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By John Helmer

The world of manganese mining is so small, concentrated, and dependent on China, as both producer and consumer, that if there are shenanigans, the reputation of the trade can be swiftly and seriously threatened, especially in China.

For the biggest of the producers, the Australians and South Africans, manganese is a sideline. Samancor is the largest manganese producer in the world, with peak production capacity of 7 million tonnes per annum; currently, this has been cut to 5.5 million tonnes. But Samancor is not separately listed; it is 60% owned by BHP Billiton, and 40% by Anglo American Corporation, whose consolidated earnings dwarf the contribution from manganese. Eramet, the French mining company, ranks second globally in manganese output, with 3.3 million tonnes produced from its Moanda mine in Gabon. It has cut back on production by 60%. Last year, when manganese was booming on the back of steel, manganese contributed 50% of the Eramet group’s revenues; this past quarter, the proportion dropped to 43%.

Assmang, the second South African producer owned by the Sacco family through Assore Ltd., and by African Rainbow Minerals, has peak production capacity of 2.5 million tonnes. At peak last year, manganese generated 64% of Assore’s revenue; 74% of its earnings. Vale of Brazil has a 2-million tonne capacity, but in the first quarter of this year has announced a mining cutback of 77%; manganese forms a small part of Vale’s multimineral output, which is led by iron ore, bauxite, and coal. The Australian producer, Consolidated Minerals (Consmin), was producing at peak last year of almost 1 million tonnes; its Woodie Woodie mine has capacity for 1.1 million tonnes. It was followed by the Australian-listed OM Holdings, whose Bootu Creek mine in northern Australia, reached peak capacity of 690,000 tonnes (currently at 500,000 tonnes).

The last two, Consmin and OM, are manganese specialists; production and sales of the ore constitute 74% of Consmin’s annual revenue; 100% of OM’s. Until January last year, Consmin’s shares had been publicly listed on the Australian Stock Exchange. The Ukrainian entrepreneur Gennadiy Bogolyubov took over after a fierce takeover contest with Brian Gilbertson’s Pallinghurst Resources. Bogolyubov already had manganese mining and refining interests in the Ukraine, as well as in Ghana. His was the second last great battle for shareholder valuation in the manganese sector. At Bogolyubov’s buy-in and subsequent delisting, Consmin was valued at A$1.3 billion.

At its June 2008 share peak, OMH, also Australian listed but controlled through a Bermuda registration by Low Ngee Tong, , was worth A$1.4 billion. With the plummeting price of manganese chasing the falling demand from Chinese steelmakers, OMH’s market capitalization dropped to A$321 million late last November. The collapse forced OMH to cancel a secondary listing of 90 million shares – 19% of the issue – on the Hong Kong exchange, which had been planned for August at a share price of A$2.50 — close to OMH’s earlier peak of A$2.87. OMH is currently trading at A$1.40, and is currently valued at A$680 million.

In the same period, the price of manganese ore has been the miner’s lifebuoy, oscillating between US$2,300 and $3,000 per tonne, and preventing OMH from sinking: https://customers.reuters.com/d/graphics/CMD_MGN0109.gif

The last of the great manganese battles is the current one: this is between Bogolubov’s vehicle, Stratford Sun Ltd – a wholly owned subsidiary of Consolidated Minerals (Jersey) Ltd – and OMH, for what the Bogolyubov group calls a strategic portfolio investment, and OMH is calling a hostile takeover. Chinese shareholders who benefitted from a September 23 shareholders’meeting, which approved an issue of 47 million OMH share options (10% of the total issue), and the controlling shareholders, who benefitted from a special shareholders’meeting on January 15, are the immediate target.

For the first time, the Australian Federal Court will be asked to apply the Australian regulatory and disclosure provisions to Bermuda, where OMH is incorporated; to the British Virgin Islands, where two wholly owned OMH investment vehicles are registered; to Singapore, where OMH is managed; and to Madagascar, where an 88% owned OMH subsidiary called Capricorn Enterprises conducts undisclosed business for the OMH group.

The contest began between September and November of last year, when market sentiment turned against OMH, and only Stratford Sun was buying. On November 28, the Consmin group formally notified OMH, and OMH released to the market, the news that Stratford Sun had acquired 57 million OMH shares, amounting to an 11.7% stake. For an outlay of about A$100 million, the Bogolyubov interests appear to have paid an average price of A$1.60 per OMH share, a premium at the time. OMH responded with an announcement that it was “seeking to clarify Consmin’s intentions in relation to its investment in the Company.” A subsequent meeting with a Consmin representative, according to OMH, indicated that OMH was “advised that its accumulated holding is financial in nature”.

