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Compass Resources loses its direction
From: The Australian May 06, 2010 12:00AM
Stuart Wilson is chief executive of the Australian Shareholders Association

THE divide between well-run blue chip companies and the off-radar minnows is large and growing. It's simple to dismiss investor losses in smaller companies as a calculated risk that didn't pay off.
But spare a thought for shareholders in Compass Resources, a firm that looked like heading for the big time before some questionable transactions resulted in shareholder heartache and a long list of unanswered questions.

Compass was developing a simple oxide mine when, for some reason still yet to be fully explained, costs blew out by 400 per cent. Worse, no one seemed to take responsibility for such an unheard-of explosion in costs.

Compass decided to take out loans from its chairman and US-based consultancy and hedge fund YA Global. YA Global is currently being sued in the US for allegedly lending a developing company some money, then heavily selling shares in that company and having a hand in driving it into bankruptcy protection. Short selling was alleged to have been involved. Instead of repaying the loan, it decided to issue the hedge fund Compass shares and on Christmas Eve 2008, YA Global announced it had become a substantial shareholder of Compass, after the company placed shares with the US-based firm.

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Oddly, the announcement indicated YA Global had no shares prior to the placement. One may speculate what had happened to all of the shares that had been previously issued to it by Compass in lieu of loan repayments, but the most likely answer is that they were sold on-market, and the share price tanked. A couple of weeks later, YA Global confirmed it had dumped a further 7 million shares on-market and the share price, which once peaked at $6.25, dropped to a low of 15c.

In the same month, Compass confirmed it had more than $9 million in the bank and was able to continue as a going concern, but felt it needed to undertake fundraising. Two days later the company was in administration and shareholders were about to face a long and fruitless search for their capital, answers and some sign the regulator was investigating. Compass appointed Ferrier Hodgson as administrators and since then, Ferrier Hodgson has done little to answer shareholder questions about the circumstances that led to the company's demise.

As a major creditor, YA Global submitted an arrangement to Ferrier Hodgson, which was approved by the other creditors. In the absence of regulatory interception, minority holders could see 95 per cent of Compass transferred to the hands of Yorkville.

From a minority shareholder's perspective, that's hard to swallow. Shareholders have been begging for the administrator to investigate and provide answers, and they've been knocking on the Australian Securities & Investments Commission's door to obtain more than a cursory reply, if it is not too late already.

Stuart Wilson is chief executive of the Australian Shareholders Association