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When China’s newly installed president Xi Jinping visited the Democratic Republic of Congo in March, nobody analysed the official statements from the trip more carefully than Nick Taylor, founder of one of the largest hedge funds in Asia. He was particularly heartened by a statement pledging joint co-operation between the two countries.
Mr Taylor was looking for evidence of a cordial relationship because Senrigan, his hedge fund, had invested heavily in mining company Sundance Resources, betting that it would be taken over by Sichuan Hanlong, a private Chinese mining company.
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Sundance, which is listed in Australia, has just one asset – a valuable iron ore project called Mbalam that straddles the border between the Democratic Republic of Congo and Cameroon. At the time of Mr Xi’s visit, Hanlong’s bid for Sundance had already fallen into serious difficulties, but friendly political ties between the two governments made it more likely that it might still succeed, or that another Chinese acquirer would step in. That would mean Mr Taylor’s bet, which has so far proved disastrous, on the deal might pay off after all.
Mr Taylor originally put 7 per cent of his fund in Sundance in the third quarter of 2011, just weeks after Hanlong took a 16 per cent stake and said that it planned to bid for the whole company in a deal valued at about A$1.4bn
But for the past 18 months, Sundance’s share price and Mr Taylor’s fund have been on a rollercoaster ride. Analysts say that Mr Taylor’s experience shows just how perilous it can be to invest in a transaction involving a Chinese entity.
In the six months after taking his initial stake, Mr Taylor continued to buy shares. He bought while the two parties continued talking, and he bought more once Beijing appeared to give its blessing to the deal. By the second quarter of 2012, Mr Taylor had 15 per cent of his fund invested in Sundance, the maximum permitted by his fund’s rules. Today he owns about 10 per cent of Sundance’s outstanding shares, down from about 15 per cent at the peak.
Then, in August, Hanlong was forced – at the behest of Chinese regulators – to cut the price it was offering for Sundance from the 57 cents the two sides had previously agreed to 45 cents a share. The price cut reflected Beijing’s paranoia that companies had been paying too much for overseas acquisitions. The market promptly turned on Sundance and Mr Taylor.
On March 20, Sundance’s shares – which were trading down at 21 cents – were suspended because Hanlong missed one of its payments for the takeover, suggesting that financing was in trouble and raising the risk that the takeover would not proceed. On April 8, Sundance called off the takeover and is now looking for another Chinese suitor.
The shares, which resumed trading last week, have fallen a further 50 per cent and are now cheaper than in 2010, when the entire board was killed in an aircraft crash. “And at that point they didn’t have mining permits and their resources have been upgraded five times since then, and the iron ore price is currently higher,” says a frustrated Mr Taylor.
Analysts still believe that, for a mix of political and economic reasons, a Chinese takeover is still the most likely outcome. “There is still a big drive by the Chinese to say the region is theirs,” says Edward Mason, mining analyst for Renaissance Capital in London.
In letter to investors in the second quarter of 2012, Mr Taylor wrote: “Worryingly, some unexpected parties appeared to have very specific knowledge of certain investments, the details of which have only been shared with our counterparties and investors.” He says that he learnt about this from his investors and brokers.
In other words, there were rumours that Mr Taylor was planning to sell off his stake in Sundance, depressing the company’s share price further and creating a vicious circle that made it hard for him to get out. He knew he had to take action by communicating to the market that he was not a distressed seller to remove the perception of an overhang.
“You did not have to go far to find people who were talking about him since he was such a tall poppy,” says Alan McChesney, a fund manager with New Zealand Asset Management who invests in Senrigan’s funds. “Everyone was taking the other side. All his competitors were calling us. The knives were out.”
After a lengthy debate with his board, Mr Taylor decided to establish a separate vehicle to hold the Sundance shares. He says that he was trying to balance the needs of those who wanted out and those who wished to stay in. Investors who wanted to bail out from Senrigan would get their money for all the holdings except for the Sundance stake, which Mr Taylor would sell down over time.
Mr Taylor had Blackstone’s support, which provided critical assurances for other investors such as Mr McChesney. “Part of the reason we invested with him was because in Nick we had a manager who felt obliged to see it through,” says Tom Hill, the executive in charge of Blackstone’s alternative investment platform.
Mr Taylor plans to hold on to his Sundance shares, betting that the deal will go to another Chinese bidder, possibly Wuhan Iron & Steel or Hebei Iron & Steel, given how attractive he believes the project is.
“It is clear that the Sundance asset needs to be developed by a steel mine that can execute,” says Mr Mason of Renaissance Capital. “Hanglong was never going to be the one that could execute.”
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