Mining Blog

The strange case of a hedge fund and a mining company

17. July 2012, Comments (0)

In September 2011, the New York and Toronto exchange-listed Silvercorp Metals * – China’s biggest silver miner – claimed that its stock had been drastic “shorted” (sold short) by unidentified investors.

According to the mining company, two New York-based websites – Chinastockwatch.com and Alfredlittle.com – spread “false information about [Silvercorp’s] internal accounting methods” .

The following month, Silvercorp claimed that the forensic accounting arm of KPMG, Silvercorp claimed had revealed there was “no truth to allegations of $1 billion in accounting fraud at the company”.

We said (on the HBF Mining blog) at the time that we had “no idea which side in this vicious dispute can claim the moral high ground. Sooner or later, the truth will probably be out.”

Now, ten months on, and truths which most of us would want exposed haven’t emerged.

What we do know is that, among the parties said to have engineered the attacks on Silvercorp is a hedge fund called Anthion and a New York “short seller” using the alias Alfred Little .

Silvercorp sued Anthion in the Supreme Court of New York on Sept. 22, 2011, complaining about a “short-and-distort” scheme in which Anthion and others deflated the company’s price with false accusations [Marketwire, 13 July 2012].

The suit sought damages of up to US$100-million citing a 14-page letter created by Anthion, which accused Silvercorp of reporting 2010 earnings of $66-million in North America, when government filings in China showed a $500,000 loss.

As a result of this letter, said Silvercorp, its stock dropped from $9 a share to US7. The company sought compensatory damages of over $1-million, punitive damages of at least $10-million and orders barring the defendants from future postings.

The company also asked for disgorgement of all profits from the short-selling “scheme”, claiming these could amount to $100-million, based on the artificially-induced drop in its market capitalisation.
Anthion didn’t take this lying down. In response, it filed an answer and counterclaim on 12 March this year. The hedge fund denied any wrongdoing, saying its letter had consisted of “good-faith criticisms”, and that nothing in the letter constituted a short-and-distort scheme [Marketwire 13 July 2012, ibid].

At the heart of Anthion’s case was an accusation that Silvercorp had used NewYork ‘s Supreme Court “for the purpose of harassing, intimidating, punishing or otherwise maliciously inhibiting the free exercise of speech.”

It therefore sought “protection” under New York’s anti-SLAPP laws – SLAPP being the acronym for a “strategic lawsuit against public participation” In other words, Anthion wanted to demonstrate that Silvercorp had, effectively, attempted to suppress legitimate criticism of the mining company’s activities which were in the public interest. * *

Silvercorp filed a motion to dismiss the counterclaim on May 31, 2012, arguing that anti-SLAPP laws in New York are only designed to protect those who would face a financial hardship trying to fight a defamation case. The laws were not meant to protect entities such as Anthion, which profited handsomely through a short-and-distort scheme that targeted Silvercorp.

owever, last week (12 July 2012), Anthion lost its case when a New York Judge found that New York’s anti-SLAPP laws are designed to protect “citizen activists” from well-financed developers and not applicable to a dispute between a hedge fund and a public company.

This appears to mark an end to the matter – one which can hardly be said to have rocked the markets, or riveted most peoples’ attention. Especially when many of us are pre-occupied with multi-billion dollar frauds, perpetrated by global investment banks, of which Barclays fixing of the LIBOR rates is the most recent example.

There’s not going to be much sympathy for a little-known hedge fund which may now have to cough up a few hundred thousand dollars. Just because it has failed to “get away” with implementing one of the most notorious, and widely-criticised, strategies for the accretion of private profits by just a few individuals – namely short-selling of shares.

But might this be one of those rare occasions when “a devil” has been singing a reasonably good tune?

We commented on the Mining.blog (24 September 2012), the case promised “to be an interesting [one] and raises some important questions about the statements, each day put out in their scores by promoters, brokerages and other “stock watchers” in order to boost the fortunes of their favoured investments. (Or alternatively, to advise investors that they run a risk in making such investments). “

For all we know, Anthion, “Alfred Little” and others – still unnamed – operated in a cynical and fraudlent fashion merely to line their own pockets.

Nonetheless, the hedge fund argues that those looking to run a “short and distort” scam, “do not typically disclose their short position or provide a detailed analysis to support their position” [Marketwire 13 July 2012]. Anthion also revealed its identity, thus its bona fides, early on in the proceedings.

