China’s appetite for iron-ore to make steel is one of the engines driving the entire industrial world. No mystery there, and no news.
But in Moscow, Hong Kong, London and on other stock exchanges which trade on the speculation of fortunes to be made from mining and selling raw materials to China, there is growing evidence of a variant of insider trading which brokers call pump and dump schemes. Take this salutory little tale about China-bound iron-ore, for example.
Announced on January 21, the takeover of rising junior iron-ore miner, BC Iron Ltd., based in Western Australia, by Regent Pacific Group, a Hong Kong-listed company run by a British and Canadian group, appears to have collapsed within a few days of the announcement. The explanation – the biggest shareholder of BC Iron, Ukrainian mining magnate Gennady Bogolyubov, owner of manganese specialist Consolidated Minerals (Consmin), is flatly opposed — and he has the votes to veto the deal.
But that begs the question – why did the men behind BC Iron and Regent Pacific think they could pull off their deal without finding out what Bogolyubov thought, or negotiating their deal directly with him? Who forgot to do the arithmetic on the votes required to push the deal through?
Remote though the answers may be to most analysts of the Asian iron-ore trade, the fact that they may be investigated soon by stock market regulators in Australia and Hong Kong signals how much speculative value there now is in the flow of iron-ore to China; and consequently how much short-term profit insiders may earn even (especially) on deals that fall through.
In 2006, BC Iron had been created by an agreement between ConsMin and Alkane Exploration to combine their iron-ore prospects in the Pilbara region of WA; it was first listed on the Australian Stock Exchange (ASX) in December of that year with Consmin the largest shareholder. Bogolyubov took control of Consmin after winning a protracted bidding contest in 2008. Through Consmin he inherited more than 21% of BC Iron.
In June of 2009, BC Iron completed a feasibility study for its iron-ore deposit; the study identified a reserve of about 36 million tonnes of ore at 57% Fe. A month later, in August of 2009, BC Iron’s board agreed with the larger iron-ore miner, Fortescue Metals Group, for the Nullagine joint venture. This provided BC Iron with access to Fortescue’s costly railroad and port loading terminal, as well as to its China marketing network, allowing BC Iron to concentrate on mine start-up and shipping mine output to China. Until the deal with Fortescue, iron-ore miners in the region kept their costly transportation assets for their own exclusive use.
A few weeks later, also with Fortescue’s help, BC Iron did a deal with a Hong Kong metals trader supplying Chinese steel-mills; the identity has yet to be confirmed by BC Iron. This provided a supply and delivery commitment for 20 million tonnes of iron-ore over 8 years, with an initial US$50 million in pre-shipment financing to get the mine up and ready. The plan agreed with Fortescue was to start mining 1.5 million tonnes per annum as quickly as possible, and expand shipments to 5 million tonnes p.a. as the mine pit and railroad capacity allowed. Production and shipping were then due to start in late 2010.
The cherry on the cake was unveiled on January 8. New studies were showing, according to the BC Iron release to the ASX, that the company’s reserves were now 46.2 million tonnes, up 28% on the 2009 estimate, with as much as 80 million tonnes if the outlying deposits on the tenement were counted. Underground, BC Iron appeared to be getting richer by the day. But there were delays in shipping, and the first load from the mine pit didn’t hit the rails until January 31.
By then, BC Iron’s chief executive Tony Kiernan had agreed with other members of the BC Iron board on a scheme to sell their company lock stock and barrel to Regent Pacific; at the time Regent Pacific was holding a 19.9% stake in BC Iron.
Sources close to the dealmaking say Regent Pacific first made its move in December, at least five weeks before the official disclosure of the buy-out offer was issued through the ASX. But Regent Pacific approached Kiernan and the BC Iron board members in the first instance; it made no move to offer Bogolyubov a buy-out of his stake; and it kept from him the secret of the approach to Kiernan. The takeover deal, plus a penalty if BC Iron backed out, was signed on December 13.
BC Iron’s share price had hit its 2010 peak at A$2.51 on November 11. Delays in meeting production and shipping targets apparently started pressing downwards on the share price, and by the time Regent Pacific decided on a takeover bid, BC Iron was down to $2.18. While these talks were under way, the share price started to move up sharply. The apparent public reason for this was the announcement on December 8 from BC Iron that mining had started; that first truck loads of iron-ore were being readied; the first railroad shipments to port were scheduled; and 60,000 tonnes of iron-ore bound for China would be despatched to Port Hedland (Herb Elliott Port) in January – one million tonnes to follow in all over the first six months of this year.
With the good revenue news this represented, not to mention the new reserves figures yet to be announced in a few days’ time, what could have motivated the BC Iron directors to vote unanimously in favour of selling out at A$3.30? The company announcement says the board was in favour “in the absence of a superior proposal”. Elaborating on this, the company has also claimed “the offer delivers an all-time high price for BC Iron shares with the certainty of cash at a time when iron ore prices are reaching historical highs.” The company had been telling shareholders it had all the cash it needed from its offtake agreements and share placements, so what was the hurry for cash just when the trading and reserves position of the company looked set for a sustained takeoff?
