Energy & Materials Sector

• On the 24 November, Silvercorp Metals (SVM CN) bumped its Scheme Offer for Orecorp Ltd (ORR AU) to A$0.19 in cash and 0.0967 new Silvercorp shares.
• At a 40.1% premium to undisturbed and key shareholder Tim Goyder (5.14%) supportive, this looked done. Then Perseus (PRU AU) built a 19.9% stake and said it would vote no.
• After postponing the Scheme meeting, Silvercorp and Orecorp have now agreed to an off-market takeover, on the same terms. The tendering threshold is 50.1%. 

• The Irc Ltd (1029 HK) IFA opines that a mandatory conditional offer from Nikolai Levitskii (Chairman and 30.61% shareholder) at HK$0.118 per share is fair and reasonable. 
• The offer is open, with the first closing date of 12 January 2024. The offer is conditional on the offeror and concert parties representing more than 50% of voting rights. 
• While the offer is light, satisfying the minimum acceptance condition is possible. The risk/reward profile is favourable as the upside (25.5% spread) outweighs the downside (5.3% to the undistributed price). 

• Indocement (INTP IJ) is trading close to 2-year lows, which seems unjustified given the ongoing recovery and a more positive outlook for FY2024. 
• The company continues to grow its distribution reach to satisfy demand from IKN in Kalimantan, smelters in Sulawesi, and East Indonesia, with acquired Semen Grobogan feeding Central Java. 
• Indocement (INTP IJ) continues to build on its sustainable credentials through the use of alternative fuels and reducing emissions and dust. Valauations are attractive trading on 6.8x FY2024E EV/EBITDA.

• We summarise the latest spreads and newsflow of merger arb situations we cover across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – Irc Ltd (1029 HK), Orecorp Ltd (ORR AU), Shinko Electric Industries (6967 JP), JSR Corp (4185 JP), Adbri (ABC AU), Probiotec Ltd (PBP AU), Volpara Health.
• Lowest spreads – Tietto Minerals Ltd (TIE AU), A2B Australia (A2B AU), IJTT Co., Ltd. (7315 JP), T&K Toka Co Ltd (4636 JP), Tokyo Rakutenchi (8842 JP), Pact Group.

• As warned in Newcrest-Newmont Merger: Fancy Index Shenanigans in October, the merger construct meant flowfront, index flowback, then later index flowback.
• We are now between the second and third events. The data on the third is there, but it won’t be obvious to everyone. 
• There should be a large, not publicly announced, downweight on Newmont (NEM AU) in the March 2024 index review for the major local indices.

• I tally 50 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Six new deals discussed this week, all Down Under: Adbri (ABC AU), Link Administration (LNK AU), Pacific Smiles (PSQ AU), Probiotec (PBP AU), A2B Australia (A2B AU), and Whispir (WSP AU).
• Key updates took place on: Azure Minerals (AZS AU), Lithium Power International (LPI AU), JSR Corp (4185 JP), Allkem Ltd (AKE AU), and Toyo Construction (1890 JP).

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We view Braskem’s ESG as “Weak”, in line with its scores for the Environmental, Social and Governance pillars. Controversies are “Material”, and Disclosure is “Strong”.

• A double dose of StubWorld this week as Hanwha Corporation (000880 KS) comes up “cheap” on my monitor.
• Preceding my comments on Hanwha are the current setup/unwind tables for Asia-Pacific Holdcos.
• These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation >20%.

• Yesterday during the day, Allkem Ltd (AKE AU) shareholders approved the Scheme and Livent (LTHM US) shareholders approved the merger. The deal is done. Allkem last trades 21 Dec.
• NEWCO starts trading 4 January in the US but the Arcadium Lithium CDIs start trading 22 Dec in Australia. S&P/ASX announced they will replace Allkem in the ASX200.
• But I have been asked for a breakdown of flows and timing again, so I have put it into a handy table which I hope makes it less confusing.