Clearly Anthion cannot be described as a “citizen activist”. Few of us, proud to own to that description, would count a hedge fund as a member of the same contingent.

On the other hand, an enemy of our enemy may sometimes be a friend, even if their interests seem diametrically opposed to what we want to see happen.

To return to our comment last September:

“[T]he rest of us – and presumably, some other investors in Silvercorp (as of September 2010, BlackRock Asset Management Canada held 3%, and UBS Securities held 1% in the company’s equity) – are no wiser as to exactly what Silvercorp is supposed to have been up to in China. Let alone what impact its operations may be having on the people or areas where it operates.”

And we’re still no wiser.

The fault-line in Anthion’s case isn’t that China’s largest silver miner was ripping off its investors.

It’s that the hedge fund apparently didn’t think to go much further – to find out what dubious things Silvercorp was doing with the funds which investors uncritically threw into its coffers.

Notes:

* Silvercorp Metals Inc. is “engaged in the acquisition, exploration, development and mining of high-grade silver-related mineral properties in China and Canada”. It is the largest primary silver producer in China through the operation of four silver-lead-zinc mines in Henan Province of China. In Canada, Silvercorp is “preparing to apply for a Small Mine Permit for the Silvertip high grade silver-lead-zinc mine project in northern British Columbia to provide a further platform for growth and geographic diversification.”
The company claims to have “achieved an enviable five-year track record of being the lowest cost producer of silver among its industry peers”.

** In 2008, Editions Écosociété and publisher of “Noir Canada” – a critique of Barrick’s global bad practices – were accused of defamation by the world’s biggest gold mining company.

When the report’s authors described the lawsuit as being an example of Barrick’s attempt to impose a SLAPP, the company issued a “notice of default”, ordering them to cease referring to the suit as a “SLAPP” (Strategic Lawsuit Against Public Participation) in any of their “campaign for solidarity or fundraising, in any media interview or on any Internet websites”.

Barrick warned the authors and publisher of “Noir Canada” that, in continuing to do so, they were exposing themselves to “additional punitive damages” and that their “behaviour could render any eventual retraction more difficult and embarrassing”. See: http://www.minesandcommunities.org/article.php?a=8939)

Seeing the mines for the trees – a dodgy Indonesian deal

11. July 2012, Comments (0)

A link between mining and timber extraction, especially in tropical countries, is not hard to detect: trees are felled and miners use the recently-ploughed roads to bring in exploration drilling equipment and take over territory that’s already been cleared of forests (and sometimes people).

However, it’s unusual to find such a close – if not internecine – relationship between a mining outfit and a pulp and paper group, as that forged in Indonesia in July 2012.

It’s quite a complex one, too – involving three Indonesian companies, a Singapore-listed timber enterprise, and an Indian-based infrastructure venture.

Golden Energy Mines is an Indonesian outfit, operating three thermal-coal mines with a combined resource of 1,930 metric tonnes of the black stuff. It sold just under 6 million tonnes of coal last year, reaping US$326 million in revenues.

Now, it has agreed to be taken over by United Fiber Systems (UFB), a timber produer listed on the Singapore Stock Exchange, which is prepared to pay out US$1.8 billion for the privilege.

In turn, UFB will receive a 97% stake in Golden Energy, funded by issuing US$1.8 billion worth of shares to another Indonesian energy company, PT Dian Swastatika Sentosa, which will take 67% of Golden Energy.

Dian Swastatika is itself a subsidiary of PT Sinar Mas Tunggal – which will end up with 65% of UFS (and then be obliged to make an offer for the remaining UFS stock).

The other 30% of Golden Energy is to go to the India’s GMR infrastructure group, which has “multiple” objectives with the deal, As stated by GMR’s finance director, gthese are:”listing in Singapore, better investor profile and a better re-rating for the stock…Singapore has a higher investor presence, valuations are better, and liquidity is higher”.

But whether, after these transactions are completed, Indonesia’s forests and those dependent on them, will be any better off, is open to considerable doubt [MJ 6 July 2012].]

See: http://moneytometal.org/index.php/United_Fiber_System_Ltd

“Carnival of Dirt” hits at mining finance in UK capital

19. June 2012, Comments (0)

Last Friday (15 June 2012), some 200 demonstrators marched in a funeral procession through London, aimed at highlighting human rights abuses by the minerals industry against communities and workers, and the killing of anti-mining activists.

