debt forces oz minerals to sell assets cheap

OH what a difference a year makes. Twelve months ago, Grant Samuel valued the assets which OZ Minerals proposes to sell to China's Minmetals in a range of $7.6 billion to $8.6 billion. It now values them in a range of $US1.385 billion to $US1.6 billion ($1.8-$2.1 billion).

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The low point of that range is higher than the $US1.206 billion Minmetals is proposing to pay for the assets, and were it not for the fact that OZ is under financial pressure, Grant Samuel would consider the proposal not in the best interest of shareholders.

But the reality is that OZ urgently needs to reduce its bank debt. There are obvious alternatives to the Minmetals proposal and while the financial pressure remains, it's almost impossible for OZ to realise assets at full value.

For those reasons Grant Samuel believes the Minmetals proposal represents an "acceptable outcome" for OZ shareholders.

Shareholders will vote on the Minmetals sale at the AGM on June 11. If it is approved, the company's remaining major asset will be the Prominent Hill copper-gold project in South Australia.

The major value downturns are for the Sepon copper-gold project in Laos and the Century zinc mine in Queensland. Last year, Grant Samuel valued Sepon in a range of $US2.2-$US2.4 billion and Century in a range of $US2.6-$US2.9 billion. It now values Sepon at $US520-$US560 million and Century at $US500-$US550 million.

The huge turnaround in the valuation of the OZ assets is primarily attributable to the sharp downturn in commodity prices over the past 12 months, although recently there has been some recovery, which Grant Samuel says is fully reflected in the latest valuation.

Grant Samuel points out that copper prices fell from $US4 a pound and zinc from $US0.85 at July last year to lows of around $US1.27/lb and $US0.47/lb in December. Since then copper prices have risen by 34 per cent and zinc prices by 30 per cent.

Nevertheless, Grant Samuel adopted fairly aggressive commodity price assumptions in its May 2008 valuations. It assumed a long-term price range of $US2.50 to $US3.25/lb for copper and $US1 to $US1.20/lb for zinc which was well above the analysts consensus at the time of $US1.69/lb for copper and US82c/lb for zinc.

This time around Grant Samuel is assuming a price range of $US1.80 to $US2.20/lb for copper and US70c to US80c/lb for zinc. That's in line with the analysts' consensus of $US1.80/lb for copper and US74c/lb for zinc.

It's also worth noting that in May 2008 Grant Samuel valued the Martabe golf project in Indonesia in a range of $US650-$US750 million. OZ has now entered into an agreement to sell Martabe for $US211 million. Oh what a difference.

THE US biopharmaceutical group Cephalon must be wondering just what it has to do to make an acquisition in Australia. Six years ago, Cephalon bid for Sirtex, after first entering into a pre-bid agreement with the company's founder Dr Bruce Gray.

He granted Cephalon an option to acquire 19.8 per cent of Sirtex at the cash bid price of $4.85 a share and said he intended to accept for his remaining 17 per cent in the absence of a higher offer. Gray would have walked away with $100 million pre-tax had the offer succeeded.

A number of institutional investors considered the offer price to be too low and resisted. Cephalon played it tough and threatened that if it ended up with minority holders it would restrict them to only a royalty on Sirtex's promising liver cancer treatment, rather than their share of profits, and would consider a capital raising.

Cephalon also declared its offer price final and said it would not be increased "under any circumstances".

Gray appeared to have second thoughts. He accepted for his remaining 17 per cent, although some suggested it was done reluctantly. However, the Cancer Research Institute, of which Gray was chairman and considered by many to be its driving force, didn't accept for its 9 per cent shareholding, leaving Cephalon a tantalisingly 2 per cent short of its self-imposed non-waivable 90 per cent minimum acceptance condition. Gray retained all of his shares.

Fast forward to 2009 and Cephalon has a two-tiered cash offer under way for Arana Therapeutics -- a base offer of $1.40 a share, conditional on a minimum acceptance of 50.1 per cent, which will rise to $1.45 if Cephalon secures 90 per cent. That's a hefty premium of almost 70 per cent to Arana's pre-offer price of 83c.

This time around, Cephalon bought a pre-bid stake of 19.9 per cent, acquiring the bulk of the shareholdings of Arana's two major shareholders -- Start-up Aust, controlled by then-Arana director George Jessup and Rockwell Securities, controlled by Malaysian businessman Lim Sen Yap.

The Arana board has unanimously recommended acceptance in the absence of a higher offer.

Once again Cephalon has struck resistance from some shareholders who consider that, despite the premium to market, the offer price is too low. Two shareholders went so far as to commission a four-page valuation of Arana from Acuity Technology Management. Acuity valued Arana in a range of $400-$467 million, or $1.75-$2.05 a share on a sum of the parts basis. It said a company valuation would be higher and a "rough analysis suggested a range of $410- $515 million, or $1.80 to $2.26 a share".

Cephalon considers the valuation is not credible.

ASIC also intervened and required Arana directors to issue a supplementary target's statement to further explain their recommendation. The Arana directors said that in the current risk-averse market, investors were not ascribing significant value to the company's technology.

The Arana board decided against an expert's report for a number of reasons: it was a cash offer; despite contact with a large number of domestic and overseas pharmaceutical companies no superior proposal had been received; and the board considered that sales of 19.9 per cent by the two major shareholders provided a "very relevant benchmark".

Yap subsequently accepted for a further small parcel of shares but apparently now considers that to have been a mistake. He still has a small shareholding and apparently there are investors regarded as friendly to Yap who own between 5 per cent and 10 per cent of the capital. Institutions and hedge funds are said to account for a further 15 per cent.

Cephalon currently has a relevant interest in 38.16 per cent of Arana, still 12 per cent short of its minimum acceptance level.

The US bidder has now resorted to its Sirtex tactic and declared its offer price final, trying to pressure the hold-outs into accepting by ruling out an increase in the bid price, Cephalon has previously said it would declare the offer unconditional if it reaches 50.1 per cent of Arana and no defeating conditions have been breached.

The bid is currently scheduled to close on June 1. Cephalon has now said that if it has not declared the offer unconditional by May 22 it will not extend the offer, unless it goes through 50 per cent in the final week and is then required under the Corporations Act to extend for a further two weeks.

Cephalon has thrown down the gauntlet. If, as seems likely, no rival bidder appears, then the institutions and hedge funds must be considered likely to accept, which would get Cephalon over the line. But the US group will no doubt be mindful of its Sirtex experience as the deadline approaches.