Sichuan Hanlong has bid for the outstanding shares of Australia’s Sundance Resources, valuing the company at $1.5-billion U.S. in a deal that would give it control of a major iron ore mine in west Africa and help feed China’s demand for metals.
Sundance’s board urged shareholders not to take any action on the Chinese group’s $0.50 Australian dollars a share offer, a 25 per cent premium to Friday’s closing price, which it said was inadequate. Hanlong already owns 18.6 per cent of the company.
The Australian company, whose shares closed 22.5 per cent higher on Monday at $0.49 Australian dollars, said it was in advanced talks with other parties on investments to fund the estimated $4.7-billion U.S. needed for the Mbalam mine, its only significant asset.
“I think (Mbalam) ... is a very attractive, large project and will make a lot of money when it’s up and running,” said Andreas Kouremenos, an analyst at Foster Stockbroking in Sydney.
Sundance says Mbalam, straddling the Republics of Congo and Cameroon, could yield 35 million tonnes of iron ore a year suitable for direct shipping to steel mills – on a par with iron ore production of Africa’s AngloAmerican PLC, much of it through a majority stake in Kumba Iron Ore.
But it would still be dwarfed by the hundreds of millions of tonnes of iron ore mined each year by Vale SA , Rio Tinto Group and BHP Billiton Ltd.
The bid by privately held Hanlong, which has stakes in explorers in Australia and the U.S., comes as China’s demand for raw materials expands rapidly. China is already the world’s biggest iron ore importer.
“Hanlong Group is carrying out its overseas strategy on iron ore and aims to become the No. 4 iron ore supplier in the world in 10 years,” Hanlong said in a statement.
“The acquisition, if successful, would have a profound impact on China’s steel enterprises; it would also help China make its voice heard more in the global iron ore market.”
In November 2010, Export-Import Bank of China agreed to lend Hanlong, which also has interests in energy, real estate, pharmaceutical, chemicals and technology, up to $1.5-billion U.S. to fund overseas expansion.
Last week, it launched a $144-million Australian dollars bid for Bannerman Resources , which is looking for uranium in Namibia.
Sundance’s board said it would continue advanced talks with potential investors, having held talks with at least five steel producers. A link up could give Sundance leverage to go back to Hanlong with a potential valuation on the company that Hanlong would have to beat.
The Mbalam project requires significant infrastructure work, a feasibility study showed in April.
“Sundance is going to need to build a rail for 500 to 600 kilometers, not to mention an associated port, and that’s not going to be cheap,” said Mr. Kouremenos.
“These things add billions and billions of dollars and the only way they can be done is by getting investors and end users involved and having them finance it.”
In March, Sundance Managing Director Giulio Casello told Reuters Sundance was in talks with Chinese steel mills as candidates to invest in the project.
Hanlong has no direct interest in steel production.
Despite turmoil in recent years, west Africa has drawn attention from iron ore explorers such as Rio Tinto, Vale, and Xstrata PLC.
China is already the world’s biggest steel producer, accounting for nearly half the world’s output, and imports more ore than any other country. In 2010 it imported more than 618 million tonnes, just 1.4 per cent below a record level in 2009.
The pace of imports has picked up this year, rising more than 8 per cent over a year earlier in January to June, preliminary China customs data shows.
Beijing has been pushing its steel makers to consolidate domestic steelmaking and reduce reliance on the likes of Vale, Rio Tinto and BHP Billiton, which together control about 70 per cent of seaborne-traded ore.
China produces plenty of its own iron ore, but much is low grade and it is cheaper to import ore with higher iron content.
In one of west Africa’s biggest iron ore projects, a joint venture of Rio Tinto and Aluminum Corporation of China plans to develop the Simandou deposit, with first shipments seen by mid-2015.
The partners are targeting initial production of 70 million tonnes per year, with estimates for potential future output reaching up to 170 million tonnes.
Rio Tinto chief executive Tom Albanese has described Simandou as the world’s biggest undeveloped iron-ore deposit containing more than 2 billion tonnes of high-grade ore.
Hanlong is also majority shareholder in Moly Mines , which is developing a molybdenum and copper mine in Australia, and Marenica Energy, which is looking for uranium, also in Australia.
In the United States, Hanlong holds a 12.5 per cent interest in General Moly .
Hanlong is being advised in its Sundance bid by Bank of America-Merrill Lynch and Sundance is being advised by UBS.