Digging into ISR's mining deal just yields more questions
The nagging problem with ISR Capital's proposed acquisition
of a rare-earth mining asset is that the company's answers to numerous queries
just keep raising even more questions.
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Kenneth Lim
08 December 2016
The nagging problem with ISR Capital's proposed acquisition of a rare-earth mining asset is that the company's answers to numerous queries just keep raising even more questions.
That might shed some light on why the Singapore Exchange (SGX) has suspended the stock's trading on the grounds that "there are circumstances that prevent trading in the shares of this company on an informed basis".
ISR, an investment company that was the former broking arm of what used to be called Asiasons Capital, has since May 2016 been trying to complete an acquisition of a 60 per cent stake in Tantalum Holding, a rare-earth mining asset in Madagascar.
ISR plans to pay for Tantalum by issuing 400 million new shares, assigning a value of 10 Singapore cents to each of those shares for a deal valuation of S$40 million. Those shares would represent about 20 per cent of ISR's enlarged share capital, including the completion of an outstanding tranche of a related share placement, so shareholders must approve the deal. A shareholders' meeting has yet to be called.
The party selling the Tantalum stake to ISR is a vehicle called REO Magnetic. REO got its Tantalum stake from Tantalus Rare Earths AG (TRE), a company whose stock trades over the counter in Dusseldorf and which was facing insolvency in December 2015. Bankruptcy was averted when REO agreed to pay TRE 3.7 million euros (S$5.63 million) in cash for a 60 per cent stake in Tantalum, which ISR now wants to buy.
But that's not all. REO is accepting ISR stock for the Tantalum stake because there is another part to the REO-TRE deal. Back in December 2015, REO also agreed to buy the remaining 40 per cent in Tantalum from TRE using shares in a Singapore-listed company at a later date; REO did not and still does not own any ISR shares. No pricing was disclosed about that remaining 40 per cent, except that the shares used to pay had to have a market value of at least 10 million euros and that the consideration shares would be distributed to TRE shareholders in specie. No mystery where those shares of a Singapore-listed company are expected to come from.
If ISR shares stay at their pre-suspension price of 12.7 Singapore cents, and REO has to pay only 10 million euros in stock for the remaining 40 per cent of Tantalum, then REO could still be left with S$35.6 million of ISR stock that it can sell for a profit.
That seems like a good deal for REO, but there are concerns that it might not be so good for ISR. SGX has asked ISR to explain why it is paying seven times what REO paid for the same asset just a few months earlier. In its reply, ISR cited independent valuations that have estimated Tantalum to be worth north of US$1 billion. On Wednesday, ISR executive chairman Chen Tong also argued that Tantalum's concessions are uniquely large and potentially efficient.
SGX is not convinced, however, that ISR's previous valuations were properly done, and a number of pointed queries by the market regulator reflect SGX's doubts. ISR on Wednesday said that it will commission a third valuation.
All of that raises some questions. If Tantalum were truly so valuable, why did TRE sell it for what amounts to tuppence to a small investment vehicle? And while it is positive that ISR is trying to get its valuation done right the third time, why was it not more conscientious about this the previous two times?
The involvement of ISR executive director David Rigoll is also unusual. Mr Rigoll was a 30 per cent shareholder and director of TRE when it made its deal with REO. He sold his shares and left TRE shortly after TRE shareholders approved the REO transaction. Nine days after Mr Rigoll sold his last TRE share, he bought his first shares at ISR and became its controlling shareholder. Shortly after that, ISR inked its deal with REO. Mr Rigoll holds about 27 per cent of ISR right now.
SGX's queries also led ISR to reveal that Timothy Morrison, a partner at the advisory firm hired by ISR to advise it on the deal, became a partner of REO after his firm had been engaged by ISR. But ISR maintained that there was no issue of conflict of interest, arguing that Mr Morrison's firm was primarily engaged to help with fundraising and not negotiating deal terms.
Why ISR's board of directors do not appear to recognise a textbook case of conflict of interest when they see one is anybody's guess, but the fact that they took such a position should raise a red flag. Some may see this as ISR board suffering from a deficit of judgment or having prioritised completing the deal over ensuring that it is fair and proper.