AUSTRALIAN mining companies – even the biggest of them – are under takeover threat because of their relatively small size in global markets.
AUSTRALIAN mining companies – even the biggest of them – are under takeover threat because of their relatively small size in global markets.
Analysts and mining executives are increasingly concerned that the thrust towards amalgamation, towards the acquisition of under priced Australian resources, is driven not only by the pursuit of greater efficiency and economies of scale, but also the share market and borrowing benefits that follow.
A study by Ken Perry, executive director of the merchant bank RFC, points out that small companies suffer because of illiquidity – a lack of share market activity which depresses prices and in turn raises the cost of raising funds.
In a modelling exercise involving American mining companies RFC found that a small company’s perceived value could rise by up to 67 per cent after it was taken over by a bigger one (its value would increase only marginally). However the value of the new, merged company would rise by 11 per cent.
The same model showed that a company with a high degree of liquidity could raise money at a cost of 5.5 per cent, another at the low end of the liquidity scale would have to pay 9.5 per cent, with an obvious negative impact on its performance.
For big Australian mining companies another sobering factor was their small market capitalisation on the world stage, making them vulnerable to takeover.
Mr Perry pointed out that the market capitalisation of Microsoft was nearly five times the total value of four companies operating in Australia, with global interests. At the time of the exercise, the software giant had capitalisation of $US290 billion; Anglo American and Rio Tinto, two of the world’s biggest mining houses, BHP and WMC, had, in total capitalisation of about $US60 billion.
The figures demonstrate how resource companies no longer hold the attention of share market players, and the manner in which companies in other sectors have increased their value by many times, while miners overall have capitalisation no greater than it was a decade ago.
On a smaller scale, this illiquidity affects Western Australian companies. Two examples are the Clough engineering group, the fortunes of which depend to a large degree on resource projects, where a big family holding means that there are few shares in the market, depressing it prices. The company is now looking at ways to redress this.
A smaller company, Mermaid Marine (in which Clough has a significant holding) is also concerned that little more than a fifth of its shares are broadly held. Its board is also considering ways to improve market turnover. Its fortunes are dependent on the expected rapid increase in oil and gas development on the Western Australian coast.
But moving back to the wider stage, Perry and other analysts point out that even a company with a market capitalisation of $1 billion is regarded as small, by global companies.
One needs market capitalisation of $A20 billion to be regarded as a global company, and only BHP, in the group listed above, fills that role among purely Australian companies.
There have already been some significant raids on local gold assets, cheap in sterling or U.S, dollars, including Angolgold’s successful bid for Acacia, and the scooping up of Hargreaves and Dome Resources by another South African, Durban Roodeport Deep and in diamonds, Rio Tinto’s win over De Beers to win Ashton Mining.
