Not just another crackdown

To the trained eye the word crackdown in a newspaper headline smacks of the triumph of image over substance. It reeks of a press release.

For a government agency though, the perception of a crackdown is just as vital as the reality.

Yet so diminished from overuse has the word crackdown become that it is surely headed the way of ”probe”, a word banned from headlines altogether, at least in this newspaper’s style book.

No matter. This week’s most notable crackdown, on prospectuses by the Australian Securities & Investments Commission, is to be commended. It has been a long time coming.

One of the first things an investor ought to know when subscribing to a public share offer is information about the sellers. Who am I buying from? What is their track record?

Until now inveterate fraudsters, even convicted heroin traffickers, have happily promoted their floats on the ASX. Of the 2300-odd companies listed on the bourse it would be safe to say a couple of hundred are simply pump-and-dump schemes, executive options scams and the like that are controlled by people whose primary intent is to mine wallets, not mineral deposits.

Until now, the same promoters have beaten a path back to the market – decade in, decade out – pouncing on every fad, boom and bubble. That they haven’t been required to disclose their myriad failures – before “backdoor listing” the likes of a “uranium” asset into a nickel explorer’s shell, itself born from a dotcom play, having emerged from the ruins of a biotechnology float – has played nicely into the hands of the promoters, brokers, lawyers, accountants and other capital markets fee-takers. Retail investors, though, have been savaged time and again.

For most, a prospectus is merely “that fat bit in front of the application form”. It is a marketing document packed with glossy pics, cherry-picked numbers and manicured corporate rhetoric. The worthwhile bits are buried in the “material contracts” notes to the accounts.

Under the mooted reforms by ASIC, directors may be required to disclose criminal convictions, bankruptcies and past links with failed companies. For perennial promoters, many with more than a dozen blow-ups on their CVs, the list will be long.

Meantime, as we have had the crackdown on probes, it must now be time for a probe into crackdowns. Anyone for a Senate inquiry?

In light of the blur of lobbying over the carbon tax, shareholders and the public at large could reasonably ask “what is the position of Australia’s leading companies?” Do they favour a tax, or a market-based carbon price? What do they really want?

We asked them this week. They responded with more out-clauses than an Allco structured finance prospectus. Some were annoyed at being asked for a straight answer. Others tried hard to deliver clarity on a difficult issue. There was much, let’s say … nuance.

Broadly, and depending on the policy outcome, more favoured action on carbon than not, and every company wanted as much as it could get in compensation.

What was surprising – readers can turn to our cover story on page 10 – was the number of Top 50 companies that either had no position or were unwilling to sally forth with it in public. Twelve supported a carbon price, three opposed it, eight dangled on the fence and more than half had “no comment”.

This is no marquee month for promoters of related party transactions. John Kinghorn’s efforts to privatise RHG on the cheap are now foundering amid the backlash from a rat pack of smaller institutional shareholders.

Kingo and his mate John McGuigan were also forced to pull their lowball bid for Cascade Coal via White Energy. And now the dogs are beginning to growl over plans by the Lynas Corp boss Nick Curtis to hive off a bit of the prized Mt Weld rare earths deposit into a vehicle called Forge Resources.

Let it be said that, unlike Kingo’s former shareholders in RAMS (now RHG), it would not be out of order for Lynas shareholders to have a bust of Nick Curtis adorning the mantelpiece in their living room.

As China has sought to corner the rare earths market, sending prices for the 15 elements essential to the comforts of modern life into orbit, from iPad screens to magnets and electric car batteries, Curtis has delivered shareholders a 1000 per cent return in two years. And they will be asked next month to vote on an apparently trifling transaction: to sell the Crown polymetallic metals and heavy rare earths resource to Forge for $21 million cash.

The rationale for the sale is that Crown is “non core” to Lynas’s plan to dominate production of rare earths outside China. So a few million in the kitty today is better than nothing.

But it was only in February 2007 (corporate presentation slide 29) that Lynas was boasting of Crown’s $50 billion worth of polymetallic metal in the ground. Crown could become the company’s next major project. Since then, as official mentions of Crown have become fewer and fewer, rare earths prices have risen 570 per cent.

Privately, it seems Nick Curtis may still be a true believer. He already has a foot on 15 per cent of Forge, a stake that should grow to 36 per cent worth $30 million were his performance shares to vest as a reward for finding Crown for Forge, and completing a capital raising.

And Nick Curtis isn’t the only member of the old Lynas crew who still hankers after Crown.

Time-machine logic

Lynas shareholders haven’t heard much from former executive director Harry Wang since he stepped off the board in 2006.

But Wang has been a key player on the sidelines.

In 2009 he slung together a proposed Chinese investment that would have seen CNMC buy a 52 per cent stake in Lynas at 36 cents a share.

Curtis backed the deal, though shareholders weren’t enamoured of it and it didn’t pass muster with the Foreign Investment Review Board.

FIRB’s desire to keep the Chinese controlling Australia’s richest supply of rare earths has been vindicated since as the press on China’s control over the global rare earths market has become almost hysterical.

Rare earths aren’t as rare as they sound, only in large, easily-mineable deposits.

Now Harry Wang and Nick Curtis are back together working for Forge on the acquisition, not just as directors on the Forge board but also as the principals of Riverstone Advisory. Riverstone is better known as Sino Resources. It changed its name a few weeks ago and is the corporate adviser to Forge.

It is for shareholders to work out whether Curtis, Wang and the Forge crew are trying to pick up Crown for a ridiculously low price. In light of Lynas’s own statements it looks it looks like a once-in-a-lifetime bargain.

Then again, “independent expert” Grant Samuel has given the deal the thumbs up – declaring it “fair and reasonable” for Lynas shareholders.

The cynics might say that getting a favourable Grant Samuel recommendation is as sure a bet as a one-horse race. But they would be wrong … that one horse could still break down mid-race.

The expert earned no less than $400,000 for this piece of work. And that was without even building a discounted cash flow model. The project costs and revenues were too hard to judge. The primary valuation methodology instead has been to go back and look at what Lynas paid for Mt Weld in 2003 – no more than $22.6 million.

Crown is only a small part of Mt Weld. Forge is forking out nearly as much for Crown as Lynas paid for the whole project. This was enough to convince Grant Samuel that the price was fair.

Roll over HG Wells! So unique is this “Undiscounted Time Machine” (UTM) methodology that it is almost worthy of its own Wikipedia entry.

Shareholders had better decide for themselves if the radical shift in rare earths and metals prices over the last eight years might possibly feature in a fair valuation.

The market is now pricing Mt Weld at more than $3 billion.

It should be noted that Grant Samuel concedes its methodolgy is not robust, and that “the only way to reliably determine the value of the sublease [Crown] deposits would be through an open sale price.” But of course.

Lynas did not pursue an open process, however. It opted to offload the asset to its own associates.

Happy Easter.