From Friday's Herald:Miner bets on uncertain outcome * Malcolm...

From Friday's Herald:

Miner bets on uncertain outcome


* Malcolm Maiden


When BHP paid $2.4 billion for Utah's global mining assets in 1984, there was a sleeper in the portfolio called Escondida. The copper deposit in Chile's Atacama Desert was barely on the radar screen when BHP did the deal, but it proved up to be one of the world's great copper mines.

Now, the reaction of Indophil's shareholders to Xstrata's surprise $426 million takeover bid will depend on whether or not they believe that the Tampakan copper-gold project in the strife-prone Philippines island of Mindanao is another Escondida.

Indophil owns 34 per cent of Tampakan, and Xstrata 62.5 per cent after exercising an option last year for just $50 million.

Xstrata's entry price has no bearing on what Tampakan is actually worth, because the option was granted by Indophil to MIM before Xstrata took over MIM, and was a priced at pre-commodity boom levels of US60c a pound for copper. Copper, which hit $US4.26 a pound in mid-April, is about $US3.65 a pound.

Xstrata is now effectively offering $426 million or $1 cash per Indophil share for the remainder of the project, and the question is whether that also significantly undervalues Tampakan, as Indophil argues.

The Xstrata chief financial officer, Louis Irvine, acknowledged yesterday that Tampakan was a world-class deposit, and he should know. Xstrata has been a part-owner for a year, and is working on a feasibility study that some believe will significantly upgrade the project in the third quarter this year.

It is a small bid, with high complexity. Indophil itself is attempting a share-exchange acquisition of Robin Widdups's mining investment company, Lion Selection, which in turn owns 25.4 per cent of Indophil. Yesterday, however, Lion sold 17.8 per cent of Indophil to Xstrata to carry Xstrata to the 20 per cent takeover threshold, and said it would sell the balance in the absence of a higher counter-bid. Widdup may be criticised for putting Indophil into play, but he is getting more than four times his entry price, and in a side deal also raised $80 million by selling a 30 per cent interest in Newcrest Mining's Cracow gold mine to Beadell Resources.

The fate of his company and Indophil's remain interwoven, with the sale of Indophil shares to Xstrata requiring Lion shareholder approval, and Xstrata's bid relying on Indophil's takeover of Lion not occurring.

Much rests with a few large Indophil shareholders, including Boston's Wellington Asset Management (9.6 per cent), JP Morgan (8.9 per cent) and Hong Kong's Ward Ferry (5 per cent) - and their decision will probably depend on what they make of the Philippines copper-gold prospect.

Tampakan is promising because it is big, and potentially highly profitable. It is a 2 billion tonne-plus resource, and pre-feasibility studies have already sketched a mine that could produce about 210,000 tonnes of copper and 218,000 ounces of gold a year, at a production cost of about $US7 a tonne.

Let's put aside rumours that the feasibility study will significantly expand the project, and simply load some copper and gold prices into the pre-feasibility production scenario. At a copper price of $US3 a pound instead of $US3.65 as it is now and a gold price of $US750 an ounce against $US866 an ounce, Tampakan can generate an annual surplus of $US655 million a year, $US213 million or 60c Australian a share of which would be Indophil's. If it were just up to that, Xstrata's offer of $1 a share would be not just cheap but ludicrous.

But there are caveats. This a very big project. It won't be complete until 2012 at the earliest, and mine development prices are steadily rising as companies scramble to find materials and workers in the boom. The final development cost will be higher, perhaps significantly so, and Indophil has only $100 million at hand. It would get another $200 million so if it took over Lion, but that bid is now under a cloud.

There's also country risk, because Tampakan is not only in the Philippines, but in Mindanao. Tampakan is tucked way into the safest part of the island, on the southern tip - but safe is a relative term. The project was attacked by Communist rebels on New Year's Day, and they have vowed to halt the development.

It's a choice of the bird in the hand, or a longer, riskier, potentially more rewarding ride. Xstrata is betting Indophil's shareholders will opt for the less exciting but more certain option.

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It is my opinion that Xstrata's offer will not be successful at this price. I note that when Lion Selection agreed to sell their stake, they agreed on the basis that they get any increased offer that Xstrata may make.