Was Black Elk the black swan that sank Asiasons, Blumont and LionGold?

A US-based hedge fund called Platinum Partners, and entities linked to it, had agreed to provide US$560 million in funding to Asiasons Capital, Blumont Group and LionGold Corp in August, September and October as shares in the three companies peaked strongly and then crashed spectacularly.

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Guanyu said…
Was Black Elk the black swan that sank Asiasons, Blumont and LionGold?

BY THE EDGE TEAM
04 November 2013

A US-based hedge fund called Platinum Partners, and entities linked to it, had agreed to provide US$560 million in funding to Asiasons Capital, Blumont Group and LionGold Corp in August, September and October as shares in the three companies peaked strongly and then crashed spectacularly.

Around the same time, a company called Black Elk Energy Offshore Operations LLC, which is controlled by Platinum Partners and its affiliates, tried to tap Asiasons for capital. On Sept 17, Asiasons said it would buy a 27.5% stake in Black Elk for a total ofUS$171.65 million. This comprised existing Black Elk shares held by the Platinum Partners Value Arbitrage Fund (PPVA Fund), and US$50 million worth of new shares to be issued by Black Elk. That price tag values Black Elk at US$625 million. Platinum Partners first invested in Black Elk in 2009. Through its funds and affiliates, it now holds more than 84% of the company, for which it is likely to have paid only about US$100 million.

Black Elk does not appear to be in good last November shape, though. Last November, an explosion and fire on one of its platforms in the Gulf of Mexico killed three workers. Black Elk is now facing multiple civil suits, including two from injured workers, totalling US$580. Last year, Black Elk reported a loss of US$72.2 million. It lost a further US$63.6 million in the first half of this year. As at end-June, the company had assets totalling US$577.5 million and liabilities totalling US$663.2 million. Black Elk anticipates that it will breach a covenant for an outstanding US$149 million in secured notes by December.

Platinum Partners has, in fact, been providing Black Elk with increasing financial support for some months. In August, a Platinum Partners affiliate bought over a US$25 million revolving credit facility to Black Elk. The credit line was raised to US$29 million in September and to US$42 million last month.

Uri Landesman, president of Platinum Partners, says he was impressed with the management team at Asiasons, and convinced they could help Black Elk. “We felt this was a team we could build a strong partnership with that would enable Black Elk Energy to grow and prosper,” he says, in response to questions from our reporters and researchers.

Strong gains and deals

Despite the risks of investing in Black Elk, shares in Asiasons climbed sharply on the news. The stock bounced from $1.325 before the announcement to $2.05 at the close of the first trading day after the announcement. The reaction was similar to bullishness elicited by announcements of acquisitions by LionGold and Blumont in the preceding months.

Shares in LionGold, for instance, had been climbing steadily for almost two years as the company acquired one gold miner after another-even though shares in the world's largest gold miners such as Barrick Gold and Goldcorp slumped in the face of rising costs and weakening gold prices. In fact, all the gold miners in LionGold's portfolio that remained listed have seen their shares tank too. Signature Metals reportedly has dropped 85% since Lion Gold acquired a 77% stake in October 2011; CitiGold Corp is down 43% since LionGold picked up an 18% stake in June 2012; and Unity Mining has fallen some 17% since Lion Gold purchased a 13% stake in May this year,

Blumont's share price also rocketed this past year in the wake of a series of small investments in natural resource companies such as Cokal, Resource Generation and Discovery Metals. Most analysts agree that the acquisitions alone could not have justified such strong performance. Yet, at its peak, Blumont had a ­ market value of well over $6 billion.
Guanyu said…
Platinum Partners' Landesman insists Asiasons was being offered a good deal. “Black Elk Energy has independent reserve reports from leading outside reserve evaluators that state a reserve base of US$1 billion in proven reserves and US$2 billion in probable and possible reserves,” he says. “We were selling a share of our Black Elk holdings to Asiasons at a discount because we believe the partnership would eventually add value to our current holdings because of the more rapid growth that would be achievable with Asiasons' participation.”

