DRD stands its ground in Emporer bidBy: Peter GonnellaPosted:...

DRD stands its ground in Emporer bid
By: Peter Gonnella
Posted: '13-MAY-04 15:00' GMT © Mineweb 1997-2004



PERTH (Mineweb.com) -- South African-based Durban Roodepoort Deep [JSE:DUR,ASX:DRD,Nasdaq:DROOY] is sticking to its guns in the war of attrition with takeover target, Aussie-based Emperor Mines [ASX:EMP].

The arm wrestling often associated with an all-scrip offer because of the fluctuating implied values – a la the Normandy Mining, AurionGold and Ashanti Goldfields bids – is well and truly in full swing again. DRD, who has kept its offer for Emperor open until 11 June, today (Thursday) attempted to shoot down in flames the recent independent expert’s valuation contained in the target’s mandatory response statement. And it may have had an initial desired effect on Emperor shareholders.

Over the past couple of months, the one DRD share for every five Emperor shares bid – which was worth A$105 million (including about A$6 million net debt) or A$0.88 per Emperor share and represented an original pre-bid premium of 31 percent – has slumped to a see-through value of just under A$77 million (using an Aussie currency rate of US$0.69 and DRD’s overnight closing price on Nasdaq) or about A$0.685/share, compared with the Emperor’s latest price by the end of the day’s trading of A$0.70. In other words, the pre-bid premium has all but evaporated.

However, independent consultant Deloitte Corporate Finance’s report in the Emperor target statement suggested a fair value was between A$1.00 and A$1.32/share. The percentage variation between the Emperor pre-bid price of A$0.67 and the mid-point of the independent valuation (A$1.16/share) is 73 percent and the premium differential between the pre-bid price (A$0.67) and the inferred value of the offer when DRD first announced it (A$0.88) and the pre-bid price and the independent expert’s base case mid-point estimate (A$1.16) is a whopping 42 percent.

DRD’s CEO Ian Murray wasn’t having a bar of that disparity. Put simply, the independent expert over-values Emperor, he said, adding that the market wasn’t buying it either. “The Emperor share price has traded in line with DRD’s implied offer and has not adjusted to reflect the independent expert’s valuation range,” he pointed out. Murray also scoffed at the independent expert’s contention that the 42 percent premium discrepancy was due to the history of underperformance of Emperor’s Vatukoula mine in Fiji and as such, according to Deloittes, “the sharemarket price incorporates a discount rather than a gold premium”.

“DRD does not believe the market mis-prices stocks to this extent,” said Murray. “We do not accept that there is some sort of ‘gold discount’ applied by the market which accounts for the … (premium) gap.”

By refusing to budge at this juncture, and perhaps with the cooling gold market working in its favour, DRD appears to have built some acceptances momentum over the past few days, picking up another 3.6 percent of Emperor for an updated total stakeholding of 24.69 percent.

Emperor’s chief executive Greg Starr, who told Mineweb the lines of communication with DRD were still open, almost distanced himself from the independent valuation, saying the report wasn’t done by the company (Emperor). However, he did reiterate the company line. “We’re trying to work with DRD and are in tune with their strategies going forward but we also want to ensure they pay the right price for Emperor,” Starr told Mineweb.

What price will convince Emperor’s independent directors to overturn its current “reject” recommendation will probably not have as big a bearing as perhaps a small cash sweetener to provide a component of certainty to the implied value. DRD is not likely to give an inch for a little while yet, especially against the background of a weaker gold equities climate. If acceptances continue to trickle in, then why rush the cash card.

Murray added that Emperor might face debt funding and cash problems in the near-term should Vatukoula misbehave and fail to achieve targets (given its track record, not out of the question) and/or gold price volatility persists.