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Kenmare Resources rebuffs approach from Iluka

Published: 11:17 26 Jun 2014 BST

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Shares in Kenmare Resources (LON:KMR) shot up by more than one-fifth after it received a takeover approach from Iluka Resources.

The Kenmare board, with the support of 19.05% stakeholder M&G Investment Management, has rejected the proposed offer from the Australian firm, which was on the basis of 0.036 new Iluka shares for each Kenmare share.

Based on the latest share prices on the Australian stock exchange, the terms value Kenmare shares at 16.8p. Shares in Kenmare were up 22.9% at 14.75p in mid-morning trade.

Broker RF Ambrian said the preliminary approach presents a “real conundrum” for Kenmare’s management.

“On the one hand, you could argue that Michael Carville and his team should bite Iluka’s hand off. Everyone in the London market knows Kenmare and I’ve yet to talk to anyone who’s made money holding it, although I suppose plenty of proprietary traders have made bucket loads trading in and out of the volatility,” the broker said in a note that was released before Kenmare confirmed the bid approach.

“Kenmare has been in most people’s funds at one time or another and no one really has anything positive to say about it. In many respects, this is a shame. While many a junior mining company like to put the somewhat meaningless phrase ‘world-class’ at front and centre of their presentations to describe their deposits, in the case of Kenmare Resources’ Moma deposit, this is genuinely true,” the broker added.

On the other hand, the broker said it believes “that the company has come close to going bust”.

Analyst Jonathan Williams went on to say, however, that the bid approach would not go unnoticed and should be good news for other minnows in the sector.

“The lesson is this: while the market has ignored the value that junior mining stocks offer, the corporates have not. They are on the move.”

SP Angel, meanwhile, feels that the bid maybe an opportunistic one but it can “see the market accepting this or a nearby offer for the company given its recent history”.

Heavyweight broker JP Morgan (JPM) said a combination of the two companies would offer Iluka growth that it does not have with its current suite of assets.

“We believe the combination would make strategic sense given Iluka has an underlevered balance sheet, and limited internal organic growth options. Moma continues to have operational issues relating to power reliability in Mozambique but these could potentially be resolved by Iluka who have the capability to spend more capital on the project,” JPM said, though it conceded that monopoly fears could be a concern.

“We estimate Iluka currently has a 31% share of the global zircon market. Adding Kenmare’s Moma would mean the combined entity would have ~36% share. With Moma ramping up to full Stage 3 capacity, we estimate this could increase to 41% by the end of the decade. Therefore anti-trust could potentially be an impediment, but we believe Iluka would have considered these factors by this stage,” the broker said.

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