fortune smiles on fortis's lucky lady

Fortune smiles on Fortis's lucky lady March 15, 2011

http://www.brisbanetimes.com.au/business/fortune-smiles-on-fortiss-lucky-lady-20110315-1bw0e.html


Madam Cheung Kwan must be one of the happiest investors in the sharemarket at the moment, thanks to the generosity of Fortis Mining.

It might be a tiddler, but Fortis has been one of the most spectacularly successful floats in recent times. Investors rushed its $4 million raising at 20 a share in November and watched as it peaked at $2.90 earlier this month. It did not do so well in yesterday's global rout, copping a 50? hiding and retreating to $1.90 - but that still puts foundation investors a long way ahead in less than four months.

Cheung, though, has killed them. At the beginning of February she signed a deal to put $2.4 million into the company in exchange for 6 million shares.

Advertisement: Story continues below In the following month, Fortis's stock rocketed because it was revealed to be nailing a deal to acquire the rights to two potash resources in Kazakhstan. (BHP Billiton made potash sexy last year with its aborted $40 billion offer for Canada's Potash Co.)

As a result, Fortis's share price had risen sixfold by the time Cheung's Grand Concord group was handing over a cheque for its new stock.

At Fortis's peak price of $2.90 a share, that meant Cheung's aptly-named, British Virgin Islands-registered, City Winner Holdings had an instant paper profit of almost $15 million. Small wonder she paid up on the stock early.

Fortis's executive director, Frank Cannavo, who is running the group with long-time business partner Jitto Arulampalam, said the company had signed a contract with Cheung and could not renegotiate the number of shares issued to reflect the exponentially higher price. Cannavo said he knows Cheung from connections in Hong Kong, although he declined to say what her business interests there are.

He also said that it was Cheung who introduced Fortis to the potash opportunities, and some other options, which suggests that the deal includes a bonus for her contribution. Although there is no way Cheung and her team could have predicted the market's reaction to Fortis's potash foray, it was a pretty fortunate outcome.

Fortis has been sketchy on the details of its leap into Kazakhstan, although there is a feeling that this may change very soon, given that the board has just returned from a visit to its almost-assets.

The group finally gave some idea of the size of the venture yesterday by revealing it had set up a $60 million equity line of credit arrangement with investment group Global Emerging Markets (GEM).

GEM, which has previously set up similar deals backing Metal Storm and the former Biosignal (now talent management group RGM), basically agrees to provide capital in exchange for shares. It gets the stock at a 10 per cent discount to the average market price, plus the first 2 per cent of the facility ($1.2 million in this case) goes back to it as a ''commitment fee''.

Fortis has also granted GEM 10 million options with a $2 strike price, which are out of the money thanks to yesterday's market fall, but have a handy clause allowing renegotiation of the strike price when the market price falls. The options also carry an $11 million penalty if Fortis fails to get them issued on time - a pretty hefty price for something that would only generate $20 million in new capital.

To get the potash assets, Fortis will buy 75 per cent of another Hong Kong company, Ji'an Resources Investment, for a $1 million down payment and 40 million of its shares when the deal is finalised.

Ji'an's current parent, which will get the cash and shares, is another aptly named BVI-registered company, United Delight Holdings.

Ji'an's attraction is that it owns the rights to buy 100 per cent of a Panamanian company, Wiyot SA, which in turn owns 95 per cent of Bates Potash Co. Bates wholly owns the two potash deposits.

Fortis is yet to reveal who owns United Delight; who sold Ji'an the rights to Wiyot, or how much the total deal will cost. What is likely, though, is that Fortis's issued capital will treble if it fully draws down the GEM ''loan'', and hands over the shares to United Delight.