurst offer was $A1.38/share ($US1.13/share) plus two shares in the new Consmin for every five shares held, with shareholders receiving a 40% stake in the new company. Pallinghurst wants to gain a minimum 50.1%. At the time ConsMin (whose board is supporting the Pallinghurst bid) said the transaction valued the company at an enterprise value of $A625 million ($US515), or at $A2.28/share ($US1.87/share).

One Perth stockbroking firm assessed that the market value today of the Pallinghurst package was $A2.30/share ($US1.89/share) which, with market unknowns, does not make it attractive compared to the raw share price, which has been lifting through improved production performances and a soaring nickel price. The Intierra group's Minmet research service put the market capitalisation of ConsMin today at $A595.2 M ($US490.7 M).

Alex Passmore, Head of Metals & Mining for Paterson Securities, who felt the bid was heading for the rocks, believes Pallinghurst must increase the offer.

The new company would be incorporated in Australia with Pallinghurst injecting $A320 M ($US263.7 M) equity. A restriction of trade provision would be that neither Pallinghurst or associate American Metals & Coal International (AMCI) -- a private global resources ground with "significant" investments in the US, China, southern Africa and South America - do not sell any shares for 12 months after implementation.

AMCI's principal Hans Mende will join the new ConsMin board and it seems a pity that about the time of the Pallinghurst announcement AMCI sold coal interests in Queensland and iron ore interests in the WA Pilbara to CVRD. Some observers felt these could have been dynamic building blocks for the new ConsMin, but that these assets may have given Mende a greater control than Pallinghurst.

There are three schemes of arrangement for ordinary shareholders, option holders and note holders, with meetings to approve the schemes set for May.

The talk in Perth investment circles is what would happen to the ConsMin board should the Pallinghurst bid succeed either in the first instance or from a second bid. Speculation includes that more directors may depart, including chairman R. Carter (a former BHP executive and a past president of the Australasian Institute of Mining & Metallurgy) and chief executive Rod Baxter, and that the Consolidated Nickel mining assets at Kambalda may be sold. An early acquisition may be a bulk minerals project in Ghana.

Richard Elman, chief executive of Hong Kong-based metals trading house Noble Group, resigned after the Pallinghurst announcement and while some speculators suggest that move will allow Noble to sell its significant block of shares there may be other post-takeover issues in the melting pot.

Noble had backed Michael Kiernan who transformed ConsMin from a sow's ear that had run up losses trying to produce manganese in Western Australia's Pilbara into a market darling in 2005-06 with profitable production of manganese, chromite and acquisition of the Beta Hunt nickel projects in Kambalda. Kiernan decided to leave after a dispute with some institutional investors on a wage package, a factor that hit the share price, coupled with a slide in the price of manganese.

In roadshows in recent weeks ConsMin said that six months revenue for the December half was $A121 M ($US M) for a profit of $A14.8 M ($US M) and production was 471,606t of manganese, 2,023t of contained nickel and 126,015t of chromite.

Capital expenditure for the current half year has been put at $A32.2 M including completion of a ventilation shaft and ongoing development of the East Alpha drive at Kambalda.

A market update by the company pointed to 10 days downtime for the manganese operations caused by an abnormally heavy period for cyclones in March that also hit regional iron ore projects. However, ConsMin did not revise its production targets.

In terms of metals, ConsMin sees demand for manganese continuing to grow with China totally dominant in this elevation. Global demand for 2007 was +14,000 Kt of ore and it would rise 7.3% in 2008 to +15,000 Kt and by 6.1% the following year.

For the nickel division production was well below target with slow development. The company said 92% of nickel tonnes were hedged at an average $US8.16/lb, though the price today was in the $US22.60/lb range, a stellar figure some analysts are saying is not sustainable.

Full year output of contained nickel (subsidiary ConsNickel delivers its ore to BHP Billiton's concentrator at Kambalda) was put at between 4,500-5,000t and cash costs at between $A6.75-7.25/lb ($US5.56-5.97/lb).

Chromite production at the Coobina mine in the Pilbara was down for the December half compared to the corresponding 2006 half, but cash costs were lowered 4.3%. ConsMin predicts full 2007 output will be between 240-250,000t at a cash cost of between $A127-142/t ($US1.04-1.17/t).

The roadshow presentations said the vision was for the transformed ConsMin to become a major mid-tier "resources champion in the next 3-5 years" and that the company was "committed to deliverying "industry leading growth and returns - justifying a premium rating."

The models to follow were Billiton (run by Gilbertson before the marriage to BHP Billiton and by Gilbertson out of Melbourne until an acrimonious departure), Vedanta Resources plc (also at one stage run by Gilbertson) and Xstrata plc which had benefited from supportive key shareholders.