13/02/2008 - 22:00

Is everybody clear about the rules?

13/02/2008 - 22:00

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In a comment piece last September, I raised the issue of foreign investment in Australian assets.

Is everybody clear about the rules?

In a comment piece last September, I raised the issue of foreign investment in Australian assets.

My concern was not foreign investment per se, but the nature of certain investors and whether they really operated with the checks and balances we expect.

I specifically pointed at entities from the former Soviet Union and China, because there was considerable investment from these regions in Western Australia’s strategic resources assets. At the same time, both these regions lack the democracy we expect, are relatively new to open market commerce, and lack the transparency that comes with both of these institutions.

Since then, two examples have justified my concerns.

The first related to the takeover of Consolidated Minerals Ltd, with the emergence of several share parcels held by Ukranian interests coinciding with that of countryman Gennadiy Bogolyubov’s Palmary Enterprises, the ultimate winner in the bidding war.

While these parties were not shown to be acting in concert, the matter raised many eyebrows on St Georges Terrace.

Those eyebrows have becoming increasingly arched by more recent shareholder action around Mount Gibson Iron Ltd.

The big concern is a deal by Russian billionaire Alisher Usmanov’s Gazmetall Holdings (Cyprus) Ltd to sell a 19.73 per cent stake to a Hong Kong-listed entity Shougang Concord International Enterprises Co Ltd, which is considered to be controlled by China’s sixth biggest steel maker, Shougang Group, through Shougang Holding (Hong Kong) Ltd.

That would not matter, except for the fact that Shougang Group already has exposure to Mt Gibson through a 20.22 per cent stake held by Hong Kong-listed entity APAC Resources Ltd.

Shougang Holding (Hong Kong) Ltd and its associates owned about 50 per cent of APAC until their holdings were diluted late last year to about 14 per cent.

Another link is a director by the name of Cao Zhong, who chairs APAC and appears to have been the Shougang Concord signatory to the Gazmetall deal.

The West Perth-based Mt Gibson is not the only place where APAC and Mt Gibson share interests. Both companies have stakes in Perth-based Australasian Resources Ltd, a listed company controlled by Queensland-based Clive Palmer’s Mineralogy Pty Ltd.

Just how close these companies are is the point being debated, with investors concerned that two big stakes held by two closely linked companies represents effective control of Mt Gibson without the launch of a takeover bid, as they ought, and without paying a takeover premium.

Certainly, a corporate presentation I have seen indicates Shougang and APAC have more than ownership linkages and have operational connections through funding arrangements and offtake agreements regarding Australasian Resources.

However, contradicting this view is Mr Palmer, who told me last week that, in his experience, there has been no indication that the two companies, which are separately represented, act in concert.

While the original investments may have come about through the Hong Kong pair talking to each other, he said they did not appear to be linked during Australasian’s involvement with them as shareholders.

“I have never seen them working together,” Mr Palmer said.

“Sometimes they disagree with each other.

“They have contrary thinking.”

Mr Palmer is not the only one who is unconvinced on the matter.

At this stage, Mt Gibson has failed to get the Australian Securities and Investments Commission to act.

Many in the investment community are aghast at the signals this sends, but perhaps ASIC is simply allowing this business to play through its proper course.

Mt Gibson plans to take the matter to the Takeovers Panel, which would be a typical step in such a matter.

But there are questions as to whether the Takeovers Panel, which uses senior representatives from the industry, is the right venue for this debate.

Are corporate lawyer and investment bank types the right people to be digging into a matter which has far deeper sensitivities than a usual takeover, with ramifications that could flow through to Australia’s long-term national interest?

There is some concern that the panel is simply the wrong place to be making decisions more appropriate to a watchdog like ASIC, or the even the Foreign Investment Review Board.

ASIC, it could be argued, has the grunt and experience to handle these sorts of matters.

The famous case of Sydney-based Offset Alpine Ltd is a good example, even if the foreign entity turned out to be linked to Australian investors Graham Richardson, the late Rene Rivkin, and Trevor Kennedy.

Getting to the heart of this matter is important for all investors, Australian and offshore.

From a purely transactional point of view, it must be very clear to everyone how investors are allowed to operate in Australia and what the rules are in terms of acting in concert.

From a strategic point of view, we must be very careful that the mechanisms to handle foreign investments, such as FIRB, are not left out of the picture because of weaknesses in existing corporate law.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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