The Christmas season is hardly the time to be doing major corporate deals, especially if they involve a hefty capital raising. With most market participants preferring to be jolly rather than desk bound, deals are often postponed until late January. But then again, WA’s iron ore sector is storming ahead with such a head of steam that finalising a major deal in the days leading up to Santa’s annual home visit can actually be done. If the smoke signals emanating from the Australasian Resources (ARH) camp are anything to go by, the Perth iron ore aspirant is close to having a deal stitched up with major shareholder Clive Palmer that will both enhance its resources base as well as restructure its share register. The company is remaining tight-lipped but sources say ARH has not given up hope of sealing the crucial deal by the end of this week. In a nutshell, the deal is about buying some more iron ore rights off Mr Palmer, the owner of a vast tract of Pilbara tenements near Cape Preston, and reimbursing him in a way that will achieve another key ARH aim: opening up its share register. As things stand, ARH has the right to mine one billion tonnes of iron ore at its Balmoral South project. The right covers tenements and State Agreements belonging to Mr Palmer’s private company, Mineralogy. In return for granting the right he has taken a 66.6 per cent stake in ARH. The deal was completed earlier this year and ARH’s managing director, Andy Caruso, has since set about advancing Balmoral South, which will involve sharing infrastructure (mainly the Cape Preston port) with neighbouring iron ore aspirant Citic Pacific. Citic, like ARH, has acquired iron ore rights off Mr Palmer but, given its status as a Chinese company, has paid the Queensland metals tycoon in cash rather than scrip. The latest Citic deal, to take its mining right from one billion tonnes to two billion tonnes of iron ore, was concluded last month and involved the Hong Kong-based group paying Mr Palmer $US200 million ($228 million) as well as promising future, undisclosed royalties. The deal also included an option for Citic to add further tonnes on a basis of $US200 million per billion tonnes. Despite its steady progress towards producing 12 million tonnes of ore a year from 2010, ARH is yet to fully reap market recognition. ARH has a resource of 1.1 billion tonnes of magnetite and probable ore reserves of 680 million tonnes (mt). It believes it will be able to recover at least 207mt, pointing to a 17-year mine life, while further drilling and the prospect of additional Clive Palmer rights should provide a significant boost. Based on ARH’s closing share price of $2.19, it is worth $965.6 million. By comparison, Mid-West players Murchison Metals ($1.4 billion) and takeover target Midwest Corp ($1.1 billion) have significantly smaller iron ore resources. What is holding back ARH’s share price is the fact that too little scrip is freely traded. In addition to Mr Palmer’s suffocating stake, Chinese steel group Shougang Corp owns 12.8 per cent. Those two players combined account for 79.4 per cent. The smart money is on ARH and its broker, Tricom Equities, arranging a deal whereby ARH will acquire an additional one billion tonnes off Mr Palmer through a mix of upfront payments and future royalties. The cash required to pay Mr Palmer would require a substantial equity raising — given that the last Citic deal was worth $US200 million, ARH may be looking at a similar transaction — that would have the added, if not principal, benefit of reducing Mr Palmer’s holding to, say, below the 50 per cent level and therefore increase the free float. It is likely Shougang would want to protect its holding and therefore would need to participate in the raising, while institutional demand is likely to be strong given interest in other iron ore stocks. No deal has yet been struck and as mentioned earlier, ARH is not commenting. But its ambitions are clear. And Mr Palmer is savvy enough to realise that a reduced holding in ARH could actually be worth more to him. [email protected]
Overlooked: ARH may be worth less than Mid-West players such as Murchison but it has more ore.
ARH Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
