Forsys and GFI Settle amid Wikileaks Intrigue

8 03 2011

In one of my very first entries, I discussed the failed acquisition of Forsys, a Canadian junior with a fully-permitted uranium project in Namibia, by Georges Forest International (GFI), a Belgian firm with questionable business practices. After being temporarily halted by Industry Canada, the transaction was called off due to GFI’s failure to transfer the funds. I speculated on the cause in a subsequent entry.

Both companies have since attempted to collect funds from each other (either as damages or break fee). A settlement has been reached. Forsys will not have to pay damages to GFI although it is unknown, yet likely that it will receive compensation from the Belgian firm. This is still no happy ending for Forsys whose share price is standing below half of the value envisioned by the 2009 deal.

According to a diplomatic cable made available to Wikileaks, Industry Canada halted the transaction under the national security provisions of the Investment Canada Act in 2009. Washington and Ottawa worried that GFI would provide uranium to Iran if it secured Forsys’ mine in Namibia. GFI is alleged to have held discussions with Iranian officials regarding the supply of uranium.


Flash News: Major Events

2 02 2011

Less than a year after the Upper Big Branch accident, Massey Energy is set to be acquired by Alpha Natural Resources. Mineweb

Rejoice! The 18-month strike at Vale’s Voisey’s Bay operations is over. Mineweb

The Russians were right. Guinea is seeking to double its share in mining projects to bring it to at least 30 per cent. It is however taking 20% in Rio Tinto, Chinalco and the IFC’s Simandou iron ore project. Mining Weekly

Mongolia is implementing a law regulating nuclear energy. Uranium exploration will begin in 2012 and according to the Prime Minister will be the most ambitious mining venture after the Oyu Tolgoi and Tavan Tolgoi projects. Talking about the later, the bid to develop about half of this coking coal deposit recently wrapped up – 15 bidders have shown interest.

The European Union still très féroce on securing rare earths. Reuters

GM and Stillwater Mining Co. It’s Back on!

30 12 2010

After abruptly dropping a decade-long business relationship with Stillwater Mining Co, the only U.S. platinum group metal (PGM) miner, as part of its bankruptcy restructuring in July 2009, General Motors has renewed its relationship with its palladium supplier. You may remember the controversy sparked by GM’s petition to a federal bankruptcy court to reject the then existing agreement with Stillwater and retain those in effect with Russian and South African suppliers.

As per the recently concluded deal, Stillwater Mining Co will provide palladium to GM for three years based on the market average price at the time of sale. The new agreement has removed the floor and ceiling prices features of the previous contracts. Stillwater Mining Co is also in discussion other automakers including Ford whose current supply agreement will soon be expiring.

As a result of the recovery in the auto sector and increased investor interest in PGMs, palladium performed well in 2010. These factors should keep supporting prices in 2011 as it is suspected that investment demand (such as demand from exchange-traded funds) could push the metal into a supply deficit in the coming year. Moreover, some analysts predict a 15% increase in gross demand. For Q1, Société Générale predicted that palladium would trade at $800 an ounce in average but warned that a correction could be expected as it perceived the metal has over bought.

La chasse est ouverte. M&A season is just starting.

30 09 2010

Hunting Season


 On August 18th, BHP Billiton announced its intent to proceed with the hostile acquisition of PotashCorp as discussions earlier in August regarding a tie-up in more consensual terms have been inconclusive. BHP Billiton is thus making an all cash offer of $130 a share to PotashCorp, assumed to be a premium of 20 per cent. The bid totals roughly $40 billion.  PotashCorp considers this deal: “wholly inadequate and is not in the best interests of the company” and has already filed a lawsuit which BHP quickly dismissed as foolish but was nevertheless allowed to proceed by a U.S federal judge.

To go through with the transaction, BHP would have to obtain approval of Canadian and US competition authorities as well as to be granted authorization under the Investment Canada Act. I’d like to focus on the latter, as this time could be different.

Investment Canada Act: Net Benefits, National Security and Political Mood of the Day.

