By BRIAN GAYNOR
The New Zealand mining industry is on its last legs, at least as far as the sharemarket is concerned.
Fourteen years ago, the NZSE had a separate mining board with 23 listed New Zealand companies.
The mining board disappeared in 1997 and only five companies remain listed - Cue Energy
Resources, Heritage Gold, Otter Gold Mines, New Zealand Oil & Gas and Summit Resources.
This may soon be reduced to four as Adelaide-based Normandy NFM has made a controversial takeover offer for Otter.
The bid is unlikely to be affected by Thursday morning's landslip next to Otter's open-pit Martha mine.
In the 1980s, most of the major brokers employed mining analysts and there were two or three new floats every year.
Twenty-five new mining companies were listed in the period. They included Horizon Oil (later Capital Markets and Fay, Richwhite), Kupe Petroleum (now CDL Investments), New Zealand Oil & Gas and Southern Petroleum.
One-third of the money subscribed to these four floats was tax deductible.
But Sir Roger Douglas removed the tax breaks and the last mining industry listing was Macraes Mining in January 1990.
Mining expertise in the investment and finance industries has also declined, and this could be one of the major issues in the Otter bid.
Several factors are behind the decline of the mining industry.
The Resource Management Act is a big contributor, although several industry sources claim the sector was already meeting most of the requirements of the act before it became law.
The biggest drawback is the huge amount of time and money spent obtaining approval under the legislation.
The other problem is getting on to Government-owned land. Large tracts of land have been transferred to the Department of Conservation and mining companies have difficulty obtaining access to it.
This is in contrast to Australia, where vast areas of Government-owned land in remote regions have no conservation-related concerns.
Another factor is the reluctance of New Zealand investors to take risks after their experiences in the 1980s.
Local institutions are also slow to invest in mining companies because they have limited analytical skills in this area.
Finally, there is the issue of overseas ownership.
The reluctance of New Zealand investors - individuals and institutions - to invest in the industry has undervalued our mining companies, allowing foreign interests to acquire these assets relatively cheaply.
The overseas parties often have a large shareholding in the target company before the offer is made, giving them a big advantage over minority shareholders.
The Fletcher Challenge Energy and Macraes Mining acquisitions were characterised by low offers, and GRD had considerable knowledge of Macraes before its bid.
The offer for Otter Gold Mines may turn out to be even more controversial than the Fletcher Energy and Macraes takeovers.
On October 11, Normandy NFM announced that it would make a full bid for Otter, offering:
* 1.9 ordinary Normandy NFM shares for every 100 Otter shares
* 1.2c cash for every 100 Otter options. The options are exercisable at $2 a share on June 30, 2003.
The bid values Otter ordinary shares at 26.1 cents compared with the pre-offer price of 13.2 cents, but option-holders are being offered only .012 cents compared with a market price of 1.6 cents on October 10.
The options offer is creating considerable confusion as nearly 400,000 options went through the market yesterday at an average price of 0.8c - 67 times higher than Normandy's offer.
The options deal is being criticised for several reasons:
* The offer is 99.2 per cent below the pre-bid market price. Before the bid, 100,000 options had a market value of $1600, but Normandy is offering only $12 for the same number of securities.
* Normandy will pay only $3300 for the 27.3 million options.
* Normandy can compulsorily acquire the options once it has 90 per cent of the ordinary shares even if none of the option-holders accept.
Under Rule 22 of the Takeovers Code the bidder, not the target company, is required to commission an independent adviser's report on the fairness of the offer between two classes of securities. (This is not the substantive independent report.)
Normandy NFM appointed Grant Samuel to assess the fairness of the bid to Otter's option-holders compared with its offer to ordinary shareholders.
But Grant Samuel has also advised Normandy Mining, which owns 87 per cent of Normandy NFM, on the fairness of a takeover offer it has received from AngloGold.
It seems inappropriate that Grant Samuel should advise Normandy Mining on the fairness of AngloGold's offer while advising Otter's option-holders in relation to a bid by Normandy's 87 per cent-owned subsidiary Normandy NFM
The other important issue is Otter's substantive independent report and the valuation of the Martha mine operations in Waihi.
Otter has yet to disclose who is preparing this report but as there is almost no mining expertise in the New Zealand finance sector, it is almost certainly being prepared by an Australian company.
This will raise the issue of impartiality. One of the more contentious issues in the Macraes Mining takeover was the appointment of the Western Australia-based operation of KPMG as Macraes' independent adviser.
The most important part of the report, which will be released next week, will be the Martha mine valuation. This is 67 per cent-owned by Normandy Mining and 33 per cent by Otter.
In its report on the AngloGold bid, Grant Samuel values the Martha mine operation in the $250-$300 million range.
It places a great deal of importance on the newly discovered Favona deposit outside Waihi township.
A $250 million plus valuation has the potential to raise Otter's value to more than 50 cents a share, assuming there has been no diminution in the value of its Australian assets.
The Favona deposit has been called a bonanza by one industry expert.
Robert Champion de Crespigny, chairman and chief executive of Normandy Mining, told the group's recent annual meeting that Favona could be brought into production quickly and enable Martha to produce more than 200,000oz of low-cost gold a year.
This compares with production of 95,100oz this year and current potential of 120,000oz.
One of the most surprising aspects of the Normandy NFM offer has been the quick capitulation of GPG, which owned 43.6 per cent of Otter.
GPG immediately sold 9.3 per cent to Normandy and indicated that it would accept in respect of its remaining 34.3 per cent shareholding.
The immediate reaction was that GPG knew what it was doing and the offer must be fair if the investment group was willing to accept.
But maybe GPG doesn't have an alternative exit strategy and underestimated the potential of Favona when it decided to sell.
The Normandy group of companies, which owns 67 per cent of the Martha mine operation, obviously has a much greater knowledge of Favona than GPG.
Otter shareholders must now wait for the release of the independent report.
There is an uneasy feeling that most Australian advisers will undervalue a New Zealand company when it is subject to a takeover offer from an Australian company.
Because of this, it is important that Otter shareholders read Grant Samuel's Normandy Mining report and Robert Champion de Crespigny's address to the annual meeting on the Australian company's website www.normandy.com.au
And what about the landslip in Waihi on Thursday? It should not hurt Otter's valuation as the prospective Favona development is underground and well outside Waihi township.
* Disclosure of interests: none.
* bgaynor@xtra.co.nz
By BRIAN GAYNOR
The New Zealand mining industry is on its last legs, at least as far as the sharemarket is concerned.
Fourteen years ago, the NZSE had a separate mining board with 23 listed New Zealand companies.
The mining board disappeared in 1997 and only five companies remain listed - Cue Energy
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