This highly-colourful “Carnival of Dirt” was led by a brass band and a Congolese choiar, and addressed by a number of speakers. Those participating represented some thirty different organisations, including a number of migrant groups from D.R. Congo, Nigeria, West Papua, Peru, Colombia & the Philippines.

Among the London protestors’ coporate targets were London-listed Rio Tinto, Vedanta, Glencore, BHP Billiton, Anglo American and Xstrata.

They occupied the steps of the London Stock Exchange and gathered outside the London Metal Exchange, making the link between mine financing and metals’ price “fixing”, for which the UK capital city has a unique responsibilty.

A report on the action can be accessed at:

http://www.minesandcommunities.org/

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Nuclear plant risks “ignored” by investors – Greenpeace report

12. June 2012, Comments (0)

With the assistance of BankTrack, Greenpeace has released a report which “rebukes the finance sector for ignoring nuclear risks”.

Although carrying a publication date of April 2012, the report wasn’t announced until today. It mirrors allegations, made in a letter to the governor of the Bank of England by high profile “persons” back in January, that “overexposure to high-carbon assets by London-listed companies risks creating a ‘carbon bubble’ (see posting on this blog, 22 January 2012).

According to Greenpeace, “Investors in nuclear power are being sold precarious and potentially damaging investments because the industry’s risks are regularly being overlooked or underestimated”.

The report – “Toxic Assets” – also argues that the value of these investments “is…being gradually eroded by aging plants, growing costs, falling utilisation rates, changing regulations and shrinking government support…”

Referring specifically to the TEPCO Fukushima nuclear plant disaster, the report claims that:“Crucial vulnerabilities in reactor design, major frauds, cover-ups and governance issues; collusion and loose regulatory supervision; and well-understood natural disaster warnings were all ignored and hidden from investors. This is a common and continuing theme, not just in Japan, but globally.

“All of these warnings had been publicly highlighted for years, often decades, before the nuclear disaster, but at best they were never taken seriously by credit agencies, analysts, or regulators. At worst, these alarm bells were ignored and covered up to preserve the false impression that nuclear power is a good investment,” says György Dallos, Greenpeace International Senior Energy Investments Advisor, and co-author of the report.

“Fukushima Daiichi has proven that nuclear power plants are not only
dangerous… These plants can create liabilities that can greatly exceed asset value, yet the scope of a disaster, the risks posed by aging reactors and the higher than assumed probability of a devastating accident are not taken into consideration.”

The report claims that “dozens of banks” provided TEPCO with at least €54bn of low-cost capital through bond issues, corporate loans and a share issuance between 2000 and 2011”.

Bond issues provided most of this funding, among which, Citi, Mizuho, Nomura, Sumitomo Mitsui, Mitsubishi UFJ, BNP Paribas, Deutsche Bank, Merrill Lynch (Bank of America), Daiwa Securities, Morgan Stanley and Goldman Sachs were the largest bond-underwriters. *

“The potential for similar catastrophic nuclear disasters and disastrous investment decisions is not limited to TEPCO or Japan” says Greenpeace..

“Nuclear power plants are potentially toxic assets for their investors and financiers. Quite uniquely, they can give rise to liabilities that can exceed their ownerʼs equity a hundred-fold or more. The probability of a devastating accident is around one major disaster in a decade based on the five core meltdowns since the 1950s…”

To download the report, go to:
www.greenpeace.org/international/toxicassets

* Further detail on Banks listed in bold typeface can be found at:
http://moneytometal.org/index.php/A_data_base

Glencore chief is unashamed about unacceptable bonuses

11. June 2012, Comments (0)

The head of the world’s biggest commodities’ trading firm – and one of the globe’s most powerful mining companies – has “gone public” on an issue which is always sure to rile shareholders at large.

Glencore CE, Ivan Glasenberg, last week defended bumper executive pay, telling investors they had to pay for “entrepreneurial spirit”.

Glasenberg made the comment at an industry dinner, in advance of the company’s plan to take over UK mining company,Xstrata in a $30-billion purchase.

Some Xstrata shareholders have already called proposed retention payments for Xstrata’s top managers “excessive”, “unacceptable” and “depressing” -“stoking fears the backlash could threaten the all-share deal” as Reuters commented on June 8.

Glencore owns almost 34% of Xstrata and the deal to combine the two groups into a mining and trading powerhouse is expected to be voted through next month.

