afr - merrill's deal and glencore makes sense.

Lower bid for Sundance but Merrill’s covered

Edited by Sarah Thompson and Anthony Macdonald
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Sundance Resources and Hanlong Mining have agreed to get a scheme of arrangement moving again after the Sundance board started to worry about missing yet another deadline to satisfy key Chinese regulatory and funding approvals at the end of the month.

Hanlong said it would fulfil its obligations under the scheme “to act in good faith” to get the approvals from China Development Bank by the August?31 deadline.

Hanlong has said China’s National Development and Reform Commission was behind the revised offer.

One interesting aspect of the deal is how Hanlong’s advisers at Merrill Lynch dealt with its client’s decision to lower its original offer. Merrill is understood to have renegotiated its fee structure to get a better slice of the profits if Hanlong bought Sundance for less than 50¢ a share, a price that had been agreed between the chairmen of the respective companies until July 31 and was about to be put to shareholders.

But after that date, everything changed and Hanlong unexpectedly demanded 40¢ from its target, as Street Talk reported on August 7, raising questions over whether the company had breached its scheme obligations to negotiate with Sundance “in good faith”. Documents tabled in court during ASIC’s investigation of Hanlong officials for insider trading last year include Merrill Lynch’s original fee structure, which contained a flat fee for success. Given this, what has raised eyebrows is talk that the adviser pushed hard to get the bid cut to just 40¢. It is believed this is because under the new fee structure, the adviser receives extra for every cent Hanlong shaved from the initial 50¢ a share offer. Merrill Lynch yesterday declined to comment on its fee arrangement with Hanlong Mining.

Most Sundance shareholders said yesterday they would rather get the deal done at the current 45¢ offer than suffer another delay, although many continue to hope that someone else will offer even an extra cent to remove the uncertainty of dealing with an unreliable Chinese counterparty.

Some remain hopeful that once the mining licences are signed off in the next month, another party will come in, possibly Glencore. The miner-cum-trader has been increasingly active in West Africa and the economics of Sundance’s project make sense.

Investor presentations from the time?iron ore was still priced according to “benchmark” or annual prices show?that Mbalam was set to deliver a 20 per cent internal rate of return even when the iron ore price was never going to go higher than $US85 a tonne.

Glencore has a small stake in private company Core Mining as well as the rights to its offtake. Core is a partner to Sundance in terms of its infrastructure, and putting the companies’ projects together makes sense. Core is also understood to be looking to sell a 10 per cent stake for as much as $300 million.