This morning suspended Continental Coal (COOL) issued the prospectus for its apparent A$35.1million fund raising. Existing shareholders have been warned if they don’t take up their allotments of 9 new shares for every 1 share they currently hold, their holdings will effectively be diluted to oblivion. In the simplest possible terms anyone considering putting money into this lost cause is out of his or her mind.
Continental Coal is a disaster of an investment. Its only real discernible purpose is to benefit insiders. It seems highly improbable Continental will secure anywhere near the A$35.1million it is after, which will mean, thanks to the underwriting arrangements, that any money raised will simply be used to pay creditors and vast sums to the directors. If you think this view is harsh, then read on.
Let’s start first with Peter Landau’s direct involvement in this business. Reappointed as a director in February, according to the prospectus Mr Landau is due to earn A$150,000 from Continental in 2014. Meanwhile, Okap Ventures, his “corporate advisory” business, is paid a monthly fee of A$70,000 for provision of “strategic and corporate advisory, capital raising, company secretarial, financial management, investor and public relations and associated services”. Talk about nice work if you can get it!
Quite how a company in as much trouble as Continental can afford to pay $70,000 a month for these services is a mystery to me, but don’t take my word for it, here is what the company’s auditors had to say about its prospects at the end of last December;
“The ability of the consolidated entity to continue as a going concern is dependent upon the success of the renegotiations with financiers and future successful raising of necessary funding through equity. These conditions indicate the existence of a material uncertainty that may cast significant doubt about the consolidated entity's ability to continue as a going concern and therefore, the consolidated entity may be unable to realise its assets and discharge its liabilities in the normal course of business”.
This brings us neatly to the offer itself. As is ever the case with a financial transaction involving Mr Landau, there is one hell of a lot of detail to wade through. Oh, and the odd gem to unearth as well.
Section 8.8 of the prospectus is a corker. In total Continental proposes to pay A$3,517,617 in fees relating to the fundraising. This is a staggering amount, but the line item that really leaps out is the A$765,705 that will be spent on “Miscellaneous”. Hopefully Continental’s shareholders have managed to preserve at least some gallows humour, as they’ve watched their investments evaporate into nothing, but spending A$765,705 on “miscellaneous” fees is almost as funny as spending $70,000 a month on Okap’s services.
The next rich vein of nuggets can be found in the labyrinthine related transactions of the proposed deal. You may or may not be surprised to discover that some of the related transactions are a little less clear than others.
For example, there appears to be a great deal of confusion over which of the directors stood to benefit from February’s emergency bridging loan.
To remind you, on February 13th this year, Continental announced it had closed the A$5million bridging loan, arranged by Empire Equity Limited, as described on January 29th. This RNS also included confirmation of Mr Landau’s reappointment to the board, as well as Mr Paul D’Sylva’s appointment as Executive Chairman. Tucked away at the end of this announcement, Continental casually dropped in the small detail that “Dr Lars Schernikau (another Continental director) is associated with entities that subscribed for $2m of the bridge funding referred to above whilst Mr Landau has a direct or indirect beneficial interest in, or otherwise represents, approximately $3m in financing creditors which have entered into the Standstill Agreements referred to above.”
What the announcement on February 13th failed to mention directly was that Empire Equity is “is an entity controlled by Paul D'Sylva”, as today’s prospectus made clear (though the February 13th did list one of Mr D'Sylva's directorships as being with Empire). Given that Mr D’Sylva had just become a member of Continental’s board, this seems like a quite an oversight.
You could argue that this is all in the past and doesn’t really matter. Sure the terms of the bridging loan were INCREDIBLY generous (Continental will repay A$7.5million, a 6percent fee and 70million options for the A$5million it received!!!!) and sure three of Continental’s directors appear to benefit, but what’s the big deal?
Well, if you really believe that, by all means go ahead and take your 9 for 1 offer, but before you do you might want to ask why the prospectus doesn’t seem to mention Mr Landau’s “direct or indirect beneficial interest in… approximately $3million” of the bridging loan. Section 8.5, Interests of Directors, confirms that “Lars Schernikau is associated with, but does not control, entities that have subscribed for $2,000,000 of the Investment Amount of $5,000,000 described in Section 3.2 of this Prospectus”. However, there is no mention of Mr Landau’s interest.
Shareholders of Range Resources (RRL) will appreciate that Mr Landau can be a bit forgetful when declaring material financial transactions (cf. the undeclared Platinum Partners loan), so perhaps his bad case of corporate amnesia persists today.
But Mr Landau isn’t so forgetful as to release an RNS, without including the issue of a boatload of shares and options!!!
“In addition, the Company announces that it has issued 36,000,000 Fully Paid Ordinary Shares and 36,000,000 Unlisted Options ($0.015; 30 June 2017) in the capital of the Company in lieu of financing costs relating to the facilitation fee of the bridging finance facility announced on 13 February 2014.”
Ah yes, that bridging loan in which Mr Landau, Dr Schernikau and Mr D’Sylva have all, at one time or another, been declared to have an interest in….
Moving on from Mr Landau’s odd concentration lapse, Continental has some interesting plans for extracting itself from the mire. In particular, it is worth paying attention to the number of shares it plans to issue to satisfy certain debts. Section 5.1, Purpose of the Offer, provides full detail, but there are a couple of points worthy of drawing attention to.
First, Continental apparently intends to issue c.1.47billion “shortfall” shares (worth c.A$7.36million) to creditors in lieu of debt repayment. These shares will be issued in the event Continental fails to raise the A$35.1million it is planning to. The inclusion of this condition strongly suggests that Continental’s board isn’t necessarily that confident about raising the full amount.
The second point concerns the line item “working capital”. This is crucial in understanding why you’d be mad to participate in Continental’s offer. By its own admission, if, by the Grace of God, Continental is able to secure the full A$35.1million, only a paltry A$2,373,441 of this will be available to the company. All other funds will simply disappear into the ether.
Of course, if Continental fails to raise anything below c.A$32.7million then there will be A$0 working capital!
So, when considering whether or not to take up your 9 for 1 offer, perhaps you should ask yourself two questions;
1) Do you really believe Continental is going to raise A$35.1million?
2) Even if Continental does manage to raise A$35.1million is this really going to be worth it to you?
After all, all you will have achieved is to pay old debts and vast sums to the directors.
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