Sent: 16-11-2010 11:48:07
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Shareholders Lose Out to Strategic Buyers
Mount Gibson Iron and Matilda Minerals are showing how ordinary shareholders can lose out to large strategic shareholders pursuing their own strategic agendas.
Australian resource companies have a history of relatively poor corporate governance. A July 2009 ATC email reported on a study conducted by University of Newcastle academics. Their data showed that equivalently sized resource companies had poorer governance track records than industrial companies. This issue was explored further in Edition 62 of the monthly ATC Digest.
Governance can affect investment returns. Poor decision making procedures may result in suboptimal use of shareholder funds and a lower return on capital employed than might otherwise be achieved. Ultimately, a lowered return on capital will lead to lower share prices.
One of the key tests of corporate governance standards is the composition of the board of directors. Truly independent directors are more likely to be objective. Minority shareholders rely on them to ensure the best deal is done for the company where products are sold, materials bought or assets traded.
The resources industry has a long history of blurring the distinctions between executive and non executive directors. Many so-called non executive directors are invited to join boards because of the ongoing benefit to the company from their ability, at a pinch, to step in and troubleshoot. This is especially important in an industry short on development experience.
The problem with directors assuming such roles is that companies are sometimes not left with anyone to fulfil the supervisory role shareholders rely on non executive directors to perform.
In the past week, the chairman of iron ore miner Mount Gibson Iron announced his decision to step down from the board. The reason given was his inability to get agreement on the board's composition.
The Mount Gibson Iron board is split among executives, non executives and nominees of the company's main shareholders. In late 2008, Mount Gibson negotiated agreements with two companies, APAC and a subsidiary of Shougang Group Corporation, under which the Chinese companies were to inject capital in exchange for long term contracts to buy future production.
The arrangements were made hurriedly in the aftermath of the global credit crisis when financing was in short supply and Mount Gibson's previous customers had reneged on their obligations to take the iron ore they were contracted to buy. About a year later, the shareholdings were reorganised with Shougang appearing to take a back seat by offloading its stake in Mount Gibson to Fushan, a Chinese coking coal miner.
Recently, all parties had apparently agreed to reduce the size of the company board. However, when it came to the crunch, the Mount Gibson chairman was, in the words of the company's statement to the ASX, "unable to solicit a definitive commitment from either shareholder to ensure that any reduction in the number of independent directors on the Board will be matched with a reduction in the number of nominee directors, thereby preserving the independence and balance of the Board".
The reluctance of the Chinese company representatives to relinquish their positions should not have been a surprise to anyone. The Chinese groups were on a strategic mission unconnected with preserving the niceties of Australia's corporate governance standards.
That mission was highlighted earlier in 2010 at the sixth annual Asian Mining Congress in Singapore. The Chinese companies present highlighted the strong likelihood of their permanent presence as an influence on the sector.
The head of the Chinese diversified steel maker, Shougang Group Corporation, himself a member of the Financial and Economic Affairs Committee of the eleventh National People's Congress, spoke about China's future iron ore needs, doing little to hide his sense of strategic positioning.
Despite the complexity of the Mount Gibson Iron shareholding arrangements and the attempts to paint them as involving multiple parties, there was no ambiguity in the Shougang view. Despite the wobbly English, the intent behind the words "owns all iron ore sales monopoly in the useful life of Gibson" was abundantly clear.
On a smaller scale, another recovering company has found a benefactor to permit continuation as a listed entity. Matilda Minerals has been in administration since the third quarter of 2008. While Matilda Minerals had ostensibly been a Northern Territory mineral sands miner, directors had set about acquiring a large number of coal exploration permits in Queensland before putting the company into administration.
Directors now intend to bring the company back to life with a capital injection from commodity trading house Noble Group. Under the terms of the deal, according to the independent expert brought in to advise shareholders, Noble could end up with nearly 60% of the company. It will also be given a management contract allowing it to set the strategic and operational direction of the company. It will also have an entitlement to a share of all sales made from the exploration properties. No less than half the directors on the board are to be Noble appointees.
What would happen, under these circumstances, if a sale of the coal properties was in the best interests of the minority shareholders? Since Noble would be entitled to an ongoing share of sales revenues from producing mines, it might not have the same enthusiasm for asset sales as other shareholders.
Who protects the other shareholders when this happens? The answer is probably no-one. Even if all minority shareholders banded together as one, their influence would be virtually non existent.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.