October 23, 2012 / 3:22 AM / 5 years ago

UPDATE 2-China firm makes $850 mln bid for Australia's Discovery Metals

* To go directly to shareholders; needs minimum 51 pct acceptance

* Has agreed funding with China Development Bank

* Has gained China regulatory clearance

* Discovery shares up more than 6 pct, trade above offer value

By Narayanan Somasundaram and Sonali Paul

SYDNEY, Oct 23 (Reuters) - A private equity firm founded by Chinese billionaire Yu Yong has gone hostile with its A$824 million ($850 million) takeover bid for Australia’s Discovery Metals Ltd after the copper miner’s board rebuffed a similar offer earlier this month.

Discovery’s shares jumped more than 6 percent to slightly more than the offer price, indicating investors may hold out for a higher offer from CF Investments, which is 75 percent owned by Yu’s Cathay Fortune Corp and 25 percent by China-Africa Development Fund.

The decision to go hostile after Discovery’s surprise rejection of an initial bid has bolstered expectations that resource-hungry Chinese firms will seek more acquisitions in the sector, especially among companies that have promising projects in emerging markets.

“What the major institutional shareholders will or should do is go back to these guys and say: ‘Give us an extra 10 percent and you can have it,’ and that’s what I think the current market price is reflecting,” said Pieter Bruinstroop, an analyst at broker Octa Phillip.

CF Investments offered A$1.70 a share, 3 percent above Discovery’s last closing price but 17 percent above its last trade before the initial offer was made public on Oct. 4, adding to a string of small to mid-sized mining deals in Asia after a slide in metals prices made valuations more attractive.

Cathay Fortune, which already owns 13.7 percent of Discovery, is targeting the firm for its Boseto project in Botswana, near a central and southern African region that has attracted more than $10 billion in copper takeovers in the past two years.

The company has set a minimum acceptance condition of 51 percent, which means it only needs just over 37 percent support to go ahead with the deal.

China, which accounts for nearly 40 percent of global copper consumption, has been on the prowl for mining investments in Africa, South America and central Asia as it looks to feed ever expanding domestic demand for key commodities.

Discovery’s shares touched a six-month high of A$1.76 after the news but later trimmed some of their gains to trade up 5 percent at A$1.732.


The hostile bid for Discovery stoked gains in other copper miners and explorers on hopes of more takeover activity, with Oz Minerals rising nearly 3 percent, and PanAust and Tiger Resources both rising about 1.3 percent.

Discovery rejected the offer earlier this month, saying it failed to reflect the value of its operations, expansion plans and exploration potential. On Tuesday, it told shareholders to take no action until they receive an official offer document.

“I think there is more value in it for the Chinese. It is a fantastic asset for them,” said Octa Phillip’s Bruinstroop, pointing to 200 million tonnes in copper and silver resources at Boseto and a large volume in mineralisation that has yet to be classified as resources.

Bruinstroop has a base case valuation of A$1.27 a share, but sees the company worth more than A$2 a share if its resources can be fully developed.

The company’s rejection of the previous offer came as a surprise, as it was well above some analysts’ valuations on the stock.

“The decision of the Discovery board to refuse access to due diligence and further engagement without any reasonable basis has prompted CFC’s decision to bypass the Discovery board,” said Yong Yu, whose net worth is estimated at $1.4 billion by Forbes.

For investors who bought into a recent capital raising at A$1.20 a share, the offer of A$1.70 would generate a 42 percent profit.

Cathay Fortune also owns 35.5 percent of Hong Kong-listed China Molybdenum Co Ltd, the largest molybdenum producer in China and the fourth-largest in the world.

It said the offer, which has already gained Chinese regulatory approval, will be funded by agreed term loans from China Development Bank Corp and existing liquidity.

Chinese firms have been actively pursuing assets in Africa this year.

China-Africa Development Fund and China Guangdong Nuclear Power Corp agreed to buy Kalahari Minerals and Extract Resources for about $2.3 billion, gaining control of the Husab uranium project in Namibia.

State-owned China National Gold is considering a bid for the African unit of Barrick Gold Corp, the world’s No. 1 gold producer.

The interest in Africa coincides with a switch away from Australia and Canada, where asset prices have become more expensive.

Long project approval processes have also put off some Chinese investors, spurring the search for assets in emerging markets.

Citigroup is advising Cathay Fortune and China-Africa Development Fund on the deal, and UBS is advising Discovery Metals.

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