Company: Felix Resources Ltd
ASX Code: FLX
Share Price: $17.35
Market cap: $3.4bn
After rallying at an annualised pace in excess of 100%, a bout of profit taking is a healthy proposition. Nonetheless the ASX200’s second largest retracement since the recovery began in March has sparked a few nerves. Most overbought shares are blowing off steam, but local coal miner, Felix Resources is holding strong. After being one of the great success stories to evolve out of the 2003-07 bull market, its shares are now back near record highs thanks to an all cash takeover bid. While it provides a rare defensive solace during the market’s corrective phase, we consider the ingredients behind its success and the current outlook for shareholders…
Felix’s meteoric rise from 35c began when it entered the coal business in 2003 via the acquisition of Yarabee Coal Company. After floundering as an exploration concern for years, the deal secured Felix a cash generating PCI and thermal coal mine in Qld’s Bowen Basin and a reliable platform for growth. Although half of the company was surrendered to Yarabee’s vendors, the transaction transformed the company from a perennial loss maker into a serious business, generating revenues of $59m within 12 months. It was during this time that the company first flew onto our radar, attracting a ‘speculative buy’ recommendation at 72c.
The company’s new era of profitable growth was supercharged when it merged with White Mining Ltd in 2004. While the deal was described as an acquisition, it was really a reverse takeover, with White Mining securing 55% of the merged entity and key management positions. But who could complain. White Mining Limited was an established coal production and stgelopment company with an industry record spanning three decades. White Mining brought to the table the Ashton Mine in the Hunter Valley, which immediately doubled the combined group’s production profile and added an incredible pipeline of long term growth opportunities.
Add to the mix a demand environment which has seen Newcastle spot prices almost triple to current levels of US$72/tonne from those which prevailed during 2003, and it is not hard to picture the ‘perfect storm’ which pushed the stock to current levels. In a nutshell it was increasing production (fuelled by smart acquisitions) and increasing sale prices which were central to its success.
However Felix’s expansion story is far from over. Its biggest project yet – Moolarben, in the Hunter Valley – awaits stgelopment, and is forecast to double the company’s production profile yet again when fully commissioned after 2011. Moolarben was acquired via the merger with White Mining, but just as deal making transformed Felix from a penny dreadful into a blue chip coal miner, another transaction is about to mark its final chapter as a listed company.
Felix has itself become the target of acquisition, attracting a $16.95/share all cash takeover offer from Yangzhou Coal Mining Company in August. The offer has Director support, but as apprehension towards foreign ‘raids’ on our natural resources has increased, there were fears that the deal could be blocked by the Government. However in recent weeks those fears have been allayed. Yangzhou’s takeover offer for Felix has received the green light from the Foreign Investment Review Board (FIRB).
Nonetheless, conditions imposed on the transaction establish a new benchmark for foreign takeovers of Australian resource companies. These conditions include retention of local management and workers, and a relisting of the company within three years at which point Yangzhou’s ownership levels of the underlying mines must be less than 50%. The conditions are positive for Australia – promoting foreign investment, but retaining local control of our irreplaceable natural resources. For Felix shareholders, the regulatory green light has dramatically reduced the stock’s downside risks, allowing it to defy downward swings in the overall market.
The resilience of stocks under takeover bids is not uncommon, and these scenario’s often provide good ‘parking spots’ for excess cash. On the other side of the equation, there is also the prospect of a rival takeover bid emerging, creating a favourable risk to reward balance. In Felix’s case, the Yangzhou offer is due to be finalised around Christmas and there is no harm in continuing to hold with a view to accepting the bid at a later date. Director support of the deal reduces the chances of a rival bid, however it is still a possibility. FIRB approval for the deal was only recently announced, and it would have been in a rival bidder’s best interests to wait and see if the offer was blocked before pouncing. But regardless of what eventuates over the next two months (or there lack of), we say to Felix, ‘thanks for the memories’.
Tim Morris is an analyst at wise-owl.com. Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.
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