Very interesting article that makes a few pertinent points.1. We...

Very interesting article that makes a few pertinent points.
1. We need to make sure that we vote.
2. Ivanhoe's desire to distribute all the proceeds could be very detrimental to the future of EXS, and make it very vulnerable.

May 09, 2011

Exco Is Just One Simple Shareholder Vote Away From Closing The A$175 Million Sale Of The Cloncurry Asset To Xstrata

By Alastair Ford

Just how complicated is voting? The answer, it seems, is that it?s as complicated or as simple as you want it to be. The electorate in the UK has just decisively rejected a proposal to change the voting system from the current first-past the post to something known as Alternative Vote, or AV. The only other country of note that uses AV is Australia, a fact that was trotted out by those against making a change as an argument in itself. Whether or not they were taking into account the anti-mining tax policies of the recently, but not easily, elected Julia Gillard is perhaps stretching the point. But as Liberal Democrat voters in the UK have rapidly learned, and as miners in Australia know only too well, a voting system that can?t deliver an overall winner tends to result in broken promises.

But that shouldn?t be the case with the upcoming vote that?s about to radically transform the fortunes of Australian-listed copper and gold company Exco. It doesn?t seem too long ago that Exco?s Michael Anderson was railing against the tax plans of Ms Gillard after they?d de-railed a long, and hard won recovery in the Exco share price. But that was in the wake of the GFC. There?s been much water under the bridge in Australian politics since then, and in terms of the development of Exco it?s almost a lifetime away. Even so, it?s now Michael who finds himself tasked with explaining a voting system, and one that?s markedly less complicated than AV.

Exco recently announced that it will sell its Cloncurry copper project in Queensland to Xstrata, which will use the ore to feed the Ernest Henry mine just across the way. Well and good, and the A$175 million in cash that should shortly be coming into the company?s coffers is more than welcome, even if some analysts did give Cloncurry a higher NPV in their spreadsheets.

But somewhat unexpectedly, given that Exco had said all along that a sale to Xstrata was the preferred option, Michael now finds himself in the position of having to sell the deal. That?s because major investor Ivanhoe, which was intricately involved in a potential alternative bid which never materialised, has expressed disquiet with the terms. There?ll be a shareholder vote on the sale, and although Michael believes he?s got the necessary support, he?s not taking any chances, given that Ivanhoe?s 22.8 per cent might vote no. And the waters have been further muddied by an apparent wilful misunderstanding on the part of the market as to exactly what percentage of shareholder support is required. To put it in a nutshell: the answer is fifty per cent on a first past the post basis.

?This is a simple, normal resolution?, says Michael. ?All it requires is more than 50 per cent of those voting? ? just like a constituency election in the UK?s first past the post system, a system which is sometimes subject to criticism because a low turnout may mean that a majority have not expressed a view in favour of the eventual outcome. And a low turnout is one possible danger that Exco faces, hence Michael has moved into full marketing mode in Perth in recent days to make sure that investors that are in favour do actually cast their votes.

There?s every incentive to do so, given that A$100 million of the A$175 million will be returned directly to shareholders themselves. Ivanhoe wants it all returned, but it?s not entirely clear why. The idea that the mighty Ivanhoe is short of funds is clearly ludicrous. On the other hand, the idea that a company that?s just completed the sale of a major asset might want to keep a few dollars aside to develop further projects seems perfectly reasonable. In the case of Exco the Hazel Creek copper project, which has long been starved of attention, is waiting in the wings, and company geologists are already working up plenty of enthusiasm for exploration programmes. Mind you, these programmes aren?t exactly hanging on the outcome of the shareholder vote, since Exco has plenty of cash coming in from its White Dam gold project. There was A$35 million in the bank at the end of the last quarter, and more coming in all the time. So, one way or another the future of Exco will be continuing production from White Dam, exploration and development work at Hazel Creek, and possibly work on a new project yet to be acquired.

In the short-term, though, before Michael gets to take a few days off and turn his attention to golf and one or two other things non-mining, there?s the shareholder vote to get through. This is due on 5th June. Michael?s pretty confident the deal will get the green light, but he?s leaving nothing to chance. Hence a series of meetings and presentations between now and then, at which he will lay out the main reasons in favour. Underlying it all is his view about what the name of the game really is. ?It?s all about unlocking value from assets?, he says. ?We?ve got a book value on Cloncurry of A$23 million. On that basis the deal offers eight and a half times return on equity.? What?s more, he also points out that additional funds would be required for any standalone development, with all the implications for dilution that that would imply. All things considered, he says, ?it?s a very favourable, risk-free outcome, and a significant realisation of value?. And what about Ivanhoe? ?There are three outcomes there. They can make their own bid. They could exit their position, and we?re all big enough and ugly enough to deal with that, especially since there?s no shortage of people who want to own our stock. Or the other possibility is that we reconcile.?

At the moment the smart money would be on an independent exit for Ivanhoe, but never let it be said that a good spat got in the way of business. A closer look at Hazel Creek, or the emergence of a counter-bid could change the position completely. Michael?s long had channels open with various Chinese parties, and the emergence of the offer from Xstrata could yet flush out further interest from that quarter. And the Chinese, famously, are far less interested in voting on anything. Instead, they let their money do the talking. It?ll be a fascinating few weeks.