When former AGL chief executive Greg Martin accepted the role of Murchison Metals chief executive mid-year, he made no bones about what his role was. It was to create a transaction that enabled it to sell-off Murchison’s core assets without taking the group under in the process. It would appear he has succeeded.

Murchison had created a highly strategic position for itself in Western Australia’s mid-west iron ore province, with a half interest in the Crosslands joint venture with Japan’s Mitsubishi that owns the Jack Hills iron ore project and a 25% stake in the proposed Oakajee port and rail project. Murchison also has a further direct 25% interest in Oakajee, a project regarded as essential to the opening up of the mid-west region.

The problem for Murchison was that, with a market capitalisation that was less than $300 million at the time of Martin’s appointment (it was down to just over $120 million yesterday), the funding requirement for its share of the Jack Hills and Oakajee developments — the capital costs for the projects are estimated at more than $10 billion — would prove impossible to meet.

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That’s why Martin made it clear from the outset that he was pursuing a “corporate” transaction. When he started the process it appeared the best outcome was a takeover of Murchison itself, but the eventual outcome has produced something surprisingly positive.

Given the direct and indirect nature of Murchison’s interest in Oakajee and the joint venturing of Jack Hills, Mitsubishi was always the most obvious buyer. The problem in making sense of any deal, however, was that Oakajee needs a lot more customers than just Jack Hills to be a viable project.

China’s Sinosteel, which has a $2 billion Weld Range project in the region, had been negotiating to become a foundation customer but walked away earlier this year in protest at the proposed tariffs for shipping its ore and their structure, which was said to impose disproportionately high charges on the foundation customers with short mine lives. Weld Range has a mine life of only about 15 years.

Weld Range is among several iron ore projects in the mid-west in which Chinese interests have invested more than $3 billion. Those projects wouldn’t necessarily be completely stranded if Oakajee didn’t proceed, but getting that ore to market would be more complicated and expensive and probably significantly delayed.

With the cost of Oakajee continually blowing out, the timing of first shipments repeatedly pushing out, iron ore prices already well down on their peaks and China starting to feel the effects of the economic woes of the US and Europe, the economics of the mid-west mines have already changed significantly. The port and rail infrastructure remains, however, a priority for the WA government and the key to opening up the resources in the region.

The deal Martin announced today is quite straightforward. Murchison has agreed to sell its interests in Crosslands and Jack Hills to Mitsubishi for $325 million of cash — an implied value of 51 cents per share and more than 80% above the group’s recent share price trading levels. No wonder its share price soared today.

If the deal is consummated — it is conditional and Murchison is free to keep trying to find a better deal now that it has a benchmark transaction out in the open — Murchison would emerge with $200 million to $220 million of net cash, its Rocklea iron ore project just west of Tom Price in the Pilbara and some exploration tenements. Rocklea, potentially a 10 million tonnes per annum mine, has a development cost of about $370 million.

Martin has beaten the bushes for alternative proposals and says the Mitsubishi deal is the best he could flush out.

Given China’s interest in the region — the Oakajee partners out-bid a rival consortium, largely Chinese and including Sinosteel, to win preferred tenderer status to build the rail lines and port from the WA government — it wouldn’t be a surprise if there was eventual Chinese involvement in the project.

Indeed, Mitsubishi is reportedly already negotiating with the Chinese and could presumably replace the undersized Murchison with Chinese state-owned investors highly motivated by China’s stated ambition of securing its own sources of raw material supply.

*This article first appeared on Business Spectator

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Peter Fray
Peter Fray
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