Glaucus attacks Fushan 'pump and dump scheme'

Shougang Fushan Resources Group has come under renewed attack from US short-seller Glaucus Research which accused the coking coal miner of buying mines from related parties at above-market prices, and possibly inflating its profit through connected transactions.

In a report released last week, Glaucus said former major shareholder Xing Libin, who sold three coking coal mines to Fushan for HK$10.5 billion in 2008, had sold them at a valuation of 97 yuan a tonne of recoverable reserves, compared with between 11 yuan and 16 yuan for similar mines.

Fushan dismissed the allegation, saying the correct valuation should be 42 yuan a tonne.

But Glaucus responded by saying 42 yuan was not a fair valuation because it was based on both recoverable and possible reserves, but the US short-seller only used recoverable figures in its calculations.

CCB International analyst Karen Li said she believed 42 yuan was a fair basis for comparison, since the 11 yuan to 16 yuan valuation cited by Glaucus probably included both recoverable and possible reserves. She also said Fushan's profit margins were credible.

Xing owns a number of coal mines in Shanxi province, besides the three sold to Fushan. He sold most of his stake in the firm within 18 months of its listing in Hong Kong via a reverse merger deal, and reaped HK$4 billion after Fushan's share price soared.

Glaucus accused Xing of manipulating Fushan's profit margins via a 'pump and dump scheme,' by inflating the price of coal sold to Xing to inflate the profit.

It cited figures from Fushan's filings to the stock exchange, which showed that Fushan sold coal within a three-month period in 2008 to Xing at a 72 per cent premium compared with that of other customers.

Fushan said it had cut connected transactions with Xing since 2009, with last year's sales to Xing amounting to 8.6 million yuan, which was only 0.15 per cent of total sales.

However, Fushan sought shareholder approval late in 2010 for caps of 1.1 billion to 1.3 billion yuan for sales to Xing between 2011 and 2013. The caps for 2009 to 2011 averaged 41 per cent of Fushan's total sales.

A Fushan spokeswoman said it was policy not to disclose details of individual transactions, and that the caps cut the need to seek shareholder approval for each transaction.