WES's $1.90 bid for KDR looks opportunistic - discount to IPFS NPV

We first wrote about Kidman Resources KDR back in March 2017 at $0.49 (KDR notes 2nd Mar 2017, 11th July 2017, 25th July 2017, and given the water under the bridge since then, if asked, I am of the view that another bid is entirely possible for KDR.

WES is paying A$776m for 50%, (100% $1.522b) with management and some shareholder support (17%), provided there is no higher bid. Given that management released an integrated PFS with a post-tax NPV of US$2.2b, 47yr project life and 3yr payback, this bid looks opportunistic if you take a long term view on the Li thematic.

WES is offering A$776 for 50%, and the IPFS (integrated pre-feasibility study) released Dec 18 valued 50% at A$1.57b (using US$0.70). That is a 31% discount to PFS. Sure we have to take Capex (US$755m) considerations into account, however, this is low vs other recent transactions (Albemarle for MIN.ASX Wodgina for instance). Further Mt Holland is arguably in the top 3 undeveloped Li assets available globally, and perhaps the best hard rock Li asset (size and grade). 

 

On the WES offer -

• Wesfarmers (WES) is looking to offer $1.90 cash or $776m for the 50% that KDR own. 

• WES has support from the board and some major shareholders, securing 17.2%, provided there is no superior offer.

• SQM is supportive, and why not, WES would be a credible well-financed partner.

It has been our view that the size, grade and location make it one of the top Lithium assets globally. And remember, KDR stopped exploring as there was no point making the resource larger at this stage. Some believe there is a large amount of additional Li on the tenements (I'm in the "some").

There has been continued momentum in the EV/Battery storage space. So the demand side is only strengthening, following the pricing concerns of the last 12 months. 

If we look at the recent Mineral Resources (MIN.ASX) transaction by Albemarle for MIN's Wodgina, then WES offer appears CHEAP.

MINERAL RESOURCES - Wodgina 50% sale

• Wodgina Ind/Inf res 259.2Mt @ 1.17% Li2O

(Prov/Prob res 151.9Mt @ 1.17% Li2O 160ppm Ta2O5)

• Albemarle purchasing 50% of Wodgina on an as-is pre-production basis for A$1.59B

• Wodgina value per res Li2O tonne (~3.03Mt contained Li2O) = ~$1,050t

Compare to KDR

KIDMAN

• Mt Holland (50%) Meas/Ind/Inf res 189Mt @ 1.5% Li2O

plus gold assets (Au (KDR 100%) Meas/Inf res >1M ozs)

Thinking out loud on the WES Offer -

• This will not be the first counterparty KDR will have thought about as a potential suitor. In discussing offtake and processing they will have built a rolodex of potential acquirers. How interested, should/will only be known by the board.

Perhaps they will look to draw them out, with qualified board support for WES.

• Nothing stopping SQM coming over the top. However, they are probably just as pleased to have WES as a local partner, given their balance sheet and their chemical operations near the proposed Kwinana site, south of Perth.

• Hard to see WES identifying issues with the resource, following the DD undertaken by SQM before they partnered up.

• CAPEX vs 3 yr payback should not concern other large potential suitors.

• We have long heard of VW walking the globe with a $50b cheque book looking to secure supply. $776m plus CAPEX looks like a small price to pay to me. Just one example of another party.

• When the deal was announced, short interest in KDR was 21.5m shares (5.3% of FPO)

Summary

My view is that the chances of WES moving forward with a bid post exclusivity are reasonably high. Therefore I think the A$1.90 cash offer is real. I also think in that period of time (exclusivity), other potential suitors will have done the numbers on the asset (given IPFS has been released), and see the ability to pay more given the long term, high-grade nature of the assets. So for my clients and myself (I own KDR stock), my position is to hold on to the KDR, and my personal view is that $1.90 is a less than a full offer. I note JPMorgan is suggesting it is worth $3.00/s (- DOWJON Newswire)

Tom 

Director - Wentworth Global Securities

Disclosure - The author of this desk note owns shares in KDR.ASX

Important Note - This note is not a recommendation or advice to buy or sell KDR shares mentioned. KDR shares should be considered speculative, high-risk, and volatile. There are significant risks inherent in mining exploration that are not discussed in this note. There is no certainty that any bid for KDR by WES proceeds or another bidder emerges. You should always seek professional advice before considering any share purchase or sale. This is a desk trading note, and not a research document, and the view of the authors only. Although we believe that the information which this document contains is accurate and reliable as at the date of publishing, Wentworth Global Securities Pty Limited have not independently verified the information contained in this document which is derived from publicly available sources.