I am a long-suffering shareholder, although clearly not as long-suffering as some of the people on this post. Fortunately, I will be back above entry cost as a result of the offer from Shenghe, but even if I wasn't, I would seriously consider accepting it. Let me take you through my reasoning:
- Firstly, I have read time and time again how Shenghe paid 99c for their initial stake and so are getting the rest of the company for a steal now. However, when Shenghe bought its stake NdPr prices were nearly 3x what they are today. Nobody in rare earths processing is making money at today's prices and our Ngualla project is marginal at best on today's pricing. And I don't see that changing anytime soon. The Chinese control pricing and are happy to keep rare earths prices low because rare earths are a cost input into where they make real money, batteries, EVs, etc. The pricing environment has changed for the worse since Shenghe bought in first time around and anybody who thinks Shenghe would pay the same price now is smoking something
- A corollary of this is that with prices being where they are, it is a very difficult project to develop. Financing of a greenfields project in Africa is hard enough, but try one that is forecast to lose money from day one - it's not going to happen!
- The company has had Macquarie Bank advising it for years and has been scouring around for other buyers/developers for a long time - groups like Mountain Pass, Lynas, Andrew Forrest, Gina etc. Mountain Pass remain close to Shenghe. The Japanese won't touch it given the Chinese/African overlay and Japanese aren't really developers of greenfields mining projects anyway. Our Chairman, Russell Scrimshaw, is well connected in Perth and was #2 in Fortescue so I'm sure the likes of Forrest and Gina have been approached and taken through the story. And for whatever reason, nobody is showing interest. Africa scares off a lot of knowledgeable investors (I know I will think twice about investing in an African stock in the future!). Lynas and Iluka have no experience with processing bastnaesite so taking on a bastnaesite project in Africa when prices are at record lows is hardly likely to excite them. So I would take the company agreeing to the scheme with Shenghe as a signal that other investors simply are not interested. Which is a real issue if the scheme falls over because, you might feel good about rejecting the scheme, but I wonder how long that will last if the share price plummets back to where it was before
- If the scheme falls over, there is no Plan B and the company simply cannot develop this project on its own. Shenghe will still be a c20% owner and this, as well as their influence in Tanzania, is likely to scare off other potential investors. And then there is always the very real risk that the Tanzanian Government gets pissed off with how things have played out and finds a reason to take the project off PEK - this is Africa, after all! And who knows, we may then find that Shenghe ends up with the project anyway and haven't had to pay for it! Of course, this is just one hypothetical worst case - but these things happen in Africa time and time again
- Lastly, I don't think FIRB gives a damn around PEK. It is an African resource, not an Australian one. Our Government tries to avoid conflict with China on Australian issues as it is, they really aren't going to take on a fight with China over a resource in Africa
So when I take in all of the above, I think agreeing to the scheme is a no-brainer. I acknowledge that I will be back in the black as a result of the offer, but it does not really compensate me for tying up my funds in the stock for a few years and having nothing to show for it. But even if I was making a loss, it is better to take this and get something back than to reject the offer and see the stock price plummet again...
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