accesing hawsons through a silver gate.

IMO, there is no doubt that the EGM being held on Friday 30th November is crucial for the development path that Hawson’s will take and for the future of CAP.

I have read both the letters from Nick Sheard and from Silvergate and I hope that this situation is resolved quickly and that both parties can reach an amicable agreement and work together in the future.

In deciding how I will vote, I have gone back through numerous CAP announcements and the court transcripts of the BMG v ASI trial. The links to the transcripts are:

• http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2011/1484.html?stem=0&synonyms=0&query=bonython%20or%20metals%20or%20group
• http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2012/137.html?stem=0&synonyms=0&query=ample%20or%20source%20or%20international

This is a long post, so unless you are really interested in CAP, turn away.

The areas that concern me with Silvergate (ASI) having two out of five board seats at CAP are:

• Conflict of interest: How do we know that Silvergate is not also bidding as part of the BMG liquidation process? CAP has first right of refusal over all offers, so Silvergate would see all other offers. Silvergate might say that they would abstain from voting, which would mean that 3 out of the 5 directors would only be involved. For such an important decision, I would like to have the whole board involved. Why have a major board reshuffle now when we all know what big decisions have to be made over the next few months?

• If Silvergate win the two seats, three out of five available Board seats will be held by our two major shareholders. Does a 20% ownership level deserve 40% of the board’s vote? I think not.

• Does Silvergate (ASI) have the money? In the Silvergate letter to CAP shareholders, it mentioned that a proposed 3 way joint venture agreement for Hawsons between CAP, ASI and Chinese steel mills. This is the first that I have heard of this. Surely, CAP would have made an announcement about this proposal if it had been seen as genuine, legitimate offer. Not to do so would be against ASX guidelines and listing rules. Silvergate raise this offer in their letter but offer not details, sighting “confidentially restrictions”. I see this as dangling a carrot to grab shareholder attention, without offering any real substance. For all I know, they could have offered $1 for Hawsons……..

• Silvergate talk about the money they have invested to date. In hindsight, why didn’t ASI invest in CAP directly from the beginning? If ASI invested $16 million in BMG, of which $8 million was spent “in the ground at Hawsons”, why did ASI not approach CAP directly from the beginning? $16 million at $1 per share would have given them 16% of CAP. Was it because Conglin Yue was already on the CAP share register and buying into BMG with the strategy of eventually taking majority ownership of BMG seen as away to ensure Chinese interests in Hawsons was maintained?

• From the court transcripts regarding late payment from ASI to BMG: “There was therefore a breach of the agreement and the delays in payments were at the very least embarrassing to Mr Hillam. He was justifiably annoyed. On examination it appears that the excuses given by Mr Cheung, or on his behalf, for his delay had more to do with convenience than necessity. Mr Cheung accepted in cross-examination that he did not have the money until 31 May 2010, that he did not have to borrow to make the payment in May but he did have to sell down some assets. I also find that that the incorrect reason given to Mr Hillam on Mr Cheung’s behalf was not corrected”. The amount that was delayed was $7 million. How can we be sure that Silvergate / ASI has the money now?

• When ASI invested in BMG, a capital raising fee of AUD $973,000 was paid to “Eric Walsh or nominee”. Mr Walsh subsequently nominated Janet McCormack as the recepient. Janet is the daughter of Ms Lau (who wants a seat on the CAP board), and I am assuming Janet is married to Edward McComark, who signed the Silvergate letter. From the court transcripts: “Looking first, and separately, at the agreement to pay Ms McCormack and the subsequent payment of almost $1 million to her, I accept that the non-disclosure of the mother and daughter relationship between Ms Lau and Ms McCormack is relevant to my assessment of Ms Lau's conduct. As submitted on behalf the defendants I also take into account the size of the sum in contrast to the payment of $209,000 of which Ample Source complains. However, beyond that, of itself the identity of the payee and the non-disclosure of the relationship had no substantial significance in the present proceedings. The financial obligation on Bonython Metals was unchanged”. So, whilst the judge did not view the fee as material to the court case that he was presiding over, I do not see this as ethical business behaviour. The payment was being looked at by the ATO, as of May 2011.

• CAP shareholders have been critical that CAP management did not do enough due diligence on Hillam and BMG when entering the J/V agreement. How can the same not be said for ASI / Silvergate? Again, from the court transcripts: “In addition, the evidence of the financial capacity of Ample Source to purchase the shares was less than satisfactory. Mr Cheung gave some evidence of discussions with bankers but this evidence was entitled to very little weight as it was unsupported by documentary evidence. Further, Mr Cheung gave evidence of his ownership of listed securities but that evidence also lacked cogency. Further still, the valuations of the properties to which Mr Cheung referred were not in evidence”. This does not exactly fill you with confidence with Silvergate’s “partners”.

• Lastly, I would prefer that the issue of BMG’s stake in Hawsons is resolved before allowing Silvergate two seats on the CAP Board.

Having said all that, I do like ASI / Silvergate’s tenacity when it comes to being involved with Hawson’s. I am just not sure that the way they have gone about it makes the most sense. If CAP shareholders were critical of CAP management for getting “in bed” with Hillam / BMG, can the same criticsm not be levelled at ASI management?

If ASI want to control Hawson's, thats fine, but they need to pay for it.