• Nippon Steel Corporation (5401 JP) and United States Steel (X US) have agreed an all-cash $55.00/share offer, 142% premium to where X traded before Cliff’s approach, a very generous 7x EV/24e EBITDA.
• A determined buyer seeks market share in the lucrative US market, with no meaningful synergies expected and willingness to keep all US Steel jobs and (greener) growth projects.
• Although unions and some lawmakers are voicing concerns, CFIUS shouldn’t pose a big hurdle. Spread is 12.04%/17.93% (gross/annualised, assuming late settlement by end of Q3 2024). Long.

Vedanta Resources (VRL) has launched a consent solicitation for an extensive liability management exercise. The company is seeking consent from noteholders of its four bonds to extend the maturities of three of the bonds (the January 2024, August 2024 and 2025 notes) to 2027-2028. There will be no haircut on the principal, and the coupon for the August 2024 notes and 2025 notes will be increased to match that of the January 2024 notes.

In our opinion, the terms of the proposal are mixed and the timeline is very tight. Failure to receive the requisite consent may lead to the company defaulting on the January 2024 notes. The new financing cannot be used to repay the January 2024 notes if the liability management exercise does not go through. In this case, there would be no time for VRL to come up with a revised proposal before the maturity of the January 2024 notes.

We acknowledge the company’s efforts in terms of the improved security packages and higher coupons. We recommend that noteholders accept the proposal and provide consent.

Pan American Silver (PAAS) released a preliminary economic assessment (PEA) of the La Colorada Skarn project, confirming its potential to become a large-scale operation producing an average 17.2Moz of silver per annum over the first 10 years of its 17-year mine life. At a base case throughput rate of 50ktpd, the company estimates the project’s post-tax NPV8 at US$1.1bn, with an IRR of 14% and a payback period of 4.3 years. We intend to update our valuation shortly to incorporate the PEA and the prevailing stronger than expected gold and silver prices.

• Today after the close, JSR Corp (4185 JP) announced that the expected “end-December” commencement of JIC’s Tender Offer to take the company private would be delayed. 
• This was somewhat expected to widely expected based on initial FUD which then gave way to “specialised reporting” a couple of weeks ago which indicated as much.
• Here I look at potential implications, spreads, and risks. And it still looks like one has to let it run (and buy a dip).

• This makes life a lot simpler. Gina Rinehart’s Hancock Prospecting will now team up with Chile’s SQM to take control of lithium play Azure Minerals (AZS AU).
• In a binding Offer, by way of a Scheme, the joint bidders (collectively holding ~37.79%) are offering A$3.70/share, a 5.1% bump in terms to SQM’s prior Scheme Offer. 
• An off-market takeover at A$3.65/share unfolds IF this Scheme were to fail. If both fail/lapse,  SQM will, “in certain circumstances”, be required to proceed with its off-market transaction of A$3.50/share.

• Azure Minerals (AZS AU) has entered a new transaction implementation deed with Sociedad Quimica y Minera de Chile (SQM US) and Hancock at A$3.70, a 51.6% premium to the undisturbed price.
• The emergence of Hancock and Mineral Resources (MIN AU) as substantial shareholders necessitated the new offer. The off-market takeover offer is A$3.65 per share if the scheme fails. 
• The scheme’s completion hinges on MinRes’ acceptance. MinRes could potentially block the scheme but has a history of selling into Hancock offers.

• The Lithium Power International (LPI AU) IE considers Codelco’s A$0.57 offer fair and reasonable as it is above the midpoint of its A$0.30-0.68 per share valuation range. 
• The scheme is conditional on FIRB approval, which should be forthcoming as LPI’s assets are outside Australia in Chile.
• Irrevocables represent 32.05% of outstanding shares. At the last close and for the 16 February payment, the gross/annualised spread was 3.6%/26.3%.

