Not sure if I posted this news article previously but since it...

Not sure if I posted this news article previously but since it provides a comments section I will reprint below

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http://www.smh.com.au/money/on-the-money/blogs/savvy-investor/asic-needs-to-take-direction-with-compass-resources/20100615-yayw.html

ASIC needs to take direction with Compass Resources June 15, 2010 - 10:48AM
Comments 2

From the sublime to the ridiculous. A reader alerted me to an interesting issue read apparent rort of minority shareholders around a small formerly listed company now under administration called Compass Resources. The now minnow of the resources sector, which in 2008 boasted a market capitalisation of nearly $1 billion, owns lead, copper, nickel, cobalt and uranium deposits.

This week Compass shareholders will vote read: be hauled over a barrel on a proposal that could see them agree to give away 95 per cent of the company to the businesss major creditors, one of which is its chairman Gordon Toll, ostensibly to allow the business to get back on its feet.

Compasss tale is a sorry one indeed. Back in January 2009 the company was suddenly placed into voluntary administration, only a year-and-a-half after shareholders were assured a major project to construct a browns oxide plant in the Northern Territory was proceeding to plan.

Advertisement: Story continues belowSomehow, the plants construction costs escalated from $70 million to $215 million and administrator Ferrier Hodgeson has blamed a lack of adequate project design and controls as a major factor leading to the companys demise.

This is a classic case of minority shareholders rights being completely sidelined.

On one reading of the situation it appears that thanks to serious mismanagement of Compass, the two key creditors, YA Global and Coffee House, will pick up Compasss not insubstantial resources for the price of the money they lent the company, a total of $72 million, which seems ridiculously cheap given Compass owns the fourth largest lead deposit in the world.

On another reading you could see Compass as just another highly speculative resources play. Investors should have known how volatile investments in this sector can be thanks to constantly see-sawing commodity prices. Frequent blowouts to project costs in resources businesses are also not unusual.

But shareholders do have a point; communication to the market was not exactly best practice, given they thought everything was tickety-boo until they had voluntary administration sprung on them back in January 2009, at a meeting at which they expected a debt to equity swap to occur to allow the company to continue trading.

A group called Friends of Compass also believes YA Global, a US-based hedge fund, has form, driving down the share price of a US company called Cobalis in order to force it into administration so as to be able to take control of its assets at fire sale prices.

Should the Australian Securities and Investments Commission have been onto this? I would have thought they should have had a good look at whether Compass directors had contravened continuous disclosure regulations.

But ultimately, under Australian law creditors interests come before shareholders interests. Given Compass is hardly a household name and its market value was around $22 million when it last traded its probably just too tiny to be on ASICs radar. When I contacted ASIC this week it had no on the record comment to make about Compass.

For shareholders one of the interesting things about this situation is that if the company does go under, they will be able to crystallise a capital loss on their investment for tax purposes. But if 95 per cent of the company is transferred to creditors following this Thursdays shareholder meeting and the company is able to continue limping along they wont be able to crystallise a loss.

A key point in all of this, raised by the Sydney Morning Heralds CBD column is that in January last year Gordon Toll was due to get 90.5 million shares to extinguish the US$25 million he had lent the company, but has somehow parlayed that up to more than 422 million shares (15 per cent of the company) under the proposed deed of company arrangement.

By allegedly driving the share price down, YAG has managed to increase its potential holding in the company from 35 per cent last January to 80 per cent under the new scheme.

No doubt the meeting on Thursday will be an explosive one.