Struggling zinc producer CBH Resources has launched a hostile $60 million takeover for struggling rival lead and zinc miner, Perilya Ltd just over two months after the companies terminated a friendly merger.
Does it matter? Could we call it a battle between two shrinking minnows?
Or is it a deal that has considerable sense, given the sharp fall in both company’s share prices this year and the prices of lead and zinc?
CBH was valued at around $65 million yesterday at its closing price of 7.9c (up 0.6 of a cent, or 8.2%); Perilya was valued at around $55 million after its shares ‘soared’ 4.5c, or 16.6%, to 31.5c last night.
There’s a hint of desperation in the bid, something that the Perilya board is likely to replay when it gives its opinion. All we got yesterday was a ‘don’t sell’.
CBH is proposing a two-tiered, all-scrip offer, which takes into account Perilya’s intention to sell its Mt Oxide copper project in Queensland to Chalice Gold Mines Ltd.
"This transaction, which will result in the Broken Hill line of lode being owned by a single company for the first time, will extend the Perilya mining operations beyond their current limited life, delivering both significant financial and operational benefits to CBH," CBH chairman Jim Wall said in a statement.
CBH is offering 2.8 shares for each Perilya share, assuming the Mt Oxide transaction goes ahead, or 4.2 shares for every Perilya share if the sale of the copper project is not completed.
The value of the takeover offer is about $60 million at CBH’s previous closing price of 7.3c.
Perilya said that the bid was "unsolicited" and advised its shareholders to take no action until the board made a formal recommendation.
The rationale behind the deal is to combine Perilya’s Broken Hill zinc and lead operation with CBH’s Rasp project and share common-user infrastructure.
This would allow CBH to process ore from the Rasp mine through Perilya’s existing concentrator and save the capital required to construct its own facility, while extending the life of the Broken Hill mine in far western NSW.
CBH Resources’ flagship mine is the Endeavour zinc mine at Cobar, north-east of Broken Hill.
Both companies have cut hundreds of jobs of full time, part time and contractor jobs at their mines in recent months as zinc and lead prices have dived.
Both companies have been hit hard by the falling zinc price and have been forced to lay-off workers and significantly modify operations to remain sustainable.
CBH said in its statement announcing the bid that “Since termination of the previously announced merger transaction between CBH and Perilya in July 2008, there have been several significant changes which have affected both companies.
"The commodity and financial markets have deteriorated significantly, and this has led to material changes being made to the mine plans at both Perilya’s Broken Hill mine and CBH’s Endeavor mine.
"Perilya has closed out of its hedge book and suspended the Beltana operation, and should the recently announced Mt Oxide transaction be completed, Perilya will be left with only one operational mine at Broken Hill with a limited life.
"The Board of CBH believes this transaction is compelling as it will generate substantial benefits for all Perilya shareholders including:
"The opportunity to become shareholders in a multi-mine zinc and lead producer with long life assets and greater ability to see through the current economic and commodity price environment.
"Participation in the combination of the adjoining Broken Hill assets and the unique value creation opportunity this provides.
"The ability to retain exposure to the Mt Oxide project (if the Mt Oxide Transaction completes and the Perilya Board distributes the Chalice shares to shareholders).
"Significantly higher ownership of the combined entity than that contemplated in the incomplete merger announced on 26 March 2008 under the Adjusted Price Offer.
"Exposure to additional base metal projects currently within CBH.
"Payment of an attractive upfront premium for their shares.
"An investment with increased equity market scale and liquidity."
Given the outlook for commodity prices, the credit crunch and slowing global economy, you’d think both companies would be trying to do something to lower costs and keep going. This seems to be a start. It’s now up to the Perilya board.
