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Legacy plans to advance the Mt Celia gold project in WA.

Vote not needed for four-fold dilution

Indian state-owned corporation NMDC recently lifted its stake in local mining hopeful Legacy Iron Ore to more than 90 per cent in a deal that minor shareholders say dramatically diluted their equity, with regulators powerless to take action.

The company announced a $11.7 million entitlement offer in December, at a price of 0.2 cents per share, to advance the Mt Celia gold project north of Kalgoorlie.

The company was valued at $2.9 million at the time the offer was released to the ASX.

The four-for-one rights issue was led by Ventnor Securities and closed in January, with about 4.8 billion shares purchased.

As a result, Legacy now has 17 times more shares on issue than miner Rio Tinto.

NMDC picked up 96.7 per cent of the new scrip, lifting its slice from 78.6 per cent of Legacy to 92.3 per cent.

The big raising was not approved by shareholders, nor was it covered under the approvals given to the company for equity raisings at the most recent AGM, but nonetheless was given the green light by the ASX.

That’s because under ASX listing rule seven, the dilution limit for capital raisings does not apply to entitlement offers.

The deal was also given approval by the Foreign Investment Review Board.

A spokesperson for the review board told Business News the decision and the reasoning behind it would not be released to the public.

NMDC last moved up the Legacy register in 2014, when the company secured 865 million shares for $12.1 million, also as part of an entitlement offer.

Legacy and NMDC share some key personnel.

Some of Legacy's directors could not partake in the raising. Table: Legacy's prospectus.

N Baijendra Kumar serves as non-executive chairman of Legacy and as both chairman and managing director of NMDC, while directors Amitava Mukherjee and Alok Kumar Mehta also hold executive roles at the Indian giant.

Company secretary Ben Donovan told Business News the deal was handled by chief executive Rakesh Gupta and director Devanathan Ramachandran, who he said were independent for the purposes of the raising.

Of the five directors only one, Mr Gupta, was eligible to participate in the raising because the other four did not hold shares in the company.

Only Mr Gupta and Mr Ramachandran receive remuneration for their roles on the board, however.

One big question will be if NMDC chooses to move to a compulsory acquisition.

Legacy’s prospectus documents say NMDC has confirmed it does not intend to proceed to compulsory acquisition, although it has a six-month time limit to get a takeover under way.

Mr Mukherjee is reported as saying, as recently as May 2019, that NMDC planned to take the remaining stake in Legacy and may delist it from the stock exchange.

Legacy’s third largest shareholder before the deal was the Pauley family, with a 0.5 per cent stake.

Ben Pauley told Business News many minor holders were angry and felt the board had not been acting in their interests.

Mr Pauley said he had opted not to participate in the entitlement.

“I don’t like the directors and I don’t like what they’re doing to the shareholders so I don’t want to support anything they’re doing,” he said.

“(People) expect directors are going to be working in their interest and not in the interest of the majority shareholder.”

Legacy’s Mr Donovan had a different view, however.

“The fairest way to have everyone included in the mix is to do a rights issue, so everyone participates on the same basis,” he said.

“If everyone contributed equally (NMDC) would stay where they are.

“If other shareholders don't contribute because they don't believe in the story or don't want to contribute funds, the natural process is (NMDC) or any shareholder that contributes, will increase their stake.”

Ventnor was expected to receive a $60,000 fee for advising on the offer.

Comments

Sydney
Under the current legal and regulatory framework there seems to exist an open door for foreign state-owned companies to gain effective control over vast amounts of Australian mineral resources for the purpose of creating a mineral reserve to be developed and brought into production only if and when the national interest of the foreign states to whom they are subordinated so dictates. In fact all that these foreign state-owned entities seem to have to do is to make their move earlier on, that is, to acquire control of a small Aussie mineral explorer with very good prospects of being in the process of uncovering something substantial, and then move to place the finding in a state of dormancy at the expense of Australian mums and dads or, if you prefer, at the expense of unsophisticated Australian investors. Some people may say the existence of a divergence of interests between a controlling shareholder and minority groups of shareholders is a general problem or a risk that investors of all sorts should take into consideration when putting money into a company. The problem is there seems to be a limit to what the community is willing to accept in terms of foreign ownership. A simple solution would be to grant permission to a foreign state-owned entity to assume a majority shareholding position in an Australian public-listed mineral explorer on the proviso that the Australian government reserves the right to compulsorily acquire such position at any time at market prices if it thinks fit. The existence of a clause like this would deter corporate behaviour that seems to have placed some Australian mums and dads in a state of revolt. I have also to say that having foreigners dictating when and how and for whom the mineral resources under the control of an Australian company are to be explored, extracted, separated and washed (the only processing done here), plus the place where the profits of the whole operation are to be recycled, does smack to some form of colonialism active in past eras.

Sydney
What a shame for long-holding investors, going from dilution to dilution to holding shares in a stock that no longer will recoup its value.

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Top 10 Shareholders

Substantial shareholders as published in the annual report.
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Total Shareholder Return as at 31/01/20

1 year TSR5 year TSR
244thAVZ Minerals24%52%
551stBreaker Resources-22%29%
726thBMG Resources-50%-23%
738thLegacy Iron Ore-55%-26%
677 WA (and selected non WA) listed companies ranked by 1 year TSR relative to other companies with similar revenue
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Share Transactions

14/06/17
$4k Bought
15/08/13
$34k Bought
15/08/13
$50k Bought
Total value as at the date of the transaction
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Revenue

316th↑Legacy Iron Ore$8k
319th↓Breaker Resources$7k
320th↑AVZ Minerals$7k
322nd↓Echo Resources$6k
323rd↓BMG Resources$5k
484 listed resources companies ranked by revenue.
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