Iron ore juniors Mineral Resources and Atlas Iron have announced a merger deal, as a wider discount on lower-grade iron ores continues to hurt each miner’s bottom line.
The board of Atlas on April 9 recommended its shareholders approve a transaction by which they will receive 1 Mineral Resources share for every 571 Atlas shares they own.
The merger ratio represents a 59% premium on Atlas’ share price at Friday’s close, prior to the trading halt.
Mineral Resources boss Chris Ellison said the acquisition of Atlas’ portfolio of iron ore assets, as well as its capacity allocation at the Utah Point export site at Port Hedland, were “on-strategy” acquisitions for MinRes.
“The amalgamation of MRL’s existing Pilbara iron ore assets with those of Atlas will enable us to exploit greater synergies and economies of scale which will drive down costs to ensure the consolidated iron ore business is sustainable in the new environment of lower global prices for low grade iron ore,” Ellison told the market.
The traditional 15% discount applied by the market to lower quality iron ore has grown to roughly 35% in recent months.
Speaking with the Financial Review, Atlas Iron boss Cliff Lawrenson agreed with Ellison: a merged company would be better suited to drive down costs, and tackle a tough market for lower-grade players.
“You have to start thinking out of the box,” Lawrenson reportedly said.
“Atlas is a wonderfully put together company, it’s done incredibly well and gone through some incredibly tough times, but I think boards need to look at combinations that are in the best interests of shareholders.”
Atlas shareholders will be provided with a detailed information package on the proposal in June, with a first vote scheduled around July.
Subject to a successful vote, the deal would be implemented in August 2018. Once the deal is done, current Atlas shareholders would own roughly 8.2% of the total issued share capital of the combined group.
The Atlas board has recommended the takeover unanimously.
Atlas chairman Eugene Davis told shareholders a merger with Mineral Resources provided them the opportunity to gain exposure to a diversified commodities and services business, with a strong balance sheet and multiple revenue streams.
“The combined operating expertise of the expanded organisation is likely to facilitate the exploitation of a number of opportunities that currently exist within the Atlas portfolio, transforming the combined operations into a diversified commodity business,” Davis wrote.
“As a result of its strategic positioning, and diversified revenue streams, the combined business is uniquely placed to prosper throughout commodity price cycles.”