A proposed share swap between the major shareholder of China Automobile Parts Holdings Ltd (CAP) (fundamental: 1.95; valuation: 1.8)and Australian mining company Siburan Resources Ltd (SBU) will come under the close scrutiny of the former’s minority shareholders, particularly with regard to the intention of the two parties.
The main concern of the minorities would be that a new party is set to own a chunk of CAP’s shares and exert influence on its business strategy. An SBU representative will be appointed to CAP’s board of directors.
Though no cash will change hands, SBU’s stake in CAP will be valued at 60 sen apiece, which triggered strong activity in the latter’s shares recently. Since the deal was disclosed on May 15, CAP has leapt 25% and closed at 45 sen last Thursday.
It is noteworthy that the deal does not seem value accretive to CAP, a fact that will certainly be pointed out at the company’s extraordinary general meeting on July 14 to seek shareholder approval.
On May 15, SBU announced to the Australian Securities Exchange that it had entered into an agreement to acquire 16.67% of CAP’s issued capital from its majority shareholder Guotai International Holding Ltd. The 100 million CAP shares granted to SBU are valued at RM60 million while Guotai will receive 417.36 million newly issued SBU shares of the same value, amounting to a 62.5% stake in the upstream miner.
SBU holds interests in the Kirwan Hill tungsten project in New Zealand and the Ora Banda gold project in Kalgoorlie-Boulder, Australia, among others. The company conducts exploratory drillings to analyse rock content via chemical assay and mineralogical studies.
Its managing director Noel Ong tells The Edge that the deal will ultimately prove beneficial to SBU, Guotai and CAP. “As for one board member trying to influence the direction of CAP, that is a non-issue as we are not the only shareholder. We are relying on the company’s positive growth prospects as its dividend income stream is essential to us to operate,” he says.
Ong notes that in recent years, Chinese investors have been acquiring mining interests in Australia and New Zealand to secure access to commodity deposits, given China’s lack of natural resources.
SBU had previously noted that the Kirwan Hill tungsten project would be a low-cost but significant source of mineable tungsten outside China, which boasts the world’s largest tungsten mine. Clearly, Guotai’s entry into SBU is an investment to secure a new supply line of tungsten, which is highly sought after and has high-end applications in the automotive and mobile phone industries.
“Even with Guotai’s entry, we intend to proceed the way we always have, which is to get into the feasibility stage of our mining assets. We know there are deposits and we are determining the viability and quality of the asset,” explains Ong.
SBU may also eventually tap CAP’s manufacturing capabilities, given the latter’s specialisation in the manufacture of chassis components for motor vehicles, Ong says. However, he reiterates that SBU’s focus is upstream exploration.
“There is a misconception that upstream exploration is riskier than the mining operation itself, which is not the case. We are still at the early stage of undertaking the projects, so our funding requirements are minimal as opposed to a miner’s who has to mine and make sure the output is enough to cover production costs.”
Interestingly, SBU’s major shareholders include some prominent Malaysian corporate figures, for example, Negri Sembilan royal Tunku Naquiyuddin Tuanku Ja’afar, who owns five million shares or a 2% stake in the company. RH Resources Ltd, an associate of Rimbunan Hijau Group, owns 10.33 million shares or a 4.18% stake.
However, their shareholding is modestly valued, given SBU’s small market capitalisation of A$17.2 million (RM48.84 million), and it will be diluted when Guotai comes in as a major shareholder.
SBU has yet to generate operational cash flow or revenue due to the nature of its upstream exploration business and its total net assets amount to just A$3.83 million or 1.6 Australian cents per share. After the share swap and new shares issuance, the company’s net assets will amount to A$25.56 million, translating into a post-adjusted net asset value per share of 3.7 cents.
While the deal will clearly benefit SBU’s existing shareholders, CAP’s investors may wonder if their interests are being served. By ceding almost a fifth of CAP’s shares to a company that has only a fraction of its market capitalisation, the move by Guotai has certainly raised eyebrows.
Even more worrying is the fact that a large block of CAP shares is being used as collateral to finance the major shareholder’s venture into commodities with a little known Australian company.
CAP’s latest quarterly earnings are a cause for concern as well because its operations seem to have been significantly impacted by a slowdown in the Chinese economy. In the quarter ended March 31, 2015, the group’s net profit plunged 50% year on year to RM11.52 million while revenue fell 37.3% to RM65.63 million.
In its May 21 disclosure to Bursa Malaysia, CAP attributed the decline to a sharp drop in both average selling prices (-10.9% y-o-y) and sales volume (-29.8% y-o-y).
This article first appeared in The Edge Malaysia Weekly, on May 25 - 31, 2015.
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