Under the Investment Canada Act, an enterprise wishing to acquire a Canadian firm will have to go through a review process to prove that its investment is of benefit to Canada’s economy (and security!), usually by entering into a confidential agreement in which it commits itself to continuity by way of maintaining a certain workforce level, investment levels and training programmes. Of the over 1500 reviews undertaken under the Investment Canada Act since 1985, only one proposal has been disallowed.

In this process, the Canadian firm being acquired, government agencies and provinces likely to be affected may submit documentation to inform the review.

Federal Government

As mentioned above, the federal government has a habit of not interfering with foreign direct investment although these reviews have usually taken place in relatively good economic periods where benefits can more easily be foreseen. Yet since 2008, the Government has had to deal with firms’ inability to stick to their commitments under the Act.

The most prominent example of this is US Steel, which is been sued by the government for not respecting the terms of the agreement it entered into when acquiring Stelco. One might argue that with the “restructuring” and its long labour conflict, Vale Inco has de justesse avoided legal troubles.

Considering these unfortunate experiences, the variable speed economic recovery and fears that super majors may be on a spending spree that they later on find not to be worth it, I am guessing that there is an imperative to be extra cautious with upcoming reviews. BHP has hired a team a top lobbyists to make representations in Ottawa.

Provincial Government

Saskatchewan has an important stake in the well-being of the potash industry. The premier met with BHP Billiton, on Sept 20th, and concluded that “My views may change … but as of today, I don’t know how we are better off if this takeover or any other subsequent change happens,” Mr. Wall told reporters. “I don’t see how Saskatchewan or Canada is better of.” Of benefit does not necessarily mean better of. The intention of BHP to pull out of Canpotex may have something to do with the premier’s unease as it could lower potash prices and in turn depress its own royalty revenue.

Potash Corp and Shareholders

PotashCorp thinks 130$ a share undervalues the company. Shareholders believe that too and are probably the fiercest opponents to the transaction. Stephen Jarilowsky from Jarilowsky Fraser referred that at some point the stock was worth 200$ (but that was in June 2008 at the peak of the commodities boom). I guess many shareholders are nostalgic of the old normal.

Potash Corp definitely wants to provide shareholder with other and better alternatives to BHP Billiton. Some options include putting together a management buyout with backing from China, pension funds, sovereign wealth funds and possibly Mosaic.

Deal Imploding?

18 05 2010

It has been rumoured that in the wake of rising iron ore prices, delays in getting regulatory approvals and uncertainties related to the Australian super-tax, the Pilbara joint venture between Rio Tinto and BHP Billiton may be called off. The two companies have however publicly reiterated their commitment to the transaction yesterday although BHP Billiton said it would likely re-evaluate the deal if no agreement is reached by year-end.

The deal may no longer represent good value.

There is growing scepticism in analyst-circles on whether this deal will materialize. In an article published on April 14th, The Age reported that Rio Tinto shareholders were tipped to ditch the deal with BHP due to rising iron ore prices. In this context, the need to share the costs is less important, even though the estimated US $10 billion of savings arising from the transaction still appears significant despite savings.

Moreover, the compensation payment of US $5.8 billion granted to Rio Tinto in consideration of the more important quantity of iron ore contributed to the venture (about 5%) was established before iron ore prices increased, which is short-changing Rio Tinto according to analysts. This compensation payment could also be reduced as delays have allowed BHP Billiton to expand its production thus reducing the amount (to US $3.6 billion some predict) that it has to pay to make the joint venture a 50-50 undertaking. However, unless the payment is increased to at least US $6.4 billion, shareholders would likely vote down the deal, it has been reported by Australian Mining.

As you remember, initial discussions of a merger took place at a time when Rio Tinto was actively seeking to reduce the debt it incurred to make its cash acquisition of Alcan and shortly after the collapse of the Chinalco deal in the spring of 2009. Subsequently to the successful rights issue, improving economic environment and the establishment of a new pricing system more favourable to iron ore miners, the merger may not longer be a necessity for Rio Tinto.

