Two senior CITIC Pacific (0267) executives resigned in disgrace yesterday after the company was forced to make provisions of HK$15.5 billion for unauthorized foreign exchange deals. The incident - which chairman Larry Yung Chi-kin said will drag the blue- chip company into the red this year - has exposed a serious corporate governance problem for the stricken property-to- steel conglomerate.
It has taken a US$1.5 billion (HK$11.7 billion) standby facility from its parent company CITIC Group, which owns 29 percent of the listed company, according to Yung.
It has booked a HK$808 million loss on the termination of leveraged foreign exchange contracts, or "currency accumulators," and warned of a further HK$14.7 billion loss on outstanding contracts.
Group finance director Leslie Chang Li-hsien, 53, and group financial controller Chau Chi-yin resigned as directors yesterday.
Chang will be replaced by director Vernon Moore with immediate effect.
The market was in shock at seeing a supposedly prudent blue-chip company laid low by the negligent risk management of two senior executives and posting such major losses on derivative investments.
One investment bank analyst slashed its target price for CITIC Pacific to HK$9.
Yung could not say whether the company would have to book further losses.
It is regrettable that the group's policies and procedures on treasury and risk management were not followed by colleagues, Yung said, apologizing personally and on beh alf of the company board.
"We have invited independent auditor PricewaterhouseCoopers to study ways to improve the group's internal controls," Yung said.
"Their recommendations to date have been accepted in full and will be implemented."
The chairman said some foreign exchange contracts had been cut back, and that the company will be flexible in deciding what to do with outstanding contracts.
"We have an iron ore plant in Australia with annual production capacity of over seven million tones, and estimated capital expenditure of A$1.6 billon (HK$8.52 billion)," Yung said.
"We need to hedge future production through currency contracts."
CITIC Pacific had entered into unauthorized currency hedging contracts since July. The fatal contracts, which make up more than 90 percent of the unauthorized deals, were taken on last month when the Australian dollar hit a high of 0.87 against the US dollar.
With the Australian currency falling by 20 percent to 0.70 against the greenback in the last month alone, the company has had its fingers burned.
Senior management uncovered the problem last month and the audit committee was authorized to begin an independent investigation and seek assistance from CITIC Beijing, Yung said.
Chang and Chau exceeded their authority in signing the contracts and failed to seek prior approval from the company chairman, managing director Henry Fan Hung-ling said.
Besides the resignation of Chang and Chau, Yung said disciplinary action will also be taken against other staff members associated with this event.
Fan stressed that there were no similar problems in other CITIC businesses, and that these "remain strong and doing well."
Chang and Chau worked for CITIC Pacific for 14 years and 21 years. Chang had been a deputy managing director since 2005, and was chiefly responsible for financial sector and infrastructure projects.
Chau joined the company in 1990, having held public accounting and financial management positions at a major Hong Kong-listed company.
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