It’s all about bucks
Share buy back bill higher than miner’s market cap
AQUARIUS PLATINUM has surely undertaken, relatively speaking, one of the most expensive share buyback exercises ever. Aquarius – listed in London, with a secondary listing on the JSE – announced in April this year the repurchase of its shares and those in Aquarius Platinum (SA) for US$790m (£390m and R6bn) from strategic investor (and rival) Impala Platinum.
Shares in Aquarius were bought back from Impala at 671p/share, which looked a reasonable price in the ensuing months as the junior miner’s share price held mostly above the 800p/share level until endJuly.
At the time of the deal, Aquarius believed the pricing and funding mechanism of the repurchases would enhance the company’s value and would be earnings accretive for its 2009 financial year and thereafter – “subject to prevailing metal prices and exchange rates”. At the time Aquarius CEO Stuart Murray commented: “I’m pleased we have been able to add further value to our business… both parties have achieved a most satisfactory outcome.”
There’s no doubt Impala made a nice turn on its investment in Aquarius. But Aquarius shareholders have hardly had a “satisfactory outcome” – and it may be a while before the repurchase exercise can be considered value enhancing or earnings accretive.
You can’t really point a finger at Aquarius for its costly venture. Not too many market experts expected the commodity cycle – especially in platinum group metals (PGMs) – to swing down as viciously as it has over the past month.
Aquarius spokesman Nick Bias says one positive from the exercise was that new capital raised via a rights issue to fund the bulk of the share buyback was struck at a higher price than Impala’s share buyback. Bias says: “The new equity issue was well supported by the market and was two times oversubscribed. Basically, new shares went out at the top and we brought new shares back in at the top.” Bias says it was an important strategic decision to buy out the Impala shareholding.
It could be argued Aquarius did more than just gain its independence from Impala. The buyback also removed an impediment to growth, as dividends would no longer have to be paid out to a rival platinum mining group.
Some may regard it pedantic to point out Aquarius’s ill-timed repurchase exercise – especially since it’s easy to be critical with the benefit of hindsight. Indeed, Aquarius can’t really be taken to task for bad timing when investors – especially in the commodities sector – are increasingly desperate and irrational.
However, developments should serve as a reminder of how quickly things can change, especially in the adventurous junior mining sector. Unfortunately, as things stand everything points to what could prove a rather expensive share buyback exercise, with PGM prices slumping and sentiment for second tier mining firms quickly evaporating.
Over the past few weeks Aquarius’s share price has plummeted to less than a third of what Impala was paid out for its shareholdings. On Wednesday last week Aquarius was trading at around 100p/share on the London Stock Exchange.
At this juncture, Aquarius’s £265 market capitalisation in London is considerably less than the roughly £390m spent on the share buyback. It’s difficult to comprehend that in just six months a company can hold a specific share buyback bill that’s now bigger than its total market cap.
To make matters worse, Aquarius – notwithstanding the raising of $400m in a sharesfor-cash placement – incurred a fair chunk of debt to initiate the repurchase exercise. Aquarius noted in April that debt funding of around $275m would be outstanding, but added the repurchase transaction was struck at a time of continued strong operational cash flows.
However, there will probably be some worried shareholders after Aquarius’s quarterly sales to end-September 2008 fell to $106m on the back of markedly lower PGM prices. Though that yielded a small operating profit of $1,3m the after-tax line – which included finance costs of $11,6m – was $37m in the red.
There was at least some reassurance about the strength of Aquarius’s cash flows, with net operating cash flow reflected as $90m for the end-September quarter. Still, some shareholders may feel that with the commodity markets caught in a bear claw the determination to shoo off Impala has now left Aquarius just a little more vulnerable.
Less than satisfactory. Stuart Murray