Avanco Resources Ltd (AVB)

AVB receives scrip and cash offer from OZL

AVB has received an off-market takeover offer for 100% of the shares in AVB. The offer is composed of a 50/50 cash and scrip offer that together values AVB at $418m, or 17 cents per share, and represents 16% of OZL’s market capitalisation. We have long believed that AVB held a suite of growth assets almost unparalleled in the ASX-listed copper space. OZL recognise this opportunity with an earnings accretive acquisition that also adds significantly to the organic growth potential of the expanded group.

Key Points

  • Half cash, half scrip: Should the acquisition be successful, AVB shareholders will receive $0.085 in cash and 0.009 OZL shares for every one remaining share in AVB. AVB shareholders will therefore own up to 7.3% of the expanded group. This represents a 121% premium to the share price on the day immediately before the offer ($0.077) and a 119% premium to the 1-month VWAP of $0.078. OZL has stated that, in the absence of a superior proposal, the bid will not be increased.
  • Pre-bid indications represent 30.6% of AVB: Private equity group Appian Natural Resource Fund, with 18.45%, has entered a pre-bid acceptance deed. Black Rock Investment Management, representing 11.6%, and AVB directors and management, representing 0.57%, have also indicated their acceptance of the offer. Total shareholding under deed or indication to accept the offer is already at 30.6%. A minimum acceptance condition of 50.1% is required as a condition precedent.
  • AVB provides a suite of growth assets to OZL: OZL has been looking for some time to diversify its portfolio to grow its assets beyond Carrapateena and Prominent Hill. OZL entered into an agreement to acquire the Nebo-Babel and Succoth assets from Cassini Resources (ASX:CZI). The AVB acquisition will grow their advanced growth asset portfolio from 3 projects to 7 whilst at the same time adding incremental copper production.
  • Acquisition cost looks attractive to OZL in our view: We take the view that at 16% of OZL’s market capitalisation, the acquisition of AVB, with its string of development assets, looks very attractive and diversifies OZL’s asset base whilst maintaining its focus on copper and gold, after the deal with Cassini (nickel and platinum). Importantly, OZL has stated they intend to keep the AVB management team. We think this will be crucial to the success of the acquisition as AVB’s management has demonstrated their ability to successfully operate in Brazil. There has been a number of examples where ASX-listed companies have not made the most of the opportunities in Brazil and we, in part, put this down to management not embedding themselves in-country.
  • Is the offer a good deal for AVB shareholders?: We believe so. Although the offer price of $0.17 is lower than our valuation, at $0.22, AVB shareholders are able to get the majority of the value gap up front, and importantly, without the execution and financing risk associated with the development of the next one or two projects. It also circumvents a less than ideal capital structure, which could have proved problemamatical in further financing arrangements.
  • Recommendation: HOLD. Potential for a superior bid may materialise.

Disclosure and Disclaimer RCAN1472

RCAN1472

This Research report expresses the personal view of the Author. The Author does not hold any securities in Avanco Resources Limited.

DJ Carmichael Pty Limited, members of the Research Team; including authors of this report, its directors and employees advise that they may hold securities, may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly from client transactions in stocks mentioned in this report.

DJ Carmichael Pty Limited is a wholly owned subsidiary of DJ Carmichael Group Pty Limited ACN 114 921 247.

In accordance with Section 949A of the Corporations Act 2001 D J Carmichael Pty Limited advises this email contains general financial advice only. In preparing this document D J Carmichael Pty Limited did not take into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document, you should assess whether the advice is appropriate in light of your own financial circumstances or contact your D J Carmichael Pty Limited adviser. D J Carmichael Pty Limited, its Directors employees and advisers may earn brokerage or commission from any transactions undertaken on your behalf as a result of acting upon this information. D J Carmichael Pty Limited, its directors and employees advise that they may hold securities, may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly, from client transactions. D J Carmichael Pty Limited believe that the advice herein is accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained in this publication and no responsibility for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence), is accepted by DJ Carmichael Pty Limited or any officer, agent or employee of D J Carmichael Pty Limited. This message is intended only for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure under applicable law. If you are not the intended recipient or employee or agent responsible for delivering the message to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication and its attachments is strictly prohibited.

The Author of this report made contact with the Avanco Resources Limited for assistance with verification of facts, admittance to business sites, access to industry/company information. No inducements have been offered or accepted by the company.

The recommendation made in this report is valid for four weeks from the stated date of issue. If in the event another report has been constructed and released on Avanco Resources Limited, the new recommendation supersedes this and therefore the recommendation in this report will become null and void.

Recommendation Definitions

SPECULATIVE BUY – Potential 10% or more outperformance, high risk
BUY – Potential 10% or more outperformance
HOLD – Potential 10% underperformance to 10% over performance
SELL – Potential 10% or more underperformance
Period: During the forthcoming 12 months, at any time during that period and not necessarily just at the end of those 12 months.

Stocks included in this report have their expected performance measured relative to the ASX All Ordinaries index. DJ Carmichael Pty Limited’s recommendation is made on the basis of absolute performance. Recommendations are adjusted accordingly as and when the index changes.

To elect not to receive any further direct marketing communications from us, please reply to this email and type 'opt out ' in the subject line. Please allow two weeks for request to be processed.

© 2018 No part of this report may be reproduced or distributed in any manner without permission of DJ Carmichael Pty Limited.

Paul Adams

Head of Research

Paul joined DJ Carmichael in 2006 as a Resource Analyst. Paul has an honours degree in Geology, is a member of the Australian Institute of Mining and Metallurgy and has 16 years experience in the mining industry in exploration, open pit, underground and operational roles, both in Australia and overseas. Before joining the company, he was Chief Geologist and Evaluations Manager at Placer Dome's Granny Smith mine. Paul has a Graduate Diploma in Applied Finance and Investment, fromthe Financial Services Institute of Australasia.