Hopes were dashed this morning for more generous takeover offers on two stocks in the mining sector. Investors in Eurasian Natural Resources (ENRC) and Afferro Mining (AFF:AIM) look like they will have to swallow the bitter taste of low bids and accept there's little chance of better offers being put on the table.

A consortium made up of the three founders of Kazakh ferrochrome producer Eurasian Natural Resources and the Kazakhstan government have offered $2.65 cash and 0.23 Kazakhmys (KAZ) shares for each ENRC share. Prior to today's share price movements, that valued ENRC at 234p.

When you take into account sustained declines in the market value of copper producer Kazakhmys, today's offer for ENRC is actually less than a proposal made in May.

ENRC - Comparison Line Chart (Rebased to first)


Kazakhmys and ENRC have long had close ties with the former owning 26% of the latter business. The takeover act prevents a company from directly acquiring its own shares for non-cash consideration, so Kazakhmys has a right to receive additional cash in lieu of its own stock. It has struck a conditional deal to use that additional cash to buy back 770,41,147 Kazakhmys shares from the consortium.

Investors in Kazakhmys clearly dislike the takeover price as its holding in ENRC has for many years been seen as a valuable investment. Today's offer is significantly below the numbers analysts have previously banded around, hence why the copper miner has fallen 8.6% to 246.3p. This takes the stock back to levels not seen since early 2009.

Analysts reckon the deal will go ahead, despite the low price, because there's little chance of a better – or rival – offer being tabled. Kazakhmys has given 'irrevocable undertaking' to accept the offer. It probably wants to end the misery of being associated with ENRC which has been a corporate governance disaster.

In the event of a successful bid for ENRC, Kazakhmys would see its free float go from 32% to 58% (as the Kazakh government is removed from the shareholder list) and get an $887 million cash injection. But it would probably see another write-down given that its ENRC stake is booked at 375p, much higher than the target's implied takeover valuation.

The resources sector has also seen corporate action developments at the junior end of the market. Following an initial statement on 22 May, Afferro Mining has today recommended a takeover proposal from International Mining & Infrastructure (IMIC:AIM). The terms of the deal haven't improved, much to the annoyance of Afferro's rabid retail investor following.

IMIC will pay 80p cash and a two-year convertible loan note at 40p to snap up the aspiring iron ore group. As we discussed last month (31 May), IMIC has subsequently been buying into Afferro's share price weakness on the market as this reduces the number of shareholders it has to buy out at the higher 80p price. The fact that Afferro's shares only nudged up 3.6% to 78.5p on today's news shows that the market is still sceptical about IMIC being able to bring Afferro's projects into production. IMIC is an unknown entity with Chinese backers. The current market price attributes no value to the loan notes, implying that investors do not believe IMIC will be trading in two years' time.

What's upset investors the most is that Afferro's directors are getting full cash settlement for their options.

Issue Date: 24 Jun 2013