Exxaro, one of South Africa's largest coal miners, said on Monday it had offered A$0.46 per Territory share, representing a 64 percent premium to the last closing price. The deal values Territory at A$123 million ($130 million), Exxaro said.

Analysts said the price was expensive given the short three- to five-year life span of Territory's mine, and investors sent shares of the South African firm sharply lower.

"When mining companies talk about an investment, they talk about assets they like and it's always low-cost, long-life assets," Henk Groenewald, a fund manager at Coronation Management, said on a conference call with the company.

"(Exxaro) bought a short-life asset and it's actually not that low-cost compared to many of the Australian mines."

Shares of Exxaro tumbled more than 5 percent on the news before recouping some losses. The shares were down 3.6 percent at 157.10 rand by 1224 GMT, underperforming a 1.9 percent drop in Johannesburg's Top 40 index of blue chips.

Exxaro's shares are up nearly 20 percent so far this year.

NEW TERRITORY

Territory currently produces approximately 1.6 million tonnes of lump and fine direct shipping ore. It also owns rights to iron ore tenements and has access to China via the port of Darwin, Exxaro said.

The acquisition is part of Exxaro's goal to acquire several iron ore assets and eventually produce 10 million tonnes of the steel-making ingredient a year, said Ernst Venter, Exxaro's manager for growth.

"It's an important step to signify that we are now seriously entering the iron ore playing field," Venter told the conference call, adding that the company was looking at Africa and Australia for more assets.

Exxaro, whose main business is still coal, has been keen to expand its interest into iron ore and mineral sands and is also investing heavily in power generation projects.

Venter also said the company could look to explore areas near Territory's mine.

The company is betting on the positive outlook for iron ore, which is expected to be supported by rising demand from India and China, he said.

Territory said a majority of its board had recommended to accept the offer and that the deal had support from a major shareholder, DCM DECOmetal.

As part of the agreement, Territory has ended talks with another firm, Noble Group, about a potential deal for debt conversion with a share placement option.

Exxaro said it had met with Noble, a major shareholder in Territory, before announcing the deal. Noble said it had not held talks with Exxaro regarding the Territory offer.

RMB Corporate Finance, a unit of South Africa's FirstRand, and Greenhill Caliburn advised Exxaro on the deal, while Azure Capital advised Territory.

Copyright Reuters, 2011