Bumi to Seek Buys Armed With CIC War Chest
PT Bumi Resources will continue its push to acquire large mines around the country in a bid to become a local mining giant, and may include China Investment Corp. as a partner after borrowing $1.9 billion from the sovereign wealth fund last month.
“Anything less than $400 million to $500 million wouldn’t make sense to us unless it’s very strategic,” said Nalinkant Rathod, president director of PT Bakrie and Brothers, Bumi’s biggest shareholder.
Bumi and CIC “signed a strategic partnership agreement where we show all of our investments above $75 million to them first,” with potential targets to be discussed with the Chinese fund this month, he said in an interview in Singapore on Thursday.
The $297.5 billion fund bought debt from the Jakarta-based coal producer and is increasing investments in resources companies to gain access to the raw materials it needs to fuel China’s growth. Bumi’s shares rose for the first time in four days on Friday, paring a decline since the Sept. 23 announcement prompted by concerns the deal, which gives CIC a 19 percent return, is too expensive.
The agreement “put Bumi at a high leverage level,” said Winston Sual, who helps manage $233 million at PT Panin Asset Management in Jakarta, which doesn’t include Bumi in its mutual funds. “I don’t see the urgency in getting this debt.”
Bumi has said that $1.7 billion of the funds will be used to refinance debt and the rest as working capital.
In terms of the agreement with CIC, Bumi will first show the Beijing-based fund all its proposed investments above $75 million, Nalinkant said.
“They’re looking for a very safe investment to start with in Indonesia,” he said. “They’ve done a lot of due diligence on Bumi, and they had to sell internally not just Bumi, but Indonesia as a country for their investment. They don’t want to be rejected again like in other places.”
Aluminum and copper producer Chinalco was rebuffed by Melbourne-based Rio Tinto Group, which rejected a $19.5 billion deal in June that would have given the state-controlled Chinese company stakes in some of Rio’s mining projects.
Opposition to Chinese investment helped block Cnooc’s $18.5 billion bid for US oil company Unocal in 2005, while Haier Group lost in the race to buy US appliance maker Maytag in the same year.
Though higher interest costs will hold back Bumi’s earnings in the short term, the funding arrangement and partnership with CIC would finance acquisitions, said Nalinkant, 58, who is also a Bumi director.
“Sometimes you sacrifice immediate profitability for liquidity and future growth,” he said. “We want to be the national mining champion for Indonesia.”
Bumi’s chief financial officer, Andrew Beckham, said the cost of funds from the debt would not be as high as 19 percent as the company would be able to book some tax benefits.
“Investors expecting strong short-term earnings will likely be disappointed,” Daisy Suryo, a Singapore-based analyst at Bank of America’s Merrill Lynch unit, wrote in a note dated Thursday after meeting Bumi. “Interested investors will need to give Bumi the benefit of the doubt — i.e., believe in its ability to achieve lucrative deals.”
The company is already a significant coal producer and plans to mine zinc, copper, lead and gold, Nalinkant said. Bumi is currently looking at “one or two” assets, and BHP Billiton’s Maruwai coal project in Indonesia is “interesting,” said Dileep Srivastava, the company’s head of investor relations, without elaborating on whether it had expressed interest in bidding.
Meanwhile, on Bumi’s share price, Sylvia Darmadji, a coal analyst at PT Ciptadana Sekuritas, said that as long as the stock remained volatile, “retail investors would still trade in Bumi stocks, regardless of the buy-sell ratings.”
Bumi’s share price rating has attracted mixed reviews from several brokerage firms that follow the stock after the company held an analysts-only meeting on Tuesday.
Macquarie Group has downgraded the miner’s stock to “sell,” while Citigroup still rates it a “buy” despite putting a cautious “high risk” warning on the miner. JP Morgan Chase & Co. has kept its neutral rating, while Deutsche Bank Verdhana Indonesia still rates Bumi a sell.