Business Context and Reporting Period
This Form 6-K, filed on January 29, 2010, reports a material change for KHD Humboldt Wedag International Ltd. (KHD) dated January 6, 2010. The Company announced a plan to restructure into two distinct legal entities: (1) a mineral royalty company, to be renamed Terra Nova Royalty Corporation, and (2) an industrial plant technology, equipment, and service company, KHD Humboldt Wedag (Deutschland) AG ("KID"). The transaction involves a pro rata distribution of KID shares to KHD shareholders.
Key Financial Metrics (Pro Forma)
The following unaudited pro forma financial data is presented as of September 30, 2009, in U.S. dollars (in thousands), reflecting the proposed split:
| Metric | Royalty Group (Terra Nova) | Industrial Group (KID) |
|---|---|---|
| Cash and Cash Equivalents | $112,540 | $294,883 |
| Total Assets | $342,181 | $595,007 |
| Total Liabilities | $55,496 | $473,714 |
| Shareholders' Equity | $286,685 | $121,293 |
| Working Capital | $115,019 | $197,311 |
| Book Value Per Share | $9.43 | $3.99 |
Asset Revaluation Note: The Royalty Group's assets include a $173 million upward revaluation of royalty interests (from $27 million to $200 million) based on updated reserves of 75 million tons of iron ore at the Wabush mine. This revaluation is not yet recognized under Canadian accounting standards but is expected upon adoption of IFRS by January 1, 2011.
Material Changes and Strategic Outlook
The restructuring is driven by significant changes at the Wabush Iron Ore Mine, where Cliffs Natural Resources Inc. acquired a 100% stake and updated reserves, implying a 15-year mine life. Management believes the sum of the parts will create greater value than the combined entity.
- Terra Nova (Royalty): Will be debt-free, maintain NYSE listing, and institute a dividend policy. Focus includes acquiring additional royalties and monetizing metal by-product streams.
- KID (Industrial): Will list on the Frankfurt Stock Exchange (FSE) in March 2010. Focus includes expanding in the Indian market, strengthening engineering capabilities in Cologne, Germany, and forming strategic alliances for EPC solutions.
Risks and Contingencies
The transaction is subject to regulatory and court approvals under the British Columbia Business Corporations Act and shareholder approval at a special meeting expected on March 22, 2010. Key risks include:
- Failure to obtain necessary approvals for the restructuring.
- Decrease in Wabush's estimated reserves or mine life.
- Regulatory and political uncertainties in India and other emerging markets.
- Decreased demand for cement and related products.
- Fluctuations in foreign exchange rates and raw material costs.
Investor Verification Checklist
- Confirm the outcome of the shareholder vote scheduled for March 22, 2010.
- Verify the receipt of court and regulatory approvals required for the Arrangement.
- Monitor the actual listing of KID on the Frankfurt Stock Exchange and the subsequent European public offering.
- Review the formal dividend policy announcement for Terra Nova Royalty Corporation.
- Assess the tax implications of the distribution for U.S. and Canadian shareholders as advised by management.