Hanlong reneges on Sundance deal

VANCOUVER –Mining companies and resource investors are going to have a tough time believing Hanlong Group if it tables another takeover offer. Twice the huge Chinese energy and resource company has offered to take over junior miners but...

VANCOUVER –Mining companies and resource investors are going to have a tough time believing Hanlong Group if it tables another takeover offer. Twice the huge Chinese energy and resource company has offered to take over junior miners but both deals have fallen apart, the latest one just recently after almost two years of negotiations.

Adding to the uncertainty, rumours are also flying that Hanlong is attempting to break apart another junior company to recoup a not-yet-due loan. And it doesn't help that the company's chairman is in jail for allegedly helping his younger brother evade arrest for his involvement in a gangland-style triple homicide.

The deal that just came skidding to a halt is Hanlong's bid for Sundance Resources (SDL-A). In October 2011 Hanlong offered A57¢ per share for Sundance, in a deal worth A$1.65 billion. Ten months later the companies agreed to a revised deal sheet that lowered the takeover price to A45¢ per share. Nevertheless the agreement seemed to be inching its way towards completion, albeit ever so slowly, until April 9.

That's when news broke that it was all over. Sundance was the one to officially call it quits, but the Australian firm did so upon learning that Hanlong simply wasn't going to meet a raft of required conditions.

News of the deal failure sent Sundance shares into free fall: the company's share price lost 56%in a day, falling to just A9.3¢. And by derailing the deal Hanlong also hurt itself, as the Chinese firm owns 14% of Sundance. It acquired 443.8 million shares in March 2011 for A44¢ a piece, in a transaction valued at A$191 million. Now those shares are worth some A$40 million.

The doomed Sundance deal follows Hanlong's failure to follow through on a A$143-million offer for Bannerman Resources (BAN-T) in 2011. And in a twist certain to add to the market's Hanlong hesitance, the Chinese company also owns a 57% stake in Moly Mines (MOL-T), which entered a trading halt on April 9 after rumours started to swirl that Hanlong is trying to oust Moly Mines' independent directors as part of an effort to recoup a US$45-million loan.

Hanlong wanted Sundance for Mbalam-Nabeba, a massive iron ore project that straddles the border of Cameroon and the Republic of Congo. The project as planned would produce 35 million tonnes of iron ore a year for 25 years, but the price tag to build the operation is US$4.6 billion. Costs are especially steep because a developer would not only be building the mine, but also a deep water port and a 510-km rail line to the Cameroon coast.

The protracted timeline to close the bid was one sign that Hanlong was struggling to meet its obligations, though a significant slump in iron ore prices last year would have slowed many a deal down. Making things more difficult, the company lacked a key supporter throughout the takeover process: the Chinese government. In February Beijing confirmed it would not fund the bid, ordering Hanlong to find funding somewhere else.

The markets will never know exactly why Beijing did not support Hanlong. It may have been the project, or it may have been the people…the Hanlong people, that is. Not long after the deal was announced a group of Hanlong executives in Australia were charged with insider trading. Then in March of this year Hanlong's chairman Lui Han was arrested for allegedly harbouring his younger brother, a suspect in a 2009 triple murder at a teahouse in their hometown.

As for the Moly Mines situation, Hanlong paid US$155 million in October 2009 for a 57% stake in the junior. That stake is now worth just US$22 million. In addition, Hanlong gave Moly Mines US$45 million, a loan that was only due to be repaid once the junior's Spinifex Ridge molybdenum project in Western Australia was fully financed and a final investment decision had been made.

Since that 2009 deal molybdenum prices have fallen by two-thirds and Spinifex Ridge is nowhere near approval. Now it appears that Hanlong is trying to recoup its cash, and is threatening to use its majority holding to overturn the board if necessary. In a news release, Moly Mines acknowledged that "Hanlong and the board are in discussions in relation to the future structure and composition of the board."

Whatever happens to Moly Mines, Hanlong will clearly have to work hard to re-establish itself in the global mining markets. For many, though, that is just one part of the story.

The failed Sundance deal prompted an array of responses from the investment community. Many analysts said the failure is further evidence that China's push for overseas resource assets is weakening and, since China has bankrolled many of the big acquisitions and mine builds in recent years, that means the global mining sector is set to feel a pinch.

By way of evidence, this camp points out that Hanlong's bid for Sundance is fourth major failed Chinese deal in recent years. Other big dud deals include China National Gold abandoning talks to take over African Barrick Gold, Chinese private equity firm Cathay Fortune withdrawing its bid for Discovery Metals, and Chalco dropping its offer for a stake in SouthGobi Resources.

Others, however, don't see the failed Sundance deal as a reflection of waning Chinese interest in strategic investments, especially in Africa. Chinese companies are spending billions of dollars building projects in Africa. For example, in Cameroon China International Water & Electric is building the Lom-Pangar dam, China Harbour Engineering is constructing the Kribi deep water port, and Sinohydro is building the Memve'ele hydroelectric project. China's involvement in the Congo is similarly extensive.

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