Aquila shares have traded at above the $3.40 per share offer price for the past two sessions, closing at $3.42 yesterday.
Analysts from Morgans this week described the hostile offer as unlikely to succeed at the current price.
“It’s a low-ball offer at a low point in the iron ore seasonal market and [with] coking coal prices at their lowest point in four years,” analysts said in a note.
Morgans said the deal was cheap on iron ore metrics alone.
“Considering the enterprise value/resource tonne on the West Pilbara iron ore project of around 81c per tonne versus a historical average of around $2/t (and even cheap deals being priced around $1) we expect that Baosteel will likely upgrade their offer,” analysts said.
“The takeover offer valuation also doesn’t take into account the value of the Washpool, Walton and Eagle Downs coal projects nor the South African iron ore projects.”
Analysts from JP Morgan aren’t so sure, saying that while there remains the possibility of an increase to the bid, the current offer looks full and is likely to be accepted.
Mark Busuttil wrote that the offer was surprising given JP’s previously valuation of $2.20 per share with an underweight rating.
JP has upgraded its rating to neutral with a $3.40 price target.
“The difference between our prior target and the offer price appears to be in the value attributed to the West Pilbara iron ore project,” Busuttil wrote.
“Based on a stand-alone project, we estimated a negative net present value for the project and therefore assigned no value contribution in our target.”
JP said even if the acquirers were successful, the development of the WPIOP remained challenging with additional participants likely to be required.
“Considering weakening iron ore prices and considerable new capacity coming online over the next few years, we believe there would be few willing participants to commit capital to build new iron ore mines in the region in order to support the project,” Busuttil said.
Baosteel, which owns nearly 20% of Aquila, said it had become frustrated by the lack of progress in developing the project with Aquila locked in a budget dispute with its partner AMCI.
Meanwhile, freight provider Aurizon has made no secret of its desire to expand into the Pilbara.
Aurizon CEO Lance Hockridge described the bid as a “very prospective opportunity for us that should offer good returns”
“This proposal represents an unprecedented opportunity to co-develop world-class rail and port infrastructure in Australia, utilising Chinese and Australian capital, to deliver much-needed Australian commodities to China,” he told a media briefing this week.
“[It] is an excellent strategic fit for both companies.”
Aquila shares have jumped 39% since the bid was announced on Monday.
Meanwhile, junior iron ore hopefuls Cullen Resources and Red Hill Iron, which have interests in WPIOP deposits, have also enjoyed price gains in the wake of the news.
Red Hill shares are up 50% since Monday, prompting a speeding ticket from the Australian Securities Exchange.
Shares in Cullen have doubled to 1.2c since the deal was announced.
