IGO’s recently proposed Joint Venture with Western Areas 9.8% shareholder Wyloo appears to Odey to breach Section 623 of The Australia Corporations Act 2001 which prohibits a bidder, during a takeover period, from offering a benefit to a shareholder if the benefit is likely to induce the shareholder to accept an offer and the benefit is not offered to all shareholders.
To cure the breach of Section 623, Odey believes that all Western Areas shareholders should be offered compensation equalling that offered by IGO’s proposed Joint Venture with Western Areas 9.8% shareholder Wyloo, which, based on assumptions previously disclosed by IGO, appears to be at least a 67% increase in deal value consideration, or the Joint Venture should be disbanded.
The Western Areas auction process should be conducted in a manner which is full and fair. IGO’s offer, at just 1.6% of the gross value of the resources of Western Areas as at March 25, 202212, remains in Odey’s view at a significant discount to reasoned appraisals of value of what is a best-in-class, highly strategic, and vast, development stage pure play nickel asset.
LONDON, March 28, 2022 (GLOBE NEWSWIRE) --
On December 16, 2021, IGO Ltd (IGO.AX) (“IGO”) announced a takeover offer, structured by scheme of arrangement, for Western Areas (WSA.AX), an upstream development stage nickel miner1. The shareholders of Western Areas include Wyloo Metals (“Wyloo”) which owns a 9.8% stake2 and Odey Asset Management LLP (“Odey”), which owns a 1.0% stake3. Subsequently, on February 17, 2022, IGO published a press release stating that, subject to a feasibility study, a 70:30 joint venture would be formed respectively with Wyloo to construct and operate a downstream nickel processing facility (the “Joint Venture”).4
Section 623 of The Australia Corporations Act 2001 (the “2001 Act”) prohibits a bidder, during a takeover period, from offering a benefit to a shareholder if the benefit is likely to induce the shareholder to accept an offer and the benefit is not offered to all shareholders5. In this case, the 30% participation in the Joint Venture that has been offered exclusively to Wyloo appears to be implied at a value of, at least, A$71 million6, or a 67% increase in offer consideration relative to Wyloo’s A$106 million stake in Western Areas. This offer to Wyloo is therefore clearly, a benefit.
Odey notes that the economic feasibility and value of a downstream nickel processing asset is conditional on the co-incident volume of upstream nickel resources possessed. The value of Wyloo’s 30% participation in the Joint Venture, an IGO-controlled downstream nickel processing asset, is therefore conditional on the success of the IGO takeover of Western Areas, a vast upstream nickel asset (Western Areas will increase the volume of IGO’s nickel resources by 455%7).
As such, Odey believes that the benefit being offered to Wyloo has properties likely to induce Wyloo, by financial incentive, to accept the offer for Western Areas. This has also been demonstrated by Wyloo’s actions: co-incident with the IGO and Wyloo statement announcing the Joint Venture, Wyloo committed to vote its shares in Western Areas in favour of the IGO proposal8, one third of which had been purchased at a premium to the deal value9.
To cure the breaches detailed, and in line with IGO’s legal requirement under the 2001 Act, Odey believes that all shareholders of Western Areas should be offered a pro-rated share of the business entity encompassing the feasibility study, followed by the 30% Joint Venture participation, that has been offered to Wyloo. Alternatively, an independent expert can be appointed to determine the value of this business opportunity that has been offered to Wyloo. The value offered to all shareholders for IGO’s proposed takeover of Western Areas must then be raised by this same percentage in cash.
A third alternative would be that, in light of the fact that the current deal structure appears in breach of the 2001 Act, IGO and Wyloo disband the announced Joint Venture entirely.
The Western Areas auction process should be conducted in a manner which is full and fair, and indeed, the provisions of the 2001 Act, which appear to have been breached, are designed to protect minority shareholders against discriminatory outcomes. Odey also encourages other Western Areas shareholders to make their views clear to both Western Areas, and to IGO, regarding the information in this press release.
