From Russia with love: Cambrian sells its Mount Gibson...

From Russia with love: Cambrian sells its Mount Gibson stake
Russia's Gallagher Group, controlled by Alisher Usmanov and Vasily Anisimov, has extensive steel interests, writes Bryan Frith
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November 14, 2006
JOHN Byrne's Cambrian Mining has produced yet another twist in the protracted takeover contest between Mt Gibson Iron and its reluctant target, Aztec Resources.
As foreshadowed in this column, Cambrian has agreed to sell its shareholding in Mt Gibson, which currently stands at 19.9 per cent, but will dilute to 14 per cent if Mt Gibson obtains 100 per cent of Aztec. The sale is still subject to FIRB (Foreign Investment Review Board) approval.
Cambrian did not disclose the buyer but it is believed to be Russia's Gallagher Group, which has extensive interests in iron ore and steel.
Gallagher is controlled by Alisher Usmanov and Vasily Anisimov.
It owns Mikhailovsky GOK, Russia's second-largest iron ore producer, Ural Steel, the leading steel producer and Moldova Steelworks. It also has significant interests (more than 30 per cent) in Lebedinsky GOK, Russia's largest iron ore producer, Oskolovsky Electric Metallurgy and Tulachermet, Russia's leading pig iron importer.
It also owns Coal Co, which is a global investor in aluminium and real estate (largely in the US).
Gallagher for some time has had a strategy of growing its iron ore interests outside Russia. Moreover, Usmanov is said to believe the commodity "supercycle" is still in its early stages, and has some way to go.
Mt Gibson apparently considers that Gallagher will be a supportive shareholder.
The Cambrian stake is being sold at 90c a share - a premium of 7.5c a share, or 8.3 per cent to Friday's close for Mt Gibson of 82.5c. Mt Gibson's share price closed 2.5c higher at 85c, ahead of news of the Cambrian transaction.
Moreover, if the talk is right, Gallagher is also seeking to buy Australian Royalties Corp's 6.6 per cent shareholding in Aztec, which would translate to 4.9 per cent of Mt Gibson if it was accepted into the bid.
That would take Gallagher to almost 24 per cent of Mt Gibson, above the 20 per cent threshold at which parties have to make a takeover offer to all shareholders. However, the Corporations Act provides an exemption if the threshold is exceeded through acceptances to a takeover offer.
Moreover, if Mt Gibson ultimately acquires full ownership of Aztec, ARC's stake would reduce to about 3.4 per cent and that in turn would reduce Gallagher's stake to 17.5 per cent, taking it below the bid threshold.
The sale delivers $98.8 million to Cambrian and represents a handy capital profit of $36.4 million. The funds will be used to develop other opportunities for Cambrian, particularly its coking coal interests in British Columbia and Virginia in the US.
It comes only two weeks after the Chinese trader Shanghai Merchants, in which China's third-largest steel producer, Shougang Steel has a 24 per cent minority interest, snapped up 10.6 per cent and at the same time waded into the sharemarket and picked up 6.6 per cent of Aztec.
Shanghai paid 85c a share for its stake in Mt Gibson, whose shares were at the time selling at only 70.5c on the sharemarket, although they were selling at 79c when Mt Gibson first announced its one for three scrip offer in late July.
That both overseas groups were prepared to pay above market for their stakes is a strong endorsement of the strategy behind Mt Gibson's bid - to consolidate the smaller iron ore hopefuls to create a genuine world-scale independent producer, able to compete with the iron majors.
The price paid by Gallagher values the Aztec bid at 30c a share, which is a premium of more than 15 per cent to the 26c a share at which the bid was valued when it was launched more than three months ago.
To date the Aztec board has steadfastly recommended rejection, on the grounds that the offer undervalues the target company.
Mt Gibson started in a strong position, by securing Cambrian's 31 per cent shareholding in Aztec, but the target company has a large shareholding base and those holders have largely followed the board's advice.
Mt Gibson had expected acceptances to take it above 50 per cent last week, giving it majority ownership and outright control, but it fell short at 41 per cent.
Mt Gibson on Friday sought to turn up the pressure by extending its offer to November 24 and stating that it would not be further extended unless it held more than 50 per cent of Aztec by that deadline. Shanghai Merchants and ARC would know that if the bid was to go away Aztec's share price would be likely to fall, perhaps significantly. Moreover, Mt Gibson would probably already have the numbers to secure control of the Aztec board and management.
Aztec can see the writing is on the wall and it now wants to negotiate with Mt Gibson in an attempt to extract a face-saving bid sweetener which can enable it to give a board recommendation.
Shanghai Merchants, which invested in Mt Gibson because it believes in the consolidation strategy, had been supporting Aztec's eleventh-hour attempts to engage with Mt Gibson, presumably because it considers it is preferable that Mt Gibson ends up with 100 per cent of Aztec, and the only way that will be achieved is through a board recommendation. That despite the fact that an increase in the scrip offer terms would be dilutive to Shanghai Merchants as a Mt Gibson shareholder.
But Shanghai Merchant's position has been weakened by the appearance of Gallagher, particularly if the Russian group manages to pick up the ARC stake. That would give it 17.5 per cent of Mt Gibson, assuming full ownership of Aztec.
Shanghai's 10.6 per cent stake in Aztec, has already been diluted to 8.8 per cent by further acceptances to the bid, and it would dilute to 6.4 per cent on 100 per cent ownership of Aztec. It's existing Aztec holding would deliver it a further 3.2 per cent of Mt Gibson, taking it to 9.6 per cent.
But if Shanghai Merchants, rather than Gallagher, could pick up the ARC stake it would have 13 per cent of Mt Gibson, compared to 14 per cent for the Russian; so the two groups would have countervailing holdings.
It remains to be seen whether, in such circumstances, either or both, would seek to improve their position by buying Aztec shares to accept into the Mt Gibson offer.
It's thought the Russian group is prepared to pay ARC 30c a share, or $23.3 million, for its Aztec holding, which is the equivalent of the price it is paying for Cambrian's Mt Gibson stake. If that's right, it may be favoured to secure the stake.
ARC's Aztec stake was issued as consideration for the purchase of a royalty which ARC held over production from Aztec's proposed Koolan Island iron ore project, and an option to take back the tenements it contributed to the project, for a peppercorn payment of $1, if Aztec failed to mine and sip at least 500,000 tonnes of iron ore by June 15 next year - a deadline it was unlikely to be able to meet.
Aztec issued the shares at 22.5c each, which valued the deal at $17.5 million, which represented more than 1.5c an Aztec share. It's possible that if Mt Gibson secures more than 50 per cent of Aztec, it will be prepared to sweeten the offer in order to obtain certainty.
But Mt Gibson has the stronger hand and any increase is likely to be a token amount - and it would no doubt take into account the payment which went to ARC at the expense

plenty of news this morning in the rags.

my opinuion only DYOR