Australia | Feb 27 2007
By Chris Shaw
In the past 12 months or so Consolidated Minerals (CSM) has lost a lot of support in the market, having fallen short on earnings expectations and gone from paying an attractive dividend for a resource stock to scrapping its dividend completely.
This caused a dramatic slide in the share price from levels closer to $3.00 to below $2.00 per share, the slide only recently being arrested thanks to rumours of a takeover with Russian mining interests considered the most likely. A takeover bid has finally appeared but according to Macquarie the deal results in shareholders becoming minority holders in their own company while receiving no premium for what they already hold.
This sounds like a rough deal but it is enough for the broker to upgrade its rating to Outperform from Neutral, as it points out there is little in the way of downside given a bid is on the table.
The terms of the bid made by Pallinghurst Resources and AMCI are CSM shareholders will receive $1.38 per share and two new shares in the new holding company for every five held, which means it is pitched at a price of $2.28 per CSM shares.
Given this is close to the current share price the broker suggests there is a good chance of a counter bidder emerging, or at least for an improved outlook given the likely benefits for CSM in being tied up with the two companies and the projects they can bring to the table.
The upgrade in rating is not only deal related though, as the broker points out there was scope for a lift in its recommendation anyway as the outlook for nickel and manganese has improved, implying a stronger earnings outlook. The company has delivered on that to some extent by announcing a first half profit of $10.2m, above the broker’s $8m forecast, and the reinstatement of a dividend with a 1.75c payout.
As a result the broker has lifted its earnings forecasts for the full year by 14% to $22.47m, while also lifting FY08 and FY09 forecasts slightly. Aspect Huntley was similarly impressed by the result in that it came in at about double its forecast thanks in large part to solid cost control. It has lifted its full year forecast by 27% to $35m, driven by the improved outlook for manganese and nickel prices.
In the group’s view the current takeover offer is likely to succeed with the upside being an increase in opportunities for the company, for which it has a reasonable track record of creating value. There is no change to its Hold rating.
Macquarie’s price target on the stock is $2.60, well above the value of the current offer. The market seems to suggest more will be forthcoming, as Consolidated Minerals shares today are trading up 3c at $2.41 as at 10.35am.