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Sep 2003 - Investment Decision

What is relevant when making an investment decision?

The subject of what is considered relevant when making an investment decision is extremely broad, however, for this month’s column we have focused on takeover situations and research.

As one of the remaining shareholders in Zimplats on 9 September 2003 (we believe that in the long-term it is worth more than A$4.08/share), we recently had a telephone call from a representative of Impala on 8 September 2003, and as they went through their “spiel” commenting about IMP holding about 79% of ZIM, we commented that it had also been reported on 2 Sept that Roy Pitchford had stated that 15% was being issued at A$3.49 to Needgate Investments (a Zimbabwean company), and that inferred that IMP only has about 68% of ZIM. However, we were informed by the IMP representative “that is irrelevant”.

Bloomberg also reported on the same day (2 September 2003) that Barbican’s chief executive Mthuli Ncube had stated in an interview that they would make a formal offer “within the next few days”, although this did not appear to have been reported anywhere else in Australia (and so far [9 September], nothing has physically materialized either).

Companies that are taking over other companies do face a dilemma, do they try and get the best deal for their shareholders, or when they are clearly in control of their target should they act in the best interests of the shareholders they now also represent. A classic example has been the recent takeover offer by Impala (IMP) for Zimplats (ZIM), which has been unusual in that the offer was made when IMP had more than 50% of ZIM.

Impala made its takeover offer for ZIM when it took over the ABSA stake and moved to a greater than 50% control of ZIM, and hence in theory controlled the board, so the board that recommended and continued to recommend accepting IMP’s offer were effectively IMP employees.

Soon after IMP made its offer, a furnace break-out that occurred on 12 July was announced by ZIM and it was stated that “an early evaluation indicates that the damage is serious and the furnace may be out of commission for between one and two months” This was an unusual announcement, given that ZIM had been working on gradually refurbishing its SMC complex for some time….and the furnace was in fact fixed and reactivated by 6 August, so was it relevant ?

Back on 30 June, Implats’ Finance Director was quoted on Minweb as saying that “due to the political risk in Zimbabwe…Impala is paying ZAR10 per platinum ounce for Zimplats, which equated to five or six times less than what Impala has paid in previous transactions”. Questions were asked as to why IMP wanted to takeover ZIM in August, was it because they had to after ABSA sold or was there any influence from the fact that at the end of August 2003 Zimbabwe was to undergo elections in which the MDC were expected to win a number of seats (we only found out after it had occurred).

The election seat “wins” could be a gradual phase towards Mugabe leaving and the political risk in Zimbabwe reducing. We did not notice any reference to this in the offer documentation, but surely if there was a chance of the political risk changing then it could be relevant to a shareholder deciding to hold or sell their ZIM shares or accept the IMP offer.

IMP extended its offer to purchase ZIM shares at A$4.08/share until 11 September 2003 through buying on market, but failed to mention anything about the elections, or that the platinum market prices had improved during the period of the offer from US$674/oz on 1 July to US$712/oz on 9 September, with palladium up from US$181/oz to US$227/oz in the same period. At current pge prices our NPV of ZIM is closer to $6/share.

What was mentioned was the usual warnings about reduced liquidity likely to result in lower share prices – not that we have seen that occur, often they rise as we commented on page 17 of Paydirt’s October 2002 Issue. We actually referred to Impala in that article as then only having 1521 shareholders, of which 1317 were individuals holding a total of 440,000 shares and 8 shareholders holding 94.8% of the issued shares. Since 30 June 2003, and the ZIM takeover announcement, IMP shares have risen by 33% from R451/share to R598/share or an increase of R11bn (approx A$2.2bn) of which part may be due to the increase in platinum prices and part may be due to the acquisition of ZIM.

Surprisingly IMP also stated that IMP’s increased shareholding of 80% on 5 September (or about 68% post the 15% allocation) could result in ZIM being delisted. If 15% is allocated then you would have thought that the 15% holders would want to have a vehicle in which they could see what its underlying value was through it trading. Also as we understand it, IMP would have to apply to the ASX to delist ZIM, and it is at the ASX’s discretion as to whether there are insufficient shareholders to warrant delisting ZIM. We could be wrong, but given what happened to North Flinders, delisting ZIM currently (9 September) appears unlikely.

While the negative points were being made about ZIM and why ZIM shareholders should accept IMP’s offer, there was no mention of some of the information in IMP’s press release accompanying their year end results on 28 August, namely that “Zimplats has title to extensive tenements, on a known, shallow, accessible orebody that has the potential to rival that of the (mega US$bn value) Bushveld Complex (of South Africa).” (our additional comments to the text are shown in a smaller font and in brackets).

So what is relevant to be disclosed to shareholders of ZIM by IMP, and is it coloured by IMP directors acting in the best interests of IMP shareholders, while at the same time being in a quandary over having effective board control of ZIM and a theoretical duty towards ZIM shareholders too.

We have referred to a number of additional factors that are available but were not clearly disclosed to ZIM shareholders in general, this additional knowledge falls under the topic of research and what is relevant.

Companies commission research to be undertaken on themselves for a number of reasons, but are restricted in notifying the ASX that a report has been completed since the ASX classifies such reports as advertising. However, such reports can have an influence on share prices, (or being an independent research company, we think they do) through enabling advisers to make a decision using more information in their recommendations to potential and existing investors.

The impact on share prices of reports that we have written are probably distorted by the fact that the share prices of most resource stocks have recently risen, however, the increases for those share reports that we have written in about the past 6 months are shown in Table 1 (sorted by %change), viz :

Table 1 Share price increases on Stocks analysed in the past 6 months by ERAGDNsep03

We think research is relevant for advisers and shareholders to make decisions, in that research can cover knowledge that may not be immediately visible, but is actually available.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and with his associates, holds interests in some of the stocks in this article.. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

  • Written by: Keith Goode
  • Monday, 01 September 2003

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