Greed and fear rule the crazy world of mainland resources
Imagine that a jewellery shop offers you a stone claiming it is a piece of top-grade jade. But before you can lay your hands on it to see if it's real or agree on a price, you have to pay HK$500,000 cash just to get a document stating the shop intends to sell it to you.
You would scream 'not a chance!' and walk away.
Not Lingbao Gold, a locally listed gold miner in Hainan. That is exactly what the company did in April when it paid HK$356 million for a letter of intent from a private entrepreneur to sell its stake in a gold mine.
Then, this week, Lingbao said the deal had collapsed, but it would get HK$113 million in compensation - about a 33 per cent return - on top of the pre-payment.
However, there seems to be uncertainty over whether the seller can pay at all.
Sounds absurd? Welcome to the crazy world of resources that the mainland's red-hot economy has fuelled. It has sent resources stocks to record highs; it has drawn in toy manufacturers, fashion retailers and hotel developers; and has spread the hunt for resources from the mainland to Madagascar.
It is a world in which greed and fear have made possible all kinds of deals, and where shareholder interest is secondary.
Let us have a look at Lingbao's deal. The gold miner is no small fry, ranking among the top five on the mainland.
Lingbao was supposed to acquire Shaanxi Jiusheng, about which it provided no information, but which, according to media, had discovered a gold mine with potential reserves of up to 200 tonnes.
In paying HK$356 million seven months ago, Lingbao gave no information on how it arrived at the figure, the value of the mine, or what was in place to secure repayment. Nothing was mentioned thereafter, not even in its annual report. Nor did the firm explain the deal's collapse. Shareholders were only informed of a repayment schedule, running until March year.
And security on the repayment? Lingbao said the seller's asset - an unidentified goldmine about which no details were offered - was only pledged after the deal collapsed.
Furthermore, the company's latest interim report said it has liquidity problems, with negative assets of 118 million yuan, less than two years after raising HK$860 million from its Hong Kong listing.
Why would management allow the company to get into this mess? They have not responded to my written questions, but fear, greed and stupidity are all possible explanations.
With gold prices touching new highs, competition for mining rights is fierce. The huge prepayment, unheard of in recent acquisitions, is needed 'to exclude any possible competition in bidding' its management earlier suggested.
In fact, China Gold, the country's largest gold miner, has always been interested in the Shaanxi goldmine. In August, it announced that an agreement had been reached to acquire Shaanxi Jiusheng once the reserve had been verified. (Why it took Lingbao more than three months to disclose its failure to acquire the mine is a question for the regulators.)
But why was no security of repayment arranged at the onset? Why was the seller allowed seven months to refund the prepayment? Why did the seller agree to 33 per cent compensation? Fear cannot answer these questions.
(By comparison, China Gold recently called off a gold mine acquisition and got one million yuan in compensation on top of its seven million yuan prepayment.
Is greed the reason?
With their local connections and aggressiveness, private entrepreneurs acquired various resource assets during the down cycle of the minerals market. But they have difficulty persuading banks to finance the capital-intensive exploration.
We don't know what the case is with Liaoning-based Jiuyi Group, which owns the Shaanxi goldmine. However, the HK$356 million cash advance from Lingbao will be useful while Jiuyi completes the sale with China Gold. In that context, a 33 per cent annual interest rate may not be too bad.
For Lingbao, whose half-year profit fell 71.3 per cent to 38 million yuan on rising materials costs, the 113 million yuan compensation will be more than helpful.
However, it is difficult to imagine why a company would enter into this kind of arrangement, risking its reputation and liquidity.
Many questions remain unanswered, and it is the job of the regulators to get those answers. But they may be too busy to do so; just take a look at the progress - or lack of progress - in many of the mine acquisition deals announced in the past six months in the attached table.