The only response company chief executive Kiernan has provided so far is this: “as part of its deliberation the Board considered various metrics including the very favourable Enterprise Value per resource tonne multiple of A$11.41/t against the peer median oif A$7.30/t.” Which peers Kiernan was thinking of, and how they compare to BC Iron in their production and sale evolution hasn’t disclosed.
Regent Pacific is registered in Cayman Islands, and was first listed in Hong Kong in 1998. It is controlled by two co-chairman, the British company founder James Mellon, who holds almost 12% of the shares; and Stephen Dattels, a Canadian, with 7.3%. Currently, they occupy non-executive board seats. The chief executive is Jamie Gibson, who is British.
Dattels is remembered in Russia and on the Alternative Investment Market (AIM) in London, for his promotion of a diamond exploration company, Everfor Diamonds, which turned out to be profitable for Dattels and a Russian partner, though not for other shareholders. AIM-listed between 2005 and 2008, Everfor obtained Russian diamond exploration licences that were controversial at issue, and proved to be fruitless three years later. The Russian regulators claimed they suspected a share price pump and dump scheme, but took no action. By the time Everfor changed its name and went into liquidation, Dattels was gone. He doesn’t mention the experience in his Regent Pacific biography.
The company has prospected for coal, copper, zinc, and other metals in China and Mongolia, and has run a small copper-zinc mine in Yunnan province, China. In 2009 Regent Pacific reported a profit of US$11.1 million on revenues of $20.6 million. The interim financial report for the six months to June 30, 2010, showed revenue collapsing to a third of what it had been the year before, with an operating loss for the half-year of almost $2 million.
While the secret deal talks were under way with BC Iron, but before the buy-out announcement was made on January 20, Regent Pacific told the Hong Kong Stock Exchange it planned to report a significant increase in profit for 2010, compared to its 2009 results. But this was the result of decision to sell out of its existing businesses.
A company release, dated January 12, claimed it would book gains in the value of its shareholdings in other companies (including BC Iron) of US$56.3 million (no breakdown between realised and paper earnings). In addition, the company said that during the final quarter of 2010 it had earned US$137.5 million on the disposal of its only Chinese mine and its Mongolian coal project. “The unaudited gains from these disposals were
US$19.83 million (HK$154.67 million),” Regent Pacific announced. Having walked away from its principal operating businesses, Regent Pacific claimed its gross cash position after the disposals was $123.6 million. The company has yet to report its liabilities.
Regent Pacific’s offer to BC Iron amounted to a bid A$276.3 million for the shares it didn’t already own — more than double the cash Regent Pacific claimed to have on hand. Its market capitalisation as it made its offer was HK$1,505 million, or A$191 million. That was roughly half the value it was putting on its takeover target, BC Iron.
“Regent is not a flipper of assets,” Gibson of Regent Pacific told Bloomberg as the takeover bid commenced. “We’re here for the long term in Australia, and we’re in for the long term with BC Iron.”
To succeed, this particular dwarf needed a giant’s shoulders to climb on. But rather than approach Bogolyubov, Regent Pacific tried to buy BC Iron by ignoring him. David Church is Regent Pacific’s general counsel and head of mergers and acquisitions. He was asked why Regent Pacific had made its offer for BC Iron without checking what the larger shareholder Consmin would be likely to consider, and why Consmin was not approached? He replied: “the offer was on the table and it’s up to them to accept or reject it.”
A small, loss-making mining company approaches a much larger mining company for takeover, and it doesn’t approach the principal shareholder of that company to see if a takeover can be negotiated — is that what Regent Pacific did? Church was asked. “This line of questioning is off base”, he replied. Did Regent Pacific make an approach to Consmin? “I decline to comment on whether an approach was made,” Church said.
Dattels was asked what role he as co-chairman of Regent Pacific had made in the company’s strategy shift and in the takeover bid for BC Iron. He declined to respond.
Speaking for the Consmin group, Oleg Sheiko said “the logic of Regent Pacific’s offer, as well as of the acceptance by the BC Iron directors, escapes us. Here is an iron-ore miner on a roll toward substantial export revenues at an iron-ore price which may not go higher, but will certainly not decline for the foreseeable future. Regent Pacific comes along with a share price offer whose multiple to BC Iron’s earnings is lower than anyone in our business would look twice at. In addition, Regent Pacific is almost too small to identify – a loss-making venture, with less than half the cash required to make good on its offer.”
What has enamoured BC Iron of the diminutive Regent Pacific has been the subject of a formal warning from Bogolyubov’s holding. It has told Kiernan of BC Iron that it is concerned by the run-up of the BC Iron share price during the takeover negotiations. It warned that it is readying a request for investigation by the Australian Securities and Investment Commission.
A report this month by the Argonaut brokerage has revealed that since the mid-January bid was officially disclosed, several major international banks and hedge funds have now entered the market to speculate on BC Iron’s share price movement. Before then, the Argonaut report reveals another share trade mystery. These data show there was a big jump in BC Iron share trading the day after Regent Pacific and BC Iron signed their deal in mid-December, well before anything was disclosed to the markets. One of the biggest trades was carried out by Argonaut, which happened to be BC Iron’s registered corporate advisor.
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