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Asset swap coming at Anooraq: JP Morgan

Brendan Ryan | Thu, 17 Nov 2011 12:02

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[] -- NEGOTIATIONS between Anooraq Resources (Anooraq) and Anglo American Platinum (Amplats) will culminate in an asset swap to recapitalise Anooraq.

That's the view of JP Morgan Cazenove analysts Steve Shepherd and Allan Cooke in a research report on Anooraq's September quarterly results.

Shepherd and Cooke described Anooraq's balance sheet as being "all Greek to us" and said the company's debt burden of R5.5bn – all of which is owed to Amplats - was "unsustainable".

Anooraq has been in negotiations over this with Amplats since early May and has issued as string of cautionary notices to shareholders.

"A deal almost certainly, in our view, involving an asset swap is the likely objective," said the analysts. "Amplats swaps the debt it holds for some of Anooraq’s around 113 million ounce minerals inventory (which originally belonged to Amplats, ironically).

"Anooraq is one of Amplats key BEE partners so we argue from a 'political' viewpoint a solution must be found that will demonstrate the sustainability of Amplats' empowerment plan, implying that failure may not be an option.

"Both sides hope to conclude the process in 2011. Time is clearly of the essence for Anooraq which is in a debt trap as things stand, in our view."

The analysts added that, if Amplats wanted its BEE strategy to maintain credibility with the South African authorities, "we'd venture to suggest that Anooraq must be seen to be capable of more than surviving – it must be able to prosper.

"To do this the whole debt burden must expunged, in our view. As we said, we suspect the only realistic chance will be an asset swap involving Anooraq selling back to Amplats some of its 113m oz 4E pgm (four element platinum group metals ) inventory."

The analysts said there were serious potential risks for both companies if the process fails over the pricing at which such a swap would be done.

They noted that the average price for all recent transactions of this nature was around R80 per pgm resource ounce with this year’s deal between Northam Platinum and Aquarius Platinum over Booysendal South being struck at R36/oz.

"If Amplats plays ‘hardball’ and allows Anooraq to suffer a ‘slow death’ or fail - will it suffer later at the hands of the Department of Mineral Resources?," the analysts asked.

"If Anooraq 'gets too greedy' will it be allowed to fail while Amplats tries to line up another BEE entity to take its place? We can think of more than one potential candidate."

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