A week after Xstrata announced it would pay retention deals to 73 of its key employees, totalling more than £170-million, Glasenberg claims that shareholders needed to pay for managers that deliver returns, acting like shareholders rather than caretakers.

“[For a chief executive who does not own shares], to get him to have this entrepreneurial culture, to work like one of us, to chase every deal like we do, we are going to have to pay him,” Glasenberg said.

Glasenberg himself earns a modest salary compared to industry peers, but he also owns almost 16% of Glencore and made almost $110-million from last year’s final dividends alone.

Xstrata’s Mick Davis, meanwhile, is one of the best paid executives in the FTSE 100, taking home £5.4-million last year in salary, cash bonus and benefits – excluding long-term incentives, deferred bonuses and retirement benefits.

Goldman Sachs makes another mining deal

8. June 2012, Comments (0)

In May 2012, Goldman Sachs brokered what Frik Els of Mining.com characterises as an “interesting” and “unconventional” deal for the bank [Mining.com 27 May 2012]. It relates to the planned re-opening of the Rio Tinto copper mine in Andalcuia, Spain.

This was the notorious operation which launched Rio Tinto in 1871 when the UK company purchased the mine from the Spanish government, turning it into the world’s biggest source of extracted copper at the time.

Rio Tinto disposed of the mine in the 1980s and it was mothballed in 2001. Now a company, listed in London and Toronto, called EMED “hopes to restart operations at the mine end of next year”

“But” says Els, “it’s not the re-emergence of mining on the Iberian peninsula nor the comeback of an iconic mining complex that makes EMED’s Rio Tinto copper project so significant”.

“What really points to a momentous shift in the copper industry is an unconventional deal the London and Toronto-listed firm inked with investment bankers Goldman Sachs… EMED gets $175 million up front with no equity dilution.

“In exchange for the cash the investment bank gets the equivalent in copper delivered every month for the next seven years. Without producing a single tonne EMED signs up a solid customer without even having to hedge the price”.

“Why would Goldman shake hands on such an arrangement?”, asks Frik Els. “Goldman, along with just about all its competitors and traders like Glencore, are getting ready to launch exchange traded funds [ETFs] backed by physical copper in the US. Deutsche Bank (DB already has a copper ETF running in Europe”.

“Not only could ETFs provide a new source of funding for developers like EMED, it could change the global copper trade – and its price – in a massive way….As one investment banker put it to the Financial Times: “Fundamentally copper is tight anyway. Add an ETF to that and it becomes explosive.”

For more on Goldman Sachs see:
http://moneytometal.org/index.php/Goldman_Sachs_Group

Deutsche Bank ends up with gold mines in its hands

6. June 2012, Comments (1)

According to Deutsche Bank’s 2010 Financial Report, the only mining company in which it holds substantial capital is Crescent Gold Ltd, which is active in Australia.

However, in May 2012, Deutsche Bank “elected” to take possession of all the assets belonging to Century Mining Corp, after that company’s parent, White Tiger Gold Ltd, had defaulted on a forward gold purchase agreement with the bank.

Century Mining had been “unable to deliver contractual volumes to Deutsche Bank under the deal, requirng it to make monthly cash payments in lieu, which had not been maintained” [MJ 1 June 2012].

Because of the default, DB has ended up – effectively- owning the Lamaque gold mine in Quebec, and Peru’s San Juan gold project.

A right royal opportunity

5. June 2012, Comments (0)

Royalty companies that raked in cash from strong precious metal prices in the last three years, look poised to drive a wave of deal activity in the Canadian mining sector, especially among junior players hungry for financing.

That’s the conclusion reached by Euan Rocha of Reuters, in a report published on 4 June 2012

Royalties companies fund mining projects in return for a portion of future revenues. They’ve generated “huge amounts of cash flow from existing deals as the price of gold and silver soared since the beginning of 2009”.

But now, “with the recent pullback in precious metal prices and slumping stock markets, they could be the saviors for small and mid-tier miners who are eager to grow but strapped for capital”

According to Rocha: “Europe’s debt crisis and slowing Asian growth have tempered banks’ appetite for lending”.

Moreover, the mining companies “are not keen to issue equity when their share prices are severely depressed”.

This leaves junior companies with “few alternatives to royalty and stream deals” in order to fund project development, although they “typically try to avoid royalty and stream deals, as they tend to negate any future upside from rising metal prices”.

