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By Ben Turney | Monday 2 March 2015
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
On November 3rd last year the Executive Chairman of African Minerals (AMI), Frank Timis, torpedoed his company’s critical strategic relationship with Shandong Iron and Steel Group (SISG). Mr Timis swooped in to devour the carcass of London Mining (LOND) and took personal ownership of the Marampa iron ore mine, Sierra Leone. African Minerals’ board “formally allowed” Mr Timis to proceed with this staggering act of reckless corporate greed, while the company’s discredited Nomad, Jefferies International, didn’t so much as utter a peep. On Friday African Minerals’ shareholders paid a bitter price for this abysmal regulatory oversight and devastating failure in corporate governance.
It must have been obvious to all concerned at the time that Mr Timis’ purchase of Marampa was going to cause a great deal of trouble for African Minerals. The company was in a dire financial predicament and had pinned its survival on the good grace of SISG.
As I reported on Thursday, African Minerals repeatedly informed the market that SISG had agreed to release $284 million in staged payments “for working capital purposes”. Without this money, the Tonkolili iron ore project and, by extension, African Minerals faced imminent extinction. African Minerals owns 75% of Tonkolili and SISG the remaining 25%. What African Minerals’ board failed to tell its shareholders was that SISG reserved the right to final authorisation of any release of money.
This failure to disclose has become all the more acute in the aftermath of Mr Timis’ purchase of Marampa.
By the end of October, SISG had not released the $61million payment expected that month. African Minerals’ plight grew more serious by the day. Faced with an ongoing collapse in the iron ore price and substantial pending debt repayments, the board knew the danger its company was in. The directors’ highest priority should have been to move heaven and earth to ensure that the relationship with SISG remained healthy. In this context how the board and its tainted Nomad Jefferies could possibly justify and approve Mr Timis’ purchase of Marampa is beyond nearly all moral reason.
To understand why Mr Timis’ purchase of Marampa made such a mockery of African Minerals’ relationship with SISG first take a look at the map below;
This took all of ninety seconds to produce, courtesy of Google Maps. Do the feckless staff at Jefferies not have access to Google Maps, I wonder?
To the east you can roughly see the location of the mine at Tonkolili. In the centre is the rough location of the mine at Marampa. In the west is marked African Minerals’ deep-water port at Pepel. African Minerals owns the 99-year least to Pepel and the railway connecting it to Tonkolili through its subsidiary, African Railway and Port Services (APRS). As it just so happens this railway also passes through Marampa…
Serviced by exactly the same route to market and producing broadly the same raw material, the strategic fit between Marampa and Tonkolili is clear for all to see. African Minerals’ board even had the audacity to admit in the RNS announcing Mr Timis’ purchase of Marampa that there was the “possibility of blending products from Marampa and Tonkolili, to mutual advantage, with a view to accessing European steel making markets”.
You can imagine the fury in Shandong when the directors of SISG read what the convicted heroin dealer Mr Timis had done. After all, African Minerals, in which Mr Timis’ Timis Diamond Corporation holds a 12.7% stake, was only able to survive thanks to the money SISG had agreed to supply. SISG didn’t own a stake in African Minerals. It was only the project partner in Tonkolili.
What must have disgusted SISG’s directors even more was that Mr Timis’ Timis Corp was miraculously able to provide Timis Mining Corp with a $70million financing package to fund the purchase of Marampa. This was at precisely the time that African Minerals was desperately waiting for October’s release of $61million by SISG.
African Minerals’ board claims that it “decided on 10 October 2014 not to enter discussions to acquire the assets of London Mining in Sierra Leone given the potential impact on the debt refinancing schedule… currently underway with Standard Chartered Bank”.
What a steaming pile of manure that statement is.
While it is true that African Minerals couldn’t afford to purchase Marampa, by “allowing” Mr Timis to rush through his purchase of the mine, African Minerals’ board all but guaranteed the death of the relationship with SISG. The Marampa mine is almost wholly dependent on APRS’ (African Minerals’ subsidiary) railway and deep-water port. Mr Timis, evidently not a man to be trusted in a cake shop, must have hoped that SISG would pay to save African Minerals while he netted the prize at Marampa. What possible incentive could the Chinese have had to save African Minerals after this stunt?
The answer is none. The answer was always going to be none. On Friday African Minerals was forced to acknowledge the magnitude of SISG’s fury, when it issued this dreadful RNS.
In short, SISG has taken possession of African Minerals’ $250million pre-export finance facility (PXFF), through a subsidiary. The balance of the PXFF is $166.7million and African Minerals has been in default since the end of November, when it failed to make the latest payment. SISG has demanded immediate repayment of the balance. The PXFF is secured against “certain assets of the borrowers and guarantors”; for that read African Minerals’ 75% stake in Tonkolili.
African Minerals’ shareholders no doubt feel angry towards the Chinese for this move. It almost certainly heralds total losses for all equity holders. However, there is a point to remember.
By the end of September last year, SISG had released $142million of the money it said it would. Why would SISG have made this payment if its intention were to drive African Minerals out of business and simply snatch Tonkolili?
The implication is that SISG was prepared to act in good faith until something happened to sour the relationship with African Minerals.
Alan Watling, African Minerals’ erstwhile CEO, took a parting shot at the Chinese, when he jumped ship two weeks ago. He claimed he had “lost respect” for the company’s partners, which left him with “no option other than to resign”. Rather than try to pin the blame, perhaps Mr Watling should reflect a little on his complicity in this unfolding disaster.
In allowing Frank Timis to snatch Marampa as quickly as he did, jeopardising the relationship with SISG at a time so critical to African Minerals’ survival, the directors of this company and its Nomad Jefferies failed shareholders inexcusably.
In my next piece I will examine the nature of the investigation into Frank Timis’ payment of $50million from African Minerals to GIO Cyprus.
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