Sell The Beach House! Shockwaves From The Opes Prime Margin Call Crisis Crash Over Australian Miners
By Our Man in Oz
In every boom someone in business comes up with a really stupid idea. A decade ago it was the boys at Bre-X who dreamt up the Busang gold fraud. In the US a few years ago it was the banks who thought it smart to lend money to poor people who couldn’t pay it back, thereby leading directly to the sub-prime crisis. But neither of those two - nor anything that went before - matches what has happened in Australia over the past week where 677 stock exchange listed companies, 25 per cent of the total on the ASX, suddenly found themselves embroiled in an almost unimaginable margin call crisis. Many of those stuck in this newly revealed tangled web of intrigue - and possible criminal activity - are miners. Some are well known to regular Minesite readers, and while the companies themselves are innocent, it turns out that there are some very dopey shareholders on their share registers who have now discovered to their personal loss that over the last 48 hours they’ve had their investments sold out from under them. Well-known names such as Gindalbie Metals, Bannerman Resources, Image Resources, Fairstar Resources, Golden West Resources, Thundelarra Exploration, Ord River Resources, and Cazaly Resources are among the companies affected. Big blocks of their shares have been snaffled by banks which originally only regarded them as collateral for margin loans, but which have now taken possession of the shares themselves. And they are selling. Lawyers are having a picnic as the crisis comes to a head. The legal investigation into the failure of the stockbroker at the heart of the disaster might last for years. As will action against it. Some once-rich individual investors have been cleaned out, and even members of the royal family of Malaysia are licking their wounds.
Before the detail of what happened, and why a string of companies, including Golden West, Fairstar, and Image remain suspended, there is a single word which sums it all up: greed. Boiled down, the story goes like this: a stockbroking firm called Opes Prime conceived a plan to make margin loans to about 1200 fat cat clients against holdings in generally small companies which are also often illiquid and subject to sharp share price movements. It was a cheap and easy scheme. But, what the investors appear to have not known, or not been told, or did not discover in the fine print, was a clause which allowed all the shares involved to be “pooled” under what is called the Australian Master Securities Lending Agreement. So far, so good.
But, when the market corrected - okay let’s be honest and call it a crash - in January and February, someone at Opes Prime decided to help out a few mates. It’s what Aussies do in times of need. The problem was the help appears to have consisted of telling Merrill Lynch and the ANZ Banking Group a few “porkie pies” which made it appear that certain individuals behind certain lines of credit owned more shares than they really did. Justice Ray Finkelstein in the Victoria Supreme Court is unravelling exactly who said what to whom, and when, but one of the borrowers, Sydney lawyer Chris Murphy, has already admitted that he had loans somewhere in the vicinity of A$100 million. Murphy was one of the people Opes Prime tried to protect.
As with all really stupid ideas it has came unstuck. Spectacularly. In the week before Easter Opes Prime discovered that it had a problem. Management trotted off to the ANZ and asked for a bit of extra cash to cover a hole in its margin lending business. The bank was deeply suspicious but chipped in A$95 million to get through Easter. Immediately after Easter the bank called in the accounting firm, Deloittes to dig a little deeper. And what did the bean counters find? An even deeper hole, of course. They also found that the pooling arrangement meant that stock exchange rules regarding declarations of large shareholdings had been breached, in several dozen cases. Whistles were blown loudly. The banks took possession of the Opes Prime margin books and started selling, hard.
Merrill Lynch moved fastest. Within a day it had sold shares worth A$500 million. The ANZ was slower and caught in a couple of legal challenges, most of which it has won. It is still selling. Some investors will get a portion of their funds back, but it’s likely to be between A33 cents and A50 cents in the dollar. In one case known to Minesite’s Man in Oz a 70 year old investor placed A$14 million worth of scrip with Opes Prime in order to secure a loan of A$4 million. Much of his portfolio consisted of small mining stocks which are not regarded as highly liquid and not the sort of security against which a normal margin loan is made. He’ll probably lose everything.
Of the companies involved a furious scramble is underway to help the receivers and liquidators appointed by the banks find new owners for big blocks of their paper. At Gindalbie a search is underway to find an owner for 16 million shares once held in the name of Melawar Steel Ventures, an investment vehicle of the king of Malaysia and his family. That situation is still in the melting pot and Gindalbie says it is working with the banks and Melawar to achieve a satisfactory outcome. At Golden West, which is busy beating off a take over bid from Fairstar, an even more interesting situation has emerged. Late on Friday 4th April, Australian time, Golden West said 11 million of its shares, or 10 per cent of its capital, had been acquired by Portman, the local iron ore mining arm of the big U.S. miner, Cleveland Cliffs. For Fairstar, that’s a disaster which will almost certainly torpedo its all-share takeover offer.
By next week, when the banks have finished their selling and short-term legal injunctions run out of time, the Opes Prime disaster will move into the forensic scrutiny phase. The directors of the broking house have surrendered their passports. Corporate cops and ASX investigators are now picking through the bones of the failure. An astonishing 677 Australian companies will be making adjustments to their share registers, and 1200 really stupid investors will be licking their wounds, and explaining to their families why the beach house has to be sold.
