It’s all about bucks

Share buy back bill higher than miner’s mar­ket cap

Finweek English Edition - - Companies & Markets - MARC HASEN­FUSS

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.

Source: McGre­gor BFA

Less than sat­is­fac­tory. Stu­art Mur­ray

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