• Back on the 18th October, Lithium Power International (LPI AU) announced it had entered into a Scheme Implementation Deed with Chilean state miner Codelco, the world’s largest copper producer.
• Codelco offered LPI shareholders A$0.57/share, a heft 119% premium to last close. LPI’s major shareholder, Minera Salar Blanco SpA with 27.88%, is supportive of the Scheme.. 
• LPI’s Scheme Meeting has now been tabled for the 23 Jan, with implementation expected on the 16 February. The IE is supportive and LPIs board unanimously recommends the transaction.

• The market remains in “lockout rally” mode, where prices continue to move higher with little-to-no pullbacks, while ignoring overbought readings.
• We have discussed this on a weekly basis since 11/21/23. Still no reason to fight this bullish trend, and we continue to expect more upside into year-end and early 2024.
• We highlight buys in Steel: NUE, STLD, RS, WOR, TMST, ZEUS, LatAm Banks: ITUB, BSBR, BBD, BAP, BCH, Industrials: ITT, FSS, SPXC, ATS, KAI, CR, BRC, SXI, and HSC

• The vote is tomorrow. It is slightly contested. Shareholder proxies have recommended approving. Some others say Allkem is going too cheap. 
• It probably should get done because of scale benefits, and if it breaks, it might be good for Allkem, which is “good risk arb risk”
• But the trade here is some combination of lithium rebound and index event, with index impact details here.

• Adbri (ABC AU) has disclosed a non-binding proposal from CRH (CRH LN) and Barro at A$3.20 per share, a 41.0% premium to the undisturbed price of A$2.27 (13 December).
• The offer is the best and final offer. The Board has granted an exclusive due diligence period, which ends on 28 February 2024. 
• The Board intends to recommend a binding proposal. The offer requires FIRB approval (ACCC approval is not mentioned). The offer is attractive vs. peer multiples and historical ranges.  

• Newcastle coal prices have normalized from the highs of USD 450/ton (in September 2022) to current levels of USD 145/ton (a 68% correction from the peak). 
• From profits of 100 mn USD/month, we are now down to 90-100 mn USD/quarter. Despite this, the stock trades at 4.5x PE with a 15% dividend yield. 
• An added buffer of 850 mn USD of net cash represents 50% of the market capitalization. 

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We assess Klockner Pentaplast’s ESG as “Adequate”, in line with the Environmental, Social and Governance pillars. Controversies are “Immaterial” and Disclosure is “Strong”.

• Welcome to this week’s Energy Cable.
• We finally got stopped out of our crude oil trade at the beginning of last week, only to see crude rally at the end of the week on the back of the FOMC meeting and again today due to the supply chain.
• We also entered a long in utilities as advertised last week and we are already enjoying a healthy plus, also as a consequence of the FOMC.

• 2022 was an exceptional year for Stora Enso. The Company drove financial performance to an all-time high, strengthened its BS and delivered on strategic initiatives
• Ince then, the market environment has deteriorated further and has shaken the Company’s fundamentals. To that end, Stora is embarking on a restructuration program.
• The Company’s own actions will improve competitiveness. The self-help improvements focus on profitability turnaround and capital release.

• Standard Lithium (SLI) is advancing lithium extraction projects in Southern Arkansas and East Texas, which could position the company as a major domestic lithium supplier.
• A definitive feasibility study (DFS) or the company’s Phase 1A Project indicates a pre- tax NPV of US$772 million and a pre-tax IRR of 29.5%.
• A preliminary feasibility study (PFS) for the company’s South West Arkansas Project indicates a pre-tax NPV of US$4.5 billion and a pre-tax IRR of 41.3%.

• Construction play Adbri (ABC AU) has entered into a process and exclusivity deed with CRH (CRH US) and 42.7%-shareholder Raymond Barro (Chairman) in order to progress to a firm transaction.
• CRH/Barro’s non-binding indicative proposal of $3.20/share (in cash), by way of a Scheme, is a 41% premium to last close. The proposal is best & final. 
• Subject to DD being carried out by CRH, this looks done.