Xstrata set to fail in bid to steal Indophil

February 2, 2010

Dear Mayne Reporters,

Xstrata, the $80 billion global mining house which stole MIM for a pittance five years ago, appears to have lost its brazen attempt to pick up 100% of the lucrative Tampakan copper-gold deposit in the Philippines, an old MIM asset now said to be the biggest untapped copper deposit in the world, after a remarkable shareholders' meeting of Lion Selection in Melbourne this morning.

First, you need the background. Xstrata owns 62.5% of Tampakan and has the Melbourne-based, ASX-listed Indophil Resources as its junior partner with the balance. Lion Selection is a mining investment fund run by former JB Were resources analyst Robin Widdup, which is the largest Indophil shareholder with 25.7%.

Indophil has bid for Lion and Xstrata is bidding for Indophil and there has been a huge personality clash between Widdup and Indophil managing director Richard Laufmann, who came out on Friday leading a management buyout of Indophil at $1.28 a share.

This trumped Xstrata's $1 a share offer for Indophil, but after initially pledging not to increase its offer on Friday, Xstrata came out yesterday and matched the $1.28 a share Laufmann consortium bid. So much for truth in takeovers.

That made this morning's Lion EGM vital because the first resolution locked in Xstrata with 19.9% of Indophil at $1.28 a share, thereby restricting the chance of a genuine auction.

However, the resolution to approve the sale of 69 million of Lion's Indophil Resources shares to Xstrata at $1.28 a share appears to set to fail after Select Asset Management voted a key 17 million share stake against the proposal.

A gentleman called "Michael" from Select told me as we left the meeting that his fund had voted against the main Xstrata deal, but in favour of resolution two which gives the Lion board the authority to sell an additional 10% Indophil stake to Xstrata without returning for shareholder approval.

After this morning's EGM, I've really seen it all.

The first speaker today was Laufmann's younger brother who at first refused to reveal his name and then would only disclose himself as a stockbroker from Perth.

Robin Widdup, who stands to pocket many millions from the deal given his 40% stake in Lion's management company, got up and very belligerently outed Laufmann's younger brother later in the meeting whilst also demanding Laufmann's himself and Indophil chairman Bruce Phillips justify their position. It was all way too aggressive and clearly personal.

Whilst Laufmann only made one brief speech imploring shareholders to vote against resolution two because Xstrata were big nasty boys who would clean up Lion in future negotiations, Indophil's chairman Phillips, its lawyer from Baker & McKenzie and its adviser from Greshams were all on the feet putting the case against.

The proxy situation was fascinating because most shareholders had already voted by the time the two latest bids were made public.

Plummy Lion chairman Ewen Tyler disclosed the proxies at the start showing that a total of 66 million shares were backing the move, including 29 million which ticked the box following the board recommendation, and 41.1 million were against.

I asked for an update on the proxies to take into account any revocations and the figures came back about an hour later with 47.9 million in favour and 40.9 million against, largely because Select had revoked its 17 million votes in favour.

We had two polls proposing a three day adjournment of resolutions 1 and 2 but despite winning majority support in the show of hands, they were comprehensively defeated in the poll by more than 97% of votes cast. The big shareholders clearly knew what they were doing and wanted it sorted today.

The Lion directors were contractually compelled to recommend the latest Xstrata offer even though it didn't appear to be in the interest of shareholders. This was because of a piddling $500,000 break fee although the Lion lawyer warned it was also susceptible to a damages action from Xstrata, which sat silently in the room with its Deutsche Bank advisers watching on.

The Lion lawyer also said more than 2 million undirected proxies with the chairman would be voted in favour of the deal because it would be "odd" not to do so. This seemed quite bizarre and will be highly contentious if resolution one scrapes over the line.

Both Lion and Xstrata have recently been talking up political risks in The Philippines after a fatal shooting near the mine site and other threats to key people.

However, during one of several breaks in the meeting, Laufmann boasted to journalists that the representive from his bidding consortium, Philippines fisheries and agriculture company Anson, was on the Presidential jet in the US at the moment, suggesting his team can handle the political risks element of the Tampakan project.

It surely hasn't helped Xstrata's prospects to be talking up the dangers of the Philippines.

For mine, it looks like Xstrata is trying to steal yet another Australian equity position in a resources project and if Select has indeed voted down the deal, it was a good result.

Laufmann should come back with a higher offer and force Xstrata to offer a lot more to get 100% of the project.

Keep an eye on the Lion Selection ASX announcement (ASX code LST) which should be coming out any moment now.

That's all for now.

Do ya best, Stephen Mayne

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