Everyone wants in on a good takeover target, but how do you spot the next Kidman?
After $40b conglomerate Wesfarmers (ASX:WES) made a $776m play for Kidman Resources (ASX:KDR), everyone’s attention turned to the next possible target.
The $1.90 per share offer was a 47 per cent premium to Kidman’s last closing price, but analysts reckon this deal undervalues the near-term lithium producer.
Some even believe another suitor is waiting in the wings.
Either way, it’s every small cap investor’s dream. Kidman went from a $9 million minnow to $776m takeover target in less than 5 years.
What’s interesting about the Kidman offer, says David Gillam of mining industry consultancy Mastermines, is that it didn’t come from a downstream processor, battery manufacturer or EV brand.
“Those groups may now need to compete with larger entities simply looking for future new energy involvement [like Wesfarmers],” he told Stockhead.
“That may in turn attract larger established miners with deep pockets.”
“However the Kidman offer pans out, new energy players will now need to compete with others to secure their supply chains.”
Although there is a current level of over-supply in the lithium feedstock market, new producers should now have some level of protection from low offers during their development phases, Gillam says, which will translate into more certainty in the lithium space moving forward.
“While frustrating for some that live in the moment, the rapid expansion of electric vehicles bodes very well for any quality resource in a favourable jurisdiction,” he says.
“Despite the misconception of many in the downstream market that such resources are not critical, we see [the number of] new entrants that tick both boxes for resource quality and jurisdiction as extremely limited.”
Mastermines has separated potential hard rock lithium takeover targets into three waves.
The logical first wave will be the current Australian hard rock producers, which are (mostly) still trading at deep discounts to their year ago price. Check this out:
For second wave targets, Mastermines looks to Africa.
“As most are large high-quality resources, we’ll certainly be keeping an eye on them over the next few years,” he says.
“And the third wave looks to be Canada right now.”
More generally, what makes a good small cap resources takeover target? Simple — high quality projects.
“This might mean it is world-class (size/grade/metallurgy), or it could be transformative to earnings to an existing producer – like a high-grade gold project feeding into a large mill with a low feed grade,” Hedley Widdup, executive director at fund manager Lion Selection Group, says.
“To me this is a theme that could play out most broadly as gold producers consolidate ground plays.”
But is trying to pick potential takeover targets a good investment strategy? Like Kidman, they could generate a healthy return if punters pick them right.
And therein lies the challenge.
“I’d question how you determine best targets – most punters I know think very differently to M&A acquirers,” Widdup says.
“Sure, there are some obvious consolidation plays but even then, the bigger fish is likely to bide its time on the basis that it appears likely that by waiting they could obtain a better price.
“Unless, and circumstances like this would be rare, they are motivated by a strategy that dictates an urgent need to deal, like putting ore in a running mill.”
Instead, small cap investors should keep it simple; look for companies they judge to have good projects that they are capable of developing.
“Otherwise, you’re speculating on a deal which has timing and value unknowns — whereas if you’re confident it’s a good asset then a takeout is just upside,” Widdup says.
As metal prices rebound from 2015 lows, major miners are searching for near-term projects to boost their respective production profiles.
One example is Sandfire (ASX:SFR) which is due to run out of ore at its flagship DeGrussa copper mine by about 2022.
In January, a cheeky 38c-per-share takeover offer from the mid-tier miner was vetoed by copper explorer MOD Resources (ASX:MOD).
The MOD share price had been hammered by a weak market and was fetching just 22c at the time.
Sandfire tabled the proposal after completing due diligence over a potential joint venture arrangement, partial sale, and market placement to support development of MOD’s T3 copper project.
Sandfire was unsuccessful, but low valuations for many small caps means more cashed up miners are running the ruler over acquisition targets, says Widdup.
“To me it’s a case of when they act on this, not if,” he told Stockhead.
“Acquirers are well aware that funding is tough for small caps in the mining space.”