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Hanlong sends right signal, yet Sundance investors left unmoved

by:Bryan Frith
From:The Australian
March 01, 201312:00AM


THE receipt yesterday by Sundance Resources of $5 million from Hanlong Mining carries symbolism far beyond the relatively small amount involved because it demonstrates that finally the Chinese private equity firm has been able to satisfy a deadline in its protracted $1.38 billion takeover of the iron ore hopeful, and that there must now be a much greater chance the transaction will proceed.

Sundance owns the Mbalam iron ore project, which straddles the Cameroon-Republic of Congo border in central west Africa.

Mbalam is part of an emerging iron ore province and is a $US4.7 billion ($4.5bn) 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.

Yesterday's announcement should have given Sundance's share price a solid boost, but investors apparently remain to be convinced, with the share price gaining only 1c to 30c -- still a significant discount of 33 per cent to the offer price of 45c a share.

Investor scepticism is understandable as the Sundance proposal is already one of the most protracted commercial transactions seen in Australia, and has been subject to revisions of the proposals and regulatory delays.

The transaction is to be implemented by a scheme of arrangement, but Sundance has already been forced to adjourn twice the shareholder's meeting to vote on the scheme, first from December 14 to February 1 and then by almost four months to May 7.

The main factor in the slippage of the timetable has been China's major regulatory body, the National Development Reform Commission, although delays in obtaining approvals from the Cameroon and Congo governments have been contributing factors.

The NDRC has already forced a downward revision of the offer price (from 57c a share to 40c a share) and delayed funding of the transaction by Hanlong's financier China Development Bank, and has now added a special requirement that Hanlong must bring in a large Chinese corporation as a partner (which almost certainly means a state-owned enterprise) in the development of the iron ore project.

That has aroused some misgivings as to whether Chinese entities should continue to be able to make proposed acquisitions of Australian companies conditional on obtaining Chinese regulatory approvals or whether they should be required to obtain those approvals before announcing the offer.

In Britain, firm bids, under rule 2.5, are allowed to have only limited conditionality. Offers can be made conditional on Competition Commission approval, but other regulatory approvals need to be obtained before a firm bid can be made.

However, where such other regulatory approvals are required, potential bidders can announce a possible offer, under rule 2.4.

The offer price was lowered in August last year, when iron ore prices were falling and the NDRC made it clear that it would not give its final approval unless the transaction was at "a reasonable acquisition price".

In December, Sundance was forced into the first scheme meeting adjournment when China Development Bank advised that it would be unable to provide a credit-approved term sheet by the time of the meeting. That came about because the NDRC had suddenly decided it required a review of the Cameroon and Congo mining permits.

Yesterday's payment of $5m is part of a $15m convertible note facility to help meet Sundance's working capital requirements. This was agreed to when the first scheme meeting was adjourned.

On February 7, Sundance advised that the NDRC had extended its provisional approval for the Hanlong acquisition to July 30 and that final approval was conditional on Hanlong securing a large Chinese partner.

The deadline for the credit-approved term sheet from China Development Bank had been extended to March 26 and Hanlong advised that its talks with a potential Chinese partner were sufficiently advanced for the bank to meet that deadline.

The convertible note facility was to be made available in three monthly tranches of $5m, with yesterday as the deadline for the first tranche.

Hanlong has now met that deadline, but investors appear to be unconvinced and may be waiting to see whether it also satisfies the more crucial March 26 deadline.

It's difficult to avoid the conclusion that there has been a stand-off between Hanlong and the Chinese authorities and that Sundance has been unfortunately caught up in that struggle.

China will be the end customer for the Mbalam iron ore and the authorities probably would have preferred to see such a major project in an emerging and strategically important region developed by a state-owned entity.

Hanlong surprised China when in March 2011 it snapped up a strategic 14.5 per cent stake in Sundance from the estate of the late mining magnate Ken Talbot, who died, along with other Sundance directors, in a plane crash after a visit to the Mbalam project, and when it followed up by proposing a scheme offer.

It's probable that Hanlong always intended to bring in a partner, but that it aimed to do so after first acquiring 100 per cent of Sundance, which would have enabled it to negotiate better terms.