Austral Resources Australia Ltd (ASX: AR1) announced about a month ago that it planned to merge with Hammer Metals Ltd (ASX: HMX) in a scrip deal, which valued the smaller company at $80.7 million.
The analysts at Shaw and Partners have run the ruler over the deal and like what they see.
They have issued a new research report into Austral Resources with a buy recommendation and a very bullish share price target, which I'll get to shortly.
First, let's have a look at the deal.
Image source: Getty Images
Copper assets coming together
Austral has agreed to acquire Hammer for 1.29 Austral shares, while Hammer shareholders will also get shares in a new company that will be spun out to hold its existing gold projects.
Following the merger, Hammer shareholders will own about 31.1% of Austral, which describes itself as "a pure-play ASX listed copper producer and developer operating in Queensland, pursuing an active regional consolidation strategy to feed its Rocklands and Mt Kelly processing hubs''.
Hammer's board has unanimously supported the deal, along with major shareholders who control about 16% of the company's shares.
Hammer's Chair Russell Davis said the deal was a better outcome than a previous offer from Larvotto Resources Ltd (ASX: LRV).
He said:
The Scheme delivers materially higher headline value and provides Hammer shareholders with an expected 31.1% ownership interest in a larger Queensland-focused copper producer, developer and explorer. Austral's existing oxide production at Mt Kelly, planned restart of the Rocklands sulphide processing facility and ongoing regional consolidation strategy provide an attractive development and production pathway for the combined portfolio. In particular, the proximity of Kalman to Rocklands creates strong strategic logic and the potential for Kalman to become an important long-term source of sulphide feed.
Mr Russell said the board also believed that Austral's regional operating capability, processing infrastructure, and funding capacity provided a stronger platform to advance Hammer's broader Mt Isa portfolio and unlock value from its substantial resource and exploration portfolio.
Broker likes the look of the deal
Shaw and Partners said the deal represented a capital-efficient route to growth for Austral.
They said Hammer added resources and exploration upside on top of Austral's existing copper inventory and would help ramp up production through the company's Rocklands concentrator.
The broker added:
For HMX holders the offer is a premium to the undisturbed price and provides continued exposure to Mount Isa as well as immediate exposure to copper producing operations.
Shaw and Partners has a price target of 28 cents on Austral shares, compared with the current 7.1 cents.
If achieved, this would constitute an increase of 294.4%.
Austral is valued at $188.5 million.
