[miningmx.com] — ONE of the reasons shares in OTC-traded Tronox fell more than a fifth following announcement it was merging with the mineral sands business of Exxaro Resources was shareholder discontent the deal would scupper a higher offer from another suitor, possibly Huntsman Corporation.
US-headquartered Huntsman Corp is a major player in the global mineral sands business and considered buying Tronox’s stake in the titanium minerals producer Tiwest which Tronox shares with Exxaro. That was in 2009 when Tronox filed for chapter 11 relief which grants distressed companies the time and space to reorganise its debts.
More recently, Huntsman was rumoured to have an interest in buying Tronox’s entire business. According to one market analyst, excitement among Tronox shareholders was high following speculation it had retained Goldman Sachs in preparation for a bid.
“Tronox shareholders were apparently hoping for an offer and this is a bit of a poison pill for their ambitions,’ a source says. “It looks a good deal for them to me, but it’s not as good as a cash takeover.’ There’s even speculation Tronox shareholders may vote against the Exxaro offer.
Says one UK source: “Many Tronox shareholders were former bondholders that received post bankruptcy equity, and thought that Tronox would get bid for. I think this deal took them by surprise. I know of one that is pissed, and I think there are a few others,’ he said. “They don’t know if they can vote the deal down as the mechanism for the vote is unclear,’ he added.
The Tronox shareholder register shows US fund Fidelity is the largest single shareholder with a 5% stake with the remainder of shareholders owning 1% or less. This would have made it impossible for Exxaro to have consulted shareholders on the suitability of its bid. Equally, however, the diverse share register creates less opportunity for gather behind a vanguard of opposition.
The feeling in Johannesburg is any Tronox discontent is just noise and will probably dissipate.
Investment house rating
The rationale for the transaction, which sees Exxaro take a 38% in New Tronox, is to garner greater value for a revenue stream largely ignored in Exxaro. There’s also the chance of fully integrating the minerals sands business, not to mention the opportunity for Exxaro to buy out New Tronox in future, hence the dual share structure (generally frowned upon these days) that grants Exxaro voting rights.
It’s a good time to be making the mineral sands business more visible. Demand for household tiles, of which zircon is a valuable ingredient, is high in China. Mineral sands as a whole are doing well, and so are listed mineral sands businesses such as Australian-listed Illuka Resources.
And yet. One can’t shrug the suspicion that in externalising the mineral sands business, Exxaro is risking some downside. It will now have two shareholdings in listed companies of which Kumba Iron Ore is the other. The only two businesses in Exxaro are coal and zinc, and the latter is to be sold.
Of the coal, a large portion of Exxaro’s revenue is Eskom-related contracts which don’t offer much scope for growth. That means the development of the Grootgeluk mine is currently the only major growth project that Exxaro wholly owns. Would this then see Exxaro attract an investment holding company discount reminiscent of that other empowerment group, Mvela Resources?
There’s also the view that contrary to company statements, Exxaro is really just exiting the mineral sands business. It has, in truth, had a mixed relationship with mineral sands; vacillatory almost. Last year, it decided to ditch its expansion project at Fairbreeze, now it has embraced it again probably by dint of the improved revenue prospects.
The last time I interviewed Sipho Nkosi, CEO of Exxaro Resources, he said Exxaro’s ambition was to continue to diversify. Based on this view, one can only assume Exxaro will be seeking new development assets of which the foiled A$123m offer for Australian iron ore and coal producer, Territory Resources in May this year, was the first attempt to diversify. Still, one has to ask the question: what is Exxaro trying to become?
