SYDNEY Chinese steel giant Baosteel Resources and an Australian partner launched a $1 billion takeover bid for Australian explorer Aquila Resources in a move that could help break the grip of mega iron ore exporters Rio Tinto and BHP Billiton.
Monday's unsolicited A$1.14 billion ($1.06 billion) offer to take over Aquila Resources Ltd AQA.AX could open up a new Australian iron ore export region to supply Asian steelmakers, by jumpstarting the $7 billion West Pilbara Iron Ore project (WPIO), half-owned by Aquila.
State-owned Baosteel's move would be the biggest foray into an undeveloped iron ore project in Australia by a Chinese investor since CITIC Pacific's (0267.HK) $10 billion Sino Iron project, which began producing last year after massive cost blowouts and delays.
Baosteel, which already has a 20 percent stake in Aquila, said it first invested in the company back in 2009 to help it fund the iron ore project and a separate coking coal mine.
"But after five years we haven't seen any projects being started. So we have been very patient, but we've become frustrated," chief financial officer Wu Yiming told reporters on a conference call from Sydney.
Baosteel, China's no.2 steel maker, and rail company Aurizon Holdings Ltd (AZJ.AX) said they will offer A$3.40 in cash per share, a 39 percent premium to Aquila's close on Friday.
Including Baosteel's existing stake, the offer values the target at A$1.42 billion. Aquila is sitting on A$507 million in cash and liquid investments, so the bid effectively values the debt-free company at A$913 million.
Aquila shares rocketed 39 percent to a high of A$3.41 and last traded at A$3.34, just below the offer price.
"From Baosteel's point of view, China's steel and iron ore demand growth may slow, but overall demand is still going to be massive, so it makes sense to make this acquisition," said an analyst at a major Chinese bank.
If the Baosteel-Aurizon bid is successful and feasibility studies prove the West Pilbara Iron Ore project to be commercially viable, the partners expect to start producing iron ore in 2017-18, said Aurizon Chief Executive Lance Hockridge.
The WPIO project has more than 2 billion metric tons (1.1023 tons) of resources, just below the 2.4 billion metric tons that Australian billionaire Gina Rinehart has at the Roy Hill project, also in the Pilbara and due to start producing in 2015.
As designed, WPIO would produce 30 million metric tons a year in its first stage, dwarfed by Rio Tinto (RIO.AX)(RIO.L) and BHP Billiton (BHP.AX)(BLT.L), which together are expected to be producing around 620 million metric tons a year by 2017.
But more importantly for Asia's steel producers, the WPIO partners plan to build a new rail line and port at Anketell Point that would be open to other iron ore producers, unlike Rio Tinto's rail and ports, providing an outlet for resources that have been stranded with no transport routes up to now.
Hockridge said the Anketell port has been designed to handle up to 300 million metric tons a year.
"You would all be aware that in that part of the Pilbara there are many, many ... metric tons of what is effectively landlocked opportunity in terms of prospective iron ore volumes," he told reporters.
Aquila said it was approached out of the blue by Baosteel and Aurizon on Saturday even though it has been talks with Baosteel for some time about the stalled WPIO project.
The suitors decided to go straight to Aquila shareholders with an offer after failing to secure a meeting on Sunday with Aquila's executive chairman and 29 percent owner, Tony Poli.
Those who know the company say Poli would be unlikely to sell for A$3.40 a share, and with him and other directors controlling more than 37 percent of the company, the suitors are in for a fight.
Aquila's 50 percent stake in the WPIO project is worth at least A$375 million, based on the price South Korean steel giant POSCO (005490.KS) paid for a 24.5 percent indirect stake in the project in 2010.
But the Australian company is likely to value it far higher, highlighting in its 2013 annual report that the project's attributable resource has since nearly tripled and all state and federal environmental approvals have been secured.
"It's going to be tough. This is not a typical takeover contest between two companies chasing a third," said BBY analyst Mike Harrowell, who has long watched Aquila's fortunes. "Aquila is Tony's baby. I'd be surprised if he was going to leave."
Poli was unavailable for comment.
Aquila, whose shares have not traded above A$3.40 since 2012, has appointed Goldman Sachs to advise on the offer and said it will be evaluated by an independent committee.
A successful bid would also give Baosteel a stake in the Eagle Downs hard coking coal project that Aquila is developing with Brazil's Vale SA (VALE5.SA).
Aurizon, advised by UBS, said it would acquire 15 percent of Aquila if the deal was successful. It aims to take a majority stake in port and rail infrastructure for the WPIO project.
Baosteel is being advised by Deutsche Bank.
($1 = 1.0795 Australian Dollars)