South Africa’s
Ashton’s board of directors has recommended that its shareholders accept De Beers’ revised offer, in the absence of a higher one. The board members intend to tender their personal shareholdings to the new bid, which represents a 45% premium over De Beers’ initial offer of A$1.57, excluding the A5 dividend paid by Ashton on Sept. 14. De Beers has extended its offer until Oct. 27.
“We are pleased De Beers has raised its offer after reviewing the information and forecasts contained in Ashton’s Target Statement,” states Ashton’s chief executive officer, Douglas Bailey. “De Beers’ revised offer recognizes the underlying value of Ashton and the strength of its position in the diamond market.”
An independent valuation by KPMG Corporate Finance determined that Ashton’s shares were worth between A$2.23 and A$2.70; De Beers’ offer falls at the lower end of this range.
De Beers Managing Director Gary Ralfe describes the new offer as “full and fair.” He says it was arrived at based on his company’s increased knowledge of Ashton’s assets, particularly the Argyle diamond mine in Western Australia, from when it first struck the original price of A$1.62 in July with Ashton’s largest shareholder, 49.9%-owner Malaysia Mining. The majority shareholder has agreed to tender a 19.9% block to De Beers.
Ashton owns an effective 40.1% interest in the Argyle mine. Rio Tinto is the operator and owns a 59.7% stake. The mine is expected to produce in the range of 25-30 million carats per year until open-pit mining draws to a close in 2007.
Argyle produces generally low-quality stones that account for about 6% of world diamond production by value. Argyle’s stones command nearly US$13 per carat. The bulk of Argyle’s production is cut and polished in India, which transforms it into affordable diamonds worth under US$200 per carat wholesale.
In the first half of 2000, the mine produced 14.2 million carats, with record diamond sales of US$256.5 million.
At the end of 1999, proven and probable reserves at Argyle were estimated at 63.8 million tonnes grading 2.6 carats per tonne for the AK1 open-pit and 5.8 million tonnes grading 0.24 carat per tonne for alluvial material. Additional resources totalled 145.2 million tonnes of AK1 lamproite grading 2.9 carats per tonne, and 45 million tonnes of alluvial grading 0.2 carat.
The joint venture has been studying various underground proposals for extending the mine life to 2018. Last year’s drilling added 20 million tonnes to the resource, providing more than 105 million tonnes for the purpose of underground development.
De Beers brings to the table marketing and underground experience that, it says, could prolong the life of Argyle. The South African major foresees an underground operation producing almost 20 million carats per year.
De Beers regards its potential takeover of Ashton as important strategically. “It gives us the opportunity, as with Winspear in Canada, of extending De Beers’ geographic base, diversifying us from Africa,” says Ralfe. “It also gives us the strategic opportunity to complement and complete the range of diamonds we offer to our clients.”
De Beers’ revised bid remains conditional on acceptance of at least 50.1% of Ashton’s shares, and approval by the Foreign Investment Review Board (FIRB) and foreign competition regulators. De Beers has dropped its original condition relating to Ashton’s ability to terminate the existing marketing arrangement for its share of the Argyle production.
“That does not mean to say that it is not absolutely fundamental to our bid,” says Ralfe. “It is fundamental, but in the careful due diligence that we have been doing since we launched the initial bid, we are now confident that Ashton has the legal and contractual rights to give notice on its current marketing arrangement through Argyle Diamond Sales.” He says the final word on this matter rests with Western Australia’s minister of mineral development.
De Beers expects its application to the FIRB and other regulators to be resolved shortly. Ralfe says that although De Beers has spent roughly A$300 million on prospecting over the past 30-40 years in Australia, the company has never before made an application to the FIRB. “The FIRB has to get to know us, and, at the same time, they have to understand some of the intricacies of the international diamond market,” the managing director states.
The Australian Competition and Consumer Commission has already cleared De Beers’ offer.
Ashton intends, subject to normal banking approvals, to pay a special, fully franked dividend of A20 per share in the event De Beers achieves the minimum acceptance of 50.1% of Ashton’s shares. Under De Beers’ revised bid, the special dividend, once paid, will be deducted from the revised offer price.
Ashton’s other key diamond development projects include: the wholly owned Merlin project, in Australia’s Northern Territory; the 33%-owned Cuango River project, in Angola; and the 48%-owned Cempaka project, in Indonesia.
In terms of exploration projects, Ashton and joint-venture partner
Ashton also owns a 68% controlling interest in
Ralfe says his company will consider all these assets carefully to determine which might be the most suitable for De Beers.
Rio Tinto mailed its offer to Ashton shareholders on Oct. 5; the A$1.85-per-share offer expires on Nov. 6. The London-based major recently signalled that it does not intend to match De Beers’ revised offer. However, the company says it will keep its existing offer open for the time being.
In an open letter to its shareholders, Ashton Chairman Justin Gardener notes that “there is still plenty of time for you to take action in relation to your Ashton’s shares.” But since a higher offer has been made by De Beers, the Ashton board is likely to recommend shareholders reject Rio Tinto’s A$1.85 bid.
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