Prospects for near-term progress (or lack thereof)

The deal still awaits approval of competition authorities in Australia, Europe, Japan and Korea. If no agreement is made by year-end Rio Tinto may be allowed to walk away without penalty, whereas if either party does so now, it will incur a US $275 million fee. Negotiations will drag…

LME Courting the Baltic Exchange

23 02 2010

On Friday the London Metal Exchange (LME) publish a news release on its web site about the possibility of forming a joint venture with the Baltic Exchange to bring the trading of Foreign Freight Agreements on a regulated exchange and move them from their telephone/over-the-counter basis to electronic trading. That sounds like progress yet it does not seem to generate much of a buy in outside the LME.

Foreign Freight Agreements are financial instruments for trading in the future prices of carrying commodities at sea. They are derivatives, nothing more. Their value is derived from the freight rate for a specific physical trade route which is assessed by the Baltic Exchange Indices daily. They are used to hedge against the fluctuations in freight rates. Taking this segment on board looks like a logical extension to LME warehousing.

The LME initiative, very similar to the one taken a year ago, is still not attracting the favour of the Baltic Exchange’s members who feared a possible loss of business. For now, the LME’s move is seen largely as some kind of joint venture participation awkwardly made through the press. A spokesman for the Baltic Exchange said that “”Naturally [the offer] will be carefully considered and in due course our response will be conveyed directly to the LME”. Many brokers have however already voiced their reluctance towards a tie up. Most eloquently, Freight Investor Services said giving the LME control would be “like putting the drunks in charge of the bar”. Cheers!

Providing an official trading forum for the over-the-counter Foreign Freight Agreements would provide greater transparency and liquidity to the market. LME chairman Donald Brydon estimated in a letter sent to the Baltic Exchange that LME projected FFA trading volumes could grow around 5.5 times “above the volumes projected for the market if it continues unchanged”.

KNOC buys Harvest Energy Trust

28 10 2009

Well, it has been a while since I last reported on done deals. The last time that I actually wrote about a transaction, it was about the Forsys deal which took an unfortunate turn. Today’s deal is a little surreal as it relates to the acquisition of Harvest Energy Trust by South Korean state-run firm Korea National Oil Corp (KNOC). I say surreal as I can’t bring myself to accept that such a premium can be paid for subpar assets.

To be straightforward, KNOC is buying Harvest Energy Trust, a Calgary-based firm that, despite labelling itself the first Canadian energy trust to become an integrated oil and gas company has a fragmented set of assets in the upstream oilsands business and a badly aging petroleum refinery in Come-by-Chance in Newfoundland. KNOC is buying the firm for C $4, 1 billion ($1,8 billion plus the assumption of C. $2.3 billion of debt) representing a 37% premium over Harvest’s share price. KNOC will raise US $1.65 million on domestic and overseas markets. All things considered, the deal comes to about 18$ per barrel equivalent which got many analysts to consider the financials positive.

This deal may align ends and means for South Korea who’s moving towards greater self-sufficiency with regards to its energy supply. However I assume that the deal does not give KNOC much bang for its buck. Production figures for Harvest seem quite modest and the overall quality of the lease is questionable as leases are not contiguous. Additionally, modernization and expansion of the Come by Chance refinery, which had been postponed due to the credit crunch earlier this year, will cost the KNOC $2 billion. As such, there is not such a compelling case for the purchase of Harvest Energy Trust.

What then is driving KNOC’s interest in a firm that comes across as an underdog in view of its average assets and high debt-load? South Korea energy policy goals are motivating the need to take on ownership of more resources; now is a prime time to do so and South Korea has faced a lot of competition from China in its previous bids which all ended in near-misses for South Korea. In that sense, I speculate that Harvest Energy Trust could have been targeted by KNOC as the ugly chick that cannot say no due to its relative absence of other alternatives. It is reported that KNOC has had trouble finding a team for the exploitation of the BlackGold leases that it acquired from Newmont Mining in 2006; the acquisition of Harvest could be seen as a proxy for the development of BlackGold. Additionally, it is possible that Harvest could continue to operate as a trust under KNOC ownership which could possibly exempt the company from paying taxes. If this is not the case, Harvest current tax pools could still shelter the business from taxation for the coming 5 years.