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Dec 2014 - Waiting Leisurely

"Wait leisurely for an exhausted enemy"

I first heard this "article of war" in a clca presentation by Leonie Mckeon on doing business in China, at the Symposium Conference in Broken Hill in May 2012, (contained in an earlier issue of Paydirt) and did not really appreciate its significance until now.

After the October 2014 China Mining in Tianjin, I attended a day of the Exploration Conference in Beijing, which covered a number of different aspects that I had not encountered before, such as resolving disputes often when companies do not fulfil their agreed obligations, as in say they are going to do something and then do not do it. Also how to take over a company (from a Chinese perspective).

The best way to resolve a dispute appears to be not to use the historic expensive LIAC (London) which has English law quirks or the semi-expensive ICC (International) often heard in Hong Kong, but instead use the ~10-year old Singapore based SIAC which has fast-track appeal/resolving options and seemed to cost about half that of the alternatives.

Of the presentations that I saw on the SIAC, in my opinion, the best and most comprehensive appeared to be that by Steven Lim, of Clyde & Co Clasis Singapore, followed by Sophia Feng of the SIAC. It would have been useful to have known about the SIAC and the alternatives, when a company I had written research on was involved in an international dispute, when their offer was accepted after an earthquake had occurred, significantly damaging the assets.

Within that exploration conference was a session on M & A (mergers and acquisitions) which stated that "with the lower commodity prices, share prices had typically fallen by >30% to 40%, representing 'prime buying time' ".

However "in acquiring a company, the point was not to take it over straight away. Ideally take a stake of >30% and board control. The 'Key' was to get board control because then you can dictate what your investment money is spent on, if indeed it needs to be spent at all! ". Note this presentation (simultaneously translated into English) was to a largely Chinese speaking audience with possibly up to 5 "westerners" present.

There are many examples of China's acquisitions of foreign resource companies that have been apparently disastrous, depending on your viewpoint.

For example, the market perception is that Shandong Gold acquired poor assets  at Focus Minerals (FML) and lost all of its investment. However, despite all the write offs and impairments etc, FML still had ~$88m in various cash forms, at 30 September 2014 plus a swag of tenements and two plants at Coolgardie and Laverton (with the Mount and the Laverton Camp sold for ~$1.7m in August 2014). FML appears to now be undergoing fairly significant exploration at up to ~$10mpa on its tenements including exploration for nickel and lithium. With ~9.1bn shares on issue, FML is now cash backed at ~ 1.1c, and no debt.

On acquisition of FML all exploration immediately stopped and the operations were gradually closed down. Successful high grade intersections are occurring in the Bonnie Vale vicinity which was one of FML's prime target areas, and there are a number of underexplored areas in the Laverton region, that are being followed up. Shandong/FML have stated that they want to put FML on a sound resource/reserve footing before re-opening the plants and recommencing gold production.

In early 2014, it was announced at the Sydney Mining Club, that Golden Cross (GCR.ax) were going to have an EGM to place shares ideally to Heron (HRR). It transpired that GCR had earlier placed shares to a Chinese company (HQ MIning) giving them effectively board control of GCR with two holdings totalling ~24%.

However, the money never came, HQ had board control and apparently kept claiming that they were unable to obtain approval to transfer the money from China (it may have been partly true as acquisition monies are now [October 2014] available for companies that are in or almost in production, preferably not exploration).  Hence GCR were running low on funds for exploration.

So a placement was arranged to sophisticated investors, amongst which Heron apparently said why don't we offer 19.9%, to which HQ reputedly said "no, we'll match it, and then launch a takeover for the whole company (inferring no problem to get the funds for a complete takeover)".

Hence the EGM took place - the February 2014 voting was heavily contested by HQ with all the votes counted, but resulted in Heron with 19.9% and a board member, with the existing Chairman then resigning and replaced by a Chinese person (the proxies were probably at the discretion of the Chairman). And since then GCR has had exploration success with a new zone at Copper Hill.

At the China Mining conference it was remarked that another listed Australian company seemed to be having issues with its new Chinese joint venture partner's ability to get approval to transfer funds from China, while other companies commented that they have had favourable experiences with no issues whatsoever, although there had usually been long-term pre-connections.

Accepting that Albidon (ALB.ax) had some issues of its own, it always puzzled me as to why Albidon's ostensibly Tier 1 (or 2) Munali Ni-Co-PGE mine south of Lusaka in Zambia with good infrastructure (road, rail, water, power) plus experienced Copperbelt labour and significant exploration upside, had failed at the first hurdle.

