'Bid undervalues Emperor on some benchmarks By: Peter Gonnella...

'Bid undervalues Emperor on some benchmarks

By: Peter Gonnella


Posted: 2004/03/09 Tue 18:28 ZE8 | © Mineweb 1997-2004


PERTH – It's not a foregone conclusion Emperor Mines [ASX:EMP] intends to automatically jump at Durban Roodepoort Deep’s [JSE:DUR,ASE:DRD] share-exchange offer at the first opportunity.
Feedback from the market and Emperor’s CEO Greg Starr suggests the takeover target may try to secure from DRD a more attractive deal that factors in to some degree the near-term upside potential of Emperor’s flagship Vatukoula operation in Fiji.

Starr told Mineweb today (Tuesday) that the DRD bid unveiled yesterday was a “good start”. Although he wouldn’t confirm one way or the other whether he thought the offer of one DRD share-for-five Emperor shares – which had a see-through value of A$105 million or A$0.88 per share derived from the two companies’ closing share prices last Friday – would nevertheless be enough, or indicate what he felt Emperor was worth given the progress made at Vatukoula.

“The offer is a recognition of the work that’s been done in the past couple of years,” Starr said, referring to the A$75 million capital optimisation project aimed at expanding Vatukoula gold production from about 120,000 ounces per annum to 180,000ozpa. But the Emperor chief wasn’t about to do a Vince Gauci, the former MIM Holdings managing director who last year flew in the face of his fellow board members’ recommendation to accept Xstrata’s takeover offer and unsuccessfully tried to entice a counterbidder or extract further cash from Xstrata. Starr said the Emperor board would reserve its judgement until an independent consultant had completed a detailed report providing an opinion on the fairness of the merger proposal (see details of bid in article in side bar) in about eight weeks.

While acknowledging Vatukoula’s unreliable history, he expects it to reach production levels equating to 180,000oz a year some time in the first half of the 2004/05 financial year and to sustain this annual gold output volume for more than 10 years. Sydney-based Emperor has already spent about A$40 million on the phase two expansion project, which involves improving underground working conditions, upgrading infrastructure, replacing and increasing the mining vehicle fleet and significantly lifting underground development rates. Starr explained that Vatukoula was a high fixed-cost mine and that an economies of scale blueprint was determined to be the best way forward to help reduce unit costs and deliver improved margins.

Leading Aussie analysts felt the implied value of DRD’s bid was reasonable, although it did fall short on certain criteria. Sydney-based Global Mining Research (GMR) had an NPV on Emperor of A$1.06/share assuming the phase two expansion targets were met, which meant “for Emperor, the effective offer of A$0.88/share (on the day) represents a 17 percent discount to the GMR-calculated NPV”, noted GMR analyst David Haughton.

Consolidation of the gold sector in recent years had provided other acquisition benchmarks. The DRD offer premium of 32 percent using last Friday’s share prices was “approaching the average takeover premium of 38 percent established in the global gold industry over the past four years,” Haughton pointed out. “However, the offer is below the average in terms of reserves (US$66 per ounce versus US$130/oz average), production (US$540/oz versus US$815/oz) and NPV (91 percent versus 135 percent).”

Haughton and others including Paterson Ord Minnett analyst Rob Brierley didn’t anticipate an alternative bidder coming out of the woodwork as DRD’s existing shareholding was perceived as a major deterrent. “DRD was the logical bidder and we believe that the chances of a rival bid are low,” said Brierley. “The timing of the bid, just before a likely operational turnaround at Emperor’s Vatukoula mine, is also predictable.” Most other major gold producers “are unlikely to find appeal in Emperor” because of its relatively small size and high cash costs, Haughton added.

Brierley reminded punters Emperor wasn’t necessarily in a great position to bargain. “Whilst we suspect that Emperor’s board will attempt to negotiate a sweetener to the offer, (we) are of the view that any price for Emperor above our DCF valuation of A$0.83 should be deemed attractive to Emperor shareholders,” he argued.'