Interesting developments are happening in the Afferro Mining (AFF:AIM) takeover saga. Its suitor, International Mining & Infrastructure (IMIC:AIM) has increased its holding by 5.2 million shares, taking its stake to 9.94%. This looks a clever move as IMIC has bought stock at below the cash element of its takeover proposal.

IMIC last week (22 May) proposed to pay 80p cash and a two-year convertible loan note at 40p to acquire Afferro, which is an aspiring iron ore producer.

Effectively Afferro investors could take a chunk of cash (80p per share) and either switch the loan note to IMIC shares at any time during the two-year period or wait until expiry and receive a further 40p cash per share.

The suitor had previously discussed a three-tiered bid model which has thankfully been simplified to a single acquisition structure.

Today's announcement reveals that IMIC has topped up its stake in Afferro through buying shares in the market at 77.89p. This is essentially a cost saving if it manages to buy the business. It means there's fewer shareholders to buy out at the higher-priced proposed bid level.

IMIC last raised its stake in January where it went to 5%. It also secured options to buy 1.8 million more shares at 90p, which would have taken its position to 6.8%. This option has now been cancelled.

Afferro has several interesting iron ore prospects in Cameroon including the 1.2 billion tonne Nkout project. Its situation is indicative of many iron ore miners around the world in that the size of the resource is irrelevant to the stock market without a logistics solution.

The biggest hurdle to developing bulk commodity projects is having rail and port access, in order to transport the ore from typically remote locations to the sea for export to Asia or South America. Afferro is sitting in a highly-prospective iron ore region but its share price has been depressed as there's no rail infrastructure.

IMIC has the backing of several Chinese parties who should help fund a rail network and open up this new iron ore corridor. That's probably why Afferro's board last week said they intend to recommend IMIC's proposed takeover offer. Click here to read our recent story on the deal rationale.

The problem for many investors is the credibility of IMIC's offer. It is a microcap company without any track record of creating deals in the mining space, apart from forming partnerships. But it does have ambitions, as we discussed last year in Shares (Pg 10).

Retail investors have bemoaned the convertible note as they simply want all the cash upfront. That's why many investors have been selling shares, keeping the stock price weak and below the upfront cash element of IMIC's proposal. Indeed, the shares have slipped 0.25p today to 78.75p – but IMIC's price has risen 0.9% to 29.5p as the market likes its crafty move.

And then there's the matter of the iron ore price, down 30% since February on slowing demand from China and plentiful supplies.

Against the backdrop, Afferro shareholders will have to sit tight and wait for paperwork on IMIC's financing and a 'fairness opinion' from the miner's financial adviser on IMIC's offer. It's a watching game.

Issue Date: 31 May 2013