While royalty deals require investors to provide cash upfront in return for a set percentage of future income, “stream deals” give miners cash in exchange for their agreeing to sell by-products in the future at a discounted price.

Says Rocha: “Royalty companies like Franco-Nevada Corp, Silver Wheaton Corp, Royal Gold Inc, Sandstorm Gold Ltd and Anglo Pacific Group now find themselves in the perfect spot to strike new deals and secure their own future growth”

The level of equity financing activity in the metals and mining sector has “swooned this year”. Oreninc, which tracks equity financing activity in Canada, notes that first-quarter financings in the sector fell almost 50 percent from levels at this point last year.

In contrast, gold focused Franco-Nevada has working capital on hand of almost $1 billion, an undrawn credit facility of $175 million and investments that are valued at over $100 million.

Earlier this year, junior gold miner Lake Shore Gold Corp struck a $50 million deal to sell Franco-Nevada both an equity stake in itself and a royalty interest on the sale of minerals from its Timmins West mine in Ontario.

In May, Franco’s smaller rival Royal Gold struck a deal to buy a net smelter return royalty on the Ruby Hill gold mine from International Minerals Corp.

Even some mid-tier miners are now mulling stream deals to finance mega projects. Last month, Inmet Mining Corp said it plans to raise roughly $1 billion from a stream deal to fund a portion of the construction costs for its $6.2 billion Cobre Panama copper project in Central America.

Further details on Franco-Nevada, Royal Gold and Anglo Pacific can be found on From Money to Metal wiki site at:

http://moneytometal.org/index.php/A_data_base

London Metal Exchange at mercy of Glencore & JP Morgan

30. May 2012, Comments (0)

The London Metal Exchange (LME) operates an “Open Cry” and electronic trading floor for some of the world’s most important metals – including copper, aluminium, tin, nickel, zinc, lead, cobalt and steel products.

It’s commonly believed that LME warehousing of physical metals is what keeps the system sound. Possession of verified stocks helps maintain a balance between supply and demand. So, to protect the interests of producers and consumers from sudden rises or fall in prices, the LME itself may release some of these supplies into the market.

But, in reality, only a small proportion of LME warehouse stocks are used for this purpose. Known as “a market of last resort”, the mechanism is triggered in a relatively small number of instances.

Otherwise, most of what is held in the LME warehouses are employed for hedging purposes – to underpin futures and options contracts.

Last week,the manner in which one of the LME’s clients, Glencore, is exploiting warehousing for its own ends, came under scrutiny.

Moreover JP Morgan – one of the banks which enjoys all privileges of the LME – was also accused of threatening the stability on which the Exchange is predicated.

Glencore is now accused of “tightening its grip on the global zinc market by moving material to inaccessible locations, forcing industrial users to pay high physical premiums for a metal that is in surplus”.

With a reported 60% of the world’s zinc trade under its control, Glencore is allegedly using warehouses, monitored by the London Metal Exchange, “to stow away the metal and support [its own] premiums”.

Disturbingly, what Glencore is doing isn’t illegal under LME rules.

For its part, JP Morgan is now proposing to launch an Exchange Traded Fund (ETF) based on the acquisition of huge amounts of copper.

This poses the alarming prospect of a “removal of all or substantially all of the [copper] stocks in all of the LME warehouses in the US”, according to a US law firm.

If allowed, the move could cause an immediate spike in the cash price for copper, with manufacturers and fabricators having to pass these increases on to their customers.

These are two glaring examples of the way in which the London Metal Exchange is exposed to manipulation by some of its own members.

The LME is increasingly looking like a body being ruthlessly undermined by the naked greed of a few of its own bona fide members.

And it seems powerless to stop them doing so.

For full story, please go to:
http://www.minesandcommunities.org/article.php?a=11727

Glencore grabs Canadian wheat

30. May 2012, Comments (0)

Shareholders of Canada’s largest grain handler, Viterra Inc have voted overwhelmingly in favor of a friendly takeover bid by UK-listed commodities trader and mining megalith, Glencore International Plc.

The acquisition still needs approval by regulators in Canada and Australia, but presuming it gets it, Glencore would become a significant player in what is the world’s biggest export market of canola and spring wheat.

Although some of Viterra’s operations are being hived off to other companies, Glencore will control most of Viterra’s country and port grain storage in Western Canada, some food processing assets, and its grain storage and handling assets in South Australia.