Yes in hindsight, Albidon should have raised money at ~$4 per share, but failed to due to a tight shareholder base (that didn't want dilution), and then gave a bank a fantastic favour by closing out its forwards in Sept 2008, realising $50m and paying $40m of the original bank debt, just as the nickel price was collapsing, and it was in the process of commissioning the mine. The forwards provider later commented that they had not forced the close out of the forwards.

However, Albidon had negotiated an offtake/sale agreement with Jinchuan Nickel from the mine gate. When the initial product  was produced, no arrangements  were in place by Jinchuan to transport the product, and Jinchuan then also refused to accept the cons because they were below spec (being commissioned closer to surface, lower grade, lower recoveries due to violarite etc), which you would have thought would have been covered by the agreement.

Funding arrangements of $31m were being made with Pacific Road in early 2009 that required $5m to be raised, with US$6m received by 28 Feb from 110m Convertible notes at A$0.08 per share, US$10m by 30 Jun at A$0.16 per share, and another US$10m by 30 Sept 2009 based on a 30-day volume weighted average price to that date.

However Jinchuan were by then an 18.4% shareholder with $15m also owing in debt (from initial offtake funding) and were apparently not supporting / or against the Pac Road offer. So on 3 March 2009, Albidon elected to instead take an offer from Jinchuan of $1.8m to be paid immediately on 3 March 2009 for the Jan and Feb below spec cons, and use the money to retrench staff and place the mine/plant on care and maintenance. The decline was to continue using additional funding with $7m in equity at A$0.08 per share received by 20 March and an unspecified further note facility at A$0.10, based on a number of conditions to be completed by 20 March.

However, on 6 March Albidon was placed into administration by its senior lenders for defaulting on its loan repayments, the immediately receivable 3 March $1.8m  payment from Jinchuan had not arrived. The 20 March meeting occurred approving the Jinchuan funding, but by 24 March still no funds (including the $1.8m) had arrived from Jinchuan, and Albidon was suspended from quotation. On 23 April it was reported that the $1.8m had arrived to place the company into care and maintenance but nothing else, Albidon was an "exhausted enemy" in administration, and almost all of its directors had resigned.

On 9 June, the new terms of Jinchuan's financing were announced being US$7m from 135.6m fpo shares at A$0.08 (US$0.052 - the A$ had since weakened further) for corporate activities, and an additional US$21m based on 323.1m of convertible notes at A$0.10 (US$0.065) with a coupon of 3.75% + USD Libor and a 5-year term to 2014. Jinchuan supplied funding of $0.4m for the administrators.

Although Jinchuan had changed the nature of the actual tranches, the tranches were deemed to have been approved by shareholders on 20 March.  And ~ 3 months' later on 11 September, due to unforeseen delays, Jinchuan issued its convertible note under a DOCA and acquired all the debt and relevant securities of Barclays and the European Investment Bank.

On 9 Sept two new Chinese directors were appointed as representatives of Jinchuan and board control switched to China, as only one Australian director was left.

On 2 November 2009, the issue of shares and convertible notes to Jinchuan were approved along with a resolution that did not require a mandatory takeover offer for the remaining shares, and the finances were all settled. (As to why no mandatory A$0.10 take over ?, well Jinchuan had board control and perhaps thought it could get the rest more cheaply). On 4 December Albidon delisted from AIM having been in suspension for over 6 months, and did not expect to relist in London. AIM shareholders  were to receive ASX listed shares.

On 23 December 2009, Albidon then entered into another $20m loan facility from Jinchuan, and had recommenced underground development with concentrate shipments recommencing in April 2010, along with a new Chinese CEO and CFO from February 2010. By June 2010, Albidon's "cash" position had risen to US$14m, and in August, two more Chinese directors were added as Albidon relisted on the ASX on 14 October 2010. Albidon even got a "speeding ticket" on 14 December for rising from 11.5c to 15c.

It looked like Munali was ramping up nicely, apparently net cash of $22m as at 31 March 2011 (although this clearly did not include the debt), March production 50% higher due to higher grade areas with higher recoveries than previous months, revenue in the month of March 2011 of $7m. In May 2011, Jinchuan made a goodwill gesture suggesting allowing 161.54m (or half) of the convertible notes to be repaid from cashflow with the balance converted to equity at a time involving a capital raising.

But then a "minor structural fault" resulted in the partial cave in of a stope on 16 June 2011. On 4 July, full underground production resumed, but on 13 July further surface subsidence occurred. On 22 August Albidon stated that media reports were incorrect, it was still in normal underground production, but it was suspended from quotation on 31 August, with lower than expected grades and  recoveries being encountered. In its 2010 AR, Albidon stated in one of its figures that it was considering sub-level caving, and showed that it was now stoping significantly lower grade peripheral areas of the orebody.

