MICHAEL WEST back PRINT-FRIENDLY VERSION EMAIL THIS STORY
All that glistens
November 19, 2004 THE institutions just adored Sons of Gwalia. Here was a major Aussie gold producer boasting a yield of 5 per cent plus. What could be better?
Gwalia was nicely hedged to protect investors from a drop in the gold price. In fact it was so nicely hedged that on Saturday August 28 it blew up altogether and anointed Ferrier Hodgson as administrator.
The 'smart money' was already out. Gwalia was a house stock of blueblood brokerage JB Were for years, its favoured exposure to the gold sector. But Were, now the House of Sachs, had cleared out in time to avert disaster.
Others weren't so fortunate. US investment mutual giant Franklin Templeton was still buying even after Gwalia had quietly appointed Ferriers to assess its finances on August 6. By then, reports, right here and elsewhere, had already mooted whether Gwalia might go under.
There was nary a squeak out of Sons of Gwalia though. Presumably, CEO John Leevers and his board didn't think it was material information to tell shareholders that their hedge book was out of control, the banks were bearing down on them and that they would lose the lot.
The last the Australian Stock Exchange was told of Gwalia as a going concern was a mini-statement on August 11 saying the full-year results would be announced along with the results of a 'strategic review' on August 31.
It sure fooled Franklin Templeton because it bought another 2 million shares the next day.
The only strategic review they'll be getting will be a Deed of Company Arrangement, if that. Gwalia is down about $850 million and destined for liquidation. As for the laws of continuous disclosure, the principles of a fair and informed market . . . don't hold your breath.
Wading through Gwalia's various reports to the ASX, you'd think everything was hunky dory. In the quarterly report of July 14 this year, for instance, the sons of The Sons forecast a result of $20 million to $21 million for 2004 after tax and before significant items. The word 'significant' is no doubt subject to broad interpretation, but administration? That must have been the significant item. And disclosure? A breach of banking covenants mustn't rate.
Late last year, Gwalia raised $70 million and forecast gold production of 500,000 ounces over five years. Were there reasonable grounds to make these representations? Litigation funder IMF Australia is busy drumming up a class action on behalf of shareholders who weren't 'in the know' but obviously hasn't got the same pull as David Tweed because they haven't been graced with the share register yet.
What will prospective foreign investors make of all this? For one, they'll think the disclosure laws down here are a joke. And this is no isolated incident.
Just take a look at the companies which sit on a takeover proposal until they are forced to fess up because the insider traders are on to it and the stock price has shot through the roof.
Anyway, Leevers told the media that the failure of the company was because it could not economically mine Marvel Loch, which meant it was short of its already hedged positions (pre-sold gold) by about 1 million ounces over five years.
But the only warning of this was a cryptic 'Apart from the cut-off grade, no economic criteria have been applied in reporting these resources', on July 14. This is difficult to decipher when you look at the reported figures in the quarterlies and annual reports. For 2004, they made their 500,000oz plus. But were they 'high-grading', digging, that is, all the good stuff out early?
Leevers told this newspaper on August 31: 'Our future production profiles had depended quite heavily on Marvel Loch being able to produce somewhere between 150,000oz and 200,000oz a year for the next five years. I had to go to the board and say we had to take those ounces out of the production model. That crystallised a significant position.'
Does this mean Gwalia was only expecting to produce 306,334oz over the whole period of the hedge book, for five years or so?
Going on what the company had produced in the past, how was it possible to get to a stage where there was not enough gold left to produce 306,334oz over the period of the hedge book, given previous reserve statements?
Whatever doesn't match up here – the reserves, the quarterly reports, or the press statements – there is one thing for sure: disclosure was inadequate and you can lay your bet now that unless the litigation funders get an action up, nothing will come of it.
SGW Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
