Miner must explain when it knew of fresh Chinese bid for...

Miner must explain when it knew of fresh Chinese bid for Kalahari

The Australian October 12, 2011 12:00AM

AN exchange of letters between the ASX and Extract Minerals only highlights the need for the stock exchange to make further inquiries as to when the company became aware of renewed takeover talks between its major shareholder, Kalahari Minerals and the state-owned China Guandong Nuclear Power.

That's necessary in order to establish whether Extract should have obtained a trading halt in its securities earlier than it did, to avoid a disorderly market.

Kalahari, which owns 42.79 per cent of Extract, is listed on the London Stock Exchange's secondary market AIM and the Namibian stock exchange.

On Friday, Kalahari's share price jumped 7 per cent from 229.5p to 246p and there was strong speculation in the British press over the weekend and was reported in The Australian on Monday morning that a bid at 270p a share was imminent, which was likely to lead to a bid for Extract.

Extract obtained a trading halt on Monday but not until there had been 13 minutes of trading in the stock and the share price had soared 82c, or 10.2 per cent, to $8.86. During that time 228,844 shares changed hands, involving about 300 trades.


Late on Monday afternoon, Kalahari confirmed it re-commenced discussions with CGNPC-Uranium Resources, owned by China Guandong Nuclear Power, aimed at reaching agreement on a recommended bid. Kalahari made the disclosure because the media speculation indicated that confidentiality regarding the discussions had been lost.

It turns out that the ASX fired off a price query on Monday morning -- well before Kalahari's announcement -- asking if the company knew of any information which, if announced, would explain the sharp jump in the share price before the trading halt was imposed.

The ASX required that in answering the question Extract should address the press reports, specifically The Australian's report, and suggested that if confidentiality had been lost Extract was no longer exempt from the requirement to make immediate disclosure under the continuous disclosure rules.

In response, Extract referred to Kalahari's subsequent announcement that it was talking to CGNPC-URC about a potential new bid and noting that it was not a part to those discussions.

Referring to the ASX remarks about press reports, Extract said it sought the trading halt because of media speculation and Kalahari's announcement later that day.

That's hardly satisfactory. The media reports about an impending bid for Kalahari and Extract were published before the start of ASX trading on Monday. If there was no truth to the reports, Extract could have said so; alternatively, if it didn't know whether or not the reports were correct, it could have sought a trading halt before trading commenced in order to prevent the risk of a disorderly market.

It was entirely predictable that in the absence of such a statement the share price was likely to jump if trading was allowed -- and that's precisely what happened. Those investors who sold before it was confirmed that takeovers talks had restarted have every reason to be upset.

In the light of Extract's response it would not surprise if the ASX now fired off an "aware letter" asking exactly when the company became aware that Kalahari had recommenced takeover discussions with GNPC-URC.

The listing rules specify that a company becomes aware of information if a director or executive office has, or ought reasonably to have, come into possession of information in the course of performance of their duties. It also says that confidentiality in the context of the listing rules has the sense of "secret" and that loss of confidentiality may be indicated by otherwise unexplained price movements or reference to the information in media or analysts reports.

In Extract's case, the company added fuel to the fire yesterday by releasing a further announcement in which it disclosed that it had been consulted by ASIC and had made submissions to the corporate watchdog around the terms and conditions for a potential "downstream" offer for Extract by CGNPC-URC if an offer was made for Kalahari. No ruling had yet been made by ASIC, but Extract, through its submissions, had sought to ensure the interest of the shareholders would be protected if a bid was made for Kalahari.

If there have been consultations with, and submissions to ASIC, that would suggest they took place before, possibly well, before the weekend press reports. Moreover, it would seem unlikely that ASIC would give consideration to a hypothetical situation.

If that is so it would suggest that Extract knew before the weekend that takeover talks had restarted and that the publication of the press reports indicate that confidentiality had been lost. In such circumstances prudence would suggest that a trading halt should have been obtained before the commencement of ASX trading and last until Kalahari could provide confirmation.

Under the Corporations Act, if a party acquires 20 per cent or more of Kalahari then it also obtains a deemed relevant interest in Kalahari's 42.79 per cent of Extract, and that would fall foul of section 606, which prohibits a party acquiring more than 20 per cent of a company without first making an offer to all shareholders.

Section 611 (14) provides an exemption from the need for an upstream bidder to also bid for the downstream company if the upstream company (Kalahari) is listed on the ASX or a foreign exchange improved in writing by ASIC. Neither AIM nor the Namibian exchange are such approved exchanges so, on the face of it, a bid for Kalahari will also require a comparable bid for Extract.

Where ASIC requires a downstream bid, the offer price is set by an independent expert at the "see through" value implied by the upstream bid. ASIC usually requires a cash bid, or a scrip offer with a cash alternative.

CGNCP-URC can apply for relief to exempt it from the requirement to bid for Extract; in fact, it would need to also apply for relief to enable it to acquire more than 20 per cent of Kalahari. It's unlikely the Chinese group would receive unrestricted relief; more likely is that it would receive restricted relief and, going by ASIC's policy, that would be likely to include a requirement for a full bid for Extract.

ASIC will normally require a downstream bid if the holding in the downstream company comprises more than 50 per cent of the upstream company's assets and control of the downstream company is a main purpose of the upstream acquisition.

The Extract stake is Kalahari's only significant asset. The Chinese group could simply bid for Extract but acceptance would create a hefty capital gains tax bill for Kalahari. It's crystal clear that if CGNPC-URC bids for Kalahari its main purpose would be to secure that company's stake in Extract and in those circumstances ASIC would almost certainly require a bid for Extract.

Kalahari announced in March that it was considering a recommended bid from CGNPC-URC of 290p a share, which at the time was equivalent to a see-through price for Extract of $10.57 a share.

In May, following the uncertainty created by the crisis at the Fukushima nuclear power plant in Japan, Kalahari and CGNPC-URC agreed on a reduced offer price of 270p but Britain's Takeover Panel ruled the Chinese group could not make a firm offer at that price because it had not reserved the right to reduce its offer price.

CGNPC-URC needs the Kalahari board's agreement to announce an offer before November 1, which would mean an agreed price; after that date the Chinese group is free to make a bid at any price it chooses.

The speculation has been that the Chinese group is considering an offer price of 270p, which would equate to a see through price for Extract of $9 a share.

However, since May there has been a further slide in the share price of uranium companies. Moreover, Namibia created uncertainty by stating that uranium was among a number of minerals that had been declared strategic to allow for exclusive exploration and mining of them by the state owned Epangelo Mining.

The Namibian government subsequently stated that existing mining licences would be unaffected. However, Extract doesn't have a mining licence although it has applied for one. Namibia has also created uncertainty by flagging potential changes to its tax laws, although it says it is willing to consult and wishes to remain an attractive investment destination. Perhaps reflecting that uncertainty, Extract's share price slipped 11c, or 1.25 per cent, yesterday to $8.75