At 30 June 2011, Albidon now had debt of $125m including $19.6m in convertible notes and $10.4m in interest, and was held 49.93% by Jinchuan. So up to $30m in new equity was needed to be raised. In November 2011, Munali was on $7.5mpa care and maintenance again, the resources had been downgraded by ~0.3%Ni and another sinkhole was developing on surface.  It was later commented that the sinkholes had been filled and had stabilised.

On 28 March 2013, a Jinchuan subsidiary proposed the acquisition of the remainder of Albidon for US$0.0025 cash (much cheaper than A$0.10), which was approved on 15 May 2013 and Albidon was finally delisted from the ASX on 14 June 2013. The "enemy" had clearly become over-exhausted, and the original Albidon discoverers and shareholders had lost the Munali mine to Jinchuan. Could / would a different scenario have occurred had the Pac Road offer been accepted - maybe.

As to what actually happened, the Munali mine had apparently mined too close to surface such that stopes breached or caved through to surface. The original intention was not to mine to close to surface due to poor recoveries and low grades (nickel sulphide appears to often oxidise to violarite at depths of less than 100m or so below surface), and instead use the lower grade areas to establish crown and other pillars.

The original intention was to decline down to and stope the materially higher grade areas - what happened there ? and how did a highly experienced mining company, with >50 years of mining knowledge from mining its Jinchuan orebody since ~1960, and highly experienced mine managers manage to mine so close to surface such that it lost the mine ?...unless perhaps Jinchuan intended to, and keep the orebody for mining in the future.

Standard mining practice when I worked underground on the Zambian Copperbelt in Kitwe's Rokana Division in the mid-1970s, was to "break" the crown pillar above a stope, and immediately (post-blast) create a "sinkhole" on surface, and this was for a ~70m high x 20-30m long x 55m wide stope, with a sandstone footwall and shale hangingwall, ~710m (2370ft to 2620ft level) below surface. The shaft, decline and deep underground workings were unaffected by the stoping and surface caving/sinkholes.

So what happened to those higher grade Munali orebody intersections, possible northerly plunging ore shoots  and the massive nickel sulphide in hard ground as shown in the Figure. Also while the resource downgrade and valuation focused on the lower nickel grades, one of the key aspects of the Munali mineralisation was its significant Cu, Co and PGE by-product credits.

Munali's mineralisation was apparently very similar to the mega Jinchuan nickel orebody in China, except that Munali appeared to be higher grade. Jinchuan's orebody is the third largest in the world and is a series of lenses over a 6.5km  strike with its higher grade ore averaging 0.55%Ni & 0.32%Cu plus Co & PGEs. Munali's resource was ~1.2%Ni, 0.17%Cu, 0.07%Co, 0.3g/tPt & 0.6g/tPd of which the higher grade resource was ~2.3%Ni, 0.3%Cu, 0.12%Co, 0.4g/tPt & 0.9g/tPd.  One day Munali appears likely to be re-opened, mined and treated again, but that could be in 10, 20 or 50 years' time.

While some of the "failed" Chinese company acquisitions may be realisable in the future, some are expected to remain "a fail" where the environment is concerned. One Chinese company in a presentation at China Mining 2014 complained about how the Canadian Govt had failed them, stating that their market cap had fallen from ~$3bn to ~$300m in the past 2 years. The Canadian Govt had been very helpful getting them to invest in a project in Canada, but when difficulties arose, suddenly "no one was available".

The Chinese company said that "in China, if an official is giving you a problem, then you appeal to his superior, and if required the official (and opposition block) is removed, but in Canada that does not happen".

It was also commented that investing in Australia has its own issues too. "Australia's corporate tax law extends to ~1,000 pages in 4 volumes - even  Australians joke about it, compared to China's (apparently) total of only 6 to 7 pages".

It is often remarked that Chinese companies take a long time to develop a relationship of trust with another company, and in the exploration exchange conference, RBC showed a figure of which western world bank to trust based on a 2014 independent global survey by The Economist, in which their bank (RBC) was the most trusted with highest expertise.  Perhaps it is time that western world companies took a longer time to assess their potential JV partner.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

Figure 1. Albidon's Munali Ni-Cu-Co-PGE Mine and Mineralisation in ZambiaGDNdec14

  • Written by: Keith Goode
  • Monday, 01 December 2014

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