Herald reluctantly endorses Bumi bid

Australian mining company Herald Resources advises its shareholders to accept a bid from Indonesia's Bumi despite deeming the $392 million offer too low. Herald continues to engage other bidders.
Australian zinc miner Herald Resources has advised its shareholders to accept, in the absence of a superior proposal, an offer made by Indonesian coal mining company Bumi Resources, only a month after it described the move as ôhostile and unsolicitedö. Bumi has valued Herald at A$455 million ($392 million).

The decision comes following significant turmoil in global financial markets, which caused AustraliaÆs benchmark index to fall 7% on Tuesday in its tenth straight day of declines. Herald has accepted the offer, subject to not attracting a higher bid, in view of uncertainties surrounding both market conditions and approvals for the exploitation of its key asset, the Dairi project in Indonesia.

Bumi, through its wholly-owned vehicle Calipso, has offered A$2.25 cash per Herald share. Bumi has so far acquired 38.7 million shares, and has received acceptance for a further 76,000 shares, representing 19.7% of HeraldÆs issued shares, according to the company press release. The offer is subject to a 50.1% minimum acceptance condition.

The Bumi offer is open until February 15. It is still subject to approval by Bumi shareholders, which should be in place by the end of this month.

Despite endorsing the bid, HeraldÆs directors have stated that BumiÆs bid undervalues the company. Herald expects shareholders to make substantial gains if approvals for the exploitation of its Dairi project, a high-grade lead/zinc project, are awarded and believes these are not reflected in BumiÆs offer. However, forestry approvals by the Indonesian government for the project have been delayed since HeraldÆs application over two years ago.

Both Herald and Bumi are in agreement that the necessary approvals will be forthcoming in the future. But the delay has caused increases in the capital cost of the Dairi project, with further increases still possible. Other risks include a deterioration in the outlook for lead and zinc prices, continued holding costs for items already ordered or paid for, loss of staff and further deterioration in market conditions, which could have an adverse impact on debt- and equity-raising.

ôMarket conditions and the uncertainty surrounding forestry approval for the Dairi project being granted in the short-term have led us to conclude that our shareholders should accept the offer,ö says Michael Wright, executive director at Herald.

ôAlthough the bid offers a premium to Herald's historical share price, we feel that it undervalues the company and its assets, and we are talking to other interested parties to attract bidders. But as yet no counter-offer has been made,ö Wright added.

Herald has advised shareholders to delay accepting the Bumi offer until shortly before the end of the offer period, presumably to enable Herald to have the maximum possible time to pursue alternative avenues.

Financing for the transaction has been secured. ôBumi will be supplying their own funds through conventional sources, but the company also benefits from assurances from Credit Suisse that it will fund anything that is required for the transaction,ö says a source. On January 7, media reported that Bumi may employ up to $375 million in debt supplied by Credit Suisse to help fund the takeover. There have also been rumours of a bond transaction to be arranged by the Swiss bank, although these are unconfirmed.

In 2006 BumiÆs coal production reached 50.7 million tonnes, an increase of 13% year-on-year, while revenue increased from $1.75 billion at the end of 2005 to $1.85 billion at the end of 2006. Herald could bring to Bumi access to high-grade zinc/lead resources, as well as rock-mining skills and experience in the projectÆs exploitation.

Herald currently has an 80% interest in the Dairi project, while PT Antam - a large publicly-listed company with a number of mining operations and which is 65%-owned by the Government of Indonesia - holds the remaining 20%. Bumi is obviously gambling that once it owns the project, it will be able to address and resolve the approvals that are being withheld.

In the meantime, Herald, which is being advised by Euroz Securities and Blackstone & Crabb, is still hoping for a competing bid which meets its price expectations. And given that Herald shares closed trading at A$2.18 yesterday, only A$0.07 below the price Bumi has tabled, Herald's hopes could still come true.
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