September 30, 2009
The Potential Of The Vulcan Resources/Universal Resources Merger Appears To Have Been Overlooked By Investors
Can two stalled copper companies merge to create a viable business? Management at Vulcan Resources and Universal Resources certainly thinks so, shareholders are hoping so, but the wider investment jury called the stock market is out. Since announcing their engagement, and proposal to consecrate the marriage early next year, the share price of the Australian-based duo has been lacklustre, creeping fractionally higher despite copper being the flavour of the month on the ASX. In a curious way could be the reason why a lot of potential supporters of the Vulcan/Universal deal have been looking the other way rather than focussing on what is being created under their noses.
Rather than looking closely at the formation of the new Vulcan/Universal, with a million tonnes of copper in the ground, two fully planned and costed mines ready to go, and a more than useful range of by-products such as cobalt, nickel and gold, Australian investors been fascinated by the performance of five other copper stocks. Marengo has been a star thanks to its investment deal with billionaire speculator, George Soros. CuDeco has returned after three years in a self-imposed wilderness. Rex has made what appears to be a significant copper discovery in South Australia and Sandfire and Talisman have ridden the Doolgunna rocket in Western Australia.
Sandfire has been the star, so far, in the remarkable revival of copper as a leader of the Australian minerals sector. On Tuesday its shares hit a fresh all-time high of $3.99 before easing back to $3.36. As recently as March anyone could have loaded up with a fistful of Sandfire paper at A5 cents. Doolgunna, which is shaping as a major copper strike, is the driver, along with bullish broker assessments such as the latest from Bell Potter which reckons the stock could be on the way to a high of A$6. Talisman, with a promising tenement position alongside Doolgunna, has ridden in the wake of Talisman despite no drilling, yet, on its ground. On Monday, Talisman hit its all-time high of A82 cents, before slipping back to A69 cents.
The point of mentioning Sandfire, Talisman, Marengo, Rex and CuDeco before getting to the purpose of this story, Vulcan/Universal, should be obvious, too much background noise. In other words, no broker or major media outlet in Australia has taken a look at how a substantial copper-focussed company is being created by merging two complementary companies. Vulcan with its best assets in Finland, topped by the high-grade underground Kylylahti copper/cobalt/nickel project, and Universal with the big, low-grade open pit Roseby project in Queensland. Together, these two projects are expected to produce more than 36,000 tonnes of copper a year, plus by-products of gold, nickel, cobalt and zinc.
“We are on the way to creating a significant, copper-focussed, global mine development company,” said Vulcan chief executive and heir apparent to the merged entity, Alistair Cowden. “We’ve been looking for some time for opportunities to enhance our production potential and this is a compelling opportunity.” But, if that’s the case then how does he explain the insipid reaction of the market which has seen the shares prices of both companies remain relatively static. “You know the way the market works,” he said. “Someone putting out drilling results faced with the reality of building the thing gets three-times the valuation of someone who is actually trying to build something.
What Vulcan/Universal plan to build will almost certainly start with Kylylahti, a project with a price tag of US$170 million and a finalised feasibility study based on the production of two streams of concentrate, a copper/gold stream containing 8800 tonnes of copper and 11,900 ounces of gold, matched by a mixed stream comprising 1900 tonnes of cobalt, 1350 tonnes of nickel, 3800 tonnes of zinc and another 1700 tonnes of copper. Following close behind will be Roseby, a project costing A$213 million, processing five million tonnes of ore a year for the recovery of 26,000 tonnes of copper and 7500 ounces of gold.
Reams of paperwork, and months of jawboning, lie ahead before the deal is finalised, a result of the slow scheme of arrangement merger process chosen under which Universal technically acquires Vulcan by issuing 6.85 of its shares for each Vulcan share. When complete existing Vulcan shareholders will own 64 per cent of the merged company, Universal shareholders the remaining 36%. There will also be a whopping 1.55 billion shares on issue, leading to one-for-10 capital consolidation, with all of the preliminary organisational manoeuvres and ongoing work at the two prospective mines covered by a healthy cash balance of A$30 million.
The synergy benefits of bringing two copper projects under the one management team, with resulting cost savings, is one aspect to the Vulcan/Universal merger. Another is the changed market conditions, on both the share and commodities markets. It is exactly one year and one week since Vulcan was forced to pull the pin on Kylylahti, a direct consequence of the Lehman Brothers collapse, the copper price commencing a free fall, and capital markets entering a financial version of a deep freeze.
Times, prices, and plans change, which is why a nosy investor will find it interesting to start sniffing around the Vulcan/Universal deal because there might be more to come on the corporate side as well as mine development. Alistair, ever the prudent Scotsman (albeit one now proudly wearing a fine coating of Australian dust and Finnish snow) declines to talk about what’s cooking, but did offer a “watch this space” suggestion. We will.