Players from New York

While market watchers have alluded to the involvement of “syndicates” in the steep run-up and subsequent crash of Asiasons, Blumont and LionGold, it now seems that US-based financial firms were players too. Jared Lim, man­aging director of Asiasons, says in response to questions from our reporters and researchers that the Black Elk deal came through a New York-based firm called Jett Capital. “Given that they had successfully introduced Platinum to LionGold, it is only logical that they subsequently made the introduction of Platinum to Asiasons.”

Besides providing Asiasons with a significant acquisition target in the form of Black Elk, the hedge fund was also a financier of the three companies. On Sept 17, for instance, Asiasons said it would sell 212.6 million new shares for $254 million, or $1.1948 a share, to PPVA Fund, Carnegie Hall Group LLC, Spring Road Advisors LLC and Partner Growth Capital LLC. The four would have ended up owning 17.68% of the enlarged Asiasons. The managing partners of Carnegie Hall and Spring Road are also listed as portfolio managers at Platinum Partners.

Meanwhile, Platinum Partners Liquid Opportunity Fund (PPLO Fund), Carnegie Hall and Spring Road were to spend some US$162 million on 180 million new shares in LionGold and 135 million new warrants. The shares were priced at $1.1097 each, while the warrants were priced at two cents. On Oct 18, Blumont said it would sell some US$200 million worth of convertible bonds to Platinum Partners.

Missed opportunity

Platinum Partners was founded in2001 by a former natural gas trader named Mark Nordlicht. The firm started the PPVA Fund in 2003. Since inception, the fund has delivered a 19.03% annualised net return and won a string of awards. The fund now has some US$750 million allocated across nine investment strategies, spanning various asset classes, geographies and liquidity profiles. About 40% of the fund is exposed to short-term trading and relative value strategies, 20% to event-driven strategies and 40% to asset-based finance strategies.

It is unclear where the Black Elk deal with Asiasons featured among these strategies, but it would probably have made a significant impact on the PPVA Fund's performance for the current year, had it gone through. In fact, our researchers calculate that Platinum Partners and its affiliates could have walked away with a gain of some US$1 billion, had the Black Elk deal and various placements gone through and shares in Asiasons, Blumont and LionGold not crashed.

Landesman has not given up on Asiasons, though. “We believe in the management team of Asiasons and would very much like to partner them in the future. We feel that they have been unfairly dragged into the volatility of some of the other Singaporean stocks,” he says in response to questions from our reporters and researchers. “We believe that investors will soon evaluate Asiasons on its core holdings and strengths, which would suggest a higher price for their shares. If this in fact transpires, we remain highly interested in concluding a transaction with them.”
Guanyu said…
Who were the sellers?

So, why did the market seem to suddenly lose its enthusiasm for the acquisition-led growth these companies were pursuing? Why did their shares suddenly collapse? Was Black Elk simply too big and too distressed to digest? Was Black Elk the black swan event that ended the run? Or, was increasing scrutiny by the Singapore Exchange and nervousness among brokers to blame?

Certainly, some market players had an inkling a steep fall was imminent. Our researchers found that, from Aug 19 to Oct 4, investors short-sold $192 million worth of LionGold stock, $107 million in Blumont shares, $30 million in Asiasons. The shorting intensified in the week preceding Oct 4, when the three stocks crashed.

Who was shorting these stocks? And, who was providing the short-sellers with the ammunition? Shares that are short-sold are borrowed from shareholders who are prepared to lend them out for that purpose. Interestingly, while major shareholders have to declare any changes in their holdings, they need not disclose whether they have lent their shares to short-sellers, provided they can retain beneficial interest, exercise the voting rights of those shares and call them back.

SGX is now investigating the matter. What it uncovers about the trading activity before and after the crash of the three stocks could deter­mine the next chapter of this unfolding story.

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