A very different company Pallinghurst Resources will buy 60% of...

A very different company


Pallinghurst Resources will buy 60% of CSM from existing shareholders. Pallinghurst is a private equity resource investor led by Brian Gilbertson of Billiton fame. The bid is $6.40 cash and two shares in the new CSM for every five shares, equivalent to $2.28 a share. The new company will be 60% Pallinghurst and 40% current shareholders. It's effectively a partial takeover, well timed and on the cheap. The deal is via scheme of arrangement. Shareholder, noteholder, foreign investment review board and court approval is needed. Directors, including the MD and Chairman, keep their jobs and unanimously support the offer. Gilbertson as well as Hans Mende and Arne Frandsen of AMCI join the board.


Judging by the Sydney lunch this week, some brokers and analysts are unhappy. The premium is modest, 14% on the six month average pre-speculation price. While some are disappointed with the price, owning 40% of new CSM will share upside. Angst is linked to disappointment with previous management, falling manganese prices and the recent poor share price performance. South African management in what is "Australia's next mid tier champion" irks some. Those issues will fade after the first one or two deals. Expect the first acquisitions to be high quality and well considered. Management is determined to escape legacy issues and re-establish credibility.


The plan is to recreate the Billiton and Xstrata experience. Aggressive growth through acquisitions backed by a supportive major investor. For Xstrata it was Glencore. CSM will have Pallinghurst. Pallinghurst has US$1bn and is backed by successful private coal company AMCI. CSM's acquisitions have been a highlight. The company is already looking at potential targets. Management is finally excited after a tough year. With $320m in the game, Pallinghurst should be sufficiently motivated.


For CSM all hinges on successful deal making. We acknowledge control has potentially passed to Pallinghurst with a small premium and that acquisition growth is more difficult in a falling commodity environment and boomy resource market conditions. That said, we see more upside than down. This may be the start of multi year growth. Operations have stabilised and key markets are improving. We upgrade from Hold to Speculative Buy. CSM can be comfortably bought up to the bid price of $2.28 and potentially beyond. Our valuation rises 16% to $2.50 after investment gains, profit upgrades and adding a 25c premium for exploration, development and acquisition potential. Long term assumptions are unchanged. Asset quality reservations are likely be overshadowed by acquisitions.


1H07 NPAT was double our forecast, mainly due to creditable cost control. Sales revenue rose 8% to $119.2m compared to 2H06 with stronger manganese and nickel contributions. Manganese production was up 8%, nickel steady and chromite down 4%. Net operating cashflow more than doubled to $10.8m and the dividend was reinstated. We upgrade our adjusted FY07 NPAT forecast by 27% to $35.0m. Assumptions for 2H07 include a US$2.38/dmtu manganese price and US$15.25/lb nickel. Similarly, FY08 increases 6% to $74.7m based on US$2.50/dmtu manganese and US$11.00/lb nickel.


1H07 RESULT
1H06
2H06
1H07
%CHG*
%CHG^

Sales Revenue ($m)
103.8
110.1
119.2
+14.9
+8.3

EBITDA ($m)
21.3
21.9
30.5
+43.1
+39.5

EBIT ($m)
7.6
12.4
17.1
+123.7
+38.1

Pre-tax Profit ($m)
4.3
10.3
12.6
+191.0
+22.2

Adjusted NPAT ($m)
3.2
12.8
8.3
+162.3
-35.1

Headline NPAT ($m)
3.2
-9.7
10.2
+222.2
n/a

Adjusted EPS (cps)
1.4
5.7
3.7
+153.9
-36.0

Net Op. CF ($m)
4.8
4.2
10.8
+124.1
+154.5

DPS (c)
3.0
0.0
1.75
-41.7
n/a

Net Debt ($m)
57.4
94.2
105.4
+83.7
+11.9

EBITDA Margin (%)
20.5%
19.9%
25.6%
+24.6
+28.8