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Monday, 28 July 2014

Left hanging

Mining saga highlights pitfalls of Chinese M&A

Sundance Resources is a case study in what ails Chinese-led takeovers. The Australian miner’s deal to sell itself to Hanlong Mining for $1.4 billion is under pressure after its suitor’s chairman was apparently arrested. The 18-month saga highlights the hurdles facing Chinese bidders, and explains why suitors are often met with scepticism.

The arrest of Liu Han by Chinese authorities, reported by Shanghai Securities News on March 20, is a dramatic turn. Sundance’s CEO is “not confident” the Chinese company will meet a March 26 deadline to prove it has the financing for the deal. However, it is merely the latest in a series of setbacks.

Regulators were the main obstacle. China’s National Development and Reform Commission, which must approve virtually all foreign takeovers, last year asked that Hanlong pay a “reasonable acquisition price” for Sundance. Even after the Chinese company cut its offer 10 percent to A$0.45 a share, the NDRC decided Hanlong needed a large Chinese partner.

Financing is another problem. When Hanlong first struck the deal, it didn’t have the funds to complete the takeover: it wasn’t until October 2012 that China Development Bank “in principle” agreed a $1 billion debt facility. That still hasn’t been finalised.

Finally, there’s patronage. Political support is almost impossible for outsiders to gauge, and can shift quickly. Until now, Liu was sufficiently in favour that he was allowed to buy a controlling stake in another Australian group, Moly Mines, and sign a deal to help a U.S. company mine molybdenum in Nevada.

Sundance may have been right to entertain Hanlong’s bid despite these concerns. The $5 billion needed to develop its iron ore project in central Africa was always most likely to come from China, and the authorities tend to discourage Chinese companies from bidding against each other. Despite the company being free to seek other offers, none have emerged.

Sundance shareholders are pricing for the worst. The company’s shares were suspended on March 19 at 22.5 Australian cents - half the value of Hanlong’s bid. The latest setback could not have been foreseen, but more scepticism at the beginning would have spared them recent pain.

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Australia’s Sundance Resources said on March 20 it is not confident suitor Hanlong Mining will meet a deadline to prove financing for its $1.4 billion takeover bid after the apparent detention of the Chinese company’s chairman.

Sundance has threatened to walk away from the long-delayed deal if Hanlong misses any further milestones and is in talks with other potential partners to develop its roughly $5 billion Mbalam iron ore project on the border of Cameroon and the Republic of Congo.

China’s official Shanghai Securities News on March 20 reported Hanlong chairman Liu Han and some family members had been detained by authorities but gave no details for the reason.

“We understand he’s been detained,” Sundance Chief Executive Giulio Casello told Reuters by telephone.

General Moly, a U.S.-based mining company, said on March 21 that it had been informed that legal counsel had suspended work on the $665 million loan it had been negotiating with China Development Bank to develop a molybdenum project at Mt. Hope in central Nevada. General Moly said Hanlong or an affiliate was obliged to arrange and guarantee the Term Loan.

Moly Mines, an Australian miner controlled by Hanlong, said on March 20 it was seeking clarification about the impact of the apparent arrest on the company.

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