WPG Resources (ASX: WPG) has agreed to sell its iron ore assets in South Australia to OneSteel Limited (ASX: OST) for about $346 million, bringing a return of about 400% on the company's iron ore investment of $70 million.
The sale is equivalent to $1.40 pre-tax per WPG share (undiluted) and the company will make a tax-effective cash distribution to its shareholders.
The transaction will deliver a distribution of cash that exceeds WPG’s current share price, with the additional benefits of franking credits.
The deal also brings the certainty of a near-term cash return and will allow the company to avoid many of the usual risks associated with the development and operation of a new project such as the Peculiar Knob mine.
Through the sale, the asset's value is locked in and delivered during the current period of historically high iron ore prices and shareholders will retain exposure to WPG’s joint venture with Evergreen Energy Inc and its coal upgrading process.
Following the transaction WPG’s team will remain largely intact, and the company said it will be looking for "further value adding investment opportunities in the resources space."
The transaction will be effected by the sale of WPG’s subsidiaries Southern Iron Pty Ltd, Central Iron Pty Ltd and Coober Pedy Resources Pty Ltd on a cash- and debtfree basis.
Southern Iron’s principal project assets are the Peculiar Knob mining lease and the Buzzard mineral claim and all of the approvals and tenements in the Coober Pedy area necessary to develop the Peculiar Knob project.
Central Iron owns the Hawks Nest exploration licence, while Coober Pedy Resources owns the Mt Brady and Windy Valley tenements.
The sale does not include WPG’s subsidiary Spencer Gulf Ports Pty Ltd which owns land in Port Pirie and the right to develop a bulk commodities export facility pursuant to the development consent previously announced.
Neither does it include Southern Coal Holdings Pty Ltd, the joint venture vehicle with Evergreen Energy Inc that owns the Penrhyn and Lochiel North coal deposits and which has the exclusive rights to use Evergreen’s coal upgrading technology in Australia for the first 15 mtpa of product coal from any project, not just from tenements that it currently holds.
The sale proceeds of about $346 million includes an estimate for WPG’s expenditure in the period from 1 July 2011 to the date of completion of the sale, which is expected to occur on or about 6 October 2011. The final sale price may be adjusted, depending on the amount actually expended.
The sale is contingent on a number of items including approval by WPG’s shareholders. In the absence of a superior proposal:
- WPG’s Board will unanimously recommend that WPG’s shareholders vote in favour of the sale; and
- each director of WPG will vote (or procure the voting) of all shares held or controlled by him or her in favour of the sale.
The general meeting of shareholders that will be convened to consider the sale will be held on or about 4 October 2011.
WPG intends to distribute the after-tax proceeds of the sale and existing cash which is surplus to short term requirements to its shareholders by way of a return of capital and a franked dividend soon after WPG has paid its tax liability later this financial year.
The company said on present indications the distribution will exceed $1.00 per WPG share with significant franking credits which will be confirmed once the final tax position is known.
Post completion WPG’s shareholders will retain exposure to WPG’s non iron ore assets including those held by Spencer Gulf Ports and Southern Coal Holdings, together with sufficient cash to meet its short term requirements.
OneSteel will provide a bridging finance facility of up to $140 million to enable project development to continue at its current pace. This facility will remain in place for up to 18 months regardless of whether the sale proceeds to completion.
This provides WPG with the certainty to continue with the development of Peculiar Knob whether the sale proceeds or not. If the sale proceeds to completion the drawn amount of the debt facility (if any) will be repaid out of the proceeds of the sale, but if the sale does not complete the loan will allow for the development of the Peculiar Knob mine and the Port Pirie export facility as previously proposed.
Funding under the bridging facility is subject to common project financing conditions.
WPG understands that OneSteel will use Whyalla, not Port Pirie, for exporting iron ore from Peculiar Knob and other iron ore deposits developed on the tenements acquired if the transaction proceeds to completion.
OneSteel will offer employment to all of WPG’s South Australian employees and some of WPG’s employees in its Sydney office.
A final sale price of $346 million is equivalent to $1.40 per WPG share (undiluted) and on a pre-tax basis, and represents a return on WPG’s iron ore investment of $70 million of approximately 400%.
This significant value for shareholders does not include the value of the WPG shares they will continue to own post transaction.