Afferro Mining (AFF) ... IMIC might do it

Afferro’s share price has fallen almost as quickly as it had risen in December last. At 60p/shr, it now trades roughly where it was prior to the bid speculation, which prompted the shares rise to as high as 105p. Capitalised at £63m, its enterprise value equates to c. £8m, which suggests that its 2.5bn tonnes of prospective iron ore (1.2bn tonnes indicated / 1.3bn tonnes inferred) is priced at c. 4.8 US cents per tonne. I am told that the going rate for African iron ore juniors EV/contained Fe is between 20-30 cents per tonne. On this basis, AFF would appear cheap. However, AFF is somewhat stranded in Cameroon, many miles away from a port and with no passing railway line. The cost to remedy its isolation is predicted to begin at $4bn.

Sundance Resources (SDL AU, mkt cap AUD 270m), another iron ore junior, is also in Cameroon and now that Hanlong (in hindsight some ramshackle Chinese outfit) is no longer bidding, would seem to be just as isolated. SDL’s share price has fallen from above 30 AUD cents per share to less than 9 from the evaporation of this bid. It may be worth noting that although SDL may be as stranded as AFF, now capitalised at 270m AUD, its resource is priced at c. 9.5 US cents / tonne. Almost twice as that of AFF’s. But this discrepancy is probably neither here nor there as both prospects are nonviable without infrastructure. 

What I find odd, when considering the collapse in AFF’s share price, is that AFF is still in a bid situation. Although Jindal Steel (JSP IN, mkt cap £3.7bn) was touted as a potential bidder, it was the small AIM listed company, IMIC (IMIC LN, mkt cap £16m) which made a formal approach. IMIC proposed it would be prepared to “make an offer, subject to completion of satisfactory due diligence and certain other conditions, for the entire issued and to be issued share capital of Afferro at between 115 and 140 pence per Afferro share. The consideration is to be satisfied by an undisclosed mix of cash, yet to be raised by IMIC, and new IMIC shares.”  The lower of this range equates to 91% higher than AFF’s current share price.

The decline in AFF’s share price suggests that IMIC’s bid is not credible. However, since making its initial approach in December last, IMIC has increased its stake in AFF to 6.8% of the shares (1.8% through options). Further, according to its recent interims from 28 March 2013, IMIC have “... appointed Bank of America Merrill Lynch in the fourth quarter of 2012 to advise on a possible offer for the entire share capital of Afferro ...” IMIC appears to be continuing with its due diligence and efforts to raise finance.

IMIC may be more credible than its current market cap would suggest. It highlights that it has a strong strategic partnership with the African Iron Ore Group (AIOG). The AIOG comprises China Railway Group (390 HK, mkt cap £6.3bn), China Machinery Engineering (1829 K, mkt cap £2bn), MCC Huaye Resources Development, and China Railway Materials. How strong this strategic partnership is remains uncertain, but it is a formidable roll-call.

In terms of what needs to be raised, if IMIC were to tender full cash at the lower end of its suggested range, 115p/shr, this would equate to £121m. The upper end of 140p/shr would require £147m. However, it is worth recalling that AFF retains c. £55m in cash on its balance sheet, or c. 52p/shr. So the net requirement may be as low as £66m and up to £92m. Further, in October 2012, IMIC secured a US$50m/£32m bond instrument “to unlock the potential of iron ore in West and Central Africa.” In June 2012, IMIC raised £10m in equity at 20p/shr, principally funded by high net worths and support from its strategic partner, the African Iron Ore Group (AIOG). It would appear that IMIC has good connections and is relatively competent at raising finance. Appointing BoA Merrills will also probably help on the latter.

Earlier this week, a niche specialist resources broker, Ocean Equities, published a detailed research note on IMIC. The note outlined IMIC’s plans for AFF; in corollary it also demonstrated AFF’s extreme cheapness relative to peers. While the note was well written it seemed a bit presumptuous to detail a company’s plans for that of another when the former hadn’t even tendered an offer to the latter. A bit like me viewing a house and telling the vendor to their face what my decorative plans were to his/her home before an offer was accepted and solicitors’ details exchanged. I would imagine that IMIC had a strong hand in constructing this note.

At 60p/shr, I reckon AFF presents an attractive speculative buy opportunity. So I have bought.

In summary:

• AFF remains in a bid situation where a suggested offer has been in the range of 115p to 140p per share.
• AFF is currently priced at virtually a zero enterprise value.
• AFF is net cash positive, with $89m at the last count.
• IMIC may be a more credible suitor than the market believes.
• IMIC has a good record of raising finance and has developed strategic partnerships with key infrastructure players. 

Afferro Mining share price
Source: Bloomberg

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