The fight for Flinders Mines gets nasty-again
Financial Review
17 March 2019
Intensely agitated minority owners of Flinders Mines have forced a board spill on their company following the Takeover Panel's finding of unacceptable circumstances triggered by the senior owner to delist the business.
The 249D meeting request was lodged last Wednesday in the name of 37 junior owners who own more than 6 per cent of the business. The minority owners are seeking to remove Flinders chairman Neil Warburton and two directors associated with the Todd Corporation, which owns 55.56 per cent of the struggling iron ore wannabe.
Todd is the conglomerate owned by New Zealand's Todd family and it has been trying, one way or another, to assert increasing levels of control over Flinders since introducing itself to the register back in March 2014.
Between an alliance formed in February 2014 and now, Todd has been, variously, an underwriter, a partner in two or three iterations of infrastructure joint ventures, a slightly jilted takeover bidder and most recently the father of efforts to delist Flinders in the name of the cost savings and efficiencies that might see the business afford attempts to again reappraise the economics of its so-far ill-fated iron ore find.
Flinders is the little iron ore miner that, so far at least, couldn't.
It was a diamond miner until October 2009, when its search for sparklers in the Pilbara revealed something more predictable – several sizeable, mid-grade iron ore deposits that collectively might be developed economically.
With the iron ore boom still bubbling along back then, Flinders announced, to some market enthusiasm, a determination to bring its collection of co-located deposits, which sit to the west of what became Fortescue Metals Group's Solomon's project, to market as soon as practicable.
Just more than two years later, with its projects still not much further progressed beyond an enduring period of pre-feasibility study, the business became the plaything of a Russian billionaire whose covetous eyes had been lured to Western Australia's northwest by Andrew Forrest's then evolving success story, Fortescue Metals Group.
In November 2011 a Russian steel company with a Marvel comic name, Magnitogorsk, came shopping for Flinders, making an offer of 30¢ a share in a bid that valued the business at $554 million. The offer, which represented a 92 per cent premium over a 30-day volume-weighted average price, was promptly recommended to shareholders.
Through history's certain rear-vision mirror, things have never looked so good again for Flinders.
Magnitogorsk is a Russian industrial icon. It was the source for every second Russian tank during World War II and every third shell fired by Russia through the war. In 2011, it was Russia's third-biggest steelworks and it was (and still is) largely owned and directed by a billionaire oligarch named Viktor Rashnikov.
Rashnikov's predictable closeness to Russian President Vladimir Putin subsequently saw him land on the Trump administration's list of billionaires targeted for specific United States sanctions.
Anyway, for about four months until April 2012, Flinders shares traded on a trivial discount to the bid price, indicating a 99 per cent confidence that the deal was done. Then along came Elena Egorova.
Egorova was, depending on your point of view, the owner of $US2000 ($2800) worth of Magnitogorsk shares who used the Siberian courts to stymie Putin's rich steel-making friend, or the figment of a legal imagination that allowed Rashnikov to withdraw from a high-priced bid.
After a series of in-camera hearings in an obscure court in the Siberian city of Chelyninsk, the bid was stopped and a cohort of hedge funds in Australia, the US and Britain ended up losing about $320 million in the bloodbath that followed.
Just more that two years later, a New Zealand family worth billions moved into the value vacuum left by the Russian billionaire. And it would be fair to say that not everything has gone smoothly since.
The plan that Todd Corporation arrived with still seems to have some degree of gravitational force. The idea was to align the owner of plans to build and operate a new Pilbara railway and port with a miner that at times has suggested it was capable of producing and exporting more than 20 million tonnes a year of a 58 per cent iron ore product.
The infrastructure side of the pitch continues to be run through the Balla Balla Infrastructure Group, a thing 90 cent owned by Todd Corp, with the balance owned by the superannuation fund of perpetual mining entrepreneur Nick Curtis.
Plans to build a 50 million-tonnes-per annum-integrated rail and port project were firmed by WA state agreements in 2017, with China State Construction Engineering Corporation signed up to do the build.
Just six months later, another potential Pilbara producer, Brockman Mining, invited BBGI to a joint-venture arrangement that appeared to underpin the potential of the infrastructure plan. In theory, BBGI would have ended up with 50 per cent of Brockman Marillana project by delivering 75 per cent of the construction equity and arranging financing for the JV.
Brockman walked away from BBGI last July, aligning itself instead with a 50-50 joint venture with Chris Ellison's Mineral Resources. Brockman said its decision to go with Ellison reflected, in good part, the pace of the respective developments. In other words, the BBGI plan was going to take too long.
The loss of at least half of the potential throughput appears to have made that a self-fulfilling justification. In December, BBGI asked the WA government for an 18-month delay on the port and rail project. The extension allowed by the state agreement means BBGI will not have to submit its development proposals until September next year.
Not long after that delay was confirmed, the now slightly embattled chairman of Flinders, Neil Warburton, told his AGM there were no guarantees on Balla Balla moving forward.
It is pretty plain that Flinders' protesting minority believe this is just so much sandbagging. They hold that Todd and their board are emphasising the negative with the aim to capturing a greater share of Flinders' longer-term value. Those shareholders offer changes to the Flinders market narrative in support of that. They wonder, for example, how it is that a deposit once described as high-grade is now sold as a large, low-grade beast?
They might well be right. But the numbers rarely lie and the interim results Flinders released late on Friday identify a wealth of troubling issues.
Indeed, the market outlook, the accounts and their qualification by auditors KPMG rather make one wonder why there is any fuss at all about where Flinders might end up.
The narrative included the step-by-step process on the decision to seek delisting, the contretemps with the Takeovers Panel, the unacceptable conduct finding and the undertakings that recovered the pathway to delisting.
The panel's issue arose from the linking of delisting to a first-come, first-serve buyback proposal that would have reduced issued capital by 10 per cent and would have been funded by Todd Corp. The panel agreed with the protesting Flinders shareholders that the senior owner could be accused of coercing owners into selling in the name of acquiring further control.
Todd has since changed tack. It will issue longer-term, low-cost debt and has committing not to exercise any increased power for at least 18 months.
Friday's results carried a warning that the pricing penalties earned over the past two years by the producers of lower-grade ores or those with high levels of silica and alumina impurities were a bit of a game-changer for Flinders. While those discounts have narrowed recently, Flinders assesses that the spreads and penalties will blow out again and that yet another project appraisal has now been commissioned.
"This work and its progress will be subject to the availability of funding in CY 2019 and beyond," the company said.
That warning seems fully justified. Flinders closed the half with net cash of $2.8 million. It spent $3.4 million though the interim, with $2.3 million of that being paid to consultants, some of whom produced the strategic review that recommended delisting in the name of prudence.
The accounts also landed with a warning from KPMG that a 12-month cash flow forecast indicated that the company would need to raise additional funds to meet its minimum operating commitments and that "a material uncertainty exists that may cast significant doubt on the group's ability to continue as a going concern ..."
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