Hi ZPer promise earlier I have just completed and sent off the...

Hi Z

Per promise earlier I have just completed and sent off the following email to Michael Woodbourne (representing BON) and Andrew Drummond (to represent MAK). Be warned, it's long and hopefully stirs a bit. :)

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Dear Sirs
I am writing in response to MAK’s announced takeover offer for BON. Up front I declare my interest in 400,000 BON shares. I also hold UCL shares.

I appreciate the potential synergies of the offer but will be voting against it on the terms that were announced today, namely that MAK would acquire BON on an, all scrip, 1 for 10 shares basis. This is around AUD $7.5 million on today’s trading or approximately the market cap of the company. This offer is inadequate. It is also my opinion that it is detrimental for BON in the short to medium term for the following reasons. (Note these are necessarily general due to my non geological background, the limitations of the information available to me as an investor and the extent of development of both company’s phosphate resources).

i. The offer undervalues the potential contribution of BON’s phosphate resource base to MAK’s resource bank

Work done to date has already proven 196.1MT at 15.8% P2O5 which will apparently readily beneficiate to over 30% P2O5. (That’s 42% of the 461MT MAK has inferred at Wonarah).

This represents a relatively small portion of the resource base across BON’s tenements which apparently, going by BON announcements, appear likely to have good continuity across the historically known sedimentation zones

It is an even smaller percentage of the potential combined global resource in the JV with UCL who are bring the better quality resource to the JV, both in degree of sedimentation and grade.

Taking, on a good faith basis, the statements to date of both BON and UCL there seems a reasonable prospect that the JV will in time prove up a total resource base in the billions of tonnes. It seems inevitable the JV will very soon demonstrate a resource that will be massively higher than 1:10 of the resource base that MAK would have as a result of acquiring BON. This will still be the case even if working on BON’s 42.5% of the JV with UCL. How can 1 share for 10 possibly be seen to be a fair offer on this basis?

ii. It undervalues the potential contribution of BON’s resource base to MAK’s future cash flow.

Both BON and MAK have made public statements about likely OPEX costs for their respective resources. If we take them both on a good faith basis we see that BON’s resource basis is projected to have an OPEX comfortably sub US $100/t whereas MAK’s is apparently going to be somewhere around US $150/t. Those numbers speak for themselves.

It is unclear what likely capex would be for BON’s projects however, given what we have been told of the apparent simplicity of dredging, beneficiating etc the phosphate sediment, it seems unlikely to be significantly adverse in comparison to the capex to mine rock phosphate under 20-30m of ground cover in a remote location.

Neither company’s phosphate projects are proven viable at this stage however assuming both are and both are targeting minimum 3 mtpa production it seems obvious to me that the Namibian resource base is worth much more than 1:10 of future MAK cash flow.

MAK could potentially pocket over $2 million cash in acquiring BON making the effective cash equivalent cost on today’s prices $5.5 million or less

Again how can 1 share for 10 be considered a fair offer?

iii. It underprices BON on the basis of recent market price

The offer quotes a 30 day vwap. This is convenient twaddle given that the BON share price was as high as 8.5 cents only about 6 weeks ago and has spent a decent amount of time above 5 cents in the last 2-3 months. Admittedly this was partly due to some general positive market sentiment in January but also linked with the developing good news from the Namibian JV. The last month of poor market conditions, which constitutes the 30 day vwap, are an unfair basis for price comparison and the 14% premium quoted is meaningless – even insulting.

iv. The nature of the offer is potentially detrimental for BON in the near to medium term

The offer, being all scrip, binds BON’s share price to MAK’s price performance.

MAK is currently in an inexorable long term downtrend. In the absence of some extraordinary news or event to reverse this, it appears to not have support until the 20-30 cent range. This price level could see BON trade as low as 2 cents when it has had support in the last few months in the high 3 to low 4 cent range – a potential 50% depreciation in market capitalisation in a takeover situation. I think you would agree this is a quite extraordinary possibility even in the current market conditions.

The link with MAK prevents the market from giving good value to the news flow that will come out of the Namibian work in the next few months. Given that MAK don’t see it settling until May this likely means several months of enforced lacklustre performance for BON. This is great for MAK to steal the company at a low price but BON’s only chance of serious gain in that time will be if MAK enjoys significant gain. BON will not be able to trade as the technically independent company that it still is.

v. The offer might jeopardise the JV with UCL

Without being privy to the full details of the JV, as a UCL shareholder as well it disturbs me to read comments today, from Andrew Drummond, that MAK’s intention would apparently be to put the Namibian tenements on the backburner until they get Wonarah up and running sometime next year. This would be a disaster for UCL and I would hope that they would be very vocal about that.

If the JV falls over as a result of this takeover then BON would obviously lose access to the Sandpiper tenements which bring the greatest value to the JV.

vi. The offer forces BON to waste cash getting an independent analysis done.

An unfortunate but necessary expense now given the conflicted interest of 60% of the board

To sum up, I can find no way that the 1:10 offer adequately reflects the value that acquiring BON would bring to MAK. My honest opinion is that on genuine merit the BON phosphate resource base is at least equivalent to MAK’s, probably even better and I see a case where 1:1 would be a justifiable offer. The only difference I can see that puts MAK in the dominant position is that MAK raised funds when conditions were better and a bit more is currently known about Wonarah and Arruwarra.

It disappoints me that the directors common to both companies appear to have allowed their conflicting interests to override the obvious here to potential detriment of BON shareholders. I realise that the common directors may have greater interest in MAK than BON. If so they benefit personally more by MAK acquiring BON cheaply however this interest is not shared with myself or many other BON shareholders I have been discussing this with today. None of us are inherently opposed to being taken over, indeed many see the potential benefits of merger with MAK, however we all object to the price. I suspect many, like me, would not support the offer at current price levels.

If I was a MAK shareholder I would be applauding the directors for going in hard and low to acquire a great project at the bottom of the market for no cash. That is their responsibility but there has never been any stage that BON directors have indicated that there would be good reason at this time (ie desperate need) that BON shareholders should roll over and welcome a hostile and unfair offer.

If MAK would like a win-win outcome with all of BON’s shareholders they must either get their own share price up to a level that 1 for 10 represents some fair value for BON holders or they need to improve the offer significantly. I would suggest either significantly approving the ratio or introducing a decent cash component. The 8.5 cent range that BON reached in January should be MAK’s starting point in revising their offer. I hope that the independent BON directors agitate hard for a better outcome for BON shareholders.