http://www.theage.com.au/business/compass-en-route-to-next-direct...

http://www.theage.com.au/business/compass-en-route-to-next-direction-20100607-xqvn.html

The former Fortescue Metals chairman Gordon Toll may feel slightly conflicted next week when shareholders of Compass Resources vote on a proposed recapitalisation of the miner.

It is never easy being a major creditor and chairman of a former sharemarket darling that has been placed into voluntary administration.

It is even harder when you ask shareholders of a company once worth $770 million to vote on a deed of company arrangement under which their stake will be diluted to 5 per cent, in return for cancelling out $73 million of debts.

Compass shareholders may have reason to be rather unhappy about the proposal, given the company had spent well over $250 million building an oxide plant south of Darwin as part of its plans to become a big polymetallic mining company.

Under the proposal, Toll's private investment company Coffee House Group, which lent $US24 million ($29 million) to Compass months before it was placed into voluntary administration, will be granted 422 million shares or a 15 per cent stake.

A hedge fund run by the New Jersey investment firm Yorkville Advisors, YA Global, will take a 80 per cent stake under the proposal, under which it will have a $36 million loan to the company cancelled and will provide a further $19 million of funding.

The shares will be issued at 2.5 a pop, a tad off their $6.25 high in February 2007.

Some Compass shareholders are still seeking answers on why the company was so quickly tipped into administration just days after telling the market it still had $9 million of cash in the bank. And why it borrowed money from its chairman instead of raising money from its shareholders.

DILUTE TO TASTE

Questions are also being asked about YA Global, and some Compass shareholders are drawing comparisons to a deal the hedge fund recently tried to push in the US.

In 2007 YA filed to have the biotech Cobalis - that it had some convertible notes in - put into liquidation.

It has been alleged that once YA had converted some of the notes into Cobalis shares, the company's shares were shorted, leading to a collapse in its share price.

YA and Cobalis submitted rival plans to bring the company out of bankruptcy.

The YA plan, according to Cobalis, ''intends to wipe out the common stock of Cobalis and its shareholders, pay creditors four to 15 on the dollar, and allow 90 per cent of revenues from the worldwide distribution of [the drug] PreHistin to be accrued to a Canadian business entity alleged to have been recently purchased by YAGI and managed by a current YAGI principal''.

A bankruptcy court in California ruled in favour of Cobalis recently, resulting in shares in the company being preserved.

YA Global took a 6 per cent stake in Compass in late 2008 after converting some of its notes with the miner.

In a letter to Compass shareholders regarding next week's meeting, Mark Angelo, the YA Global founder, acknowledged how ''most CMR [Compass] shareholders would prefer not to be diluted''.

''Unfortunately, while we all wish things were different, the position of CMR is what it is, and we are all in the position of having to seek the best available option.''