It is furthermore notable that IGO’s acquisition proposal, at just 1.6% of the gross value of the nickel resources of Western Areas as at March 25, 202210, also appears to be at a significant discount to reasoned appraisals of value of what is a best-in-class, highly strategic, and vast11, development stage pure play nickel asset. Upon IGO and Wyloo disbanding the Joint Venture, not only will IGO’s current acquisition proposal still remain, but further, in Odey’s view, there is a good probability that a competitive auction process can then be incrementally achieved for Western Areas.
A competitive auction process for Western Areas under the provisions of the 2001 Act would demand that any protagonism from Wyloo was exclusively in the role of a competing bidder (a role that Wyloo has acted in for other, similarly sized, development stage nickel assets)12. Odey believes such an auction process also has a strong probability of attracting new interest from other scaled mining companies13 and from forward thinking battery manufacturers and automakers looking to advantageously secure their future commodity needs. This contention is made particularly in the context of recent nickel price developments which have starkly demonstrated the price impact of changes in nickel demand.
Alternatively, the minority shareholders of Western Areas, subsequent to the disbanding of the Joint Venture and then including Wyloo acting also as an independent minority, can engage with IGO to ensure any takeover proposal from IGO only succeeds at a price much closer to fair value.
Adrian Courtenay
Fund Manager
Odey Asset Management
Odey Asset Management LLP “Odey”, established in 1991, is an independent boutique asset management firm overseeing in excess of $4 billion in funds under management.
Contact details: +44 (20) 7208 1400, press@odey.com. See more at www.odey.com.
Footnotes
1. IGO press release, Acquisition of Western Areas Ltd [link]
2. Wyloo Consolidated Investments Pty Ltd, a wholly owned subsidiary of Wyloo Metals, has 31,509,769 shares, representing a 9.8% interest, in Western Areas Limited [link]
3. Odey Asset Management LLP, through funds under its discretionary management, holds a position equivalent to 3.3 million shares in Western Areas, representing 1.0% of the shares outstanding.
4. Wyloo Metals And IGO Form Strategic Partnership To Advance Downstream Nickel Processing Opportunities [link]
5. The Australia Corporations Act 2001, Chapter 6, Section 623(1) Benefits during offer period, states that a “bidder must not, during the offer period for a takeover bid, give, offer to give or agree to give a benefit to a person if: (a) the benefit is likely to induce the person or an associate to … accept an offer under the bid… and (b) the benefit is not offered to all holders of securities in the bid class under the bid.” [link]
It is notable that these Chapter 6, Section 623(1), provisions of the 2001 Act remain relevant when an acquisition is structured as a Scheme of Arrangement, as is the IGO proposal for Western Areas.
Section 411(17) of the 2001 Act states: “The Court must not approve a compromise or [scheme of] arrangement under this section unless: (a) it is satisfied that the compromise or [scheme of] arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or (b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement; but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b). [link]
6. In a press release dated 1 November 2019, IGO disclosed the completion of a pre-feasibility study on the IGO downstream nickel sulphate process. The study concluded that, on base case assumptions, the Net Present Value (“NPV”) of a downstream nickel processing facility would be A$236m [link]. Given Wyloo’s 9.8% stake in Western Areas at the deal value of A$3.36 a share is worth A$106m, the benefit being offered to Wyloo is implied at a 67% increase in offer price (i.e. [A$236m x 30% participation] / A$106m = 67%).
However, this inference that the value uplift offered to Wyloo is 67% may now be significantly too conservative an estimate. Firstly, the average nickel price March 25, 2022, at $37,200 a tonne, was 121% higher than the nickel price on 1 November 2019, at $16,819 a tonne, when the pre-feasibility study was completed. Secondly, the acquisition of Western Areas would increase IGO’s nickel resources by 455%, from 207 kt of nickel to 1,148 kt of nickel7, providing a path to scenarios of significantly higher downstream nickel throughput volume than the assumptions used as inputs for the pre-feasibility study.
Nevertheless, and regardless as to the magnitude of any incremental NPV uplift implication, it is of course stating the obvious that Wyloo would only be countenancing the up-front capital investment element to the 30% participation in such a downstream nickel processing facility were it to provide to Wyloo a benefit (the requirement for the breach of the 2001 Act), by way of accreting Wyloo with a significant financial return, or NPV.
“I invest, like so many of us do in our great country, certainly to make a return.”
Andrew Forrest, Wyloo Metals control shareholder, public statement on Huon Aquaculture, August 2021 [link]
7. According to IGO’s acquisition of Western Areas presentation, slide 12, the acquisition of Western Areas would increase IGO’s nickel resources by 455%, from 207 kt of nickel to 1,148 kt of nickel [link].
8. “Wyloo Consolidated Investments Pty Ltd, a wholly owned subsidiary of Wyloo Metals, has undertaken to IGO to vote its 31,509,769 shares (representing a 9.8% interest) in Western Areas in support of the Western Areas board recommended scheme of arrangement between IGO and Western Areas” [link]
9. On 27 January 2022 it was disclosed that Wyloo Metals had increased their stake in Western Areas from 6.1% to 9.1%, at a cost of A$31.45 million for 9.17 million shares on market - or A$3.42/share [link]
10. Western Areas has total mineral resources of 937.1 kt. Source: Western Areas quarterly resource statement, page 24 [link]. Therefore, the gross value of the resources of Western Areas is US$34.9bn (i.e. the nickel price was $37,200 a tonne at March 25, 2022 x 937.1 kt of resources = US$34.9bn). By comparison, IGO’s A$3.36 takeover consideration for Western Areas values its market capitalisation at US$765m (3.36 x AUDUSD at 0.70 x 321.6m shares), and, less US$97m in net cash and less its US$93m stake in Panoramic Resources, results in an Enterprise Value of US$575m. Therefore, IGO’s takeover consideration for Western Areas is just 1.6% of the gross value of its nickel resources (i.e. US$575m / US$34.9bn = 1.6%).
11. A lithium-ion battery for an electric vehicle contains 40kg of nickel [link]. The total mineral nickel resources of Western Areas at 937.1 kt is therefore vast – sufficient for the production of 23.4 million electric vehicles (i.e. 937,000,000 / 40) or 3.6x Gartner’s estimated global electric car shipments in 2022 of 6.4 million vehicles [link].
12. Wyloo Metals has historically acted as a control buyer for development stage nickel assets, offering an enterprise value of US$0.5bn to acquire Noront Resources in December 2021 [link].
13. On June 19, 2020, BHP Billiton announced the acquisition of the Honeymoon Well Nickel Project from Norilsk Nickel [link]. The Honeymoon Well Nickel Project, which contains 173 mt of measured and indicated resources grading 0.68% nickel [link], is less than 100 km distance [link] from the principal nickel assets held by Western Areas at the Cosmos Nickel site [link]. In August 2021 BHP indicated a desire to acquire additional nickel assets [link].
Separately, on February 8th 2022, the Australian Financial Review reported that Mincor Resources approached Western Areas with a share-based proposal in late 2021, which was rejected [link]. The share price of Mincor Resources has since risen materially, however, gaining more than 70% as of March 25, 2022, relative to its average level in Q4 2021.
Disclaimer: Odey Asset Management is acting on behalf of itself and not as agent for or on behalf of any third party. The content of this press release has been prepared by Odey Asset Management alone and is not, and has not been, endorsed or approved by any other person. You should assume that, as at the date hereof, Odey Asset Management may have a position (long or short) in one or more of the securities of any company mentioned in this document (and/or options, swaps and other derivatives related to one or more of these securities) and may continue transacting in such securities.
