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Dancing Bears

By John Helmer in Moscow

Before the global collapse of mine commodities and mining equities in the autumn of 2008, Mineweb, the Johannesburg-based mining publication, suffered a meltdown in asset valuation. Then, in July 2008, it incurred the worst cash loss in the publication’s history.

The publisher and editor-in-chief of Mineweb is Alec Hogg. With Louise Hogg — his ex-wife, now a resident of Ireland — Hogg is the controlling shareholder of Moneyweb, the South African listed company (ticker MNY:SJ), which owns Mineweb. Each of the Hoggs individually holds a 24.4% stake. The single largest shareholder, with 25.1%, is Mvelaphanda, the South African conglomerate controlled by Tokyo Sexwale. According to Mvela’s representative on the Moneyweb board, Lindikhaya Sipoyo, the explanation for what has happened at Mineweb is still “in discussion”.

Hogg has told public shareholders that the cost of a defamation case, brought against Mineweb in London by Sergei Generalov, a Russian owner of a Georgian mining company called Madneuli, caused the cash loss. Hogg hasn’t disclosed his own role in the affair, or explained how it happened that, nine months before the settlement was announced, Hogg himself had refused to negotiate a no-cost deal with the Russian.

Nor has Hogg explained to shareholders that over several years, he has actively sought international sale offers for Mineweb, rejecting three in a sequence when each one elicited a significantly lower price than its predecessor. The first offer was for $5 million, according to the man whom Hogg asked to arrange the sale. The second was for more than $2 million; and the third, negotiated in London this past June, was for $1.5 million. Hogg initially accepted each of them; only to change his mind, and then refuse.

According to Hogg’s presentation at the last sale negotiation in July, Mineweb’s market value should be a sixfold multiple of its revenues. A tabulation Hogg compiled and presented in London of the Mineweb costs appears to show the revenue line rising and falling to reach R3.3 million for the South African financial year ending March 31, 2008. At the time, that was the equivalent of $410,000.

-> Mineweb Financials, 2007-2008

But the bottom line is that while revenues may have risen, and profit too, Hogg has been turning down valuations that had fallen by 70% before the collapse of the international mining markets. The decline in Mineweb’s negotiable value, according to the negotiations Hogg himself has conducted, has materialized despite the rising revenue line.

Hogg’s annual report to shareholders of his negotiations has been limited: “once again a foreign party expressed interest in acquiring Mineweb, the fourth such approach in the past five years. In the wake of the latest troubles – and with so many exciting opportunities in our home base – the appeal of offloading the problem child was enhanced. But sanity eventually prevailed.”

In a recent article in South Africa’s Sunday Times, Jim Jones, former editor of Business Day and then of Mineweb until 2006, reported on the problems now facing media companies. He concluded that Moneyweb is “a clear example of just how quickly the recession can hammer a family-run and family-controlled business”. According to Jones, the trouble that has struck Mineweb had started before the global crisis, showing up as a serious falloff in advertising revenue between April and September. This was compounded, according to Jones, by the difficulty of cutting costs “in a small family-run company that might be seen as having to provide a living for its owner-founders”.

-> http://www.moneyweb.co.za/mw/action/media/downloadFile?media_fileid=4026
table of compensation at page 32, sect. 21

Total staff costs for Mineweb in FY 2008, according to Hogg’s financial report, were R2.6 million; that amounts to two-fifths of the staff costs of the Moneyweb group as a whole. Of this total, the Hoggs received R1.02 million, half of which went to Louise Hogg in Ireland. The growth in their compensation was roughly in line with the 16% growth in Ebitda from 2007 to 2008.

Paying themselves a large, difficult to cut portion of the Moneyweb company costs isn’t wrong. Blaming others for much higher costs can be. This is the tale of how Hogg tried to deal with his troubles, and in the process challenged the credibility of a publication, whose founding motto was “uncompromising independence”.

When Hogg owned racehorses and entertained at a box in the Turffontein grandstand, above the historic Johannesburg race-track, he used to promote Mineweb, inviting senior executives of South Africa’s leading mining companies to be his guests, and helped them to place their bets. At the time, under a succession of established South African editors – David McKay, Tim Wood, and Jim Jones – the reporting in Mineweb set a standard for breaking news, exposing fraud, tipping value, and diligently investigating the mining and metal markets.

But this past October, when one of the mining industry’s leading internationals offered to advertise in Mineweb, Hogg refused. The reason was Hogg’s conflict with the principal investigative writer for Mineweb – me. That is something he hasn’t explained, yet.

According to its public reports, Moneyweb has blamed its financial woes on a London court case. The case turned on a series of Mineweb reports published between August 4 and October 16, 2007. These concerned the Madneuli mining company in Georgia, that country’s largest mining enterprise; the President of Georgia, Mikheil Saakashvili; Saakashvili’s uncle, Timur Alasaniya; and the government privatization sale of the mine, two years earlier, to a company under the control of Sergei Generalov; he is a Russian businessman whose holding, Industrial Investors, is based in Moscow.

On February 12, 2007, Generalov launched his lawsuit in London charging defamation against Lawrence Williams, a freelance self-employed contractor based in London, who did technical and text editing for Moneyweb, which in turn published Mineweb in Johannesburg. The other defendant in the case was Moneyweb Holdings.

One of the charges was that Moneyweb had ignored a letter from Generalov’s solicitors of November 19, 2007, “requesting, amongst other remedies, immediate withdrawal of the articles from the website and the publication of a correction and apology setting out the true position. The Second Defendant [Moneyweb] has failed to acknowledge or make any response to the Claimants’ complaint, or correct the position on its website, thereby treating the Claimants, and their own readers, with contempt.”

In its defence, lodged in the High Court on April 8, 2007, the South Africans did not admit there had been a publication in the jurisdiction Generalov had chosen; denied there had been a defamation; and claimed “the words complained of concern a subject of legitimate public interest…[and] were published on an occasion protected by privilege in the sense acknowledged by the House of Lords in Reynolds v Times Newspapers Ltd [2001] 2 AC 127 and re-stated by the House of Lords in Jameel v Wall Street Journal (Europe) Sprl [2007] 1 AC 359.” The advocate in the Wall Street Journal’s successful defence of publishing privilege, Gavin Millar QC, was advocate for Mineweb in the new case.

The full case file can be found in the records of the High Court, Queens Bench division, case no. HQ08X00543.

An Ernst & Young audited report by Madneuli for 2005 and 2006, dated after the Mineweb reports commenced, can be read here:

-> Madneuli audited financial report, 2005-2006.pdf

A statement read out in the High Court on July 9, and distributed to the press in Moscow that day by Industrial Investors, says: “the Defendants now accept that all of those allegations are completely untrue, that Mr Generalov and Industrial Investors’ involvement with Madneuli was undertaken in a straightforward manner and in good faith, and that Mr Generalov and Industrial Investors conduct their business affairs in an honest manner. In particular, the defendants accept that neither Mr Generalov nor Industrial Investors have ever had any corrupt dealings with President Saakashvili of Georgia or any of his family including Timur Alasaniya.”

According to Hogg’s letter to shareholders in Moneyweb’s annual report, issued on October 1, “at first we were assured by the legal counsel that Mineweb had no case to answer. Then as the matter progressed, costs mounted and more research was conducted, we were informed by the same attorneys that the chances of successfully winning the case with costs were only 50:50. On our insistence, the attorneys explained that something in the order of R12m in legal fees would be incurred in getting the matter to trial, with additional costs required during the court case itself.”

The risk, according to Hogg, was the cost of defending in the UK courts. “The board of Moneyweb Holdings decided pursuing the matter introduced excessive risk for the company and switched from defending to seeking a settlement. This was duly achieved in July 2008 and after considerable financial and management costs, the unhappy matter is now behind us.”

If blame was due, Hogg told the shareholders, it was in London. “The UK’s legal system has come under severe criticism lately for its apparent bias in favour of those claiming against the media. We now know from bitter experience why this is so.”

On November 13, the company issued a market warning: “Moneyweb is currently finalising its results for the six months ended 30 September 2008 and anticipates that earnings per share will decrease by between 50% and 70% and headline earnings per share will decrease by between 240% and 260% compared to the six months ended 30 September 2007. The decrease in headline earnings per share is mainly attributable to the costs of settling the legal challenge referred to in the 2008 Annual Report of
the company during this reporting period.”

On November 17, a financial statement was issued, indicating that there had been a big loss for the six months to September 30: http://www.moneyweb.co.za/mw/view/mw/en/page1820?oid=2154&sn=Detail

-> Moneyweb unaudited financial report for six months to September 30, 2008

The report reveals that advertising revenue had fallen by R2.5 million to R9.3 million; this marked a decline, compared to the same period of 2007, of 22%. The loss of this advertising revenue is almost double the reported amount of the legal costs of the London case.

In addition, according to the November 17 report, trade receivables counted on the asset line of the company balance-sheet, but not received as income, had jumped 63% to R8.7 million. Hogg was asked if the increase of R3.4 million in receivables represented unpaid advertising revenue, which the advertisers might never repay, and which Hogg might be obliged to write off. He replied: “The increase in the receivables figure is a combination of higher advertising sales achieved this year compared with last and the timing of the reporting period.” As for non-payment risk, he added: “As part of the outsourcing contract with United Stations, all of Moneyweb’s South African advertising receivables – over 80% of the company’s total revenues – are insured. As a result there are no write-offs expected and [there] have not been any in the past two years.”

If the revenue and receivables lines reflect the slump in Moneyweb’s advertising revenue, which began in April, then together they add up to R5.9 million; that is four and a half times the figure Hogg has reported for his London legal costs.

The appearance of these advertising problems was despite the report’s acknowledgement that the core audience of Mineweb had more than doubled to 55,000 in the same period to September 30. That, the report declared, was “a credit to London-based Lawrie Williams and his team. The globalisation of the business is complete and today non-South Africans account for 93% of Mineweb`s audience and more than two thirds of the advertising revenues.”

How many Russians, and UK and US-based investors in Russian resources, accounted for this growth in Mineweb’s international audience was not revealed in the November 17 report. The report referred only to the Russian problem on the deficit side of the balance-sheet.

An explanatory note in the report claimed: “the company`s offshore operation Mineweb.com was the subject of a legal action after it published a series of articles written in late 2007 by its Russian correspondent. Legal fees incurred in defending and then settling the action are responsible for the company reporting a headline loss of R1,459 million (1,91 cents per share) for the interim period. By order of the High Court of England and Wales, details of the substantial settlement paid by the company are confidential. However, there is no further liability for shareholders as the entire cost of the settlement and legal fees of R1,3 million have been accounted for in expenses in the interim period.”

Not subject to the confidentiality of the settlement are statements by the London lawyer, Amber Melville-Brown, who was my solicitor, and was introduced by me as solicitor for Moneyweb. During the negotiations, but prior to the settlement agreement, she disclosed that the fees for her services, plus those of the Queens Counsel and a junior barrister, were between ₤50,000 and ₤55,000. She also estimated that the fees and charges were of comparable size on the other side. She said that two of the terms proposed for settling out of court were reimbursement of those costs, plus a donation to charity. Melville-Brown indicated that the total value of the claims in negotiation exceeded ₤100,000.

Not long after, Andrew Smith, the chairman of the Moneyweb board, told Mineweb staff in an internal communication on July 9: “we have issued an apology as well as paid damages to a charity of the claimant’s choice.” He did not refer to payment of the claimant’s legal costs. The court statement, which wound up the proceedings, and the statement Mineweb agreed to publish, also refer to “a substantial payment to a charity of Mr Generalov’s choice in compensation”. There is no mention of Generalov’s legal fees.

In July, the sterling value of the 1.3 million rand cost of the settlement, reported by Moneyweb, was just under ₤85,000. If that is correct, then money appears to have been taken off the table before the London settlement was reached. A lot of money – or not a lot of money, depending on how you count the difference between ₤85,000 and ₤150,000.

When Hogg briefed the Moneyweb board during the negotiations, he said the settlement cost, including Moneyweb’s legal fees and the other side’s costs and demands, added up to at least ₤150,000. In an email, Hogg wrote: “What I am wanting to do however is explore every possible option for the board meeting on Tuesday. And have assumed, in a worst case scenario, that our exposure at this stage is GBP 150 000 being the legal expenses we have appeared to incurred (although how it got there is a mystery to me given we were working off deposits of 5 000 at a time) their legal expenses and the donation Generalov demands. This draws a line under the potential loss for now.”

Melville-Brown denies the quid pro quo for the reduced money loss was a confidential undertaking to stop my publications.

On October 9, three months after the London settlement announcement. Hogg wrote me a letter in which he announced “we shall no longer be retaining you [John Helmer] as a contributor to Mineweb.” There were two reasons, according to Hogg – one reflecting the need for advertising revenue, and one reflecting the Russian audience.

“Over the past three days,” Hogg claimed, “we have been engaged in a thoroughgoing strategic review of Mineweb. This has included re-examining Mineweb’s financial situation and assessing likely developments in the light of the recent sharp fall in commodity prices. We have identified that a proportion of the current advertising revenue is at risk and are acting proactively to reduce the cost base wherever possible. There is little room to manoeuvre as the bulk of Mineweb’s costs are editorial so the decision had to come down to cutting content costs.”

“Unfortunately, despite your comprehensive coverage of the Russian scene, Mineweb’s readers have shown insufficient interest in the intricacies of the Russian commodity sector such that in the past four months only three times have stories penned by yourself been included in the monthly top 20. There has also been little interest from the domestic business sector with no Russian company advertising on Mineweb….”

Within two days, Hogg was contacted by one of the most influential mining entrepreneurs in the world. He made an offer for his company to buy substantial advertising in Mineweb to add to Mineweb’s revenue, on condition Hogg revoke his firing notice, and reinstate my coverage of Russia.

Hogg refused. Instead, he asked for the money, adding that there was no connexion between the termination notice, and either Mineweb’s advertising revenue, or the audience for Russia coverage. He refused to disclose what the real reason was.

To me, Hogg wrote: “your accusation that I have acted in haste or that there was pressure from some party to ‘fire’ you will not be dignified with a response.” Edwin Jay, a director on the Moneyweb board, and the company lawyer responsible for deciding the Generalov publications had been accurate and defensible, also refused to discuss the rationale for the London settlement in July, or the reasons for the firing notice in October. Jay said in an email: “I have no intention of going over the UK litigation as the matter has been settled. I am instructed that you have not been dismissed. You were not an employee of Moneyweb or Mineweb. You had a contract which was not renewed.”

Just how much turns for Hogg and Jay, and the London solicitor Melville-Brown, on the semantic difference between firing and non-renewal of a contract, is unclear. According to an email from Melville-Brown, who consulted Moneyweb before writing: “It was certainly not part of the settlement agreement reached in the Moneyweb libel action that you be fired.”

Hogg wrote Mineweb staff that he and Williams met in Johannesburg just before October 9 for “strategising”. Williams says he had nothing to do with Hogg’s claim that the audience for Russian mining and resource coverage had been slipping.

Appointed in 2007 after Hogg had fired two editors within six months, and run up substantial costs, Williams introduced several innovations in Mineweb’s management. One was the titling and display of stories to emphasize the gold price and speculative metal trading. Another was the republication of reports from the Reuters wire. A third was a form of electronic audience monitoring, with daily measurement reports of users, sessions, and page impressions. Reuters frequently out-scored Mineweb’s original reports.

Commodity and share price speculation consistently drove the daily electronic scores. On what was claimed to be Mineweb’s “best-day ever”, October 6, 2008, one-third of the page-impression score was accounted for by Reuters and a report on price volatility by Williams himself. He denies he helped Hogg to construct a monthly metric in order to dilute the size of the Russian mining audience, which dominated the top story scores in the daily counts when Russian reports were published. “I was not involved at all in constructing the monthly metric for your Mineweb audience, nor did I ever suggest that it be prepared. I did not devise the monthly measurement.”

Williams also says that in November 2007, when the first claims were sent to Mineweb from Generalov’s lawyers, Jay had been in charge. “Edwin was supposed to be dealing directly with the other solicitors. My understanding was that Edwin would handle all the dealings with the other side. They say he never made contact with them.”

The last sentence suggests that Hogg and Jay were together responsible for the circumstances triggering the lawsuit, and the costs which followed. Williams began the sequence on November 19, 2007, relaying a letter from the London solicitors for Generalov. This included a draft text for proposed publication, with the line, “Mr Generalov is a businessman with a deservedly high reputation”.

At the time, there were no legal fees on Mineweb’s side, nor any demand for reimbursement of costs on Generalov’s side.

On November 19, 2007, Hogg wrote in an email: “We are clearly in a position here where certain information which we published as fact is being disputed. Please would you discuss between yourselves and recommend a course of action and the reasons why you would suggest same. Once you have done so, I will ask Edwin to apply his mind and advise us of the best course of action from a legal perspective. Only then would I be in a position to make a decision on what to do about it.”

After a review, and my redrafting of a notice for publication, to which Williams agreed as editor, Jay advised: “I would remove the last sentence in the apology.” Jay wanted to edit out the line, “Mr Generalov is a businessman with a deservedly high reputation”. Hogg commented, also by email: “I like this and suggest Edwin proceed to offer them this.” In another email, Hogg added: “Discussed the issue with Edwin today. He will handle it in his normal professional manner.”

According to Williams, Jay did not reply to the solicitors’ letter, and did not negotiate the terms that had been agreed. Three months later, on February 12, 2008, without a reply from Jay or Hogg, Generalov’s UK lawyers initiated their lawsuit in the High Court.

The lawyers’ letter to Williams the next day made clear why Generalov had gone to court: “We refer to our previous correspondence on this matter. Although we have written to the legal advisors of Moneyweb Holdings Limited as you have suggested, we have received no response to our complaint. Accordingly, our clients Sergey Generalov, Industrial Investors Capital Management Limited and Industrial Investors Limited, have been left with no alternative but to issue proceedings…” The expensive sequel began to play out.

Ahead of this publication, Hogg was asked why he had failed to reply to Generalov’s initial letter; and also to say what the reason had been for his firing notice. He responded: “The matter has been fully dealt with and communicated in detail to Moneyweb’s shareholders.”

In October, in his annual report to shareholders, Hogg had said there are “comfortably over a million souls who are directly exposed to and, for the most part, trust the Moneyweb brand to give them accurate and timeous [sic] information. Such is the wonder of the world of New Media. And if we have been able to do it, so can others. Which is humbling for those of us riding this horse…..”

Hogg’s horse appears to be going in the opposite direction from his scapegoat. He has been asked to explain how the financial report shows advertising down 22% to September 30, while he claims “higher advertising sales achieved this year”. He doesn’t respond. He also doesn’t explain why the London lawsuit is blamed for the company’s big loss, when the collapse of advertising has been much more costly.

For the year that is now ending, Moneyweb’s share price is down 50% in rand terms. The market capitalization of the entire Moneyweb company is now the equivalent of $4 million. That is based on the illiquid share price staying at 50 South African cents. The latest Johannesburg stock exchange report indicates that the current bid price is 16c – a discount of 68% to the last traded level. At this level, there are no takers; not yet.

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