iron ore juniors in same train of thought

Iron ore juniors in same train of thought
Matthew Stevens From: The Australian January 26, 2011

THERE are now three points of firm public agreement between the Pilbara iron ore wannabes, Brockman Resources and FerrAus.
First, iron ore is a highly attractive commodity; second, that the unlikely takeover offer made for each of them by Hong Kong's Wah Nam International is not good business; and, finally, that the two emerging juniors are definitely not engaged in any sort of formal merger discussion.

Both of Wah Nam's Pilbara targets yesterday rejected merger speculation triggered by comments from FerrAus executive director Barry Oliver on Monday in the wake of a highly successful shareholder meeting that saw his strategy endorsed and his Hong Kong predator's effectively dismissed.

While Oliver never actually mentioned the M word and certainly didn't say that negotiations were under way, he did leave his media audience with the firm impression that something was afoot.

Start of sidebar. Skip to end of sidebar.
Related CoverageBrockman, FerrAus play down merger talk Perth Now, 19 hours ago
Brockman, FerrAus in merger talks The Australian, 1 day ago
Explorer aims to fend off bids Herald Sun, 1 day ago
FerrAus, Brockman mull merger Perth Now, 1 day ago
BC Iron welcomes Regent takeover Herald Sun, 4 days ago
.End of sidebar. Return to start of sidebar.
For example, after discussing the valuation gap caused by the differing maturities of the Brockman and FerrAus projects -- the former is probably two years ahead of the latter with a confirmed resource and with a bankable feasibility study within its near grasp -- Oliver went on to say:

"At some stage, I'd expect we'll move closer together" -- he was talking about valuations of the companies -- "and if you get to a point where each party can put up a proposition that's of interest to the shareholders, then it's probably the time we will see some movement". A less than amused Brockman led the brief chorus of rejection first thing yesterday, declaring it "wishes to advise that it is not currently in merger discussions with FerrAus".

The company then took the opportunity to confirm good progress in negotiations with Fortescue Metals over the rail access. A deal with Andrew Forrest's emerging giant would, ultimately, confirm the serious viability of Brockman's proposed 17 million tonnes a year Marillana iron ore project.

And, having accidentally triggered merger talk, Oliver then had FerrAus release a statement saying there were no "active merger discussions".

That statement then noted, delphically, that the company "expects that discussions may be held with various corporate parties in the normal course of business in an effort to maximise value for its shareholders".

What FerrAus is talking about here is not so much mergers but, like Brockman, rail access arrangements.

The company's iron ore sits in hills a good 100km to the east of the railhead of BHP's Mt Newman line. FerrAus has been in and out of discussions with BHP over access to the Newman network.

Right now it is talking to BHP as it is with Fortescue, though any deal there would require building a much longer spur line than the one that would be required to attach FerrAus to a BHP umbilical.

One interesting thing about the Fortescue talks is that its discussions with both Brockman and FerrAus centre on haulage rather than the full access that they would appear to be entitled to, given that the emerging giant's railway is a declared system. The difference is stark.

Under haulage arrangements, Fortescue would provide the train sets and carry iron ore for a third party. But under the access regime, that third party would be able to drive its own trains up and down Fortescue's line.

That, of course, is the ambition at the root of Fortescue's five-year effort to seek the declaration of the whole Pilbara system.

Meanwhile, amid the mistaken hubbub about merger talks, the meaningful import of Monday's FerrAus EGM was substantively overlooked.

The great news for Oliver was that 70 per cent of FerrAus shareholders supported plans to issue $35 million worth of new shares to complete the financing necessary for the new phase of drilling needed to translate "resource" to "reserves" and to pay for a full feasibility study on the company's Robertson Range and Davidson Creek deposits.

That pair are currently assessed to contain a resource of 328 million tonnes of iron ore. Assessing the mineable resource and the feasibility of mining the Mirrin Mirrin project is expected to cost north of $50m.

Now FerrAus's biggest owner is none other than Wah Nam. The Bermuda-based Hong Kong investor whose income is generated pretty much exclusively from a collection of mainland Chinese limo franchises owns 19.9 per cent of FerrAus (and, formally at least, 22 per cent of Brockman).

Now, it is believed that Wah Nam voted against a plan, which is no surprise given that its position of strength on the FerrAus register will certainly be diluted by a plan that will expand the junior's issued capital by something just shy of 20 per cent.

Remember this is a placement, not a rights issue, so there is absolutely no requirement for FerrAus to offer shares to Wah Nam. Indeed, as things stand, there is every incentive for FerrAus to avoid any outcome that sustains Wah Nam's relativity.

The more immediate problem for Wah Nam though is that the issue of new capital is a defeating condition in its complicated attempt to forge a position of strength in the Pilbara by making an all-scrip offer that would effectively result in the merger of FerrAus and Brockman.

The logic here is that this combination would deliver them with the potential for 40 million tonnes of annual production, which is the level once felt necessary to justify construction of a third eastern Pilbara railway.

The first point there is that idea no longer holds. The massive increase in the cost of constructing infrastructure like port, rail and mining capacity has rather lifted the bar of sustainability for a new rail link with most putting the required throughput at something nearer 55mtpa.

But the essential logic of the Wah Nam strategy holds true nonetheless.

Given the iron ore market continues to evolve as expected, there will be sustained consolidation in the Pilbara over the next five years or so and that process is most likely to be driven by those companies that own and control the region's railways.

Should Wah Nam suddenly emerge with smarts and capital enough to successfully pursue Brockman and FerrAus and then actually be able to finance and construct the railway it has foreshadowed, then doubtless it might become a fourth force in the game of concentration ahead.

Mind you, as Wah Nam is proving, a good idea is one thing -- turning it into effective action quite another.

Wah Nam's all-scrip offer, which is effectively little more than an attempt at jurisdictional arbitrage given that Wah Nam's value is essentially secured by its shareholdings in the Australian iron ore duo, has been rejected by both boards and has received more attention from the regulators (in particular the Takeovers Panel) than it has from the owners of either target in the two months since the offer was made.