The end of Australia's decade-long mining boom and a plunge in commodity prices has roiled a resources industry that accounts for almost half the nation's listed companies.
Shares of gas, coal and iron ore explorers have declined, providing an opportunity for activist investors to take stakes and agitate for changes the same way Icahn and others have done in the United States for years. Legislation designed to empower shareholders in Australia is aiding activists in their attempt to shake up management teams.
"Australia is on the radar for activists," Jonathon Mant, UBS AG's head of mergers and acquisitions for Australia, said in an interview. "There has been some activity already in the natural resources sector and there may be more given the fall in commodity prices."
Karoon Gas Australia, which has a market value of A$789 million, on Monday repelled plans by a British Virgin Islands-based fund to install directors to steer Karoon toward acquisitions. Arrium, the Sydney-based iron ore and steel producer that's slumped 78 per cent this year, may be targeted next by investors pushing for a breakup, said Morningstar.
The Bloomberg Commodity Index is near a five-year low and iron ore has tumbled about 40 per cent in 2014. The steelmaking material is so cheap that many miners are struggling to produce at a profit. Arrium is this year's biggest decliner on Australia's S&P/ASX 200 Resources Index. Karoon is down 29 per cent.
The nature of Australia's resources industry makes it potentially lucrative ground for activists looking for hidden value, said Kim Reid, a Sydney-based partner at law firm Allens.
"They've got real assets, exploration licenses, mining leases and drilling results," said Reid, a shareholder activism specialist at Allens who acted for Antares. "They're interesting targets."
Stock declines help activists recruit support from shareholders disaffected with management, said Andrew Lumsden, Sydney-based partner at law firm Corrs Chambers Westgarth.
"Junior explorers have to keep going back to the market: 'I want some more money, I want to keep exploring,'" he said. "If the market feels you've run out of ideas, there's no doubt that makes you vulnerable. The activists are actually coming up with ideas. It's not just about stirring the pot."
Pegasus CP One, which has said it oversees 2.4 per cent of Mount Martha, Victoria-based Karoon, proposed three directors for election at Monday's annual meeting to redirect the board from exploration toward buying more mature assets.
None were voted in.
Before the meeting, Karoon Chairman Robert Hosking said Pegasus's plans were "opaque" and advised shareholders not to elect the directors. He noted Karoon had about A$690 million of cash in the bank.
Karoon shares on Monday climbed 2.3 per cent to A$3.08 at the close in Sydney.
Activists ought to target Arrium, said Peter Warnes, head of equity research at Morningstar in Sydney. Arrium last month announced plans to raise A$754 million by selling more stock, just weeks after declaring a dividend.
"That's where the activists should be," Warnes said. A breakup might unlock value in the business that makes rail wheels, steel ropes and metal balls, he said. A spokesman for Arrium, which has a market value of A$999 million, declined to comment.
Arrium was unchanged on Monday at 34 cents.
Lawyers say some elements of Australian law lend themselves to activism. A stake of 5 per cent allows an investor to demand a meeting to suggest new directors and the company must send details of the proposed changes to other shareholders.
If just 25 per cent of shareholders oppose the company's director compensation plans on two consecutive years, they can vote to hold another meeting where they can replace the board.
"That's being used in many instances by shareholders who want to get control of junior companies without paying any premium for control," said Gavin Wendt, founding director and senior resources analyst at MineLife in Sydney.
Demands for company meetings are now lodged every week, said Maria Leftakis, managing director at Sydney-based GPS, which worked for activists against Intrepid, Antares and Karoon.
"In years gone by, you might have seen five or 10 a year," Leftakis said in a phone interview.
All the same, activists don't always prevail on the first attempt, even if they've got a suitable plan, she said.
"You've got to demonstrate that you can actually effect that change through the lineup of individuals you're putting forward," said Leftakis. "The hurdles are very high."
Antares shareholder Lone Star, for instance, failed in July to win backing for its plan to replace directors at the A$115 million explorer, which has projects in the Permian Basin of Texas. Lone Star, founded by Jeffrey Eberwein, a former portfolio manager at Soros Fund Management, still owns 6.3 per cent of the company, according to the most recent data compiled by Bloomberg.
Antares said on Monday it sold its Southern Star project to BreitBurn Energy Partners for $50 million and BreitBurn shares that were valued last week at about $73 million. Antares also said it would buy back as much as 10 per cent of its stock. The shares jumped 5.9 per cent to 45 Australian cents.
On the other hand, Intrepid Mines shareholders Quantum Pacific Capital of Hong Kong and US-based Fides Capital Partners successfully used their combined stake of more than 5 per cent in the Brisbane-based company to convince shareholders to vote for three directors nominated by Quantum.
At the activist's request, Intrepid Mines shareholders also ousted three other directors. Quantum asked Intrepid to return all capital to shareholders after the A$128 million company sold an Indonesian asset because of an ownership dispute.
As agitators become aware of their rights and how to circulate their views among other shareholders, more campaigns may be coming, said Reid, the lawyer at Allens.
"The key issue is for boards to be activism-ready," he said.
- Bloomberg
