Wall St...

Wall St Journal

http://www.theaustralian.com.au/business/opinion/managing-uranium-production-most-sensitive-issue-for-bhp/story-e6frg9lx-1226055608853

No more laughing

WAY down at the seriously earthy end of the resources game, we have been following with some considerable amazement the progress of Wah Nam International and its slightly eccentric chase for a pair of maturing Pilbara iron ore juniors.

Wah Nam is a Hong Kong-based investor that owns 133 limousines used to support rental franchises at airports in Hong Kong, Shanghai and Beijing.

It owns also a very, very small copper project in China's Yunnan Province that measures output in the hundreds of tonnes annually as opposed to OD, which runs at about 200,000 tonnes when it hasn't broken its main shaft.

In short, Wah Nam is no one's idea of a mining house.

More than 90 per cent of its revenues and all its profits come from the limo business. And that is why there was a good deal of chuckling in November, when Wah Nam popped up with simultaneous, scrip-funded takeover offers for Brockman Resources and FerrAus.

Well, last night the laughing stopped because Wah Nam took control of Brockman, moving to just under 52 per cent of the company and therefore satisfying its minimum acceptance condition.

And the thing is, for all that the investment theory behind Wah Nam's play always looked good, no one in the local market (me included) ever actually believed it would work.

Wah Nam began preparing its pitch in 2009 by building a 20 per cent stake in Brockman Resources and then making a similar move to the takeover threshold in FerrAus. Given resource investment attract a higher multiple on the Hong Kong exchange, the multiplier effect was beneficial to Wah Nam's share price and left it better able to make its subsequent all-scrip offer for the Pilbara pair.

In other words, Wah Nam's play is a very effective use of the arbitrage between the Hong Kong and Australian valuations of Brockman and FerrAus.

And the idea driving the bid is that a consolidation of Pilbara juniors with material Joint Ore Reserves Committee-compliant minerals bases makes good sense and not just because in mining bigger is better.

The fact is that both Brockman and, to a greater degree, FerrAus are sitting on stranded assets.

Both own nice, almost medium-sized resources but neither of their foundation projects are worth anything until they can get their ore to customers.

Given they will have access to port capacity through their involvement in the North West Iron Ore Alliance's port project at Port Hedland, the real issue is getting themselves a train set, either through some kind of access arrangement with BHP or Fortescue, or by building a whole new Pilbara train set.

And that is where Wah Nam says it has a real advantage, given the merger it proposed gives it a resource base big enough to justify production of maybe 40 million tonnes a year and that is enough to make sense of about $2bn needed to invest to build a new train line.

The Wah Nam plan is apparently to build the resource base and with that done it can secure low-cost finance from Chinese banks (Wah Nam apparently reckons it can get its cash at something like Libor plus 1 per cent).

Now, Wah Nam's sudden rush to the first of its finish posts not only makes success in the FerrAus push more likely (FerrAus has said it would reconsider its negative recommendation on any significant change of circumstance) but it has triggered a bout of speculation about the mechanics by which it has developed such meaningful traction on the Brockman register.

Brockman has expressed "serious concerns with regard to the pattern of recent trading in Brockman shares and acceptances of Wah Nam's offer".

Brockman plainly still believes that undeclared associates of Wah Nam have positions on its register and subsequently accepted into the offer.

In February, Brockman took its concern to the Takeovers Panel in an attempt to earn an unacceptable circumstances order against Wah Nam.

But while the panel expressed "concern" over some "business, family and social connections between certain Brockman shareholders, and loans between some of them which funded the acquisition of Brockman shares" it was left unable to "draw the necessary inferences and find the alleged associations."

The orders were not made.

In a statement issued on Thursday, Brockman said it was "continuing to investigate these matters and the requirement for further regulatory action, including seeking an ASIC investigation".

The focus of Brockman's scepticism are the nine shareholders who delivered to Wah Nam acceptances worth 22.77 per cent of the company.

Brockman made the point on Thursday that the overwhelming majority of acceptance so far have originated in Hong Kong or Singapore.

And acceptances by Australian and New Zealand shareholders so far have accounted for significantly less than 1 per cent of the business.

The first thing to say here is that Brockman risked leaving itself in a delicate position indeed.

Success meant a return to the status quo and that meant it has raised public doubts over the credibility of 10 key Asian shareholders (Wah Nam included) that would have collectively, although separately, spoken for 45 per cent and more of the company.

Mind you, the answer to Brockman's continued probing on the issue of associated parties would appear to be well within Wah Nam's reach.

All it needs to do is provide some transparency on the nine investors that have accepted the offer and establish to everyone's satisfaction that they are in no way related, by family or financier, to Wah Nam, its management, board or senior shareholders.