OMH didn’t believe the assurance, however. Within days, according to OMH’s public announcements, it had decided that it was the target of a hostile takeover bid, and that it would mount a defence. At the same time, the fall in Chinese demand for manganese and the falling metal price led the OMH management to reverse an optimistic fourth-quarter forecast from chief executive, Peter Toth. In a production and trading update on October 15, Toth acknowledged “short-term volatility”, but claimed OMH “will also continue to be well-placed even under moderate Chinese GDP growth conditions.”According to Toth, OMH was continuing to pursue a growth strategy, with expansion of production at its existing units. He added: “we will also continue to selectively assess quality strategic acquisition opportunities…”

In fact, as OMH subsequently conceded in a December 15 market advisory, the company had suspended manganese shipments for the quarter, and halted some ore-processing operations. The mine output target for the first quarter of 2009 was cut from the planned 700,000 tonnes to 500,000 tonnes. The share price on December 15 was just 90 cents.

OMH says that it had also decided that its Bermuda company charter allowed Bogolyubov to continue buying up OMH shares to the 20% mark without having to make a buyout offer to all shareholders. Although the company said in its December 15 announcement it was attempting to “implement strategies to maximize the value of the company in the current challenging market conditions”, it had decided to vote a set of new protections into the Bermuda charter, and if possible prevent further share buying by Stratford Sun at the prevailing market price. A vote of shareholders was called for at an emergency meeting in Singapore on January 15.

According to the notice sent out just before Christmas, OMH proposed selecting provisions of the Australian Corporations Act, and adopting a number of the takeover protections “broadly similar” to the Australian regulatory requirements. OMH told its shareholders that under the existing charter, “a person may gain control of OMH without making an equal offer to all shareholders.” The new measures, according to OMH, would enable shareholders to know the identity of a takeover bidder, with sufficient time and information “to assess the merits of the proposal”.

The alternative, or a vote against adopting the selected takeover protections, meant, according to OMH, “a person could discretely seek ‘creeping control’, execute a ‘dawn raid’, or target a few major shareholders, and gain effective or actual control of OMH.” Were that to happen, the management warned, some shareholders might miss out on the “control premium which would ordinarily be paid by a person obtaining control of a company.”

In its letter to shareholders ahead of the showdown vote in January, OMH admitted it was being selective in its adoption of takeover protections from the Australian practice, and that “some differences to the Australian Corporations Act takeover provisions [remained].” OMH also conceded that if the takeover protections were voted into the company charter, there would still be no external regulator to supervise and monitor the transactions, and that the company board would have “certain discretions to vary the application of the rerlevant rules”. There might even be a price discounting impact, OMH conceded, in the new regime. “It may reduce any ‘takeover speculation’ element in the Company’s share price. While this may be a disadvantage of the proposal for certain shareholders, the Board considers that it is the best interests of all shareholders as a whole.”

The Bogolyubov group has charged that the entire scheme is aimed at preserving the controlling shareholders’position, with management, and allowing them unregulated power to withhold the very information OMH has been promising the new protections will provide the market. The effect, according to sources close to Consmin, is to threaten dilution of existing shareholders; and hold down the OMH share price from moving upwards with the recovery of the manganese price and Chinese demand.

The prospect of a genuine bidding contest for OMH initially stimulated demand for the shares in December. But the easy victory of the OMH board at the January 15 shareholder meeting pushed the share price down once more. The implication is that if the OMH share price were free to move in line with the manganese price, it would have recovered substantially more in unit price and market capitalization than it has done so far this year. In short, the conflict over transparency and compliance has added a risk discount to the share price worth as much as A$90 million in market cap, or 18 cents per share.

Oleg Sheiko, for Stratford Sun and the Consmin group, say the reaction of the OMH controlling shareholders has been a boomerang for the minority shareholders, and has failed to deliver the protections that had been proposed – at least, not for the market value of OMH’s shares. “As a shareholder of OMH, we think we can add value and expertise. But to accomplish these ends, there has to be more transparency by the board and the controlling shareholders of OMH.”

Stratford Sun plans to ask the Australian Federal Court for a disclosure order that would require OMH to provide details of the resolutions adopted in September to issue 47 million share options to company insiders. Among these beneficiaries are Low Ngee Tong and his wife, Heng Siow Kee, who are believed to be the controlling shareholders of the company. They are identified on the OMH website as, respectively, Executive Chairman and Human Relations Director of an OMH subsidiary in Singapore, OM Materials. Heng has previously served as a director on the OMH board and Company Secretary.

Another beneficiary is Wong Fong Fui, who is identified by OMH as a non-executive director, who runs Boustead Singapore Ltd. Boustead is a listed stock on the Singapore exchange, and its business is the provision of engineering services. It has reported assets of S$177 million as of March 2008. A Boustead spokesman, Keith Chu, explains the position: “Although Mr Wong had been granted share options in OMH as outlined in OMH’s FY2008 Annual Report, the share options are personal and are not in any way associated with Boustead Singapore Limited. Currently, Mr Wong does not have any shareholdings in OMH.”

Another non-executive director of OMH, who was awarded substantial stock options as OMH started to prepare its defence against Consmin, is Thomas Teo Liang Huat. Trained as an accountant in Australia and Singapore, Teo is reported on the OMH website as the chief financial officer of G.K. Goh Holdings, a listed Singapore investment group. Goh’s website lists net assets at the end of last year at S$277 million, after suffering a 29% contraction in the second half of the year. It is unclear what shareholding stake in OMH was held by Goh before the share option award. Goh and Teo did not respond to questions.

According to OMH’s reports, the September share issue was approved on a show of hands. The January 15 adoption of the erstwhile protections was polled in a more conventional manner. Notwithstanding, it is unclear what part in the voting is played by Low and his wife, Wong and Teo. Stratford Sun had urged that the meeting should be delayed until after the Christmas-New Year holidays to give shareholders more time to consider the position. It is critical of the vote itself. “Some decisions appear to have been taken by a majority of the minority, after the controlling shareholders reportedly abstained,” Sheiko says. “We would like to know how that is possible, given the distribution of the shares of the company. We have been told we are not transparent enough towards OMH. We are asking the Australian court to ensure that OMH’s controlling shareholders are comparably transparent towards the market where they sell their shares.”

According to an OMG posting, 82% of the company’s shares are owned by the top 20 shareholders. The board and management – without further identification – are listed as holding 22%; HSBC Custody Nominees holds 12%; Strategic Partners, 10%; and Zero Nominees Pty.Ltd., 7%.

Stratford Sun, with 11.7%, has told OMH that for almost twelve years, OMH appears to have preferred the haven status of incorporation in Bermuda for the main holding company, and BVI for two affiliates, with a Sydney listing in March 1998. If OMH wants to protect all shareholders, Stratford Sun says it has proposed that OMH move its registration to Australia to bring it entirely under Australian statutory and regulatory compliance. Or else, it should bring the entire Australian takeover protection code into the Bermuda charter. “To do less is cherry-picking,” Sheiko says, “and the market realizes this now.”

In January, after the adoption vote, Low was reported as saying: “With this protection now in place, the board of OMH will continue to work with all of its stakeholders to maximise shareholder returns, grow the company and deliver on its growth strategy…OMH will continue to seek constructive and value-creating engagement with dissenting shareholder Stratford Sun Ltd and its parent, Consolidated Minerals Ltd, in order to better understand their views and objectives.”

Low, Heng, and their CEO Toth were asked if the conflict between OMH and Stratford Sun over transparency and accountability issues has introduced a risk discount into the market valuation of the OMH share price, holding it back from gains that might otherwise have been achieved as the manganese market revives. They were also asked for details of last year’s Hong Kong listing prospectus for OMH; of the Madagascar affiliate Capricorn Enterprises, whose role in the group’s mining, trading and investment operations is not disclosed in OMH’s website documents or last annual report; and of the relationships between OMH and those who received share options last September. Toth declined to respond to the questions, saying “neither the management nor the directors of OMH wish to respond to your enquiries at this time”.

According to Toth, “OMH has and will continue to abide by its continuous disclosure obligations under the ASX Listing Rules and full and complete disclosure has already been made regarding some of the questions outlined.” Although OMH and the Bogolyubov group have been reported as having met, and to have discussed the “cherry-picking” issue, Toth said OMH reserves the right not to answer questions that “are considered strategically and/or commercially confidential, focus on issues which have occurred in the past and are considered closed or which we do not consider appropriate or pertinent for public discussion.”

The Bogolyubov group insists that it is not seeking a takeover of OMH. Toth, Low and Heng decline to say why they do not believe this.

The day after Toth, Low and Heng refused to answer questions, they upped the ante in a letter to shareholders, disclosed to the Australian Stock Exchange (ASX) in Sydney on May 15. This time Toth said the OMH Board had “unanimously recommended” that shareholders vote down the nomination of Peter Allen as a director on the board, when the annual general meeting is held on May 26. Allen is an Australian, and is currently working for the Bogolyubov group as chairman of Comnsmintrade Pte. Ltd., a wholly owned subsidiary which trades and markets for the Consmin group.

Toth claimed that Stratford Sun “has not provided the Company with a biography of its representatives credentials”, although Consmin’s website identifies Allen as its general manager marketing. OMH’s website does not disclose the attack on Allen’s nomination for a board seat.

Toth told the ASX and OMH shareholders that Allen should be rejected because “Consmin is a direct competitor of OMH…in fundamental operational areas including mining, processing, and most importantly marketing and trading of manganese ore and alloy products…” In a hint that OMH may already be considering undisclosed sale and purchase transactions, and other “strategic alliances with existing manganese ore producers and explorers”, Toth’s letter to the market claims that “if a Consmin representative was appointed to the OMH board, it would be impossible to manage these conflicts.”

When asked directly to say how he and the OMH board had managed the bid last year by the company for the sale of shares on the Hong Kong Stock Exchange, and why it had been withdrawn, Toth refused to say. “OMH is not required to make any further comment on the questions raised”, he added.

The Bogolyubov group is emphatic that as the principal minority shareholder, outside the management control group, it is concerned to establish the proper corporate governance and management accountability for OMH; for its compensation schemes; and for its share dilution strategy. According to Sheiko, “we hope OMH will understand that these are not hostile demands. They are preconditions for the recovery of OMH’s share price. We think the manganese sector will enjoy the benefits of global recovery. We want to ensure that OMH doesn’t disqualify itself from the benefits.”

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