The collapse of Melbourne stockbroking outfit, Opes Prime, and its ripple effect this week in Western Australia will no doubt have repercussions.
The collapse of Melbourne stockbroking outfit, Opes Prime, and its ripple effect this week in Western Australia will no doubt have repercussions.
It is yet another case of directors and substantial shareholders being forced to potentially dump stock into a falling market due to the margin loan contracts over their stakes.
In case you missed it, Opes collapsed on Thursday last week and, this Monday, that failure ensnared shareholders in at least seven WA resources companies, including high-profile mining identity Nathan MacMahon and the biggest stakeholder in Gindalbie Metals Ltd.
Gindalbie, Blackham Resources Ltd, Conquest Mining Ltd, Bannerman Resources Ltd, Catalyst Metals Ltd, Red Fork Energy Ltd, and Hodges Resources Ltd all called trading halts in relation to shareholders who had equity finance contracts with Opes Prime.
Mr MacMahon is a director of Bannerman.
To many, this should never have been allowed – with the people closest to the companies involved exposing themselves and other shareholders to great risk through their highly leveraged investments.
That view is widely held right now, as the collateral damage amasses and the consequences of forced sales hits the hip pocket of investors in those companies, and may well prompt share price falls in unrelated stocks.
In some ways, ungeared investors are the double losers in this.
They don’t stand to gain as much on the way up and then they lose real value in shares they really own on the way down.
But we have to be careful about calling for change.
Few investors can criticise other shareholders for seeking ways to increase their exposure to the companies they are involved in; especially directors.
This is generally viewed as a positive signal by the market.
If they’ve been overzealous – as well as failing to heed the history of the market – then there is a price to pay.
Some might argue it’s not their money, but in the end, many of these investors risk losing all the gains their stocks have made and may well yet have to find other ways to repay their debts.
If the concern is, as I believe it ought to be, the impact on other shareholders, then a simple mechanism should be created for directors and substantial shareholders to report in detail contracts that might force them to sell shares.
That way the market would have some idea of the overhang of such influential stakes.
Perhaps we need to go one step further and have overall level margin loans covering each stock reported, without revealing individual shareholders, so everyone in the market can gauge the risk involved if a share price tumbles.
• Ensuring sustainability NOW that investment funding is getting harder, a company’s cash burn will be an important litmus test to their sustainability.
Take Peter Briggs’ Westralian Gas and Power Ltd as a case in point.
A week before Easter, it released its half-yearly report, which contained the following note from BDO Kendalls in its independent review of the company, under the heading ‘Material Uncertainty Regarding Continuation as a Going Concern’.
“Without qualifying our conclusion, we draw attention to Note 2 in the interim financial report and the heading of working capital,” wrote BDO Kendalls Audit & Assurance (WA) Pty Ltd director Chris Burton in Westralian’s annual report dated March 12.
“Westralian Gas and Power Ltd incurred a net loss of $1,100,187 (30 June 2007 $2,127,933) during the half year ended 31 December 2007 and had cash assets of $1,201,199 (30 June 2007 $66,975).
“These conditions, along with other matters as set forth in Note 2, indicate the existence of a significant uncertainty which may cast doubt about the consolidated entity’s ability to continue as a going concern and as a consequence realise its asset values and extinguish its liabilities at their current book values.” The directors of the company were a little more positive, as you would expect.
In the notes to the financial statements they highlight that ongoing exploration and development of assets may require further working capital funded through cash flows, from existing assets, proceeds from asset sales or additional capital raisings by share placements.
“As such, the directors consider the company can manage its assets to ensure sufficient funds are available to meet its financial responsibilities,” the directors stated in the interim report notes.
“Based on this, the directors consider it appropriate that the financial report be